Turkey - Karakaya Hydropower Project

Document of The World Bank FOR OMFICIAL USE ONLY Report No. 10243 . u)MPLETI0N REPORT TURKEY KARAKAYA PROJECT (LOAN 1844-TU) DECEMBER 27, 1991 Energy Operations Division Country Department I Europe, Middle East and North Africa Regional Office This document has a res.ricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise he disclosed without World Bank; authorization. --~~~~ ,  CURRENCY EOUIVALENTS Currency Unit - Lira (TL) At Appraisal (March 1980): US$1 - TL 70 TL 1000 - US$14.29 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) 3 2,205 pounds One kilocalorie (kcal) (1,000 calories) - 3,968 BTU Cumecs (m3/second) e 35.31 cubic feet per second GLOSSARY AND ABBREVIATIONS DSI - Devlet Su Isleri (State Hydraulics Agency) EIB - European Investment Bank GOT - Government of Turkey MENR - Kinistry of Energy and Natural Resources PCR - Project Completion Report SPO - State Planning Organization TEK - Turkiye Elektrik Kurumu (Turkish Electricity Authority) Fiscal Year - January 1 to December 31  FOR OFFCIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. 0Ok. nf DIWctco.rma Op.at tm Evakiatii December 31, 1991 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on Turkey Karakava Proiect (Loan 1844-TU) Attached, for information, ie a copy of a report entitled "Project Completion Report on Turkey - Karakaya Project (Loan 1844-TU)" prepared by the Europe, Middle East and North Africa Regional Offic,e and Part II contributed by the Borrower. No audit of this project has been made by the Operations Evaluation Department at this time. Attachment I This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  FOR OFFICIAL USE ONLY TURKE KARAKAYA HYD-ROPOWER PRJECT (LOAN 1844-TU) PROJECT COMPLETION REPORT TABLE OF CONTENTS Page Nos, PREFACE ...........................................................i EVALUATION SUMMARY ................................................ii Part I 1. Project Identity. 2. Background .1 3. Project Objectives and Description. 2 4. Project Design and Organization. 3 5. Project Implementation. 3 6. Project Results. 4 7. Project Sustainability. 6 8. Bank Performance. 6 9. Borrower Performance. 7 10. Consulting Services ......................................... 8 11. Project Documentation and Data .............................. 8 12. Findings and Lessons ........................................ 8 PART II DSI's Comments on the PCR ......................................... 9 PART JI_ 1. Related Bank Loans ........................................... 10 2. Project imetable. .10 3. Loan Disbrsement .11 4. Project Implementation .11 5. Project Costs and Financing .................................. 12 6. Project Results .13 7. Status of Covenants .15 8. Use of Bank Resources .19 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. its contents may not otherwise be disclosed without World Bank authorization.  -i- TURKEY KARAKAYA HYDRPOWER PPROJECT (LOAN 1844-TU) PROJECT COMPLETION REPORT Preface This is the Project Completion Report (PCR) for the Karakaya Hydropower Project in Turkey, for which Loan 1844-TU in the amount of US$120 million was approved on May 15, 1980. The loan was closed on December 31, 1988 and fully disbursed on March 13, 1989. 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 State Hydraulics Agency (DSI) on behalf of the Borrower. The findings of this PCR are based on the Staff Appraisal Report; the Loan Agreement; supervision reports, correspondence between the Bank and the Borrower; and internal Bank memoranda.  - ii - TURKEY KABAKAYA HYDROPOWER PROJECT (LOAN 1844-TU) PROJECT COMPLETION REPORT Evaluation Summary Introduction A loan of US$120 million was made to the Republic of Turkey in 1981 for the above project. The project was the fourteenth Bank group operation in Turkey's power subsector, and was a continuation of the Bank's assistance, started in 1952, for developing the subsector and increasing utilization of indigenous resources. Objectives The principal objectives of the project were to expand power generation based on indigenous resources and improve usage of the Keban hydropower plant upstream, as well as to continue the institution-building efforts under earlier projects following establishment of the Turkish Electricity Authority (TEK) in 1970, improve power sector planning and financing policies, and possibly promote riparian coordination in the use of the Euphrates waters. Ipjlententation Experience Project ^n'-..ruction, originally expected to be completed in December 1986, was not completed until February 1989, but generally proceeded smoothly after resolution of initial contract problems with the civil works contractors. A relatively simple contracting arrangement providing for only two main contractors for, respectively, the civil works and the supply and installation of the electro-mechanical equipment, and a strong project management team at the project site with sufficient authority to solve site problems without having to