Document o f The World Bank

FOR OFFICIAL USE ONLY

Report No: 36341-TR

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

IN THE AMOUNT OF EURO 205 MILLION

(US$269.4 MILLION EQUIVALENT)

TO THE

TURKIYE ELEKTRIK DAGITIM A.S. (TEDAS)

WITH THE GUARANTEE OF THE REPUBLIC OF TURKEY

FOR AN

ELECTRICITY DISTRIBUTION REHABILITATION PROJECT

March 26, 2007

Sustainable Development Unit Europe and Central Asia Region (EC S S D)

This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS (Exchange Rate Effective February 28,2007)

YTL 1.4 = US$1 US$ 1.31 = €1

Currency Unit = New Turkish Lira (YTL)

APL BOOS BOTAS

BOTS CAS CFAA DISCO(s) DSI EA EC ECSEE EIA EIB EML EMP EMRA EPDK ERP EU EUAS GENCO(s) IBRD IDA IFC LNG MENR MOEF MOF PA PPA PPIAF SEE SIL SPO TEAS TEDAS TEK TEIAS UCTE

FISCAL YEAR January 1 - December 31

ABBREVIATIONS AND ACRONYMS Adaptable Program Loan Build Own and Operate Power Plants BORU HATLARI ILE PETROL TASIMA A.S. (Turkish Pipeline Company) Build Operate and Transfer Power Plants Country Assistance Strategy Country Financial Accountability Assessment Distribution company(ies) formed by restructuring TEDAS Devlet Su Ivleri (State Hydraulic Works) Environmental Assessment European Commission Energy Community o f South Eastern Europe Environmental Impact Assessment European Investment Bank Electricity Market Law, No. 4628, 2001 Environmental Management Plan Energy Market Regulatory Authority Enerji Piyasasi Duzenleme Kurumu (EMRA in Turkish) Enterprise Resource Planning program European Union Elektrik Uretim A,$. (Electricity Generation Corporation, Turkey)

nd Petroleum Tran mission

Portfolio generating companies to be created from the restructuring o f EUAS International Bank for Reconstruction and Development International Development Association International Finance Corporation Liquefied Natural Gas Ministry o f Energy and Natural Resources Ministry o f Environment & Forestry Ministry o f Finance Privatization Administration Power Purchase Agreement Public-Private Infrastructure Advisory Facility State Economic Enterprise Specific Investment Loan State Planning Organization Turkiye Elektrik A,$. (Turkish Electricity Corporation, Predecessor o f EUAS and TEIAS) Turkiye Elektrik Dagitim A.S. (Turkish Electricity Distribution Corporation) Turkiye Elektrik Kurumu (Turkish Electricity Corporation, Predecessor o f existing Corporations) Turkiye Elektrik Iletim A.S. (Turkish Electricity Transmission Corporation) Union for the Coordination o f Transmission o f Electricity in Europe

Vice President: Shigeo Katsu Country Director: Ulrich Zachau

Task Team Leader: Sameer Shukla Sector Manager: Charles Feinstein

FOR OFFICIAL USE ONLY TURKEY

Electricity Distribution Rehabilitation Project

CONTENTS

Page

A . STRATEGIC CONTEXT AND RATIONALE .................................................................. 5 Country and sector issues .................................................................................................... 5

Rationale for Bank involvement .......................................................................................... 9

Higher leve l objectives to which the project contributes .................................................. 10

1.

2 . 3 .

B . PROJECT DESCRIPTION ................................................................................................ 10 1 . 2 . 3 . 4 . 5 .

Lending instrument ........................................................................................................... -10

Project development objective and key indicators ............................................................ 10

Project components ............................................................................................................ 10 Lessons learned and reflected in the project design .......................................................... 11

Alternatives considered and reasons for rejection ............................................................. 12

C . IMPLEMENTATION ........................................................................................................ -13 1 . 2 . 3 . 4 . Sustainability ..................................................................................................................... 14

5 . Critical risks and possible controversial aspects ............................................................... 14

6 . Loadcredit conditions and covenants ............................................................................... 16

Partnership arrangements (if applicable) ........................................................................... 13

Institutional and implementation arrangements ................................................................ 13

Monitoring and evaluation o f outcomes/results ................................................................ 14

D . APPRAISAL SUMMARY .................................................................................................. 17 1 . Economic and financial analysis ....................................................................................... 17

2 . Technical ........................................................................................................................... 19

3 . Fiduciary ............................................................................................................................ 20

4 . Social ................................................................................................................................. 20

5 . Environment ...................................................................................................................... 21

6 . Safeguard policies .............................................................................................................. 21

7 . Policy Exceptions and Readiness ...................................................................................... 21

This document has a restricted distribution and may be used by recipients only in the performance o f their off icial duties . I t s contents may not be otherwise disclosed without Wor ld Bank authorization .

Annex 1: Country and Sector or Program Background .......................................................... 22

Annex 2: Majo r Related Projects Financed by the Bank and/or other Agencies .................. 29

Annex 3: Results Framework and Monitor ing ......................................................................... 32

Annex 4: Detailed Project Description ...................................................................................... 35

Annex 5: Project Costs ................................................................................................................ 46

Annex 6: Implementation Arrangements .................................................................................. 47

Annex 7: Financial Management and Disbursement Arrangements ..................................... 50

Annex 8: Procurement Arrangements ....................................................................................... 57

Annex 9: Economic and Financial Analysis .............................................................................. 62

Annex 10: Safeguard Policy Issues ............................................................................................. 78

Annex 11: Project Preparation and Supervision ...................................................................... 81

Annex 12: Documents in the Project F i l e .................................................................................. 82

Annex 13: Statement o f Loans and Credits ............................................................................... 83

Annex 14: Country at a Glance .................................................................................................. 86

Annex 15: Map IBRD 34858 ...................................................................................................... 88

TURKEY

Source Borrower International Bank for Reconstruction and Development Total:

ELECTRICITY DISTRIBUTION REHABILITATION PROJECT

Local Foreign Total 75.00 0.00 75.00

126.90 142.50 269.40

20 1.90 142.50 344.40

PROJECT APPRAISAL DOCUMENT

EUROPE AND CENTRAL ASIA

ECSSD

Date: March 26, 2007 Country Director: Ulrich Zachau Sector ManagerDirector: Charles Feinstein

Team Leader: Sameer Shukla Sectors: Power (1 00%) Themes: Other urban development; Infrastructure services for private sector development Environmental screening category: Partial Assessment

Project Financing Data

Project ID: PO96801

Lending Instrument: Specific Investment Loan

[XI Loan [ ] Credit [ 3 Grant [ ] Guarantee [ 3 Other:

Borrower: TURKIYE ELEKTRIK DAGITIM A.S. (TEDAS) Inonu Blv. No: 27, Bahqelievler Ankara Turkey Tel: (90-3 12) 2 13-7804 Fax: (90-3 12) 2 15-7275

Responsible Agency: TURKIYE ELEKTRIK DAGITIM A.S. (TEDAS) Inonu Blv. No: 27, Bahqelievler Ankara Turkey

FY Annual Cumulative Project implementation period: Start September 3,2007 End: June 29,2012 Expected effectiveness date: April 30, 2007 Expected closing date: December 3 1, 20 12 Does the project depart from the CAS in content or other significant respects? Ref: PAD A.3 Does the project require any exceptions from Bank policies? Ref: PAD D. 7 Have these been approved by Bank management? I s approval for any policy exception sought from the Board? Does the project include any critical risks rated “substantial” or “high”? Ref: PAD C.5 Does the project meet the Regional criteria for readiness for implementation? Ref: PAD D. 7 Project development objective Ref: PAD B.2, Technical Annex 3 To help improve the reliability o f power supply to consumers in Turkey by supporting the implementation o f the electricity distribution network rehabilitation and expansion program.

Project description [one-sentence summary of each component] Ref: PAD B.3.a, Technical Annex 4 The Electricity Distribution Rehabilitation Project consists o f the following investments:

Distribution Network Rehabilitation and Expansion: This includes investment projects for distribution network rehabilitation and expansion in the TEDAS regional companies o f Ayedav, Uludag, Meram, Gediz, Toroslar, Menderes, Osmangazi and Akdeniz. The investment components financed by the Loan include rehabilitation and upgrading o f medium and low voltage distribution equipment and facilities, by: (i) replacing existing run-down and aged medium and low voltage overhead l ines in densely populated areas with underground cables; and (ii) constructing new distribution substations and feeders. While rehabilitating the networks, effort would be made to eliminate nonstandard medium voltages (besides 34.5 kV) which are currently in operation at several locations. Investments financed by this loan will include the installation o f performance monitoring systems in the provinces with investment projects financed by this loan to enable monitoring and recording o f the distribution network’s performance and their compliance with the regulatory service reliability criteria.

[ ]Yes [XINO

[ ]Yes [XINO [ ]Yes [XINO [ ]Yes [XINO

[XIYes [ ]No

[XIYes [ ]No

2007 2008 2009 2010 2011 2012 2013 0 0 0.00 20.00 50.00 60.00 70.00 40.00 29.40 0.00 0.00 0.00 20.00 70.00 130.00 200.00 240.00 269.40 269.40 269.40

Technical Assistance for supervision consultants: The project will also finance supervision consultants to assist TEDAS and the regional companies in managing and supervising the implementation o f the investment projects. These consultants will support TEDAS and regional staff in the following: - provide monitoring support to the regional companies for the implementation o f the

investments, - ensure that the project activities are well coordinated between the TEDAS, regional

companies and the contractors as will as with other relevant agencies (Le. municipalities, local

infrastructure utilities), and

Project design and work schedule. - ensure that the supplied equipment and c iv i l and installation works are in compliance with the

Consultants/advisers will be used to assist TEDAS in the implementation o f a system for monitoring and evaluation o f performance indicators.

Which safeguard policies are triggered, if any? Re$ PAD 0 .6 , Technical Annex 10

Ref. P A D D.6, Technical Annex 10 Environmental Assessment (OP/BP/GP 4.0 1)

Significant, non-standard conditions, if any, for:

Re$ PAD C. 7

Board presentation: There are no conditions for Board Presentation.

Loadcredit effectiveness: There are no conditions for Loan Effectiveness.

Covenants applicable to project implementation:

The following covenants are included in the loan agreement, in addition to the standard covenants relating to audits, accounts, procurement plans, mid-term reviews etc.

I. Financial Covenants

(a) TEDAS will maintain its collection efficiency for sale o f electricity to final consumers, expressed as a percentage o f total electricity sold, at not less than 93% from 2007 onwards, at not less than 95% for 20 10 onwards, and at not less than 98% for 20 15 and thereafter. (b) TEDAS will achieve a s e l f financing ratio (funds from internal resources as a proportion

o f the three-year average capital expenditure) o f not less than 25% in every year starting from 2007.

11. Institutional Arrangements

(a) TEDAS shall, through the Project Management Team (PMT), oversee the overall implementation o f the Project. To that end, the Borrower shall maintain the P M T throughout the implementation o f the Project, under terms o f reference acceptable to the Bank and with sufficient and suitable human, financial and technical resources.

(b) TEDAS shall enter into contractual relations, acceptable to the Bank, with the regional distribution companies, to ensure: (a) the annual debt service obligations o f the Borrower, through an escrow account to be established in a manner satisfactory to the Borrower and the

Guarantor, until the debt service payments are fully recovered by the Borrower; and (b) the satisfactory implementation o f the investments supported under the Project.

(c) TEDAS shall implement the EMP and shall include in the quarterly progress reports to the Bank specific environmental reports, as required, providing results o f any monitoring programs undertaken as part o f the EMP.

111. Financial Management Covenants: TEDAS will maintain a financial management system acceptable to the Bank.

A. STRATEGIC CONTEXT AND RATIONALE 1. Country and sector issues

Country Economic Overview 8 The Turkish economy has rebounded from the 2001 crisis which had serious

economic and social impacts: by the end o f 2001, the currency had devalued by 50 percent, nominal interest rates were about 100 percent, and the banking system had virtually collapsed. GNP growth has been strong since 2001 close to 8 percent on average during the last 4 years. Inflation was also brought under control, reaching single digits in 2004 for the first time in 35 years, although i t i s expected to be around 10 percent at end-2006. Several factors contributed to the improved macroeconomic performance - key amongst them are: strong fiscal discipline which has allowed the maintenance o f a large primary surplus in the order o f 6.5 percent o f GNP; on-going structural reform; and political stability since 2002.

been an important signal to financial markets and has created a firm anchor for the country’s development and structural reforms in the years ahead, notwithstanding the fact that the process i s expected to be long and difficult.

8

The EU’s decision to open accession negotiations with Turkey in October 2005 - has

The Electricity Sector in Turkey: Transition to a Competitive, Privatized Market 8 Legislative basis - The Government has embarked upon a comprehensive reform and

restructuring program o f the electricity sector to create a liberalized, efficient and economic sector. This reform program was initiated by the Electricity Market Law (Law No. 4628) promulgated in February 2001 and reflected in the Strategy Paper accepted by the High Planning Council in March 2004, which accelerated the reform process. The principles and goals o f the reform program defined by this L a w are substantially in l ine with EC Directives (1 996/92/EC and 2003/54/EC) concerning rules for the internal market for electricity.

the EC initiated to develop the regional electricity and gas market in South East Europe and eventually integrate it with the internal electricity and gas market o f the European Union. The regional market development process commonly referred to as the “Athens process” was initiated by 2002 Athens Memorandum. The Athens Memorandum 2003 which superseded the 2002 document included provisions relating to natural gas market development. While other regional members signed the resulting Energy Community o f South Eastern Europe (ECSEE) Treaty on October 25, 2005, Turkey did not, owing to reservations on some o f the Treaty provisions. With the EU decision o f October 3, 2005 to begin negotiations for full accession, some reservations on the Treaty now become intertwined with the negotiations on the Energy Chapter o f the Acquis Communautaire. Turkey however remains committed to, and continues to implement the provisions o f the 2003 Athens Memorandum.

Market Law, TEAS, the former integrated generation and transmission corporation, was restructured into a generating corporation EUAS, a trading corporation TETAS and a transmission corporation TEIAS. TEDAS, the Government-owned distribution corporation had been earlier separated from TEAS’ predecessor, TEK. In 2004, TEDAS

ECSEE Treaty - Turkey i s a signatory o f the Athens Memoranda o f 2002 and 2003 that

8 Functional and corporate restructuring of the sector - Pursuant to the Electricity

5

was restructured into separate regional distribution companies (DISCOS) in preparation for their privatization. The generation sector i s also in the process o f being restructured into one holding company which will retain the major hydroelectric power plants, and six separate portfolios o f generation assets that wi l l be later formed into companies (portfolio companies) that would be privatized once distribution i s substantially privatized.

authority, the Energy Market Regulatory Authority (EMRA) with jurisdiction over electricity, gas, petroleum and LPG. EMRA has powers over licensing, tari f f setting and customer service issues.

G W h are considered eligible, Le., they can choose their own supplier - this represents more than 30% o f the total Turkish electricity market.

competitive bilateral contract market with a balancing and settlement system. Cash-based market operations began in August 2006, and i t i s expected that the final market structure will be in place once daily settlements supported by hourly metering i s implemented. TEIAS, the transmission company i s the independent system operator and the market operator. The market i s expected to provide the necessary price signals for potential new generation.

Independent Regulatory Framework - Turkey has set up an independent regulatory

Retail Competition in Electricity - Consumers whose annual consumption exceeds 6.0

Competitive Market Structure - Market simulations are in progress to introduce a

The Electricity Distribution Business

1. The electricity distribution system in Turkey i s owned by TEDAS (except Kayseri), a corporation created from the restructuring o f TEK, an integrated electricity utility, in 1993, and operated by 20 regional distribution companies under transfer o f operating rights (TOOR) contracts. TEDAS was shifted to the “privatization program ”’ o f the Privatization Administration (PA) in April 2004 and was restructured into 20 regional companies in 2005. In addition to TEDAS, eligible consumers are supplied by IPPs, autoproducers, wholesalers and other private producers. One region, Kayseri, i s operated by a separate company in which the municipality holds the largest stake. TEDAS sales made up about 75% o f total consumption o f electricity in Turkey in 2005, with the remaining attributable largely to autoproducers eligible consumers. TEDAS sold about 93 T W h in 2005 to about 28 mi l l ion consumers. About 30% o f total consumption was by industrial consumers in 2005, with residential consumers making up another 30%.

2. TEDAS estimates its system losses (technical and commercial, including theft o f electricity) at about 17.8% in 2005. Losses rose consistently from about 10.7% in 1990 to 21.6% in 2000, but have declined gradually since then, as a result o f several measures by TEDAS to improve metering and bi l l ing and curtailment o f theft. In 2004 for instance, loss detection teams set up at headquarters and in the regions inspected about 6 mi l l ion consumers and recorded 320,000 cases o f theft - this resulted in a revenue assessment o f US$ 230 mi l l ion and cash collection o f US$ 78 mil l ion. In several places, metering, bi l l ing and collections are outsourced,

The term “privatization proguam” refers to the transfer o f a state-owned enterprise to the ownership and financial oversight o f the Privatization Administration in preparation for eventual privatization, Typically, State Owned Enterprises are owned and supervised by the Undersecretariat o f Treasury.

I

6

and the outsourcing agencies are provided added incentives for theft prevention. TEDAS’ staff have also developed an internet-based system to improve retail services such as subscription, metering, billing and collections - for instance, the system enables bill payment through banks, and also facilitates consumption to be tracked to identify potential theft, remote disconnections and reconnections.

3. While TEDAS’ collection efficiency has been rising, to about 93% in 2005, arrears for sale o f electricity stood at US$ 3.5 billion at the end o f 2005. A significant part o f the arrears, about 53% o f the total, arise from non-payment by government agencies, particularly municipalities and particularly for street lighting. The Government i s however, trying various options to deal with the problem o f accumulated arrears (See Annex 9). For municipalities in particular, laws have been amended in order to enable the Government to allocate central tax devolutions through Iller Bank2, towards meeting electricity dues. The dues o f about 2500 municipalities and 8 metropolitan municipalities were reconciled and rescheduled in June 2006, and i t i s expected that from July 2006, monthly deductions from central devolutions will commence. For street lighting bills, which have been a particularly serious problem since municipalities have by and large refused to accept these bills as their responsibility, the Government has prepared amendments in related legislation to allow the use o f municipal taxes and additional electricity tax for recovery o f these dues (and future bills) over time.

4. The electricity distribution network in Turkey i s in poor condition and system reliability i s declining. Investment in the distribution sector has been constrained for over a decade and the system i s now showing signs o f this lack o f investment, with high system losses and system reliability declining over time. Between 1994 and 2003, TEDAS requested an investment budget o f US$ 7.6 billion and was allocated less than half that amount3. In about the same period, the number o f consumers increased by 9.5 million (a compounded annual growth o f 5.1%); staff strength reduced from 38,351 to 32,140 in 2004; and system losses rose from about 15.5% to 19.9%. The distribution sector also went through a phase o f poorly structured and failed privatization from 1997-2002 which exacerbated system inefficiencies, as the sector remained in limbo with very l i t t le attention being given to the physical condition o f the system. Average annual interruption levels per consumer4 are much higher than EU countries with similar climate and geography, and the performance’ o f the distribution networks in Turkey i s also below average performance amongst other EU countries. The Bank’s Investment Climate Survey6 for Turkey shows that nearly 82% o f the 1,300 firms surveyed experienced an average o f 28 power outages in 2005, leading to a loss o f more than 4% o f annual revenues. 47% o f the

Central tax and other devolutions to municipalities are routed through I ler Bank, a government-owned bank. Up to 20% o f these monthly devolutions to any particular municipality will be deducted for payments to TEDAS.

