Turkey - Second Phaseout of Ozone Depleting Substances Project

Report No. PIC2228 Project Name Turkey-Second Phaseout of Ozone... Depleting Substances Project Region Europe and Central Asia Sector Industry Project ID TRPA38404 Recipient Republic of Turkey Implementing Agency Beneficiary Private Enterprises Financial Intermediary Technology Development Foundation Financing Plan OTF Grant: US$14.0 million Private Enterprises: US$10.5 million Project Cost: US$24.5 Million Appraisal March 1995 Expected Signing June/July 1995 Country/Sector Background 1. All ozone depleting substances (ODSs) utilized in Turkey are imported, with consumption of about 6286 tonnes (equivalent to about 5000 ODP tonnes)(see 1/) in 1993. The primary uses of ODSs were for refrigerants (22%), refrigerator and polyurethane foams (48%), and solvents (229). There are five large domestic and commercial refrigerator manufacturers who account for over one-half of ODS consumption in Turkey. There are an estimated 1500 workshops for servicing refrigerators, about 1200 of which are manufacturer-authorized workshops and the remainder independently owned. In addition to the refrigerator manufacturers who produce their own requirement of rigid foams, there are four large and over fifty small to medium producers of rigid foams used in building insulation. Flexible foams for seating and furnishing applications are produced by ten large and a number of small to medium firms. A variety of solvents are used for diverse applications across the industry. The use of aerosols has been aost completely phased out, largely due to industry initiatives taken in response to market forces. ODS usage, particularly refrigeration and foams, has continued to increase due to expanding domestic markets. The exports of refrigerators and building insulation foams has also increased over the past few years. In the short- to medium-term, most western European nations will ban imports of products containing ODSs, as well as imports and exports of ODSs themselves. If measures to encourage adoption of non-ODS technologies are not implemented soon, Turkish industries in the refrigeration, foams and solvents sectors will not be able to continue with production due to shortages or lack of supply of ODSs, and the country will lose export markets and earnings. 2. The Government of Turkey (GOT) has already taken significant steps toward the phaseout of ODSs. Prior to ratifying the Montreal Protocol on September 20, 1991, Turkey passed the entire text of the Protocol as law. Although it qualifies under paragraph 1 of Article 5 of the  Protocol for a ten year period to phaseout the use of ODSs, GOT has opted for an accelerated program aimed at phasing out usage of these substances, except for recharging, by 1998. ODSs used for recharging refrigerators and other appliances are to be phased out by 2007. GOT is taking steps to implement its strategy which calls for policy actions and investments, including the implementation of a public awareness campaign, to achieve the effective phaseout of ODSs. 3. The implementation of the strategy has already started and is being supported through an OTF grant of US$6.165 million approved in January 1994 for the first Phaseout of Ozone Depleting Substances (PODS-I) Project (OTF Grant No. 021934). The PODS-I project supports institutional and management strengthening of the Ministry of Environment (MOE) including setting up the advisory Ozone Panel, implementing an ODS monitoring framework, promoting ozone awareness, and preparing a framework for the regulation of ODSs in the future; conversion to non-ODS technologies at Turkey's largest domestic refrigerator manufacturer, Arcelik A.S.; and identification and preparation of additional projects for ODS phase-out. The MOE, Arcelik A.S. and the Technology Development Foundation (TDF) are, respectively, responsible for implementation of the three components. Overall project implementation of PODS-I has been satisfactory and Arcelik is expected to complete its project ahead of schedule. The proposed project would build on the progress made under PODS-I, and would extend coverage by supporting additional private sector enterprises in phasing out their use of ODSs. Project Objectives 4. The objective of this Project is to assist GOT in ensuring that ODS-using industries in Turkey effectively and efficiently phase out ODS usage through the adoption of non-ODS technologies. The policy and regulatory measures will also be monitored as agreed under the PODS-I project. The phaseout is to be effected in compliance with the Protocol, as ratified by the Republic of Turkey, and in accordance with the recommended ODS phaseout strategy and action plan outlined in the Country Program. Project Description 5. The proposed Project would provide financial assistance to enterprises in all sectors for adoption of non-ODS technologies. Eligible investment costs and recurring costs would be financed in accordance with prevailing MPEC guidelines. Investment costs include manufacturing and processing equipments, prototyping & testing, safety equipments for handling hazardous substances such as cyclopentane, and