seek DSI headquarters' approval, helped to overcome problems during construction (in stark contrast to the experience with the Elbistan Thermal Power Project [Lns. 1023 and 2650 TU] which was completed at about the same time, but more than eight years behind schedule). Results Of the project's two main objectives, one was satisfactorily achieved. The completed facilities provide additional capacity to meet the power demand in the national power system and enable better use of the Keban hydro power station upstream, although optimum utilization will only be achieved after completion of an additional, southern transmission line which is included in the Fourth TEK Transmission Project (Ln. 2586-TU). The achievement of the institutional objectives of the project, i.e. to improve power sector planning and financing policies, and contribute towards riparian coordination in the use of the Euphrates waters, was far less satisfactory, and indeed disappointing. The financial target for the public power subsector, i.e. a net internal cash generation of 35% of public power sector investments, has also not been met in recent years. Thus, most of the project's institutional goals were not accomplished.  - iii - The estimated 11.8% rate of return of the project falls short of the 15.1 estimated at appraisal, mainly because of the delay in completing the project and the fact that tariffs are lower than expected at appraisal. Appropriate resettlement measures were taken for the project. Loss of agricultural and grazing land in the reservoir area was the main environmental impact, along with limited impact on archaeological and historical sites. Since the beginning of 1986, the year of reservoir filling, the Borrower has not submitted quarterly reports to the Bank on the Euphrates river flows as required under the loan agreement. However, according to the project completion report submitted by the borrower, river flows, which had been reduced to 140 m3/s for about 1h months prior to commencement of impounding, were completely interrupted for only eight days before again reaching the normal monthly average minimum of 500 m3/s. The Borrower has also failed to transfer the cost of the project, including interest during construction, to TEK in the form of equity, as required under the loan agreement. Since creation of the 1-ublic Participation Fund (PPF) in 1985, all hydropower facilities constructed by the State Hydraulics Agency, DSI, rather than being transferred to TEK, have been retained by the Government in order to mobilize funds through a levy, payable by TEK to the PPF, on the power generated at these facilities. Substitution of this PPF levy on TEK (payable in cash) for the depreciation (not involving a cash outflow) which TEK would have provided on Karakaya and other hydropower facilities if the Government of Turkey (GOT) had continued the past practice of transferring such facilities to TEK as equity, has substantially aggravated TEK's financial difficulties in recent years. Findings and Lesson The lesson to be learned from this lending operation is that institution-building efforts will not be successful unless there is a firm and continuing commitment on the part of the Borrower to the agreed goals, and the Borrower is prepared to intervene in a decisive and timely manner to initiate any actions that may be warranted.  TURKEY KARAKAYA PROJECT (LOAN 1844-TU) PROJECT COMPLETION REPORT PART--I 1. Project Identity Project Name: Karakaya Hydropower Project Loan Number 1844-TU RVP Unit EMENA Country : Turkey Sector Energy Subsector : Power 2. Background 2.01 At the time the Bank was approached for funding the above project in 1975, Turkey had actively studied plans for the development of the water resources of the Euphrates Basin since 1962, and formulated projects for irrigation and power. In 1974, it completed the first stage of the 1,260 MW Keban hydropower dam. The Bank chaired the syndicate for the financing of this project and assisted in the financing of the associated transmission system. Karakaya represents the second stage in the basin development program and involves primarily regulation of the water released from the Keban reservoir for hydropower generation. The Karakaya project, like Keban, does not involve irrigation, nor abstraction of water from the Euphrates river other than for initial filling of the reservoir. 2.02 In order to ensure that reservoir filling and operation of Karakaya would not adversely affect the lower riparians, Syria and Iraq, the filling and operating rule proposals were evaluated by the Bank on the basis of a model developed by the Bank in 1974. As a result of this evaluation it was ascertained that if Turkey maintained an average monthly discharge of water of at least 500 cubic meters per second, as the Euphrates passes from Turkey into Syria, this would ensure that the existing downstream requirements for power generation and irrigation and reasonable growth during 1975-85 could be met and that the Turkish power plants could be operated for maximum energy output. Moreover, it also confirmed through the model that the Karakaya reservoir could be filled in a reasonable span of time. This operating rule was named the "Rule of 500". 