Improvement o f Operational Efficiency and Service Quality in the Electricity Distribution Grid - Feasibility Report by McKinsey for TEDAS General Directorate

See footnote ## 3 . A record o f actual energy interruptions to consumers i s not available. However, according to the distribution feeder outage records (number and durations), TEDAS approximate calculations show that unserved energy due to interruptions in some regional companies could be equivalent to as high as 8 days o f the regional company’s annual energy sales..

Losses in the distribution networks vary from about 5.0% in Bursa province to as high as 71.6% in Mardin province. Voltage drops in the distribution network could be as high as 10% during peak demand.

The Bank conducts Investment Climate Surveys (ICs) in many countries on a regular basis, with the objective o f assessing the main factors which constrain growth by manufacturing firms. The Turkey ICs covered 1,323 firms representing nearly every industry and ownership structure.

3

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surveyed firms own a generator as a result. In comparison, 64% o f firms in Brazil reported having faced outages, at an average o f less than 5 outages per firm during 2005.

5. In many regional distribution companies, the urban distribution network poses a safety risk. Turkish towns and cities have urbanized rapidly, and in several places, urban housing and commercial developments have expanded with l i t t l e regard for environmental or safety considerations vis-a-vis existing distribution networks. Rapid urbanization has thus come with poorly regulated construction, and clearances between distribution overhead lines and buildings are significantly below the levels prescribed in the electricity regulations and pose serious safety risks.

Turkey’s distribution privatization strategy

6. PA’s privatization strategy i s a modified Transfer-of-Operating Rights (TOR) approach backed by a sale o f shares to private investors. In this approach, TEDAS will continue to own the assets, and wil l transfer the right to operate the distribution networks in specific regions to the relevant regional distribution companies. These distribution companies will have al l the rights that an owner would have, including the right to invest in network maintenance and expansion. These operating rights will be co-terminus with the distribution and retail licenses provided by EMRA. These distribution companies wil l then be privatized through a sale o f a majority o f the shares on a competitive basis.

7. After intense debate over the preferred privatization strategy and approach’, the relevant agencies have agreed to the strategy proposed by PA. Preparation for privatization has proceeded at a fast pace, and in September 2006, P A commenced the privatization transaction for three distribution companies - Ayedag, Bagkent and Sakarya. Key procedural and legislative requirements for commencing privatization have been completed: (i) significant amendments have been made in the Electricity Market Law (EML) No. 4628 and other relevant laws, (ii) 5- year tari f f profiles have been approved, and (iii) transition contracts between EUAS, portfolio gencos, TETAS and the distribution companies were signed in June 2006. The Law has been amended fairly significantly, most recently in M a y 2006. These amendments seek to reduce the perceived risks in the agreed privatization approach, and to make it consistent with the overall reform program. The changes include mainly provisions enabling (i) the transfer o f operating rights, (ii) tariff equalization and 5-year tari f f profiles, and (iii) transition contracts. Perhaps most significantly, the amendments further require that the 5-year transitional tariff profiles for each regional company can be changed only by the Government through a Council o f Ministers’ decree.

8. The investor will be obliged to make a pre-defined level o f investments in the network, and to demonstrate the achievement o f pre-defined performance criteria such as loss reduction, improved collection efficiency, and improved customer service. The tender documentation for the privatization will reflect the availability o f the Bank loan for the rehabilitation o f distribution systems. Upon completion, it i s expected that these investments will improve reliability and reduce energy disruptions.

The other main alternative, outright asset sale was seen to carry serious legal impediments and was hence not 7

considered feasible.

a

9 . The tariff profiles are based on the Government’s decision to maintain uniform national tariffs and to achieve a degree o f stability in the tariff level. However, future changes in either fuel prices or power purchase costs will be passed through. The tariffs also factor in the targeted performance criteria and investments required by the distribution companies.

10. Since different distribution companies have different cost structures, each distribution company will require a different tariff profile. In order to enable the implementation o f uniform tariffs, a tariff equalization mechanism i s being established. This mechanism will aim to equalize across distribution companies to ensure that they recover the revenues that they require to cover eligible costs, after factoring in performance targets. I t i s envisaged that this equalization will be done through TETAS (See Annex 9).

1 1. Prerequisites for privatization: The Government has agreed that privatization will be completed after the following elements o f market and regulatory reforms have been tested and implemented: (i) the implementation o f a balancing and settlement system on a cash-settlements basis with the multiple DISCOS and the transition contract arrangements; and (ii), the tariff equalization mechanism and 5-year tariff profiles for distribution companies. The balancing market was implemented in August 2006 and has been in operation since then. Transition contracts are in place, and are currently being fine-tuned. The tariff equalization mechanism has been finalized, and will be implemented over the next few months.

2. Rationale for Bank involvement

There are two main reasons for the Bank engaging in the Turkish electricity distribution sector:

(a) Ensuring completion of deferred rehabilitation and upgrades - The distribution sector in Turkey has postponed essential investments in upgrades and rehabilitation for several years. Two factors contributed to this. First, the distribution sector went through a five year hiatus from 1997-2002 during which attempts at privatization failed. Consequently, the expectation that the private sector would make the necessary investments was not realized. Second, the Government faced budget pressures during repeated fiscal crises and curtailed investments in the distribution sector. The government remains committed to privatizing the distribution sector, but i s against continuing to defer important distribution system investments in anticipation o f a rapid privatization. Bank engagement at this stage would assist in financing essential distribution system upgrades that can help the sector ensure reliable supply to a growing electricity demand in the country, reduce losses, meet performance criteria established by the regulator, and achieve compliance with safety regulations. Some o f the regional companies that will utilize the Bank loan may be privatized over the l i f e o f the Project. I t i s expected that since the projects are technically and economically justified, the availability o f financing for these projects will not adversely affect the privatization process.

(b) Consistency with the overall Bank support for electricity reforms in Turkey - The World Bank has played an important policy support role in the reform process. The Bank has, through PPIAF and the Spanish Trust Fund, established an expert panel that advises the Government on the adequacy o f market rules, pre-privatization preparation, vesting contract arrangements, etc. In addition, through the National Transmission Grid

9

Project (2002) - the Bank financed consulting firms to assist the implementing agencies (TEIAS, TETAS, TEDAS, EMRA). By engaging directly with TEDAS which i s currently in the portfolio o f PA, the Bank can engage more directly in finding solutions to pre-privatization issues noted above.

3. Higher level objectives to which the project contributes

12. The project i s part o f the overall support currently being provided to the electricity sector in Turkey by the Bank. Through the project, the Bank will assist in improving the distribution system in critical areas, reduce interruptions in supply, expand capacity and assist in improving the potential for privatization. Moreover, the investments will enable the distribution network to become more compliant with safety regulations. A reliable and efficient electricity distribution system i s important for Turkey’s economic growth.

13. for the period FY 2004-07 (Report No. 33995-TU, dated November 8,2005).

The Project i s consistent with the overall Country Assistance Strategy (CAS) for Turkey

B. PROJECT DESCRIPTION

1. Lending instrument

14. This project will use a Specific Investment Loan (SIL). The loan will be borrowed directly by TEDAS, under a sovereign guarantee from the Republic o f Turkey. TEDAS i s expected to use the variable spread loan (VSL) - the financial terms and arrangements will be finalized at negotiations.

2. Project development objective and key indicators

The Project Development Objective is:

T o help improve the reliability o f power supply to consumers in Turkey by supporting the implementation o f the electricity distribution network rehabilitation and expansion program.

15. Achievement o f this objective would be monitored through the following indicators:

Reduction in number and average duration o f annual interruptions in power supply to consumers in the areas served by the nine regional distribution companies where investment projects are funded by the Bank project. New load served in the project areas o f the eight regional distribution companies funded under the Project. Improvement in collection efficiency in the eight regional distribution companies.

3. Project components

The Electricity Distribution Rehabilitation Project consists o f the following investments:

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16. Distribution Network Rehabilitation and Expansion: This includes investment projects for distribution network rehabilitation and expansion in the TEDAS regional companies o f Ayedav, Uludag, Meram, Gediz, Toroslar, Menderes, Osmangazi, and Akdeniz.

17. The investment components financed by the Loan include rehabilitation and upgrading o f medium and low voltage distribution equipment and facilities, by: (i) replacing existing run- down and aged medium and low voltage overhead lines in densely populated areas with underground cables; and (ii) constructing new distribution substations and feeders. While rehabilitating the networks, effort would be made to eliminate non-standard medium voltages (besides 34.5 kV) which are currently in operation at several locations. Network rehabilitation will help reduce: distribution system losses; network operation and maintenance costs; and, supply interruptions caused by equipment and facilities outages. The conversion o f overhead lines to underground cable would also improve the safety o f the network by reducing the potential for faults and accidents - and the associated compensation payments made for material damage and loss o f l i fe . These investments will also ensure compliance with the Electricity Power Current Facilities Regulation o f 2000 which has increased the minimum allowable distance between overhead power lines and buildings.

18. Technical Assistance for supervision consultants: The project will also finance supervision consultants to assist TEDAS and the regional companies in managing and supervising the implementation of the investment projects. These consultants will support TEDAS and regional staff in the following:

0

0

provide monitoring support to the regional companies for the implementation o f the investments, ensure that the project activities are well coordinated between the TEDAS, regional companies and the contractors as well as with other relevant agencies (Le. municipalities, local infrastructure utilities), and ensure that the supplied equipment and civil and installation works are in compliance with the Project design and work schedule.

0

19. Under the project consultantdadvisers will be used to assist TEDAS in the implementation o f a system for monitoring and evaluation o f performance indicators.

A detailed description o f the project components and their scope i s presented in Annex 4,

4. Lessons learned and reflected in the project design

20. Project design, preparation and procurement have benefited from the extensive experience that the Bank has in developing large infrastructure investment operations, and specifically in rehabilitation o f generating plants and power transmission and distribution networks. These include:

(a) Detailed technical review of project feasibility The project design and scope have been developed after a detailed feasibility study o f each proposed investment. The review was supplemented by intensive field visits by Bank technical specialists to several

11

o f the provinces, where investment projects are proposed to be financed by the loan’. The Bank team was supported by an experienced engineer from Turkey. The Bank’s review assisted in assessing overall project design and the scope, and resulted in the identification o f eligibility criteria for future investments to be financed by the Bank loan. Where necessary, the Bank recommended changes in the project design and scope to meet established selection criteria.

(b) Project implementation based on Supply and Installation Contracts and Supervision of Implementation Given the large scale o f the Distribution Network Rehabilitation Program, the Bank team and TEDAS agreed that the projects will be procured and implemented using mainly supply and installation contracts to minimize the risk o f project non-completion due to any lack o f coordination and implementation capacity o f the regional companies. Furthermore, supervision o f the project implementation by the regional companies will be assisted by hiring qualified consultants.

(c) Flexibility in policy dialogue and recognition of macroeconomic priorities project will follow the overall philosophy o f addressing key energy sector priorities through a combination o f project based lending and advisory support. Lending focuses on addressing key bottlenecks (e.g. reliability, energy security, etc) and overall sector level policy dialogue on issues like electricity market implementation, sector restructuring and privatization i s continued through specific advisory and policy review activities with the Government and implementation agencies. These activities include an international expert panel that reviews reform implementation on a regular basis. These activities are financed through World Bank budget and parallel trust funds (e.g. ESMAP, PPIAF, and CTFs). This approach has proved successful in several countries (e.g. China, Vietnam, and Turkey) where lending complements a portfolio o f advisory activities that address government policy priorities and provide “how-to” implementation advice. In addition, given that Turkey i s about to commence negotiations on the EU Acquis on Energy, separate Bank conditionality in this loan was kept at a minimum.

The

5. Alternatives considered and reasons for rejection

21. As discussed in Section A.2 the investments supported under the proposed project as priority upgrades to increase system reliability that are necessary to compensate for the years o f deferred maintenance and investments in the distribution network. The Government and World Bank undertook an assessment o f whether the proposed investments should be undertaken prior to privatization. I t was determined that the investments should not await the completion of. privatization as much o f the rehabilitation and expansion work i s urgently needed to prevent the system from becoming progressively less efficient and there was no value in delaying these investments further. On this basis, the Government and TEDAS have chosen to carry out some o f the rehabilitation works in advance o f privatization. In addition, i t was anticipated that the commencement o f these investments, and the availability o f financing for them from EIB and the

Bank staff visited, or met regional staff from, the following provinces: Avanos, Nigde and Nevqehir in Meram region; Adana, Mersin and Kozan in Toroslar region; Samsun, Ordu and Amasya in Yeqilirmak region; Balikesir, Bursa and Canakkale in Uludag region; Sakarya and Kocaeli in Sakarya region; Erdine in Trakya region and Istanbul (Anatolian side) in Ayeday region.

8

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World Bank, will enhance the attractiveness o f the beneficiary regions for their future privatization.

22. Another alternative considered was the co-financing o f the total investments o f YTL 900 million with EIB. Given the implementation and procurement difficulties associated with co- financing, i t was decided that the World Bank supported investments should be undertaken in coordination with, but separately from the EIB funded investments.

23. Once the above decisions were made, the possibility o f lending directly to the regional distribution companies was assessed. I t was determined that the regional distribution companies as affiliates o f TEDAS did not presently have the financial independence to be effective borrowers o f the World Bank loan. The necessary financial independence would be achieved only when the regional distribution companies had been privatized. I t was consequently decided to implement the project with the TEDAS holding company as the borrower o f the World Bank loan with appropriate project implementation responsibilities assigned to the regional distribution companies.

C. IMPLEMENTATION

1. Partnership arrangements (if applicable)

24. The Bank i s working closely with the European Investment Bank (EIB) which has prepared a parallel operation with the same broad objectives as this project. EIB’s project preparation and appraisal benefited from the Bank’s indepth work, and overall, the cooperation has been very productive for al l the parties involved. It i s envisaged that the Bank and EIB will continue to liaise during project implementation. In addition, PPIAF grants and the Spanish Trust Fund are being used to support the overall reform program, which also includes support for the initial work on restructuring o f generation, and preparation o f transition contracts between the generation and trading businesses.

2. Institutional and implementation arrangements

25. The project will be implemented by TEDAS and the regional companies. A Project Management Team (PMT) has been set up at TEDAS headquarters to oversee project implementation, and key staff have been identified within the regional companies to monitor the project on a more operational basis. The supervision effort will be supported through the use o f qualified consulting f i r m s / individuals to be recruited by TEDAS through the Bank loan.

26. Onlending arrangements: TEDAS will remain the Borrower for the l i f e o f the loan. TEDAS will enter into contractual agreements with the regional distribution companies, to (a) ensure the annual debt service obligations o f the Borrower, through an escrow account to be established in a manner satisfactory to the Borrower and the Guarantor, until the debt service payments are fully recovered by the Borrower; and (b) ensure the satisfactory implementation o f the investments supported under the Project.

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3. Monitor ing and evaluation of outcomeshesults

27. The PMT and key staff from the regional companies, with the assistance o f the implementation consultants, will monitor progress against the agreed performance indicators specified in Annex 3. Besides this other indicators shall be developed with TEDAS to capture the progress on project and institutional level. The PMT will provide, on a quarterly basis, 45 days after the end o f each quarter, consolidated reports on project implementation progress in the Bank’s FMR format. The Bank will conduct regular supervision missions about once a quarter, during the initial years o f the project implementation. The PMT will prepare a detailed mid-term report to serve as the basis for a project mid-term review. The PMT will also help prepare the Borrower’s contribution to an Implementation Completion Report (ICR), so that the Bank could complete the ICR within six months o f the closing date o f the Loan. The ICR would involve a complete assessment o f project costs and benefits, project execution and performances o f the parties involved.

4. Sustainability

The project i s considered sustainable for the following reasons:

Intensive review o f feasibility and strict criteria for eligibility - The overall project concept and design has been based on a very intensive appraisal o f the existing network, the critical system requirements, and the feasibility studies prepared for specific projects. Detailed field trips with TEDAS team further refined the overall appraisal and implementation preparedness o f the sub-projects. Candidate projects in the future will have to meet strict eligibility criteria, and adequate justifications will have to be submitted in order for the projects to be considered.

Detailed ongoing supervision of project implementation - TEDAS will recruit qualified engineering consultants/ firms to assist in supervising project implementation at field level on regular basis. The Bank will supplement the supervision effort with regular visits to the field by consultants recruited specially for the purpose.

Adequate tar i f f to recover cost of investments - The tariff profiles approved by EMRA in October 2006 are expected to provide adequate margin for TEDAS and the private operating companies to recover the cost o f the rehabilitation and expansion investments. The rehabilitation investments under the project represent about 15% o f total distribution investments over the 5-year tariff period.

5. Cri t ical risks and possible controversial aspects

I Risk I Risk rating 1 Mitigation Measure 1 A. Project implementation issues

Issues due to Inadequate Institutional Capacity

M TEDAS is embarking on a large rehabilitation investment program for which it needs to allocate adequate staff and resources to manage implementation. At the same time, TEDAS itself is undergoing restructuring and privatization. The risk is proposed to be mitigated by use of qualified consultants at field to assist TEDAS and the regional companies in project supervision. Further, during project preparation, a detailed strategy for implementation has been drawn up, which includes:

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Risk

A.2 Issues due to limited experience with World Bank Procurement Guidelines

Risk rating Mitigation Measure

H

I (1) the establishment of a team made up of TEDAS and regional staff, to ensure continuity in project management through the period of restructuring, (2) distribution network expansion and rehabilitation with the projects grouped into two to allow staggered procurement and implementation; and (3) the use of Supply and Installation contracts for project implementation to minimize delays.

TEDAS does not have experience of using the Bank’s procurement guidelines and procedures. This risk however, is likely to be at a high level for the procurement of the first group of projects and medium level for the subsequent procurements. TEDAS staffs exposure to the EIB procurement process, which has already started, is expected to assist in increased understanding of issues involved with international procurement. The Bank’s procurement staff have been providing training and significant guidance to TEDAS staff on bid preparation and tendering. Capabilities are expected to improve gradually as staff get progressively better acquainted and gain experience with procurement practices.

B. Financial issues

Overall Project Risk

B . l Lackof progress in resolution of non- payment by municipalities and street lighting

M Based on risks and the mitigation mechanisms discussed above, the overall project risk is assessed to be “Moderate”.

M-H

C . l Privatization in the absence of adequate preparation on other market reform elements

TEDAS had about US$ 3.5 billion of outstanding receivables in 2005, of which a large portion emanates from municipalities including street lighting. While it is difficult for this project to mitigate this risk entirely, the Government is working towards clearing the arrears of municipalities through various measures including legislative and budget transfer mechanisms. The related agencies are also working with MENR and the utilities to resolve the issue going forward. (See Annex 9).

H

C.2 Ambitious expectations of privatization and efficiency improvement

M-H The privatization approach includes the establishment of 5-year tariff profiles for the distribution companies based on significant efficiency improvements (Le. increased collection efficiency, loss reduction etc.) resulting from the planned privatization. Given the fact that efficiency improvements targets are aggressive, and that privatization may take longer than anticipated, there is a significant risk that cash flow problems may emerge.

There is a risk that privatization of distribution companies may proceed without the other aspects of the market reforms being suitably prepared. The privatization process has been managed by PA so far, while the other reform aspects are being implemented under the guidance of MENR. In addition, there are other significant stakeholders in the reform process, and it has not always been possible to ensure complete consistency or coordination. This may harm the market implementation process and create a negative perception with private investors. Through the expert panel’s advice and the Bank’s continued engagement at the highest levels of Government, the Bank has worked towards achieving agreement on a viable approach.

