Turkey - Elbistan Power Projects

Docwnuit of The World Bank FOR OFMCIAL USE ONLY MICROFICHE COPY ReprtNo. 10246 Report No. 10246-TU Type: (PCR) MAUPRIVEZ,/ X31709 / T9 069/ OEDD3 PROJECT COMPLETION REPORT TURKEY ELBISTAN PROJECT (LOANS 1023-TU AND 2650-TU) DECEMBER 27, 1991 Energy Operations Division Country Department I Europe, Middle East and North Africa Region This document bas a restricted distribution and mar be used by recipients only in the perfortnance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit - Lira (TL) At Appraisal (October 1973): US$1 - TL 14 TL 1000 - US$71.43 June 1990: US$1 - TL 2610 TL 1000 - US$0.3831 WEIGHTS AND MEASURES kW - kilowatt MW - 1,000 kW kWh - kilowatt hour GWh (Gigawatt hour) = 1,000,000 kWh kV (kilovolt) - 1,000 volts One meter (m) - 3.28 feet One kilometer (km) 0.624 miles One kilogram (kg) (1,000 grams) - 2.2 pounds One ton (metric ton) (1,000 kg) _ 2,205 pounds One kilocalorie (kcal) (1,000 calories) - 3,968 BTU Cumecs (m3/second) - 35.31 cubic feet per second GLOSSARY AND ABBREVIATIONS EIB - European Investment Bank GOT - Government of Turkey KFW - Kreditanstalt fur Wiederaufbau MENR - Ministry of Energy and Natural Resources PCR - Project Completion Report SEE - State Economic Enterprise SPO - State Planning Organization TEK - Turkiye Elektrik Kurumu (Turkish Electricity Authority) TKI - Turkiye Komur Isletmeleri Kurumu (Turkish Coal Authority) Fiscal Year - January 1 to December 31  FOR OMCIAL USE ONLY THE WORLD BANK Washington. DC 20433 USA Office of Directnt-General Operations Evaluation December 31, 1991 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on Turkey Elbistan Project (Loans 1023-TU and 2650-TU) Attached, for information, is a copy of a report entitled "Project Completion Report on Turkey - Elbistan Project (Loans 1023-TU and 2650-TUW" prepared by the Europe, Middle East and North Africa Regional Office and Part II contributed by the Borrower. No audit of this project has been made by the Operations Evaluation Department at this time. '~~ Attachment This document has a restricted distribution and may be used by recipients only in the performnance I of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.|  FOR OFFICIAL USE ONLY PROJECT COMPLETION REPORT TURKEY ELBISTAN PROJECT (LOANS 1023-TU AND 2650-TU) Table of Contents Page No. PREFACE ........................................................... EVALUATION SUMMARY ...............................ii Part I 1. Project Identity ........................ ...................1 2. Background . 3. Project Objectives and Description . 4. Project Design and Organization. 2 S. Project Implementation. 3 6. Project Results and Sustainability. 5 7. Bank Performance. 6 8. Performance of the Borrowers and Guarantor. 6 9. Consultants' and Contractors' Services. 7 10. Conclusions ............... ................................. 8 PART II TEK's Comments on the PCR.. - ................................... 9 PART III 1. Related Bank Loans, Grants and IDA Credits .11 2. Project Timetable .11 1. Loan Disbursements .12 4. Project Implementation .12 5. Project Costs and Financing .13 6. Project Results. 14 7. Status of Covenants .16 8. Use of Bank Resources .18 This docu,nent has a restricted distribution and may be used by recipients only in the performance or their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - i- TURKEY ELBISTAN PROJECT (LOANS 1023-TU AND 2650-TU) PROJECT COMPLETION REPORT Preface This is the Project Completion Report (PCR) for the Elbistan Project (Lignite Mine & Power Station Development, and Operation & Maintenance Assistance) in Turkey, for which Loans 1023-TU and 2650-TU in the amount of US$148 million and US$10 million, respectively, were approved on June 27, 1974 and February 4, 1986. The first loan was closed on June 30, 1983, and fully disbursed on September 13, 1983, the second loan closed on December 31, 1988, and was fully disbursed on March 31, 1989, except for a, balance of US$83,580 which was cancelled. The PCR was prepared by the Energy Operations Division, Country Department I of the Europe, Middle East and North African Regional Office (Preface, Evaluation Summary, Parts I and III). Part II of the PCR, has been prepared by the Borrower (Turkish Electricity Authority - TEK). The findings of this PCR are based, inter alia, on the Staff Appraisal Report; the Loan and Guarantee Agreements; supervision reportFs correspondence between the Bank and the Borrower; and internal Bank memoranda.  - ii - TURKEY ELBISTAN PROJECT (LOANS 1023-TU AND 2650-TU) PROJECT COMPLETION REPORT Evaluation Summary Introduction Two loans, 1023-TU for tlS$148 million in 1974 and 2650-TU for US$10 million in 1986, were made for the development and commissioning of the Elbistan Lignite Mine and Power Station. They were respectively, the tenth and eighteenth Bank group operation in Turkey's power subsector, and were a continuation of the Bank's assistance, started in 1952, for developing the subsector and increasing utilization of indigenous resources. Loan 1023-TU was made jointly to the Turkish Electricity Authority (TEK) and the Turkish Coal Authority (TKI), Loan 2650-TU only to TEK. Both loans were guaranteed by the Republic of Turkey. Objectives The principal objectives of the Elbistan project were: (i) to expand power generation based on indigenous resources through construction of a 4 x 300 MW lignite-fired power station and development of an open-cast lignite mine with a production capacity of 20.7 million tons per annum; and (ii) to support reform of TEK in the areas of organization, management, personnel and finance, in the context of the Governments aim of SEE reform. Implementation Experience Project implementation, originally expected to be completed in 1981, was not completed until the end of 1988. While technical problems contributed to this delay, the most important factors were: (a) the