2.03 After considerable discussion, an informal agreement was reached in 1976 between the Government of Turkey (GOT) and the Bank on the "Rule of 500" for reservoir filling and operation of Karakaya. The principles were communicated by Turkey to Syria and Iraq, and Turkey offered to discuss a possible tripartite arrangement with these countries to monitor their application. It was only then that the Bank decided to appraise the project. However, following objections received from both Syria and Iraq, Board consideration of the loan for the project was deferred. In March 1979, an official policy statement was endorsed in the Turkish Parliament that Turkey would abide by the Rule of 500 during filling and operation of the Karakaya reservoir, and that this procedure would continue as long as no unexpected hydro- meteorological conditions developed and no other project was constructed on the Euphrates which would require the use by Turkey of the waters of this river.  - 2 - Turkey also formally represented that the Bank could rely on this policy statement in considering its participation in the financing of the project. The Bank was aware that the Rule of 500 agreed by the Turkish Government concerning Karakaya was only an initial step in reaching a broader agreement among the Euphrates river riparians, but considered it adequate to participate in the financing of the project, despite the objections of Syria and Iraq. The project, therefore, was reappraised in late 1979, and presented to the Board in May 1980. 2.04 Prior to approval of the Bank loan of US$120 million in May 1980, the Turkish Government had obtained a bilateral credit from a group of Swiss banks in 1977/78 for an amount equivalent to US$295 million to finance principally the supply of the turbines and electrical equipment for Karakaya. Additional financing was also obtained from the European Investment Bank (ECU 85 million, equivalent to US$110 million) and from Italy (US$20 million). Total project cost was estimated at that time at the equivalent of US$1,160 million (excluding interest during construction), of which US$602 million were foreign expenditures. Expenditures up to 1979 were computed to be equivalent to US$241 million, with US$121 million equivalent in foreign currencies. 3. Project Obiectives and Descrittio 3.01 The principal objectives of the project were to provide additional generating capacity (1,800 MW and 7,353 GWh per year) for the Turkish Power System and to enable better use of the upst -eam Keban hydropower plant (the output of Keban would be increased by 400 GWh in an average hydrological year), thus saving foreign exchange by substituting hydroelectric energy for imported oil. The other objectives were the continuation of the institution-building effort started with the establishment of the Turkish Electricity Authority (TEK), coordination in power sector planning among TEK, the State Hydraulics Agency (DSI), the Ministry of Energy and Natural Resources, and the State Planning Organization, the development of appropriate policies for power sector financing, including energy pricing, and possible riparian coordination in the use of the Euphrates river waters. 3.02 The project consisted of the construction of the Karakaya dam and hydropower plant with a reservoir of 5,600 million cubic meters useful storage on the Euphrates river, located about 160km downstream of the Keban dam, comprising a concrete arch-gravity dam 173 meters high with an overflow spillway, power intakes, steel penstocks, a powerhouse at the toe of the dam containing six 300-MW turbine-generator units, a switchyard located 7.5km from the dam, relocation of 33km of railway line, construction of 35km of new highways and resettlement of about 17,000 people living in 34 villages. 3.03 During the negotiation of Loan 1844-TU, the Government agreed to make arrangemeusts satisfactory to the Bank for securing the financing needed to ensure completion by TEK of the 400-kV lines connecting the project with the national power network. The Third and Fourth Transmissio,n Projects fulfilled the undertaking. A 400 kV transmission line from the Karakaya switchyard to the interconnected power system was constructed by TEK as part of the Third TEK Transmission Project (Loan 2322-TU). Concurrently, TEK strengthened the 400- kV national transmission network under the same project. Further expansion and strengthening of this network is being done under the Fourth TEK Transmission Project (Loan 2586-TU).  - 3- 4. Prolect Design and Organization 4.01 Geological and site investigations for the project were comprehensive and very thorough for the type of dam constructed. In the Bank's initial review of the proposed project design, the adequacy of certain design features was questioned, particularly the bottom outlet features. This prompted revision of the original design with more reliable solutions for the project water handling facilities in order to avoid problems such as those experienced with the Keban project upstream, following which the Bank was satisfied with the project design. Engineering consultants (a joint venture of two Swiss firms, a US firm and a local firm) assisted DSI personnel at the project site during the entire construction and commissioning phases. This arrangement contributed to a relatively trouble free engincering effort and to the successful completion of the project. 5. Project Implementation 5.01 Project construction (which preceded the approval of the Bank loan) started in October 1976 and was expected to be completed by 1987. At the time the Bank reappraised the Project in 1979, basic preparatory works had been completed and construction of the diversion tunnel was nearing completion. The construction equipment had also been brought to the project site and all necessary facilities for the main construction works had been set up. The main hydro and electrical equipment was being manufactured and deliveries started in early 1980. For temporary storage of this equipment a large storage facility was under construction at the railway station about 30km from the project site. However, the Italian-Turkish joint venture contractors for the main works (dam and powerhouse) had slowed down construction activities because of delays in advance and progress payments and concern about future project funding. That led to serious disputes with the Owner (the State Hydraulic Agency--DSI). A period of considerable tension and low morale ensued, until finally with the good offices of the Bank both parties met in late 1979 and agreed to settle the disputes amicably. As a consequence of resolving the basic disputes with the construction contractors, a new project schedule was agreed and payment for work carried out was expedited by means of a letter of credit. From then on, project implementation proceeded smoothly to the start of reservoir filling in mid- 1986, completion of the dam including spillway in late-1987 and full commissioning of the power plant (all six units) in February 1989, about two years behind the date anticipated in the 1980 Staff Appraisal Report. 5.02 At appraisal it was found that although DSI's headquarters had considerable experience in carrying out large hydropower projects, the site management at Karakaya was not well structured and organized and that substantial improvement was needed. Communications between the site and DSI's headquarters in Ankara were inadequate; flights from Ankara to Diyarbakir (nearest airport, located about 150 km from the site) were irregular and telephone connections unreliable. Under normal procedures DSI's headquarters had full responsibility for execution and funding of projects, with the consultants at the site acting only as advisers and without responsibility for directing the contractors or approving their proposals. However, since sound project management was essential to the successful execution of a project of the magnitude and importance of  Karakaya, the Bank requested and the Government agreed to the establishment of a project management team at the project site, and to the appointment at the site of a manager with responsibilities, qualifications and experience satisfactory to the Bank, and with sufficient authority to solve site problems without having to seek DSI's headquarters approval. This arrangement worked out satisfactorily during the entire project execution time spar Contributing factors to the smooth implementation of the project were latively simple contracting structure, providing for only two main contra;. for, respectively, the civil works and the supply and installation of the electro mechanical equipment, and the assistance of a panel of internationally-known experts for periodic review of the technical aspects of the project construction. 5.03 Problems during construction were primarily related to the civil works. Severe rainfall in 1983 washed out part of the approach road to the site as well as a major bridge, filled the excavation area on the left bank with mud Lnd seriously damaged the roads and facilities at site. Heavy stabilization work, river diversion and dam excavation took longer than planned. The rate of concreting of the dam in the later years (after mid-1985) was less than planned because of more complex and thin sections at the higher dam levels. During the overspeed test, the stator coils of a generator were damaged due to problems with the ventilation fans. In order to avoid recurrence, the fans for all generators were replaced. 