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6. Loadcredit conditions and covenants

Other than standard requirements, there are no conditions for presentation to the Board and Loan Effectiveness.

29. Covenants in the Loan Agreement The fo l lowing covenants are included in the loan agreement, in addition to the standard covenants relating to audits, accounts, procurement plans, mid-term reviews etc.

I. Financial Covenants (a) TEDAS will maintain i t s collection efficiency for sale o f electricity to f inal

consumers, expressed as a percentage o f total electricity sold, at not less than 93% f rom 2007 onwards, at not less than 95% for 2010 onwards, and at not less than 98% for 201 5 and thereafter.

(b) TEDAS will achieve a self financing ratio (funds f rom internal resources as a proportion o f the three-year average capital expenditure) o f not less than 25% in every year starting f rom 2007.

11. Institutional Arrangements

TEDAS shall, through the Project Management Team (PMT), oversee the overall implementation o f the Project, and take necessary actions to cause the distribution companies to implement the Project after their privatization. T o that end, the Borrower shall maintain the P M T throughout the implementation o f the Project, under terms o f reference acceptable to the Bank and with sufficient and suitable human, financial and technical resources.

TEDAS shall enter in to contractual relations, acceptable to the Bank, with the regional distribution companies, to (a) ensure the annual debt service obligations o f the Borrower, through an escrow account to be established in a manner satisfactory to the Borrower and the Guarantor, until the debt service payments are fully recovered by the Borrower; and (b) ensure the satisfactory implementation o f the investments supported under the Project.

TEDAS shall implement the E M P and shall include in the quarterly progress reports to the Bank specific environmental reports, as required, prov id ing results o f any monitoring programs undertaken as part o f the E M P .

111. Financial Management Covenants TEDAS will maintain a financial management system acceptable to the Bank.

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D. APPRAISAL SUMMARY

1. Economic and financial analysis

30. Economic analysis An economic analysis o f the proposed rehabilitation and expansion program was undertaken by the Bank, based on the feasibility studies prepared by the regional distribution companies. The feasibility studies were for the Group 1 projects in four individual regional distribution companies. These companies are Gediz, Meram, Ayedag and Uludag. The economic analysis was done for the Group 1 projects only. Feasibility studies for most o f Group 2 projects have been largely completed - the economic analyses o f these projects will be reviewed using the same assessment framework.

31. for these regional distribution companies:

There are five major economic benefits from the rehabilitation and expansion program

1.

2.

3.

4.

5.

32.

Reduction in accident risk through compliance with the new safety regulations as a result o f the rehabilitation o f distribution equipment and the replacement o f overhead distribution lines with underground cables. Although an extremely important benefit, i t cannot be fully quantified going forward. However, there have been serious accidents in the system for which compensation was paid. In the absence o f better information on the risk levels these compensation benefits have been taken as a measure o f the safety benefits o f the project. Furthermore, replacement o f overhead l ines with underground cables i s also expected to reduce the adverse impacts and supply disruption caused by ice storms and events like earthquakes. Decrease in supply interruptions as a result o f the rehabilitation and expansion program. The value o f this decrease in interruptions varies among the distribution systems depending on the level o f current interruptions. These range from the equivalent o f 2 days o f the annual electricity sales for Ayedag to around 8 days for Gediz and Uludag (Balikesir province). The value o f a 1 kWh reduction in interrupted energy supply (unserved energy) i s taken to be 0.65 YTL (equivalent to US 50 cents). Ability to serve additional load growth. The expanded and rehabilitated systems will serve new urban developments that are being built and need to be supplied. This benefit has been assessed conservatively using only identified load growth. Reduction in operating cost. The rehabilitation o f the distribution systems will reduce costs since the new underground cables will require fewer repairs than the older overhead l ines they replace. This benefit i s estimated as the reduction in materials and hired labor costs. No reduction in TEDAS direct labor cost or staff i s assumed. Reduction in system technical losses and theft. The distribution systems being rehabilitated typically have significant losses ranging from around 5% to 12% o f power supplied. As a result o f the rehabilitation, both technical losses and theft will be reduced in the project areas. The reduction in technical losses i s valued at the cost o f power purchased by TEDAS o f 0.082 YTL per kWh. The ERR calculation does not assign any economic value to the reduction in non-technical losses.

Taking into account these benefits and the net cost o f the expansion and rehabilitation program in each regional company an economic rate o f return (Em-) was calculated for each regional company program and for the four regional company programs together. The ERRS for

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the regional company programs varied between 13% real for Ayedag to 34% real for Gediz. The composite ERR for the four companies i s 22% real. This indicates that given the benefits, especially the high cost o f supply interruptions, the distribution rehabilitation and expansion program i s quite attractive economically.

33. Financial models were constructed for both TEDAS and the seven out o f eight distribution companies which will use Bank funds’. TEDAS’ current and anticipated tariffs are sufficient to cover i t s operating costs and service any l i ke ly debt that will be procured for investments. The last tar i f f increase was in 2003, but TEDAS has been able to make modest profits o n i t s books despite the lack o f any revisions since then. In the last two years, TEDAS’ collection efficiency has improved to about 92.6% and i t s system losses have reduced to about 17.8% due to extraordinary efforts f rom TEDAS staff. TEDAS has traditionally not borrowed externally for i t s capital expenditures, and has no debt o n its books. I t has essentially deferred payments to electricity suppliers and used the credit to finance i t s activities.

Financial analysis

34. TEDAS has however had a major problem with trade receivables f rom consumers, wh ich stood at US$ 3.5 b i l l i on at the end o f 2005, representing about 15 1 days o f sale o f electricity o r about 41% o f sales (total o f trade and other receivables). The problem stems primari ly f rom municipalit ies and government agencies which make up about 40% o f total receivables. Poor collection f rom the public sector i s the most significant risk in the cash f lows o f TEDAS. The Government i s evaluating various options to address this problem, including legislation to enable deduction o f central devolutions to municipalities. Some o f these measures are expected to be enforced f rom July 2006 onwards.

35 . The forecasts are based o n conservative assumptions. Collections and system losses are expected to improve only gradually, at a more conservative pace than i s currently assumed in the 5-year ta r i f f profiles. Tarif fs are forecast to remain stable except for passing through power purchase cost increases over the next 5 years, and thereafter increase marginally. The 5-year tariff profi les also provide for the agreed investment program (including the Bank-financed portions), and for the recovery o f debt servicing and other l iabil i t ies associated with the program. As Annex 9 shows therefore, while prof i tabi l i ty i s forecast to remain robust, the cash f lows remain particularly sensitive to risks o f continued non-payment by government agencies.

36. The risk to cash flows i s clearer f rom the forecasts for the 7 distribution companies”. In the case o f 3 companies - Toroslar, Meram and Osmangazi - cash f lows are l i ke ly to continue to be affected by poor collection efficiency. Sensitivities done to simulate the impact o f improved collections however show that the three companies turn around in the medium term, and begin generating adequate levels o f cash. The problem o f collections arises mostly f rom street lighting in the case o f most companies. In the case o f Meram, Toroslar and Gediz, collections f rom agricultural consumers are an additional problem - in the case o f Meram, agriculture dues are the more serious problem, accounting for about 40% o f total receivables o n the company’s books in 2005.

The regional companies o f Akdeniz wi l l be analyzed when the feasibility studies o f these companies are made available to the Bank.

The forecasts are based on assumptions made by Bank staff and past data t i l l 2005 received from TEDAS, and do not represent official forecasts. For reasons o f confidentiality, due to the ongoing privatization transaction, the detailed financial forecasts for the distribution companies are not being disclosed. The regional company o f Akdeniz wi l l be analyzed when the feasibility study and financial data o f this company are made available to the Bank.

I O

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37. The other four companies are forecast to be able to manage their financial requirements reasonably comfortably with minimal increases in tariffs in the later years. Most o f these companies are also forecast to begin paying down their accounts payable by the end o f the forecast period.

3 8. In summary, i t appears that under conservative assumptions on collection efficiency, some o f the distribution companies may require continued cash support from the Government. As has happened in the past, most recently in March 2006, the Government has injected cash into TEDAS in order to enable payment o f power purchase bills to TETAS. This may create some residual risk for the tariff equalization mechanism, which would in turn create cash flow problems for TETAS, which i s expected to operate the equalization mechanism.

2. Technical

39. TEDAS has implemented investment projects o f a similar nature with acceptable standards o f quality. While there has been exposure and attempt to introduce modern technologies in the electricity distribution area to improve service standards and reduce losses, these efforts have been budget constrained. TEDAS companies have well-qualified staff to do the design engineering, planning and implementation o f the investment components under the project. The project will employ modern technological practice in rehabilitating the distribution networks including (i) utilizing underground cabling technology to replace rundown overhead electric l ines in urban areas, (ii) replacing old equipment with more efficient and standard equipment, and (iii) continuing the phasing out o f non-standard medium voltages to provide more reliable and eff icient operation o f the distribution system and to minimize the costs o f network maintenance and future expansion. The Bank team reviewed the feasibility reports for the identified investment projects in four regions (Ayedag, Uludag, Meram and Gediz) included in Group 1” o f projects planned for procurement and implementation. The preparation o f the feasibility reports for other projects proposed for financing by the Loan as part o f project Group 2 i s under way. The Bank team also carried out detailed technical field visits, supported by an experienced consultant and TEDAS’ design and planning team in some cases, and these visits assisted significantly in assessing the technical viability o f the proposed projects. In several cases, the Bank team suggested, and TEDAS agreed, on changes to the project design and/or scope, to increase the viability and sustainability o f the projects.

40. Criteria fo r future projects:TEDA$ and the Bank have reached agreement on the overall design philosophy for the investment components based on the reviews and completion o f the feasibility studies for Group 1 projects. The agreed design philosophy will be applied to future projects in Group 2. TEDAS will have the flexibility to add or remove projects currently being prepared for Group 2, as long as proposed projects are economically justified and comply with the following eligibility criteria agreed during appraisal:

(a) Underground conversion and network expansion investment pro jects in large c i t ies selected for safety reasons, because o f the need for compliance with clearance regulations, or for increased load growth. Large ci t ies with buildings and structures close to existing overhead lines, and where load growth i s likely are ideal candidates for these investments.

Annex 4 contains the detailed description o f projects included in Group 1, and potential projects for Group 2. I I

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(b)

(c)

Investment to continue the ongoing replacement o f non-standard medium-voltages by the standard medium voltage o f 34.5 kV. Investment projects aimed at improving system control and at reducing system losses and energy interruptions in provinces or distribution systems with high losses and energy interruptions.

41. The main technical issue anticipated by the team i s the implementation capacity o f TEDAS to simultaneously undertake investments at much larger levels than in the last five years. The team has agreed with TEDAS on several steps to mitigate risk on this account (also see Annex 6). These steps include:

(a) identification o f key members at the regional level and at headquarters for implementation o f the project,

(b) supply and installation contract packaging to reduce the coordination responsibilities and risks o f project non completion, and

(c) recruitment o f qualified consultants to support TEDAS in implementation and monitoring o f the projects.

3. Fiduciary

42. A procurement capacity assessment carried out by the Bank found that TEDAS staff have limited experience o f the Bank’s procurement rules. Bank Staff have been working intensively with TEDAS staff training them in Bank procurement. Furthermore, TEDAS staff are preparing procurement documents according to Bank rules and these documents are expected to be ready by the time o f Board presentation.

43. The Bank’s review o f TEDAS’ financial management arrangements has also been undertaken and they were found to be generally satisfactory. The financial management arrangements o f the project are therefore acceptable to the Bank, subject to the installation o f a project budgeting and accounting system. The annual audited project and entity financial statements wil l be provided to the Bank within six months o f the end o f each fiscal year, and project financial statements wil l be provided also at the closing o f the project. Financial statements for TEDAS and regional companies will be audited by an auditor acceptable to the Bank.

44. TEDAS and the regional companies will produce a full set o f interim unaudited financial reports (IUFRs or Financial Monitoring Reports - FMRs) for each calendar quarter throughout the l i f e o f the project. The reporting i s based on TEDAS’ own reporting systems. The project will use transaction based disbursements.

45. commercial bank acceptable to the Bank.

The designated account (DA) for administering the project funds will be opened in a

4. Social

46. The population o f each o f the respective areas wil l benefit from these projects. Existing electricity users wil l experience fewer accidents and safety risks as well as more reliable electricity supply; and consumers in expansion areas wil l immediately gain from the reliable

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distribution network. In several places, the existing overhead lines are hazardous and inconveniently located, due to inadequately planned investments. Three o f the companies reported approximately 180 accidents during the last year, including one fatality, for which they paid more than 500,000 YTL in compensation. The incidence o f accidents i s expected to decrease markedly in project areas. There will be some temporary inconvenience as the overhead lines are buried in the streets but this should be minor. Underground cabling and rehabilitation o f the network i s expected to improve the reliability and safety o f electricity supply in the areas during normal operation, but also during calamities like storms and earthquakes. These investments are also expected to enable the regional companies to serve more loads. Electricity tariffs may increase over time in order to cover r ise in costs, and with better efficiency, bill collections should increase and illegal connections should decrease. Tariffs however are not expected to r ise due to the project. N o land acquisition i s expected, as the underground cables will be located under public land (streets, sidewalks).

5. Environment

47. The environmental benefits significantly outweigh any potential environmental drawbacks. The environmental benefits consist o f removing a large number o f the wires on city streets which are unsightly and lead to accidents for people, birds and animals. The scrap material obtained from the removal o f these wires and any distribution substations will be recycled. Environmental Management Plans have been prepared for each o f the regional rehabilitation and expansion programs. The Project i s classified as an Environment Category B, because o f i t s limited environmental impact.

6. Safeguard policies

Safeguard Policies Triggered by the Project Yes No

Environmental Assessment (OP/BP/GP 4.01) [XI [ I Natural Habitats (OP/BP 4.04) [I [XI

Pest Management (OP 4.09) [ I [XI Cultural Property (OPN 11.03, being revised as OP 4.1 1) [ I [XI

Involuntary Resettlement (OP/BP 4.12) [ I [XI Indigenous Peoples (OD 4.20, being revised as OP 4. IO) 11 [XI

Forests (OP/BP 4.36) [ I [XI

Safety of Dams (OP/BP 4.37) [ I [XI

Projects in Disputed Areas (OP/BP/GP 7.60) [ I [XI

Projects on International Waterways (OP/BP/GP 7.50) [I [XI

7. Policy Exceptions and Readiness

N o policy exceptions are sought for the project.

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Annex 1: Country and Sector o r Program Background

TURKEY: Electricity Distribution Rehabilitation Project

Country Economic Overview I T h e Turkish economy has rebounded from the 2001 crisis which had serious

economic and social impacts: by the end o f 2001, the currency had devalued by 50 percent, nominal interest rates were about 100 percent, and the banking system had virtually collapsed.

years. Inflation was also brought under control, reaching single digits in 2004 for the first time in 35 years, and was 9.8 percent at end-2006.

amongst them are: strong fiscal discipline which has allowed the maintenance o f a large primary surplus in the order o f 6.5 percent o f GNP; on-going structural reform; and political stability since 2002.

been an important signal to financial markets and has created a firm anchor for the country’s development and structural reforms in the years ahead, notwithstanding the fact that the process i s expected to be long and difficult.

I GNP growth has been strong since 2001 close to 8 percent on average during the last 4

Several factors contributed to the improved macroeconomic performance - key I

I T h e EU’s decision to open accession negotiations wi th Turkey in October 2005 - has

The Electricity Sector in Turkey: Transition to Competitive, Privatized M a r k e t Legislative basis - The Government has embarked upon a comprehensive reform and restructuring program o f the electricity sector to create a liberalized, efficient and economic sector. This was initiated by the Electricity Market Law (Law No. 4628) promulgated in February 2001 and reflected in the Strategy Paper accepted by the H igh Planning Council in March 2004, which accelerated the reform process. The principles and goals o f the reform program defined by this Law are substantially in l ine with EC Directives (1 996/92/EC and 2003/54/EC) concerning rules for the internal market for electricity.

the EC initiated to develop the regional electricity and gas market in South East Europe and eventually integrate i t with the internal electricity and gas market o f the European Union. The 2002 Athens Memorandum initiated the regional market development process commonly referred to as the “Athens process”. With the inclusion o f natural gas, a more detailed version o f the memorandum was signed, which i s referred to as the Athens Memorandum 2003, and supersedes the 2002 document. While other regional members signed the Treaty on October 25, 2005, Turkey did not, owing to reservations on some o f the Treaty provisions. With the EU decision o f October 3, 2005 to begin negotiations for full accession, some reservations on the Treaty now become intertwined with the negotiations on the Energy Chapter o f the Acquis Communautaire. Turkey however remains committed to, and continues to implement the provisions o f the 2003 Athens Memorandum.

the former integrated generation and transmission corporation, was restructured into a generating corporation EUAS, a trading corporation TETAS and a transmission corporation TEIAS. TEDAS, the Government-owned distribution corporation had been earlier separated from TEAS’ predecessor, TEK. In 2005, TEDAS was restructured into

I E C S E E Treaty - Turkey i s a signatory o f the Athens Memoranda o f 2002 and 2003 that

I Functional and corporate restructuring of the sector - Pursuant to the Law, TEAS,

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separate companies (DISCOS) in preparation for their privatization. The generation sector i s also in the process o f being restructured into one holding company which will also retain the major hydroelectric power plants, and six separate portfolios o f generation assets that will be later formed into companies (portfolio companies) that would be privatized once distribution i s substantially privatized. See Figure 1.1 below on the currently planned transitional sector structure.

authority, the Energy Market Regulatory Authority (EMRA) with jurisdiction over electricity, gas, petroleum and LPG. EMRA has powers over licensing, tariff setting and customer service issues. EMRA i s currently involved in setting multi-year tariff principles for the distribution business, and a tariff equalization mechanism across regions in order to enable national uniform retail tariffs. The Law was amended in May 2006 to allow uniform national tariffs and to enable an equalization mechanism. EMRA has also conducted the expansion o f gas distribution reasonably successfully over the last few years, through tendering procedures run by itself.

distribution companies in phases over the next two years. The regional companies have been created in preparation for privatization, and in September 2006, PA commenced the privatization transaction for three distribution companies - Ayedag, Bagkent and Sakarya. This process has been delayed from the original timeline since Turkey i s keen to avoid a repeat o f earlier difficulties in privatization'2.Turkey also plans to privatize i t s existing generating assets, once a substantial part o f the distribution business i s privatized. The configuration o f the generation portfolio companies has been decided, and EUAS will be restructured into 7 companies, one o f which will be the holding company retaining the large hydroelectric projects and i s not expected to be privatized in the medium term.

GWh can choose their own supplier - this represents more than 30% o f the total Turkish electricity market.

competitive bilateral contract market with a balancing and settlement system. Cash-based market operations began in August 2006, and, when fully implemented, the Turkish electricity market will consist o f an organized Day-Ahead market operated by TEIAS as Market Operator, a real-time system balancing and operational mechanism operated by TEIAS as the Transmission System Operator, and a bilateral contracts market. In addition, there will be one or more organized markets for procurement o f ancillary services. The market i s currently operating in a transition phase with day-ahead scheduling and real time balancing o f energy. In December 2007, the final balancing market i s expected to become operational. The current practice o f monthly settlements with three metering periods i s expected to move eventually to daily settlements supported by hourly metering.

operator. The market i s expected to provide the necessary price signals for potential new generation.

I Independent Regulatory Framework - Turkey has set up an independent regulatory

Privatization of Distribution and Generation - Turkey's plan i s to privatize its

I Retail Competition in Electricity - Consumers whose annual consumption exceeds 6.0

Competitive Market Structure - Market simulations are in progress to introduce a I

I TEIAS, the transmission corporation i s the independent system operator and the market

Turkey attempted to privatize distribution in the 1998-2000, but the process was challenged in Court and the I 2

transactions resulted in being cancelled.