unsatisfactory contract management arrangements, (b) the institutional weakness of TEK and TKI; (c) inadequate site management and insufficient delegation of authority from headquarters to the site; and (d) acute TL shortages on the part of TEK, TKI and the Government. TEK and TKI suffered from serious shortages of good quality staff, cumbersome bureaucratic regulations and procedures, and a poor financial position. Given their lack of experience with projL ts of this magnitude and complexity, project management should have been entrusted from the start to a company with a proven track record in this field. As none of the domestic firms would have qualified, this would have involved recruitment of a foreign company, but would have required a change of attitude of both the Government and the institutions concerned, and a substantial modification of their regulations and operating procedures. By 1978, the severe shortages of local currency had become sufficiently serious to impede project implementation and by 1980, the main co- lenders, KfW, EIB and the Bank, insisted that both TEK and TKI appoint expatriate management teams. Two German companies, employed in 1981, proved very satisfactory and this was probably the single most important factor in improving project implementation. From mid-1982, progress was satisfactory and the first unit went into commercial operation at the end of December 1984. In 1986 the  - iii Bank made a follow-up loan (2650-T'J) to complete the project and ensure its adequate operation and effective maintenance. KfW and EIB also made additional funds available. Project Results and Sustainability Completion of the project, although much behind schedule, has provided Turkey with the means of utilizing some of its substantial deposits of low grade lignite for power production. However, during the seven-year delay in completion of Elbistan, other major power plants have been constructed, such as the Karakaya hydropower station (1,800 MW) and the combined cycle power stations at Hamitabat and Ambarli (2,700 MW), erected after conclusion in 1986- 87 of an agreement with the Soviet Union for the supply of natural gas. As a result, Turkey presently has excess power generation capacity and Elbistan, which was conceived as a base-load plant at a time of power shortages and rapidly increasing demand for electrical energy, is not being fully utilized to planned levels. In the longer run, it should find a role by economic c3mparison with new generating units. However, the power production cost at Elbistan includes the cost of lignite which TEK pays TKI, which includes a very large element ot fixed costs, while the economic cost to the country is low. TEK's power dispatching program, therefore, should be revised by ranking generating plants on the basis of economic costs rather than financial costs because, unless utilization of Elbistan is at a high level, the project is unlikely to generate an acceptable level of net economic benefits during its useful life. Tie production capacity of the mine has yet to be tested, because during 1987, 1988 and the first half of 1989 the Elbistan power plant was run at less than full capacity, since 1987 and 1988 were very good hydrological years and production of hydroelectricity was much above average. Due to low water availability for hydro-generation, utilization increased in the second half of 1989, but since the beginning of 1990 the plant is once again being run with a low capacity factor. The project fell short of its objectives in several other respects. Much remains to be done to transform TEK and TKI into efficient and financially viable entities. TEK's financial position, which had improved in the mid-1980s, has since deteriorated and tariffs have again fallen below economic levels. Because an appropriate technology could not be readily fotnd, TKI decided (and the Bank agreed) not to proceed with the installation of a plant to produce lignite briquettes as domestic fuel. Consequently, the anticipated economic benefits attributed to the sales of lignite as domestic fuel could not be realized. The estimated 3.4% rate of return of the project falls far short of the 17.6% estimated at appraisal because of a number of factors -- the most important being the long delay in completing the project and the huge cost over- run. Other factors were the deletion of the domestic fuel production plant, the over-estimate at appraisal of the likely power plant availability factor of  - iv - 74% (compared with a maximum of 65% now forecast) and tariffs being below economic cost. Unless TEK's power dispatching program is changed as noted above, plant utilization, and the rate of return, will be even lower. Appropriate environmental protection measures have been taken. Pollution control equipment was installed in the power station. The maximum pollution recorded to date is in compliance with the levels permitted by Turkey's environmental standards. All effluents are being appropriately treated. Good progress has been made in pl.anting trees as part of a land reclamation program. Conclusions The unsatisfactory project management arrangements during the first seven years of project implementation, and the institutional and financial problems pervading TEK and TKI, were the main contributory factors to the project's poor implementation record. Moreover, the design of the lignite mining equipment (bucket wheel excavators) and of the boilers to burn the poor and variable quality lignite was based on experience with low grade lignite elsewhere, but had never been tried under Turkish conditions. One of the consequences, inter alia, was that major modifications had to be made to the boilers after commissioning. Continuing technical problems are being experienced in operating the power plant, mainly because of the highly variable calorific values and ash content of the lignite supplied by the