6. Proiect Results 6.01 Of the project's two main objectives, one was satisfactorily achieved. The completed physical facilities provide additional capacity to meet the power demand in the national power system and enable better use of the Keban hydropower capacity upstream, although optimum use will be reached only after completicon of a further, southern transmission line which is included in the Fourth TEK Transmission Project (Ln. 2586-TU). However, the achievement of the institutional objectives was far less satisfactory, and indeed disappointing. The overall results can be summarized as follows: i. Institutional Improvement of TEK: TEK has not yet achieved the greater efficiency anticipated at the time of project appraisal. ii. Coordination of Power See~tor Planning: In this area very little has been achieved and planning is still done with insufficient coordination between the sector entities, the Ministry of Energy and Natural Resources (MENR), and the State Planning Organization. iii. Development of Appropriate Policies for Power Sector Financing. including Energy Pricing and Power Sector Cash Generation: Power tariffs have eroded sharply in real terms between 1986 and 1989, and even after recent adjustments still remain below LRMC; and the financial target for TEK, a net internal cash generation target of 35X of public power sector investments, has not been met in recent years (para 9.02).  iv. Riparian Coordination in the Use of Euphrates Waters: A compromise solution on long-term issues, and systematic coordination of water useage on the basis of a unified model for the Euphrates river has yet to be achieved. 6.02 The actual internal rate of return for the project, estimated at 11.8%, falls short of the 15.1% estimated at appraisal, mainly because of the delay in completing the project and the fact that tariffs have been lower than expected at appraisal. 6.03 Resettlement of the population affected by the project was organized by DSI in close cooperation with the provincial authorities and the Ministry of Agriculture. Forestry and Rural Affairs. The loan agreement required submission of a resettlement plan and timetable for implementation by February 28, 1981, and no significant difficulties were subsequently experienced in resettling, ahead of reservoir impounding, the population of the 34 villages affected by the reservoir. During project supervision the Bank regularly monitored the resettlement progress. A consultant has reviewed progress on the specific resettlement issues that needed to be addressed under the project. On the basis of the information gathered during a mission to Turkey, he prepared a report in 1987 which outlined the legal and organizational resettlement arrangements and the actual process followed: The report has concluded that the existing legal and administrative system in Turkey governing involuntary resettlement is basically sound, and that practices and procedures for resettlement, including those relating to Karakaya, are satisfactory. The report recommended some improvements in the areas of collection of socio-economic data, follow up, and administration and coordination at site level, which have been communicated to the Government and DSI, who have indicated that they would follow up on these matters. A limited number of disputes concerning the compensation for land expropriated in the Karakaya reservoir area continues in the Turkish courts. 6.04 A study, based on terms of reference suggested by the Bank, of the environmental consequences of the project, including physical, biological and social impacts, was prepared by consultants in 1977. This was to be followed- up by an ecological reconnaissance by the Bank's environmental staff but this did not take place. Intensive archaeological investigations made throughout Turkey during the 1970s with the assistance of numerous foreign scientific institutions, also covered the area which would be flooded by impoundment of the reservoir, and the Bank assisted in the salvage of archaeological artifacts by bringing authorities from Turkish universities and overseas into the project. As previously noted (para 2.01), the project does not involve abstraction of water from the Euphrates river for irrigation or other consumptive purposes and is not expected to have major adverse effects for the downstream riparians as long as the "Rule of 500" is maintained. The project area and surrounding countryside are generally bare and treeless, with practically no wildlife, and restricted areas of agriculture. Loss of agricultural and grazing land in the reservoir area was the main environmental impact, along with a limited impact on archaeological and historical sites.  -6- 7. Proiect Sustainability 7.01 The principal benefits realized from the project, i.e the contribution to meeting the demand of the national power system, the savings in imported fossil fjels in thermal power plants because of their replacement by hydroelectric energy, and the financial revenue derived from the sale of the energy generated by the project, will endure for the useful life of the project, which is about 40-50 years. 