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Turkey’s Regional Interconnection Efforts - Turkey first applied for UCTE (Union for the Coordination o f Transmission o f Electricity in Europe) membership in March 21, 2001. Since then several studies financed by the European Commission within the framework o f the TEN (Trans-European Networks) Program, have assessed different scenarios for connecting the Turkish power system to the UCTE power system through Bulgaria and Greece. O n September 28, 2005, a technical study was initiated by UCTE to complete transmission assessments including static, and stability analyses to determine the technical conditions under which the Turkish power system will be synchronized with the power system o f the UCTE. Turkey already has two lines to Bulgaria, and will complete its section o f the linkage to Greece [The Greek section has been delayed but i s expected to be completed in 20071,

Figure 1.1 Transitional Electricity Sector Structure

Transitional Contracts

, _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

The Electricity Distribution Business in Turkey 1. The electricity distribution system in Turkey i s owned by TEDAS (except Kayseri), a corporation created from the restructuring o f TEK, an integrated electricity utility, in 1993, and operated by 20 regional distribution companies under transfer o f operating rights (TOOR) contracts. TEDAS was shifted to the “privatization program”l3 o f the Privatization Administration (PA) in April 2004 and was restructured into 20 regional companies in 2005. In addition to TEDAS, eligible consumers are supplied by IPPs, autoproducers, wholesalers and other private producers. One region, Kayseri, i s operated by a separate company in which the municipality holds the largest stake. TEDAS sales made up about 75% o f total consumption o f electricity in Turkey in 2005, with the remaining attributable largely to autoproducers eligible consumers. TEDAS sold about 93 TWh in 2005 to about 28 mi l l ion consumers. About 30% o f total consumption was by industrial consumers in 2005, wi th residential consumers making up another 30%.

The term “privatization program ” refers to the transfer o f a state-owned enterprise to the ownership and financial oversight o f the Privatization Administration in preparation for eventual privatization. Typically, State Owned Enterprises are owned and supervised by the Undersecretariat o f Treasury.

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2. TEDAS estimates i t s system losses (technical and commercial, including theft of electricity) at about 17.8% in 2005. Losses rose consistently from about 10.7% in 1990 to 21.6% in 2000, but have declined gradually since then. In the last few years, TEDAS has actively worked towards reducing losses by a variety o f approaches, which have enabled reduction in losses to about 17.8% in 2005. In 2004 for instance, loss detection teams set up at headquarters and in the regions inspected about 6 mi l l ion consumers and recorded 320,000 cases o f theft - this resulted in a revenue assessment o f US$ 230 mi l l ion and cash collection o f US$ 78 million. In several places, metering, billing and collections are outsourced, and the outsourcing agencies are provided added incentives for theft prevention. TEDAS staff have also prepared an internet- based project to improve retail services such as subscription, metering, bi l l ing and collections - for instance, the system enables bill payment through banks, tracking o f theft, remote disconnections and reconnections, etc.

3. While TEDAS’ collection efficiency has been rising, to about 93% in 2005, arrears for sale o f electricity stood at US$ 3.5 bi l l ion at the end o f 2005. A significant part o f the arrears, about 53% o f the total, arise from non-payment by government agencies, particularly municipalities and particularly for street lighting. The Government i s however, trying several options to deal with the problem o f accumulated arrears (See Annex 9). For municipalities in particular, several laws have been amended in order to enable the Government to allocate central tax devolutions through I le r Bank 14, towards meeting electricity dues. The dues of, about 2500 municipalities and 8 metropolitan municipalities were reconciled and rescheduled in June 2006, and it i s expected that from July 2006, monthly deductions from central devolutions will commence. For street lighting bills, which have been a particularly serious problem since municipalities have by and large refused to accept these bills as their responsibility, the Government has prepared amendments in related legislation to allow the use o f municipal taxes and additional electricity tax for recovery o f these dues (and future bills) over time.

4. The regional companies differ in their size and system characteristics significantly. Bogazici for instance, consumes about 15% o f total energy consumption in TEDAS areas, while companies in the east consume less than 5%. Consumer m i x varies a lot too, wi th Ayedag for instance, having nearly 45% consumption by residential consumers with Osmangazi having only about 15% residential consumption. System loss levels and collection efficiency levels also vary radically - Meram for instance, reports a loss level o f 8-9% while Dicle and Van Gol i i report losses o f about 60% respectively. This wide disparity i s because eastern and southeastern regions of the country have been subject to weaker ut i l i ty governance and thus have tended to be less commercial. Unserved energy due to interruptions also varies from one province to another. Unserved energy in the provinces included in first project group range from an equivalent o f 2 days o f the annual electricity sales in Ayedag region to about 8 days in Gediz15. Voltage drops in the distribution network could be as high as 10% during peak demand.

5. The electricity distribution network i s in poor condition and system reliability i s declining - TEDAS has been investing about US$ 250 mi l l ion on average every year over the past 5 years.

Central tax and other devolutions to municipalities are routed through Iler Bank, a government-owned bank. Up to 20% o f these monthly devolutions to any particular municipality wil l be deducted for payments to TEDAS.

A record o f actual energy interruptions to consumers is not available. However, according to the distribution feeder outage records (number and durations), TEDAS calculations show that energy interruptions in some regional companies could be as high as 1 1 days.

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A majority o f this investment, about 75% o f the total, has been directed to urban areas with high growth in demand. TEDAS’ investments make up about 20-22% o f total investments in the energy sector by the Government and state-owned uti l i t ies, but are s t i l l much lower than the requirements. Between 1994 and 2003, TEDAS requested an investment budget o f US$ 7.6 bi l l ion and was allocated less than hal f that amount 16. In about the same period, the number o f consumers increased by 9.5 mi l l ion (a compounded annual growth o f 5.1%); staff strength reduced from 38,351 to 32,140 in 2004; and system losses rose from about 15.5% to 19.9%. The distribution sector also went through a phase o f poorly structured and failed privatization from 1997-2002 which exacerbated system inefficiencies, as the sector remained in limbo with very l i t t le attention being given to the physical condition o f the system. Annual interruption levels per consumer are much higher than EU countries with similar climate and geography, and the performance o f the distribution networks in Turkey are also below average performance amongst other EU countries. The Bank’s Investment Climate Survey17 for Turkey shows that nearly 82% o f the 1,300 f i r m s surveyed experienced an average o f 28 power outages in 2005, leading to a loss o f more than 4% o f annual revenues. 47% o f the surveyed firms own a generator as a result. In comparison, 64% o f firms in Brazil reported having faced outages, at an average o f less than 5 outages per firm during 2005. Only 26% o f firms in Poland reported having experienced outages, at an average o f 1.5 times per firm.

6. The urban distribution network poses a safety risk - Turkish towns and cities, especially Istanbul, Ankara and Izmir, have urbanized rapidly, and in several places, urban housing has developed around existing distribution networks, with little regard for environmental or safety considerations. Rapid urbanization has thus come with poorly regulated construction, and clearances between medium voltage overhead lines and buildings pose safety risks.

Turkey’s distribution privatization strategy

7. Earlier efforts at privatization in the mid-1990’s by the Government were unsuccessful due to poor design and unfavorable legal decisions. However, the regional distribution companies have now been transferred to the Privatization Administration (PA), and a detailed privatization strategy has been formulated. After intense debate over the strategy within the relevant agencies over the past year, a transfer o f operating rights (TOOR) approach backed by a sale o f majority shares in the operating distribution company has finally been agreedl8. In this approach, TEDAS will continue to own the assets, and wil l transfer the right to operate the distribution network in specific regions to the relevant regional distribution company. The distribution company will have al l the rights that an owner would have, including the right to invest in network maintenance and expansion. The operating right will be co-terminus with the distribution and retail licenses provided by EMRA. This distribution company wil l be privatized through a sale o f majority shares on a competitive basis. In the first phase which began in September 2006, three companies have been offered for sale. These companies existed as separate companies prior to being absorbed in TEDAS, and therefore these companies continue

Improvement o f Operational Efficiency and Service Quality in the Electricity Distribution Grid - Feasibility Report by McKinsey

The Bank conducts Investment Climate Surveys (ICs) in many countries on a regular basis, with the objective o f assessing the main factors which constrain growth by manufacturing firms. The Turkey ICs covered 1,323 firms representing nearly every industry and ownership structure.

The other main alternative, outright asset sale was seen to carry serious legal impediments and was hence not considered feasible.

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to have management .structures and organizational strength that are more developed than in other regions.

8. Legal amendments: Preparation for privatization has proceeded at a fast pace. Several key procedural and legislative requirements for commencing privatization have been completed: (i) significant amendments have been made in the Electricity Market Law (EML) No. 4628 and other relevant laws, (ii) 5-year tari f f profiles have been approved, and (iii) transition contracts between EUAS, portfolio gencos, TETAS and the distribution companies were signed in June 2006. The Law has been amended fairly significantly, most recently in May 2006. These amendments seek to reduce the perceived risks in the agreed privatization approach, and to make it consistent with the overall reform program. The changes include mainly provisions enabling (i) the transfer o f operating rights, (ii) tariff equalization and 5-year tari f f profiles, and (iii) transition contracts. Perhaps most significantly, the amendments further require that the 5-year transitional tariff profiles for each regional company can be changed only by the Government through a Council o f Ministers’ decree.

9. 5-year transitional tariff profiles: The tariff profiles currently factor in the Government’s preference for stable tariffs. However, future changes in either fuel prices or power purchase costs will be passed through. The tariffs also factor in the targeted performance criteria and investments required by the distribution companies. These tariff profiles will be based on efficiency improvements that can be expected in different regional companies, and will ensure an adequate return on capital and recovery o f investment expenditures. The tariffs will be made up o f several components, some o f which will be regulated and some, such as the retail sales tariff, which will not be regulated. The distribution tariff component will cover fixed and variable distribution operating expenses, the amortization for new investments, the cost o f capital and the cost o f energy losses.

10. Tariff equalization mechanism: The tariff profiles will also factor in the Government’s decision to maintain uniform national tariffs. However, since different distribution companies have different cost structures, each distribution company will require a different tariff profile. In order to enable the implementation o f uniform tariffs, a tariff equalization mechanism i s being established. This mechanism will aim to equalize across distribution companies to ensure that they recover the revenues that they require to cover eligible costs, after factoring in performance targets. I t i s envisaged that this equalization will be done through TETAS (See Annex 9).

11. Pre-defined investment requirement and the Bank-financed project: The investor will be obliged to make a pre-defined level o f investments in the network, and to demonstrate the achievement o f pre-defined performance criteria such as loss reduction, improved collection efficiency, and improved customer service. Tariffs will cover the cost o f these investments along with appropriate returns on equity. The assets created in the private distribution company through these investments will remain on the company’s books in a special account, the ‘Special Cost Account’ (SCA), although the ownership will be retained by TEDAS. Relevant tax laws have been amended to allow the company to earn depreciation on the assets that i t will finance, and at the time o f the expiry o f the license, the distribution company would be compensated for i t s investments based on the SCA (See Annex 9 for details).

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12. The tender documentation for the privatization will reflect the availability o f the Bank loan for the rehabilitation o f distribution systems. Upon completion, it i s expected that these investments will improve reliability and reduce energy disruptions.

13. Prerequisites for privatization: The Government has agreed that privatization will be completed once the following elements o f market and regulatory reforms have been tested and implemented: (i) the implementation o f a balancing and settlement system on a cash-settlements basis with the multiple DISCOS and the transition contract arrangements; and (ii), the tariff equalization mechanism and 5-year tariff profiles for distribution companies. The balancing market was implemented in August 2006 and has been in operation since then. Transition contracts are in place, and are currently being fine-tuned. The tariff equalization mechanism has been finalized, and will be implemented over the next few months.

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Annex 2: Major Related Projects Financed by the Bank and/or other Agencies

TURKEY: Electricity Distribution Rehabilitation Project

An Overview o f the World Bank Program in the Energy Sector

Advisory Support 1. in the gas and electricity sector.

The Bank has a strong advisory support program to help the Government and the utilities

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The Bank supported the government in structuring and establishing the Energy Market Regulatory Authority in 2001 and in defining the detailed electricity market design. A Bank technical assistance loan supports specific implementation tasks, such as distribution sector unbundling, definition o f tariff review rules, and preparation o f initial vesting contracts to prepare for privatization. An independent expert panel o f leading international specialists in market implementation, regulation and privatization provides the government guidance on challenging implementation trade-offs and choices. The Bank recently completed a report on the security o f electricity supply in the medium term, which looks at the issues in this regard, and recommends possible ways o f mitigating the risk o f shortage. In the gas sector a comprehensive gas development strategy was completed in 2004 to set a framework and process for introducing competition in wholesale supply, and in November 2006 the Bank completed a report on the experience with Greenfield gas distribution. The Bank i s also beginning its support to key energy utilities in achieving a credit quality and rating that will enable them to access capital markets without sovereign guarantees. Presently, financial advisors financed by PPIAF (Public Private Infrastructure Advisory Facility) are working with BOTAS in preparing for a credit review by a rating agency.

In addition to the continuing work on reform implementation, the Bank will continue its advisory work focusing on issues o f energy supply security, EU market integration and helping the institutional development o f various utilities in the energy sector.

Project Lending

3. The current program o f lending in the energy sector aims to: (a) bridge gaps in gas and electricity service delivery needs during the reform transition; (b) meet EU integration challenges; and (c) ensure that essential infrastructure that can affect energy supply reliability i s implemented. The projects include:

(a) National Transmission Grid Project (NTGP): This project loan o f US$270 million was approved in 1998 to the then integrated transmission and generation corporation, TEAS. Project objectives are to: (i) develop adequate transmission grid capacity in a timely and environmentally sustainable manner; (ii) continue the reform o f the power sector by establishing the independent operation o f the transmission grid system; and (iii) maintain the financial viability o f the state institution responsible for the grid development and operation.

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The project was restructured in 2002, after TEAS was restructured into three corporations - TEIAS (transmission), EUAS (generation) and TETAS (trading and contracting). TEIAS i s the successor and has taken on the obligations under NTGP, but US$ 20 Mi l l ion o f the loan was assigned to the Government for helping fund the implementation o f the reform process. The project i s rated satisfactory both on a Development Objectives (DO) and Implementation Progress (IP) basis. While construction o f transmission l ines has been slower than anticipated, capacity shortages have been avoided, TEIAS has been designated the independent operator o f the transmission grid and TEIAS i t s e l f remains financially viable. In addition, the loan supports the creation o f an electricity market and ongoing efforts to privatize distribution and generation, and capacity development within the independent regulatory agency.

(b) Renewable Energy Project: The project loan o f US$ 202.3 mi l l ion was approved in May 2004. The objective o f the project i s to increase privately owned and operated power generation from renewable sources without the need for government guarantees, and within the market-based framework o f the Electricity Market Law. The Treasury has on-lent the funds to the Turkish Development Bank (TKB) and the Turkish Industrial Development Bank (TSKB). The two development banks in turn are on-lending the funds to private developers o f renewable electricity generation projects. The PHRD grant was used to support the government in the preparation o f the renewable energy law approved in June 2005.

(c) ECSEE APLZ: As Turkey gets closer to i t s negotiations wi th the EU for accession it i s in the process o f integrating its energy markets wi th those o f Europe. Under the Athens Process, Turkey i s liberalizing its electricity market and linking i t s market to the electricity markets o f other countries in South East Europe. The World Bank established a regional adaptable program loan in FY05 to support the eight non-EU members in meeting their technical and institutional obligations. This regional program provides Bank investment support by using the adaptable program lending (APL) instrument. This loan o f EUR 50.6 mi l l ion i s the first loan to Turkey under this program. The specific objectives o f APL2 are to: (i) assist with the creation o f a market management system for the electricity market; (ii) strengthen the SCADA system to enable TEIAS to operate more efficiently; and (iii) strengthen the transmission grid. This loan became effective in September 2005.

(d) The Gas Sector Development Project: This project loan o f US$ 325 mi l l ion to Turkish Gas Pipeline Corporation (BOTAS) finances a gas storage facility for Turkey as well as part o f i t s transmission system expansion. In addition, the project will support the restructuring o f BOTAS and help it achieve access to capital market financing in the future. This project results from the Gas Distribution Strategy and the Gas Sector Strategy Note completed by the Bank for the Turkish Government in July and September 2004. These studies indicated inter alia that peak demand for gas would increase rapidly with the expansion o f gas distribution and therefore storage i s increasingly needed. This storage would make gas supplies more reliable, thereby improving the investment climate for gas using companies. The system expansion and the storage would also assist wi th Turkey’s increasing role as a gas transit country. The loan became effective in March 2006.

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(e) ECSEE-APL3: This loan i s the second regional adaptable program loan to Turkey. Its objectives are to increase the safety, reliability, efficiency and capacity of the bulk power transmission system in Turkey and to improve market access for consumers and suppliers o f electricity. The project will support the strengthening and expansion o f the transmission network to reliably meet the growing electricity demand. I t will also help upgrade the transmission network in dense urban areas to minimize the risk to public safety posed by urban encroachment on existing overhead lines. The loan became effective in May 2006.

( f ) Energy Generation Rehabilitation and Restructuring Project: This project i s aimed at improving the reliability and efficiency o f one o f the largest generating plants in Turkey, and to assist the Government in restructuring the existing generating company, EUAS, into separate portfolio generating companies. The project will result in a significant increase in plant capacity, availability, and efficiency, thus assisting in increasing supply security in the country. This project will also have a very significant positive environmental impact because it will assist in reducing dust emissions, which have been quoted as the major negative impact o f the plant during public consultations. The loan became effective in November 2006.

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Annex 3: Results Framework and Monitoring

TURKEY: Electricity Distribution Rehabilitation Project

Project Development Objective To improve the reliability of power supply to consumers in Turkey by supporting the implementation of the electricity distribution network rehabilitation and expansion program.

In termed iate Resu Its

Distribution Network Expansion and Rehabilitation

Outcome Indicators

The consumers served by the power distribution networks in the areas, funded under the Bank project will have better quality of supply, with much lower interruptions.

Results Indicators

(i) Percentage reduction in number and duration of interruptions faced by the consumers in areas served by the eight regional companies funded under the Project.

(ii) New load served in the project areas of the eight regional companies funded under the Project

Use of Outcome Information The regional distribution power networks operate more reliably with greater supply security to consumers.

Use of Results Monitoring

Widespread equipment outages and energy interruptions in the project areas are reduced.

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Annex 4: Detailed Project Description

TURKEY: Electricity Distribution Rehabilitation Project

The Electricity Distribution Rehabilitation Project consists of Distribution Network Rehabilitation and Expansion. This includes investment projects for distribution network rehabilitation and expansion in the TEDAS regional companies of Ayedag, Uludag, Meram, Gediz, Toroslar, Menderes, Osmangazi and Akdeniz. The projects comprise medium and low voltage (34.5 kV, 0.4 kV) line replacements and extensions, substation upgrades, and include upgrading the network from nonstandard medium voltages and conversion to underground cables.

The project will also finance the cost of supervision consultants to assist TEDAS and the regional companies in managing and supervising the implementation of the investment projects.