mine, understaffing of the plant, operating errors of poorly trained staff, unsatisfactory maintenance procedures and unavailability of spare parts. The most startling finding, however, is that the Elbistan project, an investment of US$2.5 billion equivalent, is being operated at less than full capacity and does not have a well-defined role in meeting Turkey's power requirements. Therefore, four major conclusions based on or concerning this operation are that: (i) the Bank should participate only in projects of tried technology and with fully satisfp'tory project management arrangements; (ii) the initial project analysis was weak, in that the role of the plant in Turkey's bulk supply system was overestimated, and the plant conceived was too large (for example, it could have been limited to two units to begin with, rather than four); (iii) subsequent system expansion planning was also inadequate, in not making sufficient allowance for the Elbistan base load capacity; and (iv) there may be a need for the Bank to continue its supervision efforts beyond physical project completion to .ensure project sustainability.  - 1 - PROJECT COMPLETION REPORT TURKEY ELBISTAN PROJECT (LOANS 1023-TU AND 2650 TU) PART I 1. Project Identity 1.01 Two loans, 1023-TU in 1978 and 2650-TU in 1986, were made for the development and Commissioning of the Elbistan Mine and Power Station. This report deals with both loans in the context of a single project. Project Names Elbistan Lignite Mine Elbistan Operation and and Power Station Maintenance Assistance Project Project Loan Nos. 1023-TU 2650-TU RVP Unit : Europe, Middle East and Nuith Africa Region C..untry Turkey Secto. : Energy Subsectors : Power and Mining 2. Background 2.01 The Government's development strategy during the first and second Five Year Plans (1962-1972) gave high priority to industrialization and self- sufficiency. Over that period, industrial output had increased at an average of 10% p.a. As a result the share of industry in GDP had grown from 17% in 1962 to 23% in 1972. During the same period the urban population rose from 28% to 36% of the total population. This combination of rapid industrialization and urbanization resulted in a correspondingly rapid increase in electricity demand of about 12% p.a. This led to electricity shortage in 1972 and 1973, since the generating program had not kept pace with demand. 2.02 The prospects for continued high economic growth were considered good and the target for the third Five-Year Plan was a GDP Growth rate of 8% p.a., with continued emphasis on industrial investment. Total power generation of the Turkish Electricity Authority (TEK) was projected to grow correspondingly by an average of 14.7% p.a. over the next 10 years. In 1973, imported oil and traditional fuels (firewood and animal dung) met about two-thirds of Turkey's energy requirements. The country's energy development strategy was to meet the rapidly increasing demand while reducing the relative dependence on these high cost sources. This objective assumed increasing importance with the increase in world oil prices in 1972. 2.03 The overall financial results of State Economic Enterprises (SEEs) -were consistently poor, with the Turkish Coal Authority (TKI) being one of the poor performers. SEE's low profits necessitated increasing budgetary transfers to meet their current and investment needs. Reform of the SEEs by improving their organization, management, executive and labor skills and pricing policies was urgently needed. 3. Pr2ject Qbjectives and Description 3.01 The Elbistani project supported the twin objectives of the sector development strategy of expanding power generation and increasing utilization of indigenous resources. In addition, it was intended to support the GovernLment's aim of SEE reform by continuing to assist TEK's long-term reform objectives and establishing a working relationship with TKI. The project comprised:  - 2 - (a) a thermal power station with four 300 MW lignite-fired units delivering, after meeting the power station and mine loads, an estimated 1048 MW and 7030 GWh/year to TEK's interconnected system; (b) 380-kV transmission lines, about 540 km long, connecting Elbistan with Kayseri and Ankara; (c) an open-cast lignite mine with a capacity of 20.7 million tons p.a., 17.9 million for the power station and 2.8 million for processing for sale as domestic fuel, including the purchase of the land and restoration of the worked-out mining area; (d) separate permanent housing for power station and mine staff and roads between these and the works as well as Elbistan town; and (e) consultancy services. 4. Project Design and Organization 4.01 The project was the country's first major effort to build a large power project based on its substantial lignite resources. The initial feasibility study was carried out by consultants from the Federal Republic of Germany (FRG) under that country's aid program. That study indicated that, while the lignite was of poor quality, because of high ash content and low calorific value, the project was feasible, and recommended construction of a 600 MW plant. From the start, the technical difficulties of a project based on lignite of such poor quality were seen to be potentially problematic. The Bank therefore hired an Australian consultant, with extensive experience on lignite based power plants, to review the feasibility study. The consultant endorsed the feasibility of the project. 