8. Bank Performance 8.01 The Bank played a role in making sure that project management arrangements were efficient (particularly by urging decentralized management at the project site) and that financing was available in a timely fashion. In addition, the Bank assisted in the successful negotiations between DSI and the main civil works contractors concerning delays in payment for work done (para 5.01). The Bank was instrumental in improving the design of the project by suggesting a number of changes, particularly regarding the bottom outlet features. 8.02 The Bank closely monitored the institutional components of the project. Hopes that TEK's institutional and financial performance would improve were raised when, following major tariff increases in the years 1982-84, TEK's internal cash generation reached, or came close to, the agreed targets in 1985 and 1986 (para 9.02) and when, after a waiver of the financial covenants for 1987, TEK's tariffs and capital were again significantly increased at the end of 1987, and a new general manager brought in from the outside initiated a reorganization of TEK. However, the increase of TEK's tariffs and capital (which was not paid up until 1989), has since been largely eroded by inflation, and the attempts to reorganize TEK had stalled by the time the new general manager left TEK in September 1988. Power sector investment planning and coordination were repeatedly examined during the Bank's public sector investment reviews and also in the context of the preparation of the Energy Sector Adjustment Loan (2856- TU) but, as noted in para 6.01 (ii), without lasting results. A strategy to put power subsector development back on track, discussed with the Government and TEK in 1989 and 1990, provides for a restructuring program for TEK under a project which is presently in course of preparation. 8.03 The Bank developed the Euphrates river basin model that was used in devising the Rule of 500. However, as noted in para 9.03, it subsequently experienced increasing difficulties in monitoring the river flows.  -7 9. Borrower Performance 9.01 At project appraisal DSI was already a highly experienced government agency, but overly centralized. Since for a project of the magnitude and complexity of Karakaya, it was essential to have adequate project management at the project site, sufficient authority had to be, and was, delegated to the site management. The restructured site management as well as DSI's headquarters organization performed satisfactorily during project implementation. 9.02 In retrospect, it is clear that there was insufficient commitment on the part of the Government to the institution building objectives of the project. As noted in para 6.01 (i) and (ii) little headway has been made in the institutional improverent of TEK or in incroasing coordination of power sector planning. The Government also has not lived up to its commitments concerning power sector tariffs and finances. In accordance with the agreements under the Karakaya loan, 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 working capital deficits from counting as a positive element in the 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 a cash generation of 41% in 1985. Since then, however, as a result, inter alia, of the Government's unwillingness to raise electricity tariffs sufficiently to cover TEK's financial costs and debt service requirements, cash generation has fallen from 31% in 1986 to an estimated -22% in 1989, and the current ratio from 0.96 in 1985 to an estimated 0.50 at the end of 1989. 1987, 1988 and 1989 were election years (general, municipal and presidential), and 1988 and 1989 also years of heavy inflation, which may 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, provides for a restructuring program for TEK under a project which is presently in course of preparation. 9.03 The Borrower did not comply with the loan covenants concerning the supply of Euphrates water flow data. When the Government decided in 1983 to seek supplemental financing for the project from the Bank, the Bank considered that as part of the appraisal of a supplemental loan, the riparian issue should be re-examined, since Turkey had started construction of the large Ataturk dam downstream of Karakaya involving power generation and abstraction of water for irrigation. Accordingly a new and more elaborate model for the Euphrates Basin was developed to review the issue in the light of new data and facts. In order to update the data and analysis on which the Rule of 500 was based it was essential to obtain figures on the water released from the Keban reservoir. The Government declined to make these figures available to the Bank and decided to seek supplemental financing elsewhere. Also, since the beginning of 1986, the year of reservoir filling, the Borrower has not submitted quarterly reports to the Bank on the Euphrates river flows as required under the loan agreement. However, according to the project completion report submitted by DSI, river  - 8 - flows, which had been reduced to 420 m3/s for about 1