Background

1. Turkey, which i s aspiring to become a member o f the European Union (EU) i s taking a l l necessary steps to bring i t s living standards o f consumers at par with other EU countries. A key objective i s to increase the reliability and safety o f electricity supply in terms o f quality and efficiency for households and businesses, thus contributing to the competitiveness o f Turkey’s economy and the quality o f l i f e o f i t s citizens. In addition to the adequacy o f the generation and transmission resources, the supply o f ef f ic ient electricity services also depends on the capacity, reliability and safety o f the distribution network. During the period o f 1994-2003, investments in the expansion and rehabilitation o f the power distribution networks were lower than the requirements. In this 9 year period, TEDAS was authorized only 49% o f the requested budget for investment needs, o f which only 80% was actually spent. As a result o f the lack o f sufficient investments in improving and expanding the distribution networks, consumers in many areas o f the country suffer from increased energy interruptions and inadequate network capacity. The distribution companies face inefficient levels o f energy losses due to run-down and aged networks and loss o f revenue due to unserved energy.

2. The Electricity Power Current Facilities Regulation, which was published in the Official Gazette No. 24246 dated November 30, 2000 increased the minimum horizontal distance between overhead l ines and buildings by including in the horizontal distance the overhead line’s maximum flexure. According to the previous regulation, the minimum horizontal distance to buildings was 2 meters excluding oscillation, while the new regulation requires the inclusion o f the overhead line’s maximum flexure in the 2 meter minimum horizontal distance. As a result o f the new regulation, many buildings in city centers are in breach o f the new mandated safety distances. At several city center locations, the overhead lines (low voltage as well as 34.5 kV) are touching tree and potential hazard to safety to lives and cause losses due to leakage current. In addition, for some land areas in city centers and in places o f tourist interest, the construction o f new overhead lines i s prohibited even if they comply with the new safety distance.

3. The TEDAS system, which developed over the years through independent small networks, has several medium voltage levels ranging from 6 kV to 34.5 kV. To serve consumers efficiently and to save additional losses from avoidable double transformation at medium voltages (e.g. 34.5 to 15.8/10/6 kV and further from 15.8/10/6 to 0.4 kV), nonstandard voltage

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networks need to be eliminated progressively over time. The elimination o f nonstandard voltage networks would also increase flexibility in system interchange, reduce inventories, ease operation and maintenance as well as reduce interruptions in the ageing nonstandard medium voltage systems.

4. TEDAS performed a feasibility studyI9 to identify the investment needs required to improve the operational efficiency and service quality o f the electricity distribution networks in Turkey. The study has identified five areas o f investments with an estimated total cost o f YTL 1.1 billion as shown in the following table: The actual investment needs now are higher than the estimates shown below, since the study i s a bit dated.

Table 4.1: TEDAS Investment Needs for 2005-2008 Areas of Investment

Network Expansion and Rehabilitation 309,540 277,150 277,150 277,150 990,000 SCADA and Distribution Management 3,850 2,750 2,750 2,750 12,100 System (DMS) Remote Meters and Management System 15,400 11,000 11,000 11,000 48,400 Geographic Information System 19,250 7,7000 7,7000 7,7000 42,350 Consulting Services for Capacity Building 1,960 1,400 1,400 1,400 6,160 Total 350,000 250,000 250,000 250,000 1,100,000

5. Due to the large financing requirements and implementation challenges o f the above investment program, TEDAS has decided to prioritize and focus its investments on the rehabilitation o f the distribution networks in provinces that have the most limited and outdated distribution networks and which will not as a result be able to meet their rapidly growing electricity demand. TEDAS has requested that the World Bank finance a portion o f the investment needed for the Network Expansion and Rehabilitation Program and the consulting services for TEDAS capacity building. TEDAS also has requested that the European Investment Bank (EIB) finance the portion o f the Network Expansion and Rehabilitation Program that will not be financed by the Bank.