4.02 To carry out the engineering studies and design, a consortium of two companies from FRG and one from France was retained by TEK with German and French technical aid. These consultants confirmed the feasibility of developing the project, agreed with the method of excavation (large bucket wheel excavators (BWE)) proposed by the original consultants, and proposed additional geological and hydrological investigations. These were carried out, and burnability tests were conducted on lignite samples. The reports correctly identified the main technical problems: (a) design of the boilers to burn the poor and variable quality lignite, and (b) the mining difficulties due to the high overburden ratio, low bearing pressures, thin lignite seams with intercalations of hard material and difficult hydrogeological conditions. Nevertheless, the consultants recommended increasing the project's output from 600 MW (4x150 MW) to 1200 MW (4x300 MW). 4.03 The boiler design was based on experience elsewhere with low grade lignite, but had not been tried under Turkish conditions. BWE's were considered the most appropriate means of dealing with the difficult ground conditions, although the units were larger (3000 cu.m/h) than had been previously used. Pumping wells were to be installed in advance of the mining operations to ensure adequate dewatering of the strata to be excavated. The Bank's Australian consultant and a British mining consultant endorsed the proposals and, by the time of appraisal, agreement had been reached on the technical design of the project.  4.04 There was not, however, a similar consensus on the other aspects of the project - organization, management and finance. The compromises which were reached on these items were the source of much of the poor implementation record of the project. During the appraisal process, concern was expressed within the Bank about the poor implementation record and the current condition of the borrowers, their staff, organizatici and management, and it was noted that the long list of covenants might prove ; quate in reducing the risks, particularly if there was no major change in t. ctitude of the borrowers and guarantor. 4.05 The project undoubtedly called for the establishment of a strong project management team with executive authority and staffed with capable personnel, experienced in the execution of projects of similar magnitude and complexity. Neither TEK nor TKI had staff of this calibre. The Government resisted any solution which would bypass TEK or TKI or require them to employ a suitably qualified construction company, yet it showed little commitment to the drastic institutional reform required in these entities. TEK and TKI were given separate responsibilities for the power and mining components, respectively. Consultants were engaged to assist TEK and TKI's inexperienced site managers. However, these consultants had no executive authority, and in practice their advice often went unheeded. Moreover, the site managers themselves had little authority and had to refer most problems to Ankara for decision. 4.06 These project management arrangements reinforced the need for close coordination of the activities of TEK, TKI and the various government departments involved, To improve the coordination, a Coordinating Committee, chaired by the Undersecretary of the Ministry of Energy and with representatives of TEK, TKI and the Government Departments was established, and an Administrative Committee formed to facilitate day-to-day decisions. In the event, neither committee was particularly effective and decisions were often delayed. 4.07 TEK was a young institution whose organization and staffing were inadequate to handle its increased responsibilities. Its financial position was poor and it was in breach of existing covenants in earlier loan agreements on the financial rate of return on its assets, mainly because of failure to increase tariffs at a time of rising costs. To address these matters, the Loan Agreement conte.-ed covenants on the staffing and management of TEK and a financial rate of r irn on its assets, and a tariff increase acceptable to the Bank was one of the Conditions of Effectiveness. Effectiveness was delayed 19 months, mainly because of the Government's failure to implement the necessary tariff increase, in spite of the Bank also delaying the presentation to the Board of a subsequent project. 5. Project Implementation 5.01 Project construction, which was expected to be completed in 1981, was not completed until the end of 1988. While technical problems contributed to this delay, the most important factors were: (a) the unsatisfactory contract management arrangements; (b) the institutional weakness of TEK and TKI; (c) inadequate site management and insufficient delegation of  authority from headquarters to the site; and (d) acute TL shortages on the part of TEK, TKI and the Governuent. 5.02 Given the lack of experience with projects of this magnitude and complexity, project management should have been entrusted to a foreign company with a proven track record in this field. For such a company to be effective, however, would have required a change in the attitude of the Government and of the implemenitation institutions concerned, and substantial modification of their regulations and operating procedures. The colenders efforts to achieve such modifications during implementation met stiff resistance from 'he borrower and the guarantur. 5.03 TEK and TKI suffered from a serious shortage of good quality staff, partly due to the low levels of pay and morale, and were burdened by cumbersome bureaucratic regulations and procedures. This was compounded by the isolated location of the site with poor social and welfare arrangements and totally inadequate communication facilities. Both institutions were in poor financial position, because of the Government's unwillingness to price their products at economic levels, compounded in TEK's case by its huge accounts receivable -- particularly from the municipalities. These weaknesses were largely typical of SEEs in general at that time, and it is doubtful if the Government could have dealt with these two entities in isolation. The problems facing many SEEs required drastic measures which the Government was unable or unwilling to take in the economic and political situation of the 1970s. Indeed, sixteen years after appraisal, a complete solution is not yet in sight. 