technology transfer and safety training. Recurring costs cover incremental operating costs arising from the technology conversion. Sub-projects in the refrigeration sector involve both investment and recurring costs, while those in the other sectors primarily involve investment costs. Project Costs and Financing 6. Project costs consist of the incremental investment and recurring - 2 -  costs incurred in ODS phaseout activities. Detailed costs for new sub- projects would be determined as proposals are developed. Cost estimates of most of the equipment will be assessed against quotations from major suppliers and/or against costs of similar equipment in other sub-projects and countries. Allowance of about 15t would be made for physical and price contingencies. Cost estimates for consultancy services would be based on average costs, including consultant fees, transportation, living expenses, etc. Incremental recurring costs would be reviewed one year after commencing production. 7. TDF is currently developing sub-projects for assistance to large enterprises in each sector. Based on the number of large enterprises in each sector and their ODS consumption, the mission estimates US$12.0 million would be needed to finance about four large enterprises in the refrigeration sector and six to eight in the foams and solvents sectors; and some US$1.5 million would be required to finance investments for small and medium enterprises. A Trust Fund Grant of US$14 million from the Multilateral Fund of the MP, including a financial agent fee of 3t to be retained by TDF, is thus proposed. Funds will be used to finance all eligible incremental project costs for conversion to non-ODS technologies, including recurrent costs. Implementation Arrangements 8. The private sector enterprises proposing to convert to non-ODS technologies would be responsible for implementation of the respective investments (sub-projects). TDF will serve as the financial intermediary and will be responsible for preparation, appraisal and supervision of sub-projects. The MOE will develop the policy and regulatory measures for ODS phaseout and will ensure the enforcement of other relevant regulations. The implementation arrangements, issues and actions proposed are described below: Sub-project Selection. The strategy identifies priority sectors; in addition, the cost effectiveness of ODS phaseout (eligible amount of OTF assistance divided by amount of ODSs phased out per annum) would be used to sub-projects for financing in each sector. The TDF would assist enterprises in the preparation of funding proposals and the Bank will review the proposals after appraisal and evaluation by TDF in accordance with Montreal Protocol guidelines before sub-projects are approved for financing. All sub-project proposals for funding support under the Project would be reviewed and approved by the Bank. Further, proposals exceeding US$0.5 million in financial support would be submitted to MPEC for review and approval. Terms of Financing. The grant funds to be made available to TDF will be provided to enterprises on the following terms: (a) for enterprises in the refrigeration sector, funds will be provided on a soft loan basis except for safety equipments, prototyping and testing and technical assistance; and (b) enterprises in other sectors, financing of up to US$0.5 million would be on grant basis and the balance would be on soft-loan basis. The soft-loan terms would be a zero percent dollar denominated loan with repayment over 2-3 years, commencing after a grace period not extending beyond - 3 -  sub-project completion. The proposed terms were designed to support the Government's desire to establish a revolving fund that could support the financing of additional ODS projects while at the same time providing grant financing to small and medium scale industries to ensure that they undertake the needed adjustments at minimal cost to them. The enterprises would repay the loans into a revolving fund set up by the TDF under PODS-I to support future ODS phaseout activities. Cost Sharing by Enterprises. Funding support for each sub-project is determined based on foreign ownership of the enterprise and its exports to non-article 5 countries in accordance with prevailing MP guidelines. Sub-projects would have different proportions of incremental project costs supported from the OTF and the balance of expenditures would be financed by the beneficiary enterprises. Project Sustainability 9. The primary purpose of the OTF is to provide a financial incentive to facilitate ODS phaseout by compensating beneficiaries for incremental costs incurred as a result of converting to non-ODS technologies. In addition, the Fund aims to ensure that beneficiary nations achieve phase-out without impairing their industrial development processes. The assistance provided to Turkish industry through the project would help to ensure that the accelerated scenario of phase-out is achieved, and would permit the sector to remain competitive on the international market as demand for non-ODS products increases and the market for ODS- based technologies contracts. Lessons From Bank Projects 10. Turkey