Network Expansion and Rehabilitation Projects

6. TEDAS has prepared a comprehensive network expansion and rehabilitation investment program for the period 2005-2008 for the 20 regional distribution companies, subject to availability o f financing. The investment program includes; 1) rehabilitation and upgrading of the existing distribution equipment and facilities, 2) network expansion by constructing new substations and feeders, and 3) replacement o f existing run-down and aged medium and low voltage transmission lines in densely populated areas with new underground cables. The preparation o f the design and technical specifications for these projects has been done by the technical staff o f the regional companies under guidance from the central planning and design directorate. The main objective o f these various projects i s to improve the reliability, efficiency and safety o f the electricity supply to end users by:

~~~ ~ ____

Improvement o f Operational Efficiency and Service Quality in the Electricity Distribution Grid - McKinsey 19

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Minimizing energy interruptions caused by equipment and facilities outages, Reducing the network technical and non-technical losses, Improving the safety o f the network and reducing damages to the public, Reducing the network operational costs, Minimizing compensation payments made for material damages, Ensuring compliance with the Electricity Market L a w No. 4628 requirements on supply reliability2' and implementing the Electricity Power Current Facilities Regulation o f 2000 which increases the minimum allowable distance between overhead power lines and buildings.

7 . TEDAS has considered various alternative designs to prepare the least cost rehabilitation program. The alternatives included new overhead lines in replacement o f the old overhead network; using aerial bunched cables; and underground cable network. Since old networks at several places are o f non-standard voltage, the new network (at voltage level different than the existing network) would need to be constructed in parallel wi th the old network in order to keep serving the existing consumers during the construction period. The right o f way i s inadequate to run two medium voltage overhead networks in parallel, which makes the alternative o f overhead lines technically infeasible. The alternative o f aerial bunched cables also would require additional supports for which right o f way doesn't exist at several locations. Besides, the aerial bunched cable would also impact the aesthetics o f tourist places and city centers and breach the municipal regulations.

8. TEDAS has finally adopted underground cabling as the most optimal alternative for the expansion and rehabilitation o f existing distribution networks. The utilization o f cabling technology in the development and operation o f distribution networks i s common in most West European countries. One o f the principal advantages o f the underground cables in urban areas i s that they improve safety o f the electric facilities and reduce the environmental and aesthetic adverse impacts. In addition, network losses (technical and non-technical losses) are lower in cables than in aerial l ines. Underground cables are also not susceptible to damage due to storms or earthquakes2' or failure due to accidents, and are far less likely to cause death or injury as usually happens in case o f accidental contact wi th the overhead lines. Furthermore, local authorities in several settlement areas and city centers have requested from TEDAS an increased reliance on underground cabling for the expansion and rehabilitation o f the distribution networks in their local areas.

9. established the following criteria to determine where underground cables will be used:

In preparing the distribution network expansion and rehabilitation program, TEDAS has

The Electricity Market Law requires that the issue o f compensation for losses and damages that may arise due to lack o f quality and/or interruptions in power supply should be addressed in the licenses and the contracts o f the legal entities providing these services to consumers. The procedures and principles concerning the implementation o f these provisions shall be defined in regulations. In addition, the Law requires EMRA to establish the scope o f the monitoring mechanism, the reports to be submitted by legal entities on service reliability, outages and other performance criteria and to ensure that these reports are regularly submitted to EMRA.

2 ' An earthquake in 1999 in Turkey with the epicenter about 5 5 miles east o f Istanbul caused 14,000 fatalities and left about 200,000 people homeless.

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In city centers and settlement areas where the distribution network has been expanded or existing overhead l ines have inadequate capacity to supply electricity due to increased energy consumption or where existing overhead l ines are not compliant with Electricity Power Current Facilities Regulation o f 2000. In areas where the construction o f new overhead l ines i s prohibited and instead the construction o f underground cables i s necessitated. In areas where the cable route and the cable i t se l f will not be damaged from incidental excavations or road expansions. In tourist areas where safety, public appearance and reliability o f the electricity will improve the tourist industry.

TEDAS Project Assessment and Grouping

10. During the project preparation, the World Bank team worked closely with TEDAS headquarters staff as well as staff from the regional companies in the assessment o f the scope, justifications and benefits from the proposed projects. In addition to the feasibility study prepared by TEDAS headquarters staff for the overall investment program, each regional company prepared a project feasibility report for all the projects proposed by that regional company for Bank financing.

11. Criteria for future projects: During project preparation, the Bank team along with TEDAS designs and planning team, undertook on-site visits to several regional distribution companies and to provinces where they have projects proposed for financing by the Bank22. During these field visits, the Bank team reviewed with TEDAS regional staff the scope and design o f the projects, their feasibility reports and visited the sites o f those project areas. Pursuant to these visits, feasibility reports where necessary, have been modified to incorporate suggestions by the Bank technical specialists. TEDAS will have the flexibility to add or remove projects currently being prepared for Group 2 as long as proposed projects are economically justified and comply with the following eligibility criteria agreed during appraisal:

(a) Underground conversion and network expansion investment projects in large ci t ies selected for safety reasons, because o f the need for compliance with clearance regulations, or for increased load growth. Large ci t ies with buildings and structures close to existing overhead lines, and where load growth i s likely are ideal candidates for these investments. Investment to continue the ongoing replacement o f non-standard medium-voltages by the standard medium voltage o f 34.5 kV. Investment projects aimed at improving system control and at reducing system losses and energy interruptions in provinces or distribution systems with high losses and energy interruptions.

(b)

(c)

The provinces where Bank Staff have visited or met regional staff are: Avanos, Nigde and Nevvehir in Meram region; Adana, Mersin and Kozan in Toroslar region; Samsun, Ordu and Amasya in Yesilirmak region; Balikesir, Bursa and Canakkale in Uludag region; Sakarya and Kocaeli in Sakarya region; Erdine in Trakya region and Istanbul (Anatolian side) in Ayeday region.

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-- Fi EDAS Regional - Companies ~

13. TEDAS has also prepared a procurement and implementation plan for the projects in the eight regional distribution companies. Due to the large number o f the projects included in the Network Rehabilitation and Expansion program, TEDAS has separated the projects into two groups, shown in Table 4.2 below, to allow staggered procurement and implementation o f the projects.

Table 4.2: Project Grouping

Group Region Projects Financed by the World Bank Group 1 Gediz Alagehir 1 1 2 4 , Manisa V

Meram Konya II, Nigde II, Nevgehir II AyedaS AyedaS VI, AyedaS VII, Urnraniye II Uludaei Balikesir Ill

Group 2 Toroslar Adana VIII, Hatay VI, Gaziantep XIV Osmanaazi Afvon Ill Uludag Bursa II, Akdeniz lsparta VI, lsparta VI1 Menderes Marmaris IV, Fethiye II

14. The following subsections include brief descriptions o f the projects included in Group 1, their scope, justifications and benefits. Other project details would be available in the respective feasibility reports o f the projects.

Pro jec t Descr ipt ion

Group 1 Projects 15. Group 1 includes investment projects financed by the World Bank that have highest priority for TEDAS and wil l be the first group o f projects tendered and implemented. Feasibility reports and technical specifications for the distribution network rehabilitation programs o f the regions with projects included in Group 1 have been completed and reviewed by the Bank team. Given the limited size o f this proposed Loan to TEDAS and large size o f the rehabilitation programs in TEDAS regions and depending on the size o f each region investment program, the Loan will finance a limited number o f projects in each region. The remaining projects in each region will be financed by a parallel EIB loan to TEDAS or by TEDAS own resources.

16. Ayedaq Projects Ayeda? i s the regional distribution company serving the Anatolian side o f Istanbul and i s responsible for the operation, maintenance, planning and expansion o f the distribution system in i t s service area. The total number o f subscribers served by Ayedaq i s 1,823,158 o f which 1,542,336 residential, 269,177 commercial, 1,497 industrials and the remaining 10,148 are other types o f consumers. In 2004, Ayedaq’ total energy sales and collection ratio were reported at 6,468,031 MWh and 96.5%. The region’s total losses are about 9.38% o f energy supplied o f which 6.0% i s technical losses and 3.38% non-technical losses.

24 The numbering sequence i s followed by TEDAS to link the investments with their approval from authorities.

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17. Istanbul i s the largest and fastest growing city in Turkey with respect to area, population, trade, financial and tourism activities. As a result, the increased electricity demand growth in the city requires investment in rehabilitation and expansion o f the city distribution network. In addition, Istanbul i s a coastal ci ty with a windy, wet and salty environment that has corrosive effects on the city’s distribution network causing frequent equipment and line outages and unserved energy interruptions to consumers estimated at the equivalent o f about 2 days o f the annual electricity sales.

18. Ayedag prepared a project report describing the above projects and outlining their benefits. The projects will include: 1) rehabilitating existing medium voltage and l o w voltage overhead networks, 2) replacing overhead l ines with underground cables, 3) installing new underground cables to expand the capacity o f the new network and 4) replacement and installation o f new distribution transformers. Table 4.3 l i s t s the projects, and their locations, in Ayedag that will be financed by this Loan.

Table 4.3: Ayedaa Network Rehabilitation and Expansion Group 1 Projects Project Location

AYEDAS VI LV-MV Electricity Distribution Rehabilitation Project: - Vanikoy - Beykoz - Sarnandira - Iqneler - Dudullu

UMRANIYE II LV-MV Electricity Distribution Rehabilitation Project:

AYEDAS VI1 LV-MV Electricity Distribution Rehabilitation Project

- Urnraniye - Bostanci - Sarnandira - Kartal

- Sarnandira - Kurtkejy

19. Uludag i s the regional distribution company serving the provinces o f Balikesir, Bursa and Canakkale. The rehabilitation projects in Balikesir province will be financed by the Loan and i s included in Group 1 due to i t s high priority.

Uludag/Balikesir Projects

20. the Bal

Uludag General Directorate o f Balikesir province (Uludag/Balikesir) i s responsible for operation, maintenance, planning and expansion o f the distribution system in the province o f .ikesir. The total number o f subscribers served by Uludag/Balikesir i s 654.136 o f which

546.81 2 residential, 78,36lcommercial, 3,114 industrial and the remaining are other types o f consumers. In 2004 Uludag/Balikesir total energy sales and collection ratio were 1,35 1,866 MWh and 91.5%. The province’s total losses are about 10.3% o f which 6.5% i s technical losses and 3.8% non-technical losses.

2 1. The Balikesir province i s one o f the main industrial provinces in Turkey with a high rate o f growth o f industrial and residential demand. The main problems o f the distribution network in the province are the inadequate capacity o f the network to supply growing demand and

41

frequent electricity interruptions to consumers (estimated at the equivalent o f about an equivalent 8 days o f the annual electricity sales) due to the age and run down condit ion o f the network infrastructure. The new Loan wil l finance four network expansion and rehabilitation projects located in several towns and settlement areas served by Uludag/Balikesir. Uludag/Balikesir prepared a project feasibility report describing the four projects and assessing their justifications and benefits. Balikesir I11 project, the largest o f the four projects, i s o f high priori ty as it would be necessary to serve new residential and industrial demand planned for construction in Balikesir ci ty center. Therefore, TEDAS has included this project in Group 1, as shown in Table 4.4.

Table 4.4: UludaQlBalikesir Network Rehabilitation and Expansion Group 1 Project Project Location

Balikesir Balikesir Ill LV-MV Electricity Distribution Rehabilitation Project

22. Belikesir I11 project wil l include expansion o f the existing medium and l o w voltage network in Balikesir c i ty center by constructing new overhead l ines and underground cables and upgrading existing transformer substations and install ing new ones.

23. Gediz/Manisa Projects Gediz serves the provinces o f Manisa and Izmir . The Loan will finance network rehabilitation and expansion projects in Manisa province only. Gediz General Directorate o f Manisa province (GedidManisa) i s responsible for the operation, maintenance, planning and expansion o f the distribution system in the province o f Manisa. The total number o f subscribers served by Gediz/Manisa i s 545,17 1 o f which 443,634 residential, 65,462 commercial, 852 1 industrial, 17,020 agricultural and the remaining 10,534 are other types o f consumers. In 2004 GedidManisa total energy sales and collection ratio were 1,269,552 MWh and 95.3%. The province’s total losses are about 10.8% o f which 6.5% i s technical losses and 3.8% non-technical losses. The new Loan will finance two projects in GedidManisa province located, as shown in Table 4.5, in Manisa and Alavehir ci ty centers.

Table 4.5: GedizlManisa Network Rehabilitation and Expansion Group 1 Projects Project Location

Manisa Center V - MV-LV Electricity Distribution Network Rehabilitation Project

Manisa Alagehir II - MV-LV Electricity Distribution Network Rehabilitation Project

Manisa

Alagehir

24. The existing distribution networks in Manisa and Alagehir suffer f rom bad voltage performance, high energy interruptions to consumers (estimated at the equivalent o f about an equivalent o f 8 days o f annual electricity sales) and inadequate capacity to meet growing demand in both cities. In addition, in many instances the clearance o f the overhead lines f rom buildings and public places does not comply with safety and new clearance requirements.

25. The Manisa V project i s planned to rehabilitate a por t ion o f the distribution network in the Manisa C i ty Center by replacing existing o l d and unsafe medium and l o w voltage overhead lines with underground cables and expanding the network transformer capacity. Rehabilitated

42

overhead lines and transformers operated at non-standard medium voltage (6.3 kV) will be replaced by cables and transformers operated at the standard 34.5 kV voltage.

26. The Alagehir I1 project i s planned to rehabilitate a portion o f the distribution network in Alagehir town served by Gedizhlanisa province. Similar to Manisa V project, the project consists o f replacing existing old and unsafe medium and low voltage overhead lines with underground cables and expanding the network transformation capacity.

27. Meram Projects Meram serves towns, districts, and villages located in the provinces o f Konya, Karaman, Nigde, Nevgehir, Kirgehir and Aksaray. The total number of subscribers served by Meram i s 1,040,677 o f which 844,205 residential, 1 12,475 commercial, 14,908 industrial and the remaining 10,148 are other types o f consumers. In 2004 Meram’s total energy sales and collection ratio were 2,975,153 MWh and 62.9%. The region’s total losses are about 8.82% o f which 7.5% i s technical losses and 1.32% non-technical losses. Meram’s poor collection ratio i s due to the very l ow collections from the agricultural consumers who consume about 20% o f Meram’s electricity sales.

28. Out o f eight projects included in Meram distribution network rehabilitation program, the Loan will finance only three projects in the Meram region located in cities and towns shown below:

Table 4.6: MeramlManisa Network Rehabilitation and Expansion Group 1 Projects Project Location

Konya center II LV-MV Electricity Distribution Rehabilitation Project

Nigde center LV-MV Electricity Distribution Rehabilitation Project

Nevgehir center LV-MV Electricity Distribution Rehabilitation Project

Konya

Nigde

Nevgehir

29. The distribution networks in Meram region suffer from high energy interruptions to consumers (estimated at the equivalent o f about 6.5 days o f annual electricity sales) due to outages o f distribution network facilities and overhead lines. The distribution networks in the region also suffer from poor voltage performance and overloaded facilities, especially in city centers, due to growing electricity demand. In addition, the Kaymakli and Avanos projects are planned in order to install new underground cables so as to replace the old overhead l ines whose economic service l i f e has expired and to protect the scenic beauty o f the Kapadokya and Avanos historical areas.

30. Meram prepared a project feasibility report describing the projects included in i t s distribution network rehabilitation program and outlining their justifications and benefits. The projects wil l include rehabilitating existing medium voltage and low voltage overhead networks, replacing overhead l ines with underground cables, construction o f new underground cables, and expansion o f the transformer capacity o f the distribution networks where the projects are located.

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Group 2 Projects

3 1. fo l lowing regions and provinces:

Proposed projects in Group 2 include network rehabilitation and expansion projects in the

0

0

0

0

Toroslar Regional Company: Projects will be located in Adana, Hatay and Gaziantep Osmangazi Regional Company: Projects wil l be located in A f y o n Akdeniz Regional Company: Projects will be located in Isparta Uludag Regional Company: Projects will be located in Bursa Menderes Regional Company: Projects wil l be located in Marmaris and Fethiye

32. Group 2 projects are among the identified priori ty investment projects for the rehabilitation o f the distribution networks and which are proposed for f inancing by the Wor ld Bank. These provinces where the projects are located are preparing feasibility reports describing the projects and assessing their justifications, costs and benefits, as per the agreed design and planning criteria. The Bank team will complete the assessment o f these projects after their feasibility reports are completed.

Technical Assistance for project implementation

33. The project wil l also support hiring o f engineering consultants to assist the regional companies and HQ, if required, in project implementation. The objectives o f this consultancy services are:

0 to provide monitoring and support to the regional companies for coordinating the implementation activities o f the projects, to ensure that the project work activities are well coordinated between the TEDAS, regional companies and the contractors as we l l as with other relevant agencies (Le. municipalities, local infrastructure utilities), and to ensure that the supplied equipment and c i v i l and installation works are in compliance with the Project design and work schedule.

Projects Cost Estimates

34. Table 4.7 shows the cost estimates and financing sources for the regional projects included in TEDAS distribution network rehabilitation program and their source o f financing. The estimated total cost o f the projects, including contingencies, financed by the Wor ld Bank Loan i s about Euro 205 mil l ion, including the cost o f hiring consultants for supervision o f the project implementation. The project cost estimates where in i t ia l ly developed by TEDAS during the preparation o f the Master Plans and feasibility studies o f the projects and continuously revised based o n further knowledge o n market prices o f such type o f projects that TEDAS has acquired f rom its procurement o f the distribution rehabilitation projects financed by EIB.

44

.................... ~~

x,"_,x x,- x,, , , , ,," , ,

45

Annex 5: Project Costs

TURKEY: Electricity Distribution Rehabilitation Project

Project Cost By Region

Local Foreign Total Euro million Euro million Euro million

Network Rehabilitation and Expansion Projects

World Bank Financing

120

145 60 205

52 172

I Consulting Services I 5.0 I 0 I 5.0 I

I Total Baseline Cost I 125 I 52 I 177 I 1 Physical Contingencies I 10 I 4 I 14 I 1 Price Contingencies I 10 I 4 I 14 I I Total Project Costs I 145 I 60 I 205 I I Total Financing Required I 145 I 60 I 205 I

- -

Physical and price contingency are assumed at 5% each. Cost estimates do not include VAT.

46

Annex 6: Implementation Arrangements

TURKEY: Electricity Distribution Rehabilitation Project

1. companies. companies - o f the total complement o f 20 regional distribution companies affiliated to TEDAS.

The Project will be implemented by TEDAS and i t s affiliated regional distribution Proposed project investments are presently located in nine regional distribution

2. The contract management, project supervision, disbursement arrangements are noted schematically in the figure 6.1 below. These arrangements below will remain applicable to a l l the regional distribution companies that are managed by TEDAS General Management i.e. as long as the regional distribution company i s not privatized. Upon privatization o f any o f the regional distribution companies where Project investments are under implementation the arrangements will shift as noted in Figure 6.2.

Figure 6.1 Project Implementation Arrangements - For TEDAS Managed DistCos

HE BORROWER

. Progress Report to WB Invoice Approval 8 Payment authorization

I ; . Disbursement

Regional Distribution Company

I I + I

Contract for Supply 8 Installation

*

Project Supervision Team 2 Fulltime Staff

(Supported by Supervision Consultants) Supervision 8 Venfication of Works . Change orders certification J a Invoice certification

I I

I

I I I I

I

Contractor

I I

I Designated Account

yment

47

Figure 6.2 Project Implementation Arrangements - For Privatized DistCos

Loan Agreement

Loan Agree ent (Backto-Back Loan) f

Contract Reassigned to Private Concessionaire

Contract for Supply

Contractor

TEDAS Project Management Team

3. TEDAS has established a Project Management Team responsible for implementation o f the projects. The team comprises staff from TEDAS General Manager Office, Design and Construction Department, System Operation Department and Research & Development and Foreign Affairs Department. The team’s main functions will be procurement, contracting and contract administration, managing disbursements. In addition, the team will coordinate with the regional companies to ensure effective supervision, implementation and completion o f the projects. The team will also be responsible for the project information management and the preparation o f consolidated progress reports on the project implementation.

4. The planning and design activities o f new investment project are carried out by technical staff o f the regional distribution companies and reviewed and approved by TEDAS General Directorate” staff, The investment projects proposed to be financed by the Loan have been included in the regional distribution companies Master Plans for the rehabilitation and expansion o f the distribution networks.

25 Responsible for design and planning o f the network rehabilitation and expansion plans.

48

Regional Project Supervision Teams

5. The regional distribution companies and their provinces with investment projects will also designate project supervision teams responsible for monitoring and supervision o f the contractor to ensure adequate quality and timely project implementation and for direct coordination with the project contractors. I t has been agreed that each Regional distribution company will assign 2-3 staff to manage the project. Given the amount o f works to managed, the regional distribution companies will hire a small team o f local consultant engineers and technicians to assist them. The regional supervision team will verify the quality and quantity o f works completed, supervise line commissioning with the distribution operation staff, and verify invoices. Invoices will be cleared by the project supervision teams and sent to the TEDAS Project Management Team who will initiate payment action. The regional project supervision teams will also be responsible for the preparation o f progress reports on the project implementation and submission o f these reports to TEDAS General Directorate.

Procurement

6. The procurement o f the project components will be on a “supply and installation” basis following the Bank’s ICB procurement guidelines, to reduce the coordination problem between multi suppliers/agencies. A procurement plan has been prepared (See Annex 8). The projects identified so far for financing under the Loan have been grouped into two groups and will be implemented in two phases as described in Annex 4. Each group includes several project packages, each o f which will be procured in one contract. To assist the regional companies in managing and supervising the implementation o f the projects, TED A’$ will hire engineering consultants as the Implementation Supervision Consultant for the project package. The objectives o f this consultancy services are:

0 to provide monitoring and support to the regional companies for coordinating the implementation activities o f the projects, to ensure that the project work activities are well coordinated between the TEDAS, regional companies and the contractors as well as with other relevant agencies (i.e. municipalities, local infrastructure utilities), and to ensure that the supplied equipment and civil and installation works are in compliance with the Project design and work schedule.

0

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Annex 7: Financial Management and Disbursement Arrangements

TURKEY: Electricity Distribution Rehabilitation Project

A. Summary o f Financial Management Arrangements

1. An assessment o f the financial management arrangements for the project was undertaken in May 2006. Current financial management arrangements for the project are marginally satisfactory to the Bank and an action plan had been developed to bring these arrangements to an acceptable level for the Bank.

A summary o f the conclusions for the project financial management purposes are as follows:

INHERENT RISK

Country Level Entity Level Project Level Overall Inherent Risk CONTROL RISK

Budgeting Accounting

Internal Controls

Funds Flow Financial Reporting

Auditing Overall Control Risk

Risk Rating

Modest Modest Modest Modest

Modest Substantial

Modest

Modest Modest

Modest Modest

Risk Mitigating Measures

Procurement process of software for effective financial management of project transactions will be commenced before loan negotiations, and the software will be installed by May 15, 2007. In the meantime, the project transactions that are also going to be booked in TEDAS' legal accounts will be followed up in Excel spreadsheets as a transitional measure. TEDAS does not have an internal control department which undertakes regular audits. TEDAS will document the internal control procedures for the project in the project financial management manual.

The reporting module will be integrated to the accounting software by May 15, 2007.

Country Issues

2. State Economic Enterprises in Turkey are subject to basic accounting and auditing obligations which apply to companies in Turkey. These are laid down in the Commercial Code, which was last revised in 1956. More detailed requirements were introduced in the Tax Procedures Law o f 1950 (which has since been consolidated into the Tax Procedures Code). Under the powers granted to it by the Code, the Ministry o f Finance (MOF) introduced a Uniform Chart o f Accounts which became effective on January 1, 1994. This prescribes certain fundamental accounting concepts, a code o f accounts, and a format for the presentation o f financial statements. The main purpose o f these requirements i s to provide information to the

50

taxation authorities, there i s no obligation to publish the financial statements, nor are they subject to a mandatory financial statement audit.

Action Responsibility The procurement of the accounting and reporting software for project will FOD and Upper be finalized. Management The accounting and reporting software will be installed and functional. FOD Chart of accounts for project transactions in line with the reporting FOD requirements will be prepared and uploaded to the accounting software. The draft project financial management manual will be revised to reflect FOD the latest arrangements put in place. Audit firm for the audit of entity IFRS financial statements will be FOD appointed.