5.04 Inadequate tariffs for power severely constrained TEK in implementing the project. A serious consequence of the failure to increase tariffs was the impact on TEK's cash generation which, together with TEK's problems of accounts receivable, led to severe shortages of local currency for the project. The country's economic difficulties meant that the Government also faced shortages of foreign and local currency for the project. By 1978 these became sufficiently serious to impede project implementatio-a. 5.05 By 1980 the situation had become critical due to the cumulative effect of the above factors. The first boiler was only 15% complete (compared with a planned 40%), the general contractor's work was 5% complete (cf.24%) and mining operations were seriously behind schedule, particularly the dewatering and workshop construction. There were major contractual and labor disputes and the project faced a projected cost-overrun of about 100%. The main colenders, KfW, EIB and the Bank, mounted a very intensive supervision effort and insisted that both TEK and TKI appoint expatriate management teams with extensive experience in similar work, and vest them with (in practice) considerable executive authority. Two German companies were employed in 1981, financed by FRG technical assistance. This had a beneficial effect, and was probably the single most important factor in improving project implementation. The severe shortage of local funds was relieved somewhat following the Bank's Structural Adjustment loans. From mid-1982 progress was more satisfactory, and the first unit went into commercial operation at the end of December 1984. The other three units were commissioned in March 1985, June 1986 and November 1988, respectively, and the present installed capacity is 1,200 MW (4x300 MW). In 1986 the Bank made  - 5 - a follow-up Loan (2650-TU) to complete the project and ensure its adequate operation and effective maintenance. KfW auid ElB also made additional funds available. 6. Project Results and Sustainability o.01 Completion of the project, although much behind schedule, has provided Turkey with the means of utilizing some of its substantial deposits of low grade lignite for power production. However, during the seven-year delay in completion of Elbistan, other major power plants have been constructed, such as the Karakaya hydropower station (1,800 MW) and the combined cycle power stations at Hamitabat and Ambarli (2,700 MW), erected after conclusion in 1986- 87 of an agreement with the Soviet Union for the supply of natural gas. As a result, Turkey presently has excess power generation capacity and Elbistan, which was conceived as a base-load plant at a time of power shortages and rapidly increasing demand for electrical energy, is not being fully utilized to planned levels. In the longer run, it should find a role by economic comparison with new generating units. However, the power production cost at Elbistan includes the cost of lignite which TEK pays TKl, which includes a very large element of fixed costs, while the economic cost to the country is low. TEK's power dispatching program, therefore, should be revised by ranking generating plants on the basis of economic costs rather than financial costs because, unless utilization of Elbistan is at a high level, the project is unilikely to generate an acceptable level of net economic benefits during its useful life. 6.02 The production capacity of the mine has yet to be tested, because during 1987, 1988 and the first half of 1989 the Elbistan power plant was run at less than full capacity, since 1987 and 1988 were very good hydrological years and production of hydroelectricity was much above average. Due to low water availability for hydro-generation, utilization increased in the second half of 1989, but since the beginning of 1990 the plant is once again being run with a low capacity factor. 6.03 The project fell stiort of its objectives in several other respects. Much remains to be done to transform TEK and TKI into efficient and financially viable entities. TEK's financial position, which had improved in the mid-1980s, has since deteriorated and tariffs have again fallen below economic levels. Because an appropriate technology could not be readily found, TKI decided (and the Bank agreed) not to proceed with the installation of a plant to produce lignite briquettes as domestic fuel. Consequently, the anticipated economic benefits attributed to the sales of lignite as domestic fuel could not be realized. 6.04 The estimated 3.4% rate of return of the project falls far short of the 17.6% estimated at appraisal because of a number of factors --the most important being the long delay in completing the project and the huge cost over- run. Other factors were the deletion of the domestic fuel production plant, the overestimate at appraisal of the likely power plant availability factor of 74% (compared with a maximum of 65% now forecast) and tariffs being below economic cost. Unless TEK's power dispatching program is changed (see para. 6.01) plant utilization, and the rate of return, will be even lower.  -6- 6.05 The project is located in a remote, sparsely inhabited area and appropriate environmental measures have been taken. Pollution control equipment was installed in the power station. Equipment for monitoring the quality of stack emissions was acquired and should be put in service as soon as possible. Two ground stations for automatically sampling and recording air quality were installed and two mobile air quality stations were purchased. The maximum pollution recorded to date is in compliance with the levels permitted by Turkey's environmental standards. All effluents are being appropriately treated. Good progress has been made in planting trees as part of a land reclamation program. 7. Bank Performance 7.01 During the preparation and early stages of appraisal the Bank performned well and identified the problem areas and risks. In devising solutions to the problem of project management, the Bank was less successful. It might have been more forceful and insisted on the appointment of a well qualified, expatriate project management team, and appropriate changes in operating procedures. However, this could well have resulted in there being no loan; in hindsight, that might have been an appropriate decision. The Bank's estimate of plant availability and assessment of the lignite processing plant were also too optimistic. During supervision, however, the Bank demonstrated appropriate flexibility by agreeing to delete the lignite processing plant and to make additional funds available for completing and commissioning the plant. Persistent efforts during countless supervision missions and close cooperation with the colenders were eventually instrumental in providing a solution to the thorny problem of project management. 7.02 This project illustrates the importance of the Bank, the borrower and the guarantor being in agreement on the main issues and how to resolve them before the loan is made. The success of this operation would have been greatly enhanced if the problems of SEEs had been tackled simultaneously with project launching, particularly the Personnel Law, revision of bureaucratic regulations and procedures and action to put the SEEs on a sound financial footing. If legislation to this effect had been passed by the Government at the time the project was initiated, it would have been evidence of the change in attitude needed to set up appropriate project management arrangements, on which the Bank should have insisted. 8. Performance of Borrowers and Guarantor 8.01 The reluctance of the Turkish authorities to agree to the establishment of effective project management and to increase tariffs or to tackle the array of institutional and financial problems pervading TEK and TKI (and other SEEs) were the main contributory factors to the project's poor implementation record. A particular feature was the lack of coordination and cooperation, not only among the agencies involved but even within the individual agencies. The authorities also failed to make optimum use of the design consultants during the early stages of construction. They did, however, later agree to the appointment of expatriate management assistance teams, after KfW, EIB and the Bank decided co take a strong stand on this matter.  8.02 The project management teams initially established by TEK and TKI did not perform satisfactorily. The site was visited only periodically by TEK's project manager, who was located in Ankara. The site manager was inexperienced and had little delegated authority. TKI's project management was also ineffective in spite of several changes in senior personnel. Arrangements for operation and maintenance of the mining facilities were unsatisfactory and resulted in poor levels of plant availability and output, yet TKI was loath to enter into maintenance agreements with the plant suppliers. The communications network was wholly inadequate and delays in decision making were common. Quality control on civil works was unsatisfactory. Social and welfare facilities on site were poor and their improvement was much delayed. 8.03 Under the first Elbistan Loan (1023-TU), TEK was to achieve an 8% annual financial return on the average realistic net value of its fixed assets in service, but TEK's actual return averaged below 3% during the period 1975- 80. In 1981, the rate of return covenant was replaced by a cash generation covenant under the Karakaya Loan (1844-TU), under which TEK's annual internal cash generation was to increase from 20% of public power sector capital expenditures in 1981 to 35% in 1986. In addition, to prevent increases in working capital deficits from counting as a positive element in tuie cash generation calculation, TEK agreed in 1983 under the Third Transmission Loan (2322-TU) to maintain a current ratio of not less than 1.0 from December 31, 1984. Following major tariff increases during the period 1982-84 (during which TEK did not meet the agreed cash generation targets), TEK did achieve a current ratio of 1.16 in 1984 and an internal cash generation of 41% in 1985. After a relatively satisfactory internal cash generation of 31% in 1986, the Bank agreed to waive the financial covenants until the end of 1987, when TEK's tariffs and capital were again significantly increased. Since then, however, as a result, inter alia, of the Government's reluctance to raise electricity tariffs sufficiently to cover TEK's financial costs and debt service requirements, internal cash generation has fallen to an estimated -22% in 1989, the current ratio to an estimated 0.50 at the end of 1989, and the capital increase (which was not paid uptil 1989) has been eroded by inflation. 1987, 1988 and 1989 were election years (general, municipal and presidential), and 1988 and 1989 also years of accelerating inflation, which mav explain why it was difficult to keep tariffs in line with the rapidly increasing costs. As a result, technically, TEK has become insolvent. A strategy to put power subsector development back on track, discussed with the Government in 1989 and 1990, provides for a restructuring program for TEK under a project which is presently in course of preparation. 