3. The electricity sector in Turkey i s regulated by the Energy Market Regulatory Authority (EMRA) established by the Electricity Market Law no.4628 on March 3, 2001. The law aims at ensuring supply o f good quality, low cost, environment friendly electricity to the users in required quantities. I t also aims at establishing an electricity sector that i s financially sound, transparent and competitive that i s subject to independent audit and regulation o f the market.

Deadline April 30, 2007

May 15,2007 May 15,2007

March 31, 2007

September 30, 2007

Strengths

4. The significant strength that provides the basis o f reliance on the project financial management system i s that TEDAS i s a well-established State Economic Enterprise which i s capable o f handling the accounting o f the project as well as preparing the financial reports as required by the Bank if provided with necessary tools in terms o f information systems.

Weaknesses and Action Plan

5. The financial management environment o f TEDAS includes some deficiencies relating to the financial management o f the project and TEDAS should take action to address these deficiencies. The following action plan i s proposed to address the deficiencies in the TEDAS financial management environment:

Implementing Entity

6. The project will be implemented by Turkish Electricity Distribution Company (TEDAS) and subsidiary regional distribution companies. TEDAS i s a State Economic Enterprise (SEE) established in 1994 and has taken over the electricity distribution functions o f TEK the former electricity company which had been split into two companies; TEDAS (Electricity Distribution) and TEAS (Electricity Generation and Transmission, which was further split into three companies). TEDAS i s responsible for the distribution o f electricity and the rendering o f the electricity sales services. TEDAS had been taken into the privatization program with the decision no. 2004122 o f the Privatization Higher Board.

7. TEDAS staff have had limited exposure to Bank projects in the past and therefore there i s a need for capacity building activities to be undertaken for the project implementation group that i s yet to be established. As presented in detail in Annex 6 Implementation Arrangements, the

51

regional distribution companies will establish project supervision teams that will be responsible for the monitoring and supervision o f the contractors. The regional distribution team will verify the quality and quantity o f works completed, supervise l i ne commissioning with the distribution operation staff and verify invoices. Invoices will be cleared by the project supervision teams and sent to TEDAS Project Management Team who will initiate the payment action by sending the relevant documents to the Financial Operations Directorate (FOD) o f TEDAS which will carry out the financial management functions under the project. The FOD consists o f five departments but the financial management o f the project will be the joint responsibility o f the Budget and Reporting Department and the Distribution Companies and Fixed Assets Department which has been restructured to execute the financial management o f loans from international financial institutions. The FOD established a project financial management team with staff with qualifications to respond to the accounting and reporting requirements o f the project. These staffs started working on improving the existing financial management arrangements.

8. The FOD has prepared a financial management manual that describes the financial management arrangements o f the project. This document will be further developed to fully cover (a) the financial and accounting policies and procedures for the project (b) organization o f the financial management and job descriptions (c) the financial management information system (d) disbursements (e) budgeting and financial forecasting (0 project reporting and (g) project budgeting and planning procedures.

9. above lays out the roadmap to improve the implementing entity rating to a low level.

The risk associated with the implementing entity is assessed as modest. The action plan

Budgeting

10. The investment budget o f TEDAS i s prepared by the Research and Development Directorate (RDD) in coordination with the Distribution Lines and Projects Preparation Directorate. Taking the investment requests o f TEDAS’S distribution companies in the regions, the RDD prepares an investment plan. This plan i s then sent to the State Planning Organization after the approval o f the Board o f Directors. The approved budget for 2007 for the Electricity Distribution Rehabilitation Project i s in the investment program for 2007.

11. TEDAS has a separate budgeting software used by the RDD. This software i s not integrated to the accounting software. Accordingly monthly financial information i s provided by the FOD to the RDD, which prepares analytical budget reports on a monthly basis for the use o f the management.

12. The accounting software (see section below for details) that will be bought for project accounting and reporting purposes will have an integrated budgeting module. Quarterly budgets will be entered into this module to facilitate making comparisons between actual and budgeted income and expenditures. The FOD will include these specifications into the TOR o f the accounting software. Moreover, the FOD will ensure the coordination with technical unit for the timely preparation o f the project budget and document these procedures in the Financial Management Manual.

The risk associated with the budgetingprocess is assessed as modest.

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Accounting

13. Project accounting will be maintained by the FOD. The General Directorate o f TEDAS i s currently using accounting software purchased in 1996 (Logo 1996) which doesn’t have the inventories, fixed assets and budgeting modules integrated to the accounting module. TEDAS has contracted an IT company to develop an integrated management information system that will include modules for the accounting, inventory, budget, personnel, fixed assets and customer information. This system (BYS - Bilgi Yonetim sistemi) i s finalized and ready to be installed.

14. The main transactions o f the project will be in the legal books o f TEDAS. However neither the current accounting system nor the BYS technically allow the FOD to do the accounting o f the project in foreign currency and the production o f the project financial statements. The modifications that are required to be made in the BYS will be costly and time consuming. Therefore TEDAS has agreed to purchase an accounting software that will enable i t to account for the project in foreign currency. The software will also have integrated budgeting and reporting modules, tailored for the needs o f the project. In the meantime, in case o f occurrence o f expenditures before the installation o f the software, the FOD will use Excel spreadsheets as a transitional measure.

15. manual.

Accounting procedures for the project will be set out in the project financial management

The risk associated with accounting is considered substantial. TEDAS wi l l purchase and install an accounting software by April 30, 2007.

Internal Control and Internal Auditing

16. the departments within TEDAS and therefore no reliance will be placed on internal audit.

TEDAS does not have an internal control department which undertakes regular audits o f

17. TEDAS does not fal l within the scope o f the enacted Public Financial Management and Control Law which requires internal control departments to be established at Government institutions. However, since TEDAS i s committed to modernizing its financial management systems i t i s important that the Organization considers the establishment o f a modern Internal Audit Department.

18. TEDAS will document the internal control procedures for the project in the project financial management manual. To strengthen internal controls, TEDAS would minimize the risk o f misuse or fraud with respect to financial management in the following ways:

The FOD will make the payments to contractors only after verifying that the invoices and other payment documents contain al l technical approvals that are required and after verifying that the payment requests are l ine with the contracts. The payments will be executed by a different person than the one who authorizes them. 0

53

The staff responsible for the project bank accounts will prepare and document bank reconciliations on a monthly basis. The reconciliation f i l e s will be supervised and signed by the Head o f FOD on a quarterly basis. The project FM team will prepare checklists for required documentation for each type o f transaction. These checklists will also be attached to the Financial Management Manual. The Head o f FOD will supervise that full supporting documentation i s provided for each transaction.

The risk associated w i th internal control is assessed as modest.

Funds Flow and Disbursement Arrangements

19. There will be one Designated Account (DA) for the project for disbursements. The DA will be in the currency o f the loan and will be at an acceptable commercial bank. Al l payments to the contractors, suppliers and consultants will either be made directly from the loan account or from the Designated Account with the authorization o f the responsible personnel. The Financial Operations Department o f TEDAS will be responsible for making both these as well as counterpart fund payments. TEDAS will specify authorized signatories and payments from the designated account will be made with the approval o f one o f these authorized staff.

20. The project i s in the investment program o f the Government. TEDAS i s a revenue earning entity and access to counterpart funds i s not expected to pose any problems during the implementation.

The risk associated w i th fundsflow is considered as modest.

Financial Reporting

21. TEDAS will maintain records and will ensure appropriate accounting for the funds provided. Financial statements for the project will be prepared by TEDAS. The interim un- audited financial reports (IUFR-also referred to as the Financial Monitoring Reports - FMRs) will be prepared on a semi-annual basis and will be submitted to the Bank no later than 45 days after the end o f the semester. Moreover, TEDAS FOD will ensure that these reports are automatically generated from the accounting software that will be bought for project accounting purposes.

The IUFR will include the following reports: Expenditure Tables, Special Account Statement, Procurement Tables, Output Monitoring Reports.

22. The IUFR templates have been prepared and agreed upon with the Bank. The financial management manual o f the project will include a section on the IUFR and formats o f these reports will be detailed there.

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The risk associated with reporting and monitoring is assessed as modest. The reporting module will be integrated into the accounting software by May 15,2007.

Auditing

23. TEDAS does not have a legal obligation to have i t s accounts audited by independent auditors. However, as part o f the Bank’s auditing requirements, TEDAS’S financial statements as well as the project financial statements will be subject to external auditing. The first set o f audit reports will be submitted to the Bank before June 30 o f the year following the calendar year in which the first disbursement from the loan has been made.

24. TEDAS financial statements will be audited by independent auditors acceptable to the Bank in accordance with International Financial Reporting Standards and International Auditing Standards. Annual project financial statements will be audited by the Treasury Controllers. TEDAS has prepared a draft Terms o f Reference for the audit work mentioned above and will assign i t s auditors for the audit o f i t s 2007 accounts no later than September 30, 2007.

25. State Owned enterprises in Turkey are subject to the audit o f Higher Audit Board (YDK). YDK was established in 1938 to audit State Owned Enterprises (SOEs) on behalf o f the Parliament. The YDK reports for the years 2004, 2003 and 2002 were reviewed. The main findings relating to financial management are:

The need for supporting the accounting units with qualified personnel. The need for improving the IT infrastructure. Weaknesses in terms o f preparing the disclosures for the financial statements.

26. Given the facts that TEDAS financial statements have not been audited in accordance with IFRS and ISA before and the potential information gaps that might have been created during the split o f the former electricity company (TEK) into two companies (TEDAS and TEAS), there i s a high risk for the auditors to give a disclaimer opinion for the f i rst years o f the audit. The IFRS financial statements audited in accordance with ISA will be reviewed once they are received. If the results o f the audits reveal any weaknesses in the financial management o f TEDAS, an action plan will be agreed with the company to address the issues identified and progress will be monitored during supervision.

The risk associated with auditing is assessed as modest.

B. Disbursement Arrangements

Designated account

27. The DA will be used following procedures to be agreed with the Bank, and will have an authorized allocation o f € 20 million. Two signatures indicated in the l i s t o f authorized signatures submitted by TEDAS will be required on the withdrawal applications. The minimum application size for payments directly from the Loan Account for issuance o f Special

55

Commitments i s € 4 million. Applications for replenishment o f the DA will be submitted to the Bank on a monthly basis, or when the balance o f the DA i s equal to about half o f the initial deposit or the authorized allocation, whichever comes first, and will include a reconciled bank statement as well as other appropriate supporting documents. Retroactive expenditures are allowed for payments made prior to the date o f the Loan Agreement, but on or after February 28, 2007 for Eligible Expenditures under Category (1) and Category (2), up to an aggregate amount not to exceed € 11 million.

1. Goods (including supply and installation)

2. Consulting services

Use o f statements o f expenditure (SOEs)

(EURO) 200,000,000 100% of foreign expenditures,

100% local expenditures (ex-factory cost) and 85% of other items procured locally 100% 5,000,000

28. Disbursements will be made against Statements o f Expenditures for: (a) goods costing less than € 10 million equivalent per contract; (b) consulting contracts with firms, costing less than € 300,000 equivalent each; (c) consulting contracts with individuals, costing less than € 75,000 equivalent each. Full documentation in support o f SOEs would be retained by TEDAS for at least two years after the Bank has received the audit report for the fiscal year in which the last withdrawal from the Loan Account was made. This information will be made available for review during supervision by Bank staff and for annual audits which will be required to specifically comment on the propriety o f SOE disbursements and the quality o f the associated record-keeping.

Total

I I I I

205,000,000

Category % of Expenditure to be financed I A z : I o n I

C. Supervision Plan

29. During project implementation, the Bank will supervise the project’s financial management arrangements as follows:

(i) During the Bank’s regular supervision missions financial management and disbursement arrangements will be reviewed to ensure compliance with the Bank’s minimum requirements;

(ii) The project’s quarterly IUFRs as well as the project’s annual audited financial statements and auditor’s management letter will be reviewed;

(iii) As required, a Bank-accredited Financial Management Specialist will assist in the supervision process.

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Annex 8: Procurement Arrangements

TURKEY: Electricity Distribution Rehabilitation Project

A. General

1. Procurement for the proposed project would be carried out in accordance with the World Bank’s “Guidelines: Procurement Under IBRD Loans and IDA Credits” dated May 2004; and “Guidelines: Selection and Employment o f Consultants by World Bank Borrowers” dated May 2004, and the provisions stipulated in the Legal Agreement. The general descriptions o f various items under different expenditure categories are described below. For each contract to be financed by the Loan, the different procurement methods or consultant selection methods, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank project team and listed in the Procurement Plan. The Procurement Plan will be updated regularly to reflect the actual project implementation needs and improvements in institutional capacity.

Procurement o f Works: No Works contracts are foreseen in the Project.

2. Goods procured under this project would include: Expansion and rehabilitation o f electricity distribution lines in the relevant city centers o f the TEDAS regional companies o f Ayedag, Uludag, Meram, Gediz, Toroslar, Menderes, Akdeniz and Osmangazi. The contracts comprise medium and low voltage line replacements and extensions, substation upgrades and upgrading o f l ines from non-standard medium voltages and their conversion to underground cables. I t i s estimated that the amount o f the goods procurement will be in the rage o f 50- 65% o f the total contract cost. The contracts will be o f Goods/Supply and Installation type which will include goods supply, dismantling and installation costs.

Procurement o f Goods/Supply and Installation(S1) :

3. There will be two large Goods/Supply Installation bid groups (packages) in this Project and each bid group will include various contract packages (slices). They will be conducted through International Competitive Bidding (ICB) procedures with post qualification o f the bidders in accordance with paragraph 2.58 o f the Procurement Guidelines. The cost estimates o f the contracts have been done by TEDAS and are updated on regular basis to reflect the changes in the market. I t was envisaged by TEDAS that the contract durations will be 22 months and that price adjustment may be considered either at the pre-bid conference stage if bidders request such a provision or for the second group o f contracts if experience during the f i rs t group o f contracts suggest the requirement for such a provision. Price adjustment will apply only to cable prices which constitute about 35-45 % o f the contract price. For any contract exceeding 24 months duration, price adjustment shall be included in the contract. The contracts will be procured depending on the priorities o f the regional companies. The S I bidding documents will be issued in both English and Turkish languages in accordance with the paragraph 2.15 o f the Procurement Guidelines. The protocols that will be arranged between the TEDAS Regional Companies and the relevant Municipalities will be disclosed to the prospective bidders.

4. for Supply and Installation o f Plant and Equipment.

The procurement will be conducted using the Bank’s latest Standard Bidding Documents

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5 . All Goods/Supply and Installation Contracts will be subject to prior review by the Bank.

6. the Project.

Procurement o f non-consulting services: No non-consulting services are foreseen in

7 . Selection o f Consultants: Consulting firms would be required for the site supervision o f the S I contracts and assistance to TEDAS Project Management Team and Regional Companies, on monitoring and evaluation during the implementation o f the project. Short l i s ts o f consultants for services estimated to cost less than €170,000 equivalent per contract may be composed entirely o f national consultants in accordance with the provisions o f paragraph 2.7 o f the Consultant Guidelines. Individual consultants and small specialized firms may also be required for highly specialized subjects and for support to the Project Management Team.

8. The envisaged procurement methods for the Selection o f Consultants in this project are:

- Quality and Cost Based Selection (QCBS); - Least Cost Selection (LCS); - Selection Based on the Consultants Qualifications (CQS) for the services estimated to

cost less than €1 70,000; - Individual Consultants.

9. Consultancy services estimated to cost above €300,000 per contract and Individual Consultants estimated to cost above €75,000 per contract will be subject to prior review by the Bank. Regardless o f the estimated cost, the first two contracts for each selection method and the Terms o f References o f al l individual consultancy contracts will be subject to prior review by the Bank. The shortlist for any audit contracts financed by the project, including those that are below prior review threshold shall be sent to the Bank for review.

10. Operational Costs: The project will not finance any operational cost.

B. Assessment of the agency’s capacity to implement procurement

1 1. Procurement activities wil l be carried out by TEDAS.

12. Assessments o f the capacity o f the Implementing Agency to implement procurement actions for the project have been carried out by the Bank team between September 2005 and M a y 2006. The assessments reviewed the organizational structure and procedures for implementing the project.

13. TEDAS has established a Project Management Team (PMT) under the coordination o f Deputy General Manager. The P M T comprises staff from Design and Construction Department, Materials and Procurement Department and Research & Development and Foreign Affairs Department. The Design and Construction Department wil l give the main support to PMT. The P M T will be supported by the procurement staff experienced in public procurement procedures during the procurement process. The advisor o f the General Manager who has experience in the international procurement will also guide the PMT.

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14. TEDAS as an institution has experience in the procurement and implementation o f contracts only in national level. TEDAS neither has experience in international procurement nor in the Bank’s procurement procedures. TEDAS has not used site supervision consultants under their own financing. Few staff speaks English and they have difficulty in the understanding o f the Bank’s procurement terminology. The overall project risk for the procurement aspects i s high.

15. In order to mitigate the high procurement risk and considering that the TEDAS staff has no experience in the Bank’s procurement procedures, the Bank’s procurement and technical staff, and PMT agreed to work closely in the preparation o f the bidding documents. I t i s also agreed that the Bank’s procurement staff will provide training to PMT on demand basis. The PMT agreed to provide a simple weekly report to the Bank’s procurement specialist every Monday indicating the status o f the procurement activities, during the first year o f the procurement plan coverage period. During the project preparation phase the Bank procurement specialist provided the Bank’s Procurement Guidelines and Standard Bidding Documents to PMT. Moreover, the important aspects o f the bidding documents such as post qualification requirements, contract grouping, technical requirements etc. were discussed between the Bank’s team and PMT. For further reduction o f the risks associated with implementation the PMT agreed to employ site supervision consultants and specialized individuals.

C. Procurement Plan

16. The Borrower has developed a Procurement Plan for project implementation which provides the basis for the procurement methods. This plan has been agreed between the Borrower and the Bank on February 27,2007 and i s available at the Project Management Team’s office in TEDAS. I t will also be available in the Project’s database and in the Bank’s external website. The Procurement Plan will be updated annually in agreement with the Bank to reflect the actual project implementation needs and improvements in institutional capacity. The Plan includes procurement activities for projects in Group1 and Group 2. However, TEDAS will have the flexibility to add or remove projects in Groups 2 or establish a new Group, subject to compliance with selection criteria defined in Annex 4.

D. Frequency o f Procurement Supervision

17. In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment o f the Implementing Agency has recommended semi-annual supervision missions to visit the field to carry out post review o f procurement actions.

18. The Project Management Team in TEDAS will keep a complete and up-to-date record o f al l procurement documentation and relevant correspondence in its f i l e s which will be reviewed by the Bank staff during supervision missions.

19. Monitoring reports and on procurement progress in the form o f completed-ongoing- planned procurements will be submitted semi-annually as an integral part of the Financial Monitoring Report on Project implementation.

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E. Other

20. TEDAS may initiate procurement o f S I contracts and consulting services before the Loan effectiveness date in accordance with the Bank’s Procurement & Consultant Guidelines. The contracts which will have been reviewed by the Bank may retroactively be financed by the Bank as described in the Loan Agreement.

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Annex 9: Economic and Financial Analysis

TURKEY: Electricity Distribution Rehabilitation Project

ECONOMIC ANALYSIS

Main economic benefits

1. There are five types o f economic benefits produced by the rehabilitation and expansion o f those parts o f the TEDAS Distribution System which are in the worse shape or most in need o f capacity expansion. These benefits are:

Increase in safety because the overhead l ines which are too close to buildings or otherwise dangerous are replaced by underground cables;

Reduction in electric power interruptions since underground cables are much more reliable than overhead lines;

Expansion o f capacity as the new cables can supply more power than the old distribution l ines which in many cases are close to capacity;

Reduction in operating costs since the new underground cables will require fewer repairs;

Decrease in technical losses due to enhanced distribution capacity with underground cables.

2. Increase in Safety. Visual inspection o f the various distribution systems indicates that there are a number o f l ines which are too close to buildings or which otherwise violate current regulations. TEDAS was only willing to quantify the safety benefits o f replacing these overhead lines with cables for the two systems where they recently had had accidents. These are Ayedag (Asian Side o f Istanbul) and Meram (Konya). In both cases significant payments had been made in 2004 to compensate victims which would not have been necessary if the particular lines involved had been underground. I t i s quite probable the safety benefit i s considerably larger than indicated by TEDAS (less than 1% o f total benefits). For example a study done by the Independent Pricing and Regulatory Tribunal o f New South Wales26 found that the main benefit from burying distribution cables i s the reduction in accidents, accounting for about 40% o f total benefits according to the Tribunal.

3. Reduction in Power Supply Interruptions For three o f the four regions for which feasibility reports exist, the reduction in power supply interruptions i s the main benefit from the rehabilitation and expansion program. This i s because there are currently substantial interruptions in the power supply since: 1) the overhead lines or substations have undergone serious deterioration, 2) they are overloaded and tending to overheat or 3) they are exposed and

26 Electricity Underground in New South Wales, A Final Report to the Minister for Energy, May 2002

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vulnerable to various types o f accidents. Replacing the worn out equipment and installing new underground cables will lead to a considerable drop in such power interruptions.

4. For example the Meram Distribution System in 2004 had interruptions o f feeder lines amounting to about 33,000 hours. Given the average capacity o f the various feeder lines this amounted to about 72 Gwh o f interruptions or equivalent to about 6.5 days o f supply. This unserved energy i s valued at about 50 U S cents/kWh equivalent to 0.65 YTL per hour (the figure used in a recent Bank financed study o f energy supply in the Balkans) minus the average cost o f supply to TEDAS o f about 0.082 YTL per kWh. If this value for unserved energy i s applied to the 72 GWh o f interruptions then the overall cost o f this unserved energy would be about 41 Million YTL. The project would certainly not eliminate the problem o f interruptions but it would be expected to reduce it roughly in proportion to the percentage o f the distribution system that i s being rehabilitated. In the case o f Meram it i s estimated that the project would reduce the value o f unserved energy by about 3.2 Million YTL per year. Similar calculations were done for the other distribution systems for which feasibility studies exist.

5. Expansion of Capacity The project will expand capacity in those parts o f the system which are experiencing rapid growth. For a l l o f the 4 regions for which feasibility studies exist, there are certain identified new housing estates or factories which are under construction or planned to be constructed in the near future which cannot be supplied with the current distribution assets. The project will provide the new investments required to supply these loads. The economic value contributed by TEDAS in supplying these loads i s assumed to be TEDAS’ average tariff o f 0.044 YTL/kWh. (The overall economic value o f supplying this new load i s much higher. However, most o f this i s attributable to the new generation not TEDAS.) Also the project will allow currently unknown additional loads to be supplied. However, to be conservative no economic value was assigned to supplying unidentified future loads.