9. Consultants' and Contractors' Services 9.01 The consultants employed during the feasibility stage performed well. It could be argued that a project of this complexity was premature given the stage of institutional development reached by TEK and TKI, but this could have been resolved with the right project management and contractual arrangements. The consultants employed for the design performed less well, and during the early stages of project construction they apparently failed to seek appropriate remedies when their advice often went unheeded. The problems should have been escalated to senior levels of TEK, TKI and Government for resolution. Some of the local contractors performed poorly, producing poor quality work much behind schedule. The general erection contractor, whose senior staff lacked  -8- experience of this kind of work, did not perform well. To some extent this can be attributed to the shortages of local funds and delays in payment to the contractor. In addition, this was a time of political and social unrest and all contractors were experiencing labor difficulties. The project management assistance teams performed very well. They exercised their considerable skills with great tact and contributed greatly to expediting completion of the project. 10. Conclusions 10.01 The unsatisfactory project management arrangements during the first seven years of project implementation, and the institutional and financial problems pervading TEK and TKI, were the main contributory factors to the project's poor implementation record. Moreover, the design of the lignite mining equipment (bucket wheel excavators) and of the boilers to burn the poor and variable quality lignite was based on experience with low grade lignite elsewhere, but had never been tried under Turkish conditions. One of the consequences, inter alia, was that major modifications had to be made to the boilers after commissioning. Continuing technical problems are being experienced in operating the power plant, mainly because of the highly variable calorific values and ash content of the lignite supplied by the mine, understaffing of the plant, operating errors of poorly trained staff, unsatisfactory maintenance procedures and unavailability of spare parts. The most startling finding, however, is that the Elbistan project, an investment of US$2.5 billion equivalent, is being operated at less than full capacity and does not have a well-defined role in meeting Turkey's power requirements. Therefore, four major conclusions based on or concerning this operation are that: (i) the Bank should participate only in projects of tried technology and with fully satisfactory project management arrangements; (ii) the initial project analysis was weak, in that the role of the plant in Turkey's bulk supply system was overestimated, and the plant conceived was too large (for example, it could have been limited to two units to begin with, rather than four); (iii) subsequent system expansion planning was also inadequate, in not making sufficient allowance for the Elbistan base load capacity; and (iv) there may be a need for the Bank to continue its supervision efforts beyond physical project completion to ensure project sustainability.  - 9 - PROJECT COMPLETION REPORT TURKEY ELBISTAN PROJECT (LOANS 1023-TU AND 2650-TU) PART II TEK's Comments on the PCR In Part I of the project completion report of the World Bank, in different clauses there are 3imilar comments for certain events. In this respect, we will not give our comments paragraph by paragraph, but as general topics: 1. During the execution of the project TEK has done its best for the employment of well qualified personnel and training of them with the facilities provided by the Government and in accordance with the Turkish Regulations which TEK has to follow. 2. In the past there might have been some delays in making the tariff increases due to certain economic considerations. However, in recent years tariff adjustments are being done in a much more effective manner. 3. In 1988 a reorganization was realized in TEK General Management except the Generation and Transmission enterprise and the Distribution enterprises. In August/September 1990 a reorganization was also realized in the Distribution enterprises as well. As is known by the Bank, studies for the restructuring of TK are being continued. A statement made by the Bank in para 8.03 in this respect is not correct. Therefore this statement must be remcved.'/ 4. In various parts of the report there are references to the effect of the consultants on the completion of the project. We agree with the Bank that the consultancy services have made certain contributions to the completion of the project. However, we are of the opinion that their normal duties as consultants in this project are being exaggerated by the Bank. In this respect especially, we have to point out our experience that the interest of the consultants to the project declined while coming to the end of the project. The preparation of PCR is a good example of this attitude. 5. The power plant has been transferred to TEK's Operation department. Therefore, we kindly request the deletion of the statement to the contrary in para 8.01.V 6. Related with the operation and maintenance activities in the power plant, we want to explain the following points: a) In order to have better coal blending, several meetings have been held with TKI. As a result, a better coal delivery is being expected in the coming months. b) The lack of personnel for the operation has been overcome by the employment of additional staff as of the end of 1989. A basic training course was applied to this staff. Now deleted.  - 10 - c) The operation and maintenance work has been done under the supervision of Steag AG, West Germany as suggested by the co- lenders. In the Afsin-Elbistan power plant a warranty operation has been carried on between the dates of November 1, 1989 and October 31, 1990 under the full responsibility of Steag. d) The training of the operation personnel is continuing in accordance with the contract for Technical Operation Management (TOM) signed between Steag and TEK's Operation Department. e) Necessary spare parts for the proper operation of the power plant have been provided.2/ f) The thermal power plant has been operated under the responsibility of Steag AG with an availability guarantee of 30% and loading guarantee of 335 MW since November 1989. 7. The electricity generation program is prepared by TEK's Load Dispatching department for the power plants connected to the grid in coordinati.n with the related departments. This program is based on the relevant conditions of the system, such as water levels at the hydro-power plants, yearly overhauling programs of the power plants, trips and outages, transmission possibilities and especially the generation costs. In the generation programs, prepared by TEK's Load Dispatching department, the Elbistan power plant is also shown as a base load plant. Because of the restrictions on the transmission lines and the high water level in 1988, the generation of the Elbistan Power Plant was low. Also at the beginning of 1989, the water input to the area reached up to 150% of the long-term average. For this reason, the Keban and Karakaya hydropower plants operated with full capacity and, within the possibilities of the transmission lines, the Elbistan power plant was also operated with the possible capacity. In the middle of 1989, the conditions became normal and the generation was increased from 1947.3 GWh in 1988 to 5650.2 GWh in 1989. For 1990 also, this same level of generation has been planned: during the first eight months of operation, the generation was 3100 GWh, and it is expected that the generation of 1990 will be 5500 GWh. 8. Erection of the equipment for monitoring the stack emissions will be completed by the end of September 1990 and it will be commissioned in the first half of October 1990. The EMl Energy Operations Division position is that this is not borne out by Steag's monthly reports (through July 1990).  - 11 - PROJECT COMPLETION REPORT TURKEY ELBISTAN PROJECT (LOANS 1023-TU AND 2650-TU) PART III 1. Related Bank Loans and Grant Title Purpose Year Status Comments T/A Grant Assistance in reorganizing 1967 Complete Turkey's power industry 568-TU Keban 380-kV Transmission Lines 1968 Complete PPAR Transmission issued 11/81 1194-TU Construction of sub-stations 1976 Complete PCR TEK Trans.II and trans. lines, including issued connection to Elbistan 10/84 2322-TU 380-kV trans. lines, connecting 1983 Complete PCR TEK Trans.III power plants in east to load being centers in west prepared 2602-TU To upgrade efficiency and 1985 Behind Power System availability of plants schedule Op. Assistance 2856-TU Assistance in carrying out energy 1987 Behind ESAL sector adjustment program schedule 2. Project Timetable Item Date Planned Date Actual 1023 2650 1023 2650 Identification 3/71 12/84 Preparation 10/71,3/73 and 7/73 Appraisal Mission 10/73 4/85 Negotiations 5/74 11/85 Board Approval 6/27/74 2/4/86 Loan Signature 6/28/74 2/14/86 Loan Effectiveness 11/1/74 5/12/86 6/1/76 5/12/86 Loan Closing 6/30/82 6/30/88 6/30/83 12/31/88 Project Completion 12/31/81 12/31/87 11/30/88 11/30/88  - 12 - 3. Disbursements Cumulative Estimated and Actual Disbursements Appraisal Actual as As of June 30 Estimate Actual of Estimate Loan 1023 1976 13.6 1977 81.9 - 1978 111.3 55.3 50 1979 128.6 81.8 64 1980 139.1 90.4 65 1981 148.0 112.8 76 1982 148.0 127.3 86 1983 148.0 145.4 98 1984 148.0 148.0 100 Loan 2650 1986 2.0 0 0 1987 6.2 2.8 45 1988 10.0 8.1 81 1989 9.9 99 4. Project Implementation Appraisal Indicators Estimate Actual Commissioning Unit I 9/78 12/84 Commissioning Unit II 3/79 3/85 Commissioning Unit III 9/79 6/86 Commissioning Unit IV 3/80 11/88 Completion of Kayseri Transmission Line 1978 1983 Completion of Ankara Transmission Line 1979 1987  - 13 - 5. Project Costs and Financing A. Project Costs (US$ Millions) 1/ 2/ 3/ Item Appraisal Estimate Rev. Estimate Actual Local F'oreign Total Local Foreign Total Local Foreign Total Power station 180.0 478.2 658.2 1025.1 719.5 1744.6 987.3 727.9 1715.2 Trans.line 14.9 13.0 27.9 17.1 50.0 67.1 17.1 50.0 67.1 Mine 83.1 194.2 277.3 272.4 321.8 594.2 383.5 319.8 703.3 Total 278.0 685.4 963.4 1314.6 1091.3 2405.9 1387.9 1097.7 2485.6 Sources: 1/ S.A.R. No. 342a-TU 6/13/74 2/ S.A.R. No. 5774-TU 12/31/84 3/ Colenders Final Estimate. Power station figures are as shown in TEK/Fichtner PCR, excluding VAT. B. Project Financing Planned (Loan Agreement) Final* Source (USS millions) Sources (millions) IBRD-Expenditure Colenders Categories I 123 KfW 734.3 DM Categories II 25 EIB 152.8 ECU IBRD 158.0 US$ Cofinancing Institutions: KfW 92 EIB 129 Other External Other External US Sources Sources 198 Citibank 22.0 Eximbank 18.0 Domestic Foreign Irving 21.3 Sources Costs 118 Man Han. 30.0 Local 91.3 US$ Costs 278 Others German Comm. 150.0 DM Saudi Fund 134.4 SR Japan Exim 17,331.2 Y French Govt. 50.0 FF ICIPU 10.0 IL Total 963 *The financing obtained for the project is shown in the currencies of the loans. The disbursement patterns of these loans are not known and, given the wide fluctuations in the exchange rates during the project period, it has not been possible to convert them to USDollars.  - 14 - 6. Project Results Economic Impact Economic Appraisal Actual Rate of Return Estimate (At Final Development) 17.6% 3.4% Underlying Assumptions Generation/Plant Actual 1984-89 capacity factor 74% 65% capacity factor from 1990 Transmission and 15% distribution losses Cost basis Constant 1987 US$ (based on MUV index deflators) Electricity prices See Table (page 14) Fuel price (lignite) Incremental production cost Incremental production (estimated on the basis of cost less sunk cost) Transmission and From SAR for Ln 2650-TU distribution cost Benefit Revenue from incre- Revenue from incremental mental electricity electricity sales only (no sales, plus sales lignite sales) of lignite Efficiency 2413 kcal/kWh (gross) Calorific value of lignite 1140 kcal/kg  - 5 - ---------- -- * n.a --.....---- -, . 4.-. . ......... .........a . .- a. am -*-- - . - -- -------- ----. * , . a .~.. . . . . . . . . . - --- - - -c - -a a- - - - * . a a a a a a a a a