6. Reduction in Operating Costs There will be a substantial reduction in operating costs as new equipment which i s purchased under the project replaces old and worn out equipment including replacing exposed overhead lines with underground cables. In estimating the reduction in operating costs it i s conservatively assumed that there i s no reduction in direct labor costs since no reduction in TEDAS staff i s assumed. However, materials costs are reduced as well as hired labor costs. The percentage reduction in costs i s assumed to be less than the proportion o f the distribution network which i s rehabilitated.

7. Reduction in technical losses and Theft The distribution systems being rehabilitated typically have significant losses ranging from around 5% to 12% o f power supplied. Typically 50-70% o f the losses in these systems to be rehabilitated are technical with the rest theft. As a result o f the rehabilitation both technical losses and theft will be reduced less than in proportion to the percentage o f the system that i s being rehabilitated. The reduction in technical losses i s valued at the cost o f power purchased by TEDAS o f .OS2 YTL per kWh. Conservatively, no economic value i s attributed to the reduction in thefts. I t i s assumed that the economic value o f the electricity supplied i s the same whether i t i s paid for or stolen although o f course there are a number o f major draw backs to the theft including a worst financial condition for TEDAS and misallocation o f resources due to the free electricity.

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Net Cost

8. For each distribution system a net cost o f the rehabil itation and expansion program for that system was calculated. This net cost i s the gross cost (excluding taxes) minus the scrap value o f the equipment taken out o f service. Typical ly this scrap value reduces the gross cost by 4- 12%. This net cost was used in the economic analysis.

Economic Rates o f Return

9. Based o n the above information and assumptions an economic rate o f return (ERR) was calculated for each o f the four distribution systems and for the a l l four systems together. A lso a net present value (at a 10% discount rate) was calculated for the investment in each system and for the four systems together. The results are as follows.

10. Ayeday This i s the system serving the Asian Side o f Istanbul and one o f the larger distribution systems in Turkey. The cost o f rehabilitation i s estimated at about 73 M i l l i o n YTL with about 16% o f the system being rehabilitated. The scrap value o f the existing poles and aerial lines i s about 9 M i l l i o n YTL. The main benefit f rom rehabil itation i s the reduction in supply interruptions which are currently the equivalent o f about two days o f the company annual sales. Another major benefit i s an increase in the capacity o f the distribution system sufficient to supply the 14 M W o f additional demand which i s forecast for the near future based on building plans. Other benefits are a reduction in accidents (based on Ayedag recent experience), a reduction in expenses and a reduction in losses. The ERR o n the rehabil itation o f Ayedav i s 1 1% real,

1 1. Uludag (Balikesir Province). This rehabilitation project covers the Balikesir Province part o f the Uludag System, specifically the cities o f Balikesir, Edremit, Zeyt in l i and Susurl~k~~. About 48% o f this system will be rehabilitated. The cost o f rehabil itation i s estimated at about 78 M i l l i o n YTL with a scrap value for the current poles and aerial l ines o f about 4.7 M i l l i o n YTL. The main benefit i s the abi l i ty t o serve a 30 M W increase in electricity demand wh ich i s coming f rom the construction o f new housing estates and factories. The second major benefit i s an anticipated reduction in supply interruptions which are currently estimated at about 8 days o f the Uludag (Balikesir) annual electricity sales due to the poor condit ion o f much o f the system. Other benefits are a reduction in costs and a reduction in electricity losses. No benefit was assigned to any reduction in accidents since there was l i t t le information o n the current level o f accidents. The ERR o n the rehabil itation o f Uludag (Balikesir Province) i s 21% real.

12. Gediz (Manisa Province). This rehabilitation project covers the rehabilitation o f the part o f the Gediz System in Manisa province, primari ly the cities o f Manisa and Alavehir. About 35% o f the system will be rehabilitated at a cost estimated to be about 36 M i l l i o n YTL. The scrap value o f the exit ing poles and aerial lines i s estimated at about 1 M i l l i o n YTL. The main benefit i s again the reduction in interruptions o f supply which are currently the equivalent o f about 8 days o f the annual electricity sales supply. However, Gediz (Manisa Province) has substantially higher electricity losses (12%) than the other three systems. These losses wh ich amounted to 153

The Feasibility Study for Uludag includes four o f the projects in the Uludag System (Balikesir, Edremit, Zeytinli and Susurluk) even though only Balikesir, 73% o f the total, is in Group 1. The others wi l l be financed by TEDAS’ own resources.

21

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Gwh in 2004 are expected to be reduced by about 28 Gwh. Only 21.3 Gwh o f this loss reduction was considered as a benefit since this i s the anticipated reduction in technical losses. Other benefits are supplying an 8 Mw increase in demand and a reduction in costs. The ERR for the Gediz distribution rehabilitation i s 27% real the highest among the systems primarily because o f the anticipated loss reduction.

DISTRIBUTION SYSTEMS

13. Meram This rehabilitation project primarily deals with the cities o f Konya, Nigde and NevSehir. The cost o f the rehabilitation i s about 31 Million YTL with the scrap value o f the existing poles and aerial l ines being about 0.9 Million YTL. About 10% o f the network will be improved. The main benefit i s the reduction in supply interruptions, currently estimated at equivalent o f 6.5 days o f the annual electricity sales. The next most important benefit i s the reduction in technical losses which are about 7.5 % o f supply. Other benefits are the ability to serve a 5 Mw increase in demand, the reduction in operating costs and a decrease in accidents. The ERR for Meram i s 21 % real.

ERR NPV (YTL Mil.)

14. based on a 10% discount rate.

These results are summarized in the table below. The ERRS are shown as well as NPV’s

AYEDAS (Istanbul Anatolian Side)

ULUDAG (Balikesir Province)

11% 2.57

21% 40.49

GEDIZ (Manisa Province)

MERAM (Konya-NevSehir-Nigde Provinces)

27% 32.2

21 % 17.5

Four Distribution Systems Combined

Sensitivity Analysis

19% 92.8

15. A brief sensitivity analysis was done to analyze the impact on the ERR for the four combined distribution systems o f changes in the assumptions. This analysis was done for an increase in the capital costs for the rehabilitation and expansion programs in each o f the distribution companies, for a decrease in the value o f unserved energy, for shorter lengths for the project (currently assumed to be 20 years), for changes in the total benefits and for the elimination o f any scrap value for the poles and lines which will be torn down. These results are shown below. They indicate that the ERR i s quite robust and that even with major negative changes in the assumptions the ERR remains acceptable

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Base Case 19%

FINANCIAL ANALYSIS

~ Capital Costs of Rehabilitation and Expansion , + I 0%

+20% Value of Unserved Energy

-20% -40%

Project Life -20% -4 0 %

Total Benefits -20% -40%

Scrap Value -1 00%

Past and Current Financial Performance - TEDAS

20% 18%

20% 17%

22% 20%

19% 14%

21%

16. TEDAS owns and operates 20 regional distribution companies which serve about 28 million consumers across Turkey. While the regional companies have been created, they operate currently as business units o f TEDAS. Thus, while TEDAS intermediates between the wholesale suppliers and distribution companies and bills the regional companies, al l the cash collected by the companies flows into accounts maintained and controlled by TEDAS centrally. TEDAS thereafter, transfers funds sufficient to meet their operating costs to the distribution companies. This financial assessment therefore considers TEDAS on a consolidated basis and projects the consolidated financial position. The team also separately reviewed the financial position o f the distribution companies which will be beneficiaries o f the Bank loan *'. The forecasts o f the companies are based on the premise that after privatization the companies will be given control over their operations shortly - this translates into the following key assumptions:

(a) Distribution companies will enter into direct transition contracts with existing wholesale suppliers, EUAS generating companies and TETAS the trading company, with no intermediation by TEDAS; The distribution companies will control the cash collected by them, and will be responsible for meeting a l l their costs; Fixed assets will remain in TEDAS' books, with the distribution companies maintaining operating rights over the assets; and

(b)

(c)

For reasons o f confidentiality, due to the ongoing privatization transaction, the detailed financial forecasts for the 28

distribution companies are not being disclosed.

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(d) New investments will be undertaken by the distribution companies, and upon their completion, will reside in a “special cost account” on their books as long as they retain operating rights on the assets.

17. TEDAS’ past and current financial performance i s summarized in the below table. These numbers are based on TEDAS’ unaudited accounts. Inflation adjustment in 2004 and 2005 resulted in adjustments in fixed assets and shareholders’ equity, though this does not affect the overall financial situation.

Cost of Sales (3 166) (4 626) (6 134) (6 790) (7 436)

Gross Profit 910 1,010 1,416

Operating Costs (796) (905) (1 085)

Operating Income 142

Capital and Reserves 2,556 2,194 2,488

Debt

Net Profit Margin

Gross Profit Margin

Annual Electricity Purchase (GWh)

Energy Loss (%)

Annual Electricity Sales (GWh)

Average Sales Price (US$ cents/kWh)

Ave. Sales Price Change (%)

Pre-Tax Return on Assets

Return on Equity

Return on Capital Employed

Debt Service Coverage Ratio

Debt to Equity Ratio

Debt to Asset Ratio

Current Ratio

Collection Efficiency (%)’

Days Trade Receivables Outstanding

Days Trade Payables Outstanding

0.6% 1.0% 0.7% -0.4% 8.0%

12.4% 12.1% 12.9% 12.9% 16.0%

86,824 94,086 102,383 105,868 113,376

21.4% 20.9% 19.9% 18.6% 17.8%

68,215 74,456 81,975 86,194 93,209

5.68 7.64 9.15 9.62 10.06

NA 34.5% 19.7% 5.1% 4.6%

2.2% 5.7% 4.0% 8.3% 36.0%

2.3% 3.0% 1.9% -1.6% 28.6%

2.2% 2.9% 1.8% -1.3% 26.2%

NA NA NA NA NA

0.04 0.00 0.00 0.00 0.09

0.03 0.00 0.00 0.00 0.06

0.76 0.91 0.89 0.88 0.88

NA 87.7% 91.5% 91 3% 92.6%

91.61 117.22 11981 150.24 151.51

116.63 140.91 150.80 208.78 270.42

18. Projtability and Cash Flow Gross profit margins have been steady in the past despite the r ise in energy costs without commensurate increases in retail tariffs. The last tariff revision was in 2003 - changes in average tariff in the table above are due to fluctuations in the currency

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in the earlier years and/or due to changes in consumer mix. In addition, personnel costs rose dramatically from 2001 to 2003 (average increase rate o f 34%), leading to substantial lowering o f profitability for the company. The personnel costs increases have now subsided at 3% in 2004 and 8% for 2005. The net loss in 2004 i s a result o f tax burden resulting from profits from inflation adjustments. The cash f low i s mainly financed through high gross margins and trade payables.

19. CapitalStvucture TEDAS has not resorted to borrowings for its financing requirements, and does not have any debt on i t s books as a result (TEDAS has been able to use a build up o f payables to TETAS as a means o f financing i t s investments - see below); therefore debt ratios do not provide a good indicator o f capital adequacy. All o f the ratios indicate that TEDAS has room for additional financing, but that its debt servicing capacity wil l be affected by the status o f i t s receivable and payable situation.

20. System Losses TEDAS estimates i t s system losses (technical and commercial, including theft o f electricity) at about 17.8% in 2005. Losses rose consistently from about 10.7% in 1990 to 21.6% in 2000, but have declined gradually since then. In the last few years, TEDAS has focused on reducing losses by a variety o f approaches:

Loss detection teams have been set up at the headquarters and provincial levels, which routinely inspect suspected high theft and loss areas. In 2004 for instance, these teams inspected about 6 mi l l ion consumers and recorded 320,000 cases o f theft. This resulted in a revenue assessment o f US$230 million, and cash collection o f US$78 million. In provinces o f high theft, about 500 special personnel have been hired on a temporary basis with the express objective o f identifying theft cases. Defective or tampered meters are routinely inspected and corrective measures are taken. In several cases, metering, bi l l ing and collections are outsourced, and the outsourcing agencies are provided added incentives for theft prevention. A special internet-based project has been prepared by TEDAS staff in order to improve retail services such as subscription, metering, billing and collections. I t includes arrangements for bil l payment in installations through banks, tracking o f theft, remote disconnections and reconnections, etc.

Receivables for Sale o f Electricity

21. The problem At the end o f 2005, TEDAS had an estimated US$ 3.4 bi l l ion o f outstanding trade receivables, representing about 5 months o f electricity sales. The rate o f accumulation o f receivables has decreased significantly in the past two years on account o f improvement in collection efficiency from about 87% in 2002 to 93% in 2005. In the past, TEDAS has not only financed these large receivables but al l o f its investments as well, by building up payables, which have accumulated to more than 7 months o f annual energy purchases from TETAS. Currently the longer payable period allows TEDAS to generate sufficient cash flow, but also i s a risk factor in the future cash f low and financial projections o f entities dependent on TEDAS collections.

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Table 9.2: Receivables details of TEDAS

Source TEDAS

22. the following reasons:

TEDAS receivables have been growing, even though at a lower rate than earlier, due to

TEDAS’ collection efficiency, although improving over time, currently averages 92.6% o f sales revenue. The public sector accounts for about 40% o f total accumulated receivables - it has been very difficult for TEDAS to employ aggressive enforcement o f collections from these customers, largely on account o f political pressure. Municipalities (including General Lighting) are the chief defaulters for not paying their bills - they alone account for about US$ 1.3 billion o f the accumulated receivables. General Lighting, Le., street lighting, was recognized as a consumer category only in 2002, and began to be billed thereafter. Municipalities have argued that street lighting was not part o f their mandate, and that it was a government priority as part o f their overall function o f safety and maintenance o f law and order (see below for more details). The economic crisis o f 2001 led to a severe buildup o f arrears - TEDAS was not able to collect because o f the severe adverse impact on household incomes and commercial/industriaI businesses. Farmers have traditionally been supported by the Government through a variety of means, including electricity prices which are lower than for other consumers such as households. Largely as a result o f political pressure, TEDAS has not been able to collect its bills from farmers. The Government has, in the past, announced amnesty schemes, which allow waiver o f penal charges and payment in installments - this has had an adverse impact on a large majority o f farmers who have avoided payments in the expectation o f a future amnesty scheme.

Possible Solutions to the Problem of Arrears from the Public Sector Public sector entities such as State Economic Enterprises (SEES) are normally regular at paying their electricity bills. As discussed above, the main problem areas are (i) municipalities, (ii) street lighting, and (iii) public institutions such as schools, hospitals and other government offices.

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24. Treasury, MENR and other related agencies such as the Ministry o f Finance and the Ministry of Interior (which i s responsible for the operations and budgeting of municipalities) - are evaluating solutions for addressing the issue o f accumulated receivables and payment of ongoing bills from the public sector.

25. Municipalities Specifically with regard to municipalities, which are the largest concern in terms o f nonpayment, the Government has begun implementing new legislation which aims to improve payment discipline. The Government has amended the main laws which govern municipalities - the Municipalities Law (Law No. 5393, ratified in July 2005) and the Metropolitan Municipalities Law (Law No. 5216, ratified in October 2004), to strengthen provisions for debt restructuring. The process for debt restructuring for municipalities i s currently being implemented as discussed below:

(a) Establishment of a “Reconciliation Committee under the Undersecretariat of Treasury - this Committee has the mandate to restructure accumulated receivables and debts to 34 public institutions and authorities by municipalities, affiliates and companies owned by the municipalities. Eligible receivables and debts - Debts that were accumulated ti l l December 31, 2004 for metropolitan municipalities and December 3 1, 2005 for other municipalities are eligible to be restructured under this process. Incentives for municipalities - While i t i s entirely up to the municipalities to choose to participate in this process, the Law provides incentives such as forgiveness o f late fees and interest that i s above the WPI during the period. This represents a substantial reduction in the payable amount for municipalities that has been accumulating them for a long period. The majority o f the municipalities have agreed as a result; 8 out of 16 metropolitan municipalities and 2,500 out of 3,225 other municipalities have agreed to participate in this process. Deduction from tax and other devolutions by I l ler Bank - Up to 20%29 of the monthly tax revenue transfers that are routed through I l le r Bank will be deducted automatically starting from July 1, 2006. The funds wil l be allocated to the debtors accordingly to the seniority l i s t provided by the Committee. TEDAS i s the first priority on this list and wil l be one of the first and main beneficiaries from this new system (see Figure 9.3 below).

(b)

(c)

(d)

29 The Law originally required 40% deductions, but this proved to be too high in the case o f a number o f municipalities. Even at 20%, some o f the smaller municipalities wil l require more than 100 years to clear their dues.

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Fipure 9.3: Priority List from Municipality Reconciliation Committee

1 2 3

DSI (State Water Works) Ministry of Finance Treasury

26. Repayment schedules have been agreed among a l l parties for 484 municipalities, and the Council o f Ministers’ approval o f the restructuring and the payment schedule has been published in the official gazette (No. 2006/103 17). Since these are based on directives issued in the official gazette by the Council o f Ministers, enforceability o f the automatic intercept i s expected to be high. The reconciliation process for the remaining municipalities was completed in June 2006. The automatic monthly deductions will begin in July 2006. The process i s thus an important step in strengthening financial responsibility o f the municipal sector.

27. In addition, the government i s also working on payment o f current bills. Among the options being studied i s the establishment o f separate budget allocations for municipal electricity dues. In addition to this, increases in budgetary allocations where necessary, are being considered.

28. Street LightingMENR, Treasury, State Planning Organization (SPO), PA and TEDAS have been in discussion on legal amendments aimed at dealing with the fast accumulation o f street lighting arrears. As mentioned above, the municipalities have mainly defaulted on these payments due to a fundamental dispute about the responsibility over street lighting. This has been compounded by the fact that no budget increase was granted along with the allocation o f responsibility for street lighting to the municipalities. Proposals considered to fund the cost o f street lighting have included the following measures;

Allocation o f municipal tax collections (if required, through the levy o f additional taxes or the raising o f tax levels) by the Government (Treasury or Ministry o f Interior) towards payment o f electricity dues, through an additional levy on electricity consumption, to be collected by the distribution companies.

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29. Government institutions For institutions such as schools and hospitals, MENR i s considering the feasibility o f applying deductions at source from the budget for these institutions. The Ministry o f Finance i s the governing agency for these institutions, and i s involved in the discussion.

30. The problem o f high accounts receivables and poor ongoing collections i s thus receiving a strong focus from relevant agencies in the Government. Coupled with the prospects o f improved discipline as a result o f privatization, the measures being considered and taken by the Government provide cause for optimism for an improvement in the situation on receivables over the short and medium terms.

Forecast Financial Performance - TEDAS

3 1. The financial projections for TEDAS are on a consolidated basis, and are summarized in Table 9.4 below. The forecasts are driven by conservative assumption^^^ wi th regard to (a) tariff increases are forecast to remain stable except for the pass-through o f energy costs, (b) collection efficiency witness gradual improvements and no resolution o f the arrears, and (c) trade payables decrease gradually to less than 5 months’ cost o f purchase o f electricity.

The forecasts are based on assumptions made by Bank staff and use past data t i l l 2005 received from TEDAS, and do not represent official forecasts. For reasons o f confidentiality, due to the ongoing privatization transaction, the detailed financial forecasts for the distribution companies are not being disclosed.

30

72

(US$ Million)

lnoomr Statrmrnt Summary

Revenues

Cost of Sales

Gross Profit

Operating Costs

Operating Income

Net Profit Balance Shoot Surnmrry

Current Assets

Fl?ed-Asset? - - ~ - - - - . Io?alAsse!s- - - - - - - - . Capital and Reserves

Debt

w e ! l?abi!l!es - ~ - - - . Total Equity and Liabilities

Cash Flow Sumnlary Net Cash Flow from Operations Net Cash Flow from Investments Net Cash Flow from

Net Change in Cash Fi??nw?g ~ - - - - ~ - - - . andCash Egulvalen'5- .

Net Profit Margin

Gross Profit Margin Annual Electricity Purchase (GWh)

Energy Loss (%) Annual Electricity Sales (GWh) Average Sales Pnce (US$ centsikwh) Ave Sales Price Change (%) Pre-Tax Return on Assels

Return on Equity Return on Capital Employed

Self-Financing Ratio Debt Service Coverage Ratio

Debt to Equity Ratio

Debt to Asset Ratio

Current Ratio Collection Efficiency

Days Trade Receivables Outstanding' Days Trade Payables Outstanding,

( 0 4 '

Projoctionr

9,645 10,332 11,172 12,165 13,253 14,454 15,860 17,604 19,288 21,300 23,549

t i , i !2) (H.49!>) ( $ 3 4 2 ) ( l(1781) ill 34H) 112541) 113H58) (15315) (1607!,) 11H :04j (20671)

1,893 1,837 1,830 1,883 1,904 1,914 2,002 2,289 2,363 2,595 2,878

(1 0 6 2 (1 104) ( 1 148) 11,194) (1,242) 11,737) (1,343) (1,:39'7) (1.453) (1,511) (1,5'72)

665 557 497 501 474 433 467 695 707 875 1,091

558 455 391 384 355 317 338 520 528 664 840

5,280 6,276 7,377 8,301 9,245 10,128 10,937 11,658 12,448 13,321 14,049

3,857 3,929 3,989 4,044 4,098 4,153 4,206 4,253 4,292 4,323 4,346

9,137 10,206 11,366 12,344 13,343 14.281 15,144 15,912 16,740 17,643 18,395

3,350 3,806 4,197 4,580 4,935 5,252 5,590 6,110 6,638 7,302 8,142

226 539 934 1,174 1,328 1,466 1,605 1.708 1,761 1,788 1,799

. _ 5.ssl- - - - -5,86! ~ - - - 6,236- - - - -6,S!! - - - - 7-,0!0- - - - - !,563- - - - -!.849- - - - 8,094 - ~ - - !L33!- - ~ - -8,554- - - - 8,453

289 348 490 493 499 502 506 508 510 513 515

5 8% 4 4% 3 5% 3 2% 2 7% 2 2% 2 1% 3 0% 2 7% 3 1% 3 6%

196% 178% 164% 155% 144% 132% 126% 130% 123% 122% 122%

120199 126698 134030 141897 150660 160152 170242 180967 192368 204487 217369

172% 165% 160% 150% 145% 140% 130% 110% 100% 9 0 % 9 0 %

99498 105792 112586 120612 128815 137731 148110 161 060 173131 186083 197806

0 1 0 0 1 0 0 1 1 0 1 1 0 1 1 0 1 1 0 1 1 0 1 2 012 0 1 2 0 1 3

1 6% 1 6% 1 6% 1 6% 2 0% 2 0% 2 0% 2 0% 2 0% 2 7% 4 0%

250% 195% 163% 173% 174% 169% 195% 343% 374% 530% 762%

167% 11 9% 93% 8 4 % 7 2 % 6 0 % 6 1% 8 5 % 80% 9 1% 103%

149% 10 1% 7 4 % 6 5 % 5 5 % 46% 46% 6 6 % 6 2 % 7 3% 84%

26% 26% 26% 31% 57% 61% 61% 61% 61% 61% 61%

181128 3107 1460 1109 917 5 2 0 3 5 8 3 9 4 367 9 9 9 1173

007 0 1 4 0 2 2 0 2 6 0 2 7 0 2 8 0 2 9 0 2 8 027 0 2 4 0 2 2

0 0 6 0 14 0 2 3 0 2 9 0 3 2 0 3 5 0 3 8 0 4 0 0 4 1 0 4 1 0 4 1

0 9 8 1 1 0 122 1 2 9 134 137 140 1 4 5 150 1 5 6 167

930% 930% 93 5 % 945% 950% 96 0% 970% 980% 980% 98 0% 990%

171 91 193 34 20983 22008 22756 23054 22836 22033 21570 20993 20082

23449 22800 22259 21491 21066 20500 19552 17931 16753 15508 13776

73

Assumptions The major assumptions made in the projections are summarized below:

Demand Growth - The demand growth assumption used are from the tari f f study, which was projected based on the population growth and electricity needs. (see Table 9.5 below) Energy Loss - Loss reductions are deliberately kept conservative, and are based on the target o f achieving 9% by 20 15. Collection Efficiency - The collection efficiency i s assumed to improve gradually to 99% in 2016. N o assumption i s made on the recovery o f the receivables stock. Payables - Accounts payable for purchase o f electricity i s assumed to decrease gradually to less than 5 months o f cost o f sales in 2016. Tariffs - The tari f f level i s set according to the profitability and cash f low needs o f TEDAS. Tariffs are increased by a fraction (40%) o f the inflation rate until 2010 and gradually increase thereafter. N o assumptions are made about the Tarif f Equalization Mechanism (see below). Energy and Operating Costs - Assumed to increase at the rate o f inflation. Financing - The Bank and EIB are the main financial sources. I t i s also assumed that TEDAS will obtain additional external financing for amounts up to 40% o f their investments during the projection period, for meeting cash requirements. The rest i s assumed to be financed out o f TEDAS' own funds.

Table 9.5: AssumDtions on Demand Growth 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Demand Growth(%) ' 602% 5 4 1 % 5 7 9 % 5 0 7 % E ' E % 630% 630% 630% 630% 630% 630'1~

33. Projtability and Cash Flow Net profit margin gradually decreases to less than 3% as tariffs are assumed not to increase until 2010, at which they will stabilize. Al l other profitability ratios also show marginal decline in profitability until 2010, after which they show increase in l i ne wi th the increases with tariffs.

34. The cash f low i s projected to be sensitive to two major drivers; tariff and collection efficiency. TEDAS will be able to maintain adequate cash reserve to accommodate a l l the outflows and the ending cash balance remains above US$ 300 mi l l ion throughout the projected period. The Self-Financing Ratio (SFR) shows adequate investing capacity, as it remains above 30% throughout the projection period.

35. The main risk to the projected cash f low will continue to be the collection efficiency, especially from government agencies. Despite the conservative assumptions o f the projection, the cash f low may be at risk if collection efficiency fails to improve unless TEDAS i s allowed to further accumulate payable or borrow more in the future for investment requirements.

36. expected collection performance to the cash f low o f TEDAS. Scenarios used were;

Sensitivity analysis was conducted on this issue to measure the effect o f lower than

a) Scenario 1 - N o improvement in collection efficiency from 2005, b) Scenario 2 - 5% reduction in projected collection efficiency.

74

The results (as seen in Table 9.6) indicate that the cash flow i s sensitive and vulnerable to the changes in the collection performance.

Scenario 1 .Noimprovement 2006 2007 2008 2009 2010 2011 2012 2013 2014 2016 2018 Net Change in Cash and Cash

. - ~ Equivalents ~ _ _ _ _ _ _ _ _ _ _ 119 _ _ _ 22 _ _ _ _ _ _ _ $6 _ _ _ _ _ i ? ? 4 ! ~ ~ - 1 3 F J _ _ _ _ i!Kl-~-~F!!! _ _ _ _ i9!!i..i!?3?1____ P - l ? 9 J - - - 4 ! ? 9 -

Ending Balance 254 216 322 98 (2UB) (690; (1,379) (2 320) (3 3521 (44YOI (59861

Scenario 2 - 6% reduction Net Change in Cash and Cash

.__ Equivalents W j J - .!4-%! ~ -@J?L - .i?W ~ ~ !?CY)- il2??!ii. -L1-4?11- Jj ??!l- ~! pY5) - !22(!4)- J2,(i731- Ending Balance (228) (723) (1.235) (2 067) (3,036) (4 241) (5 723) (i 544) (9 540) (11 744) (14 417)

Self-Financing Ratio -102% -135% -164% -212% -227% -289% -367% -462% -509% -565% -696%

37. Investment Plan The investment plan in Table 9.7 below shows a stable investment plan over the foreseeable future. The reasonable level o f the SFR in the future years indicates that cash flows continue to be able to support these enhanced investments.

Table 9.7: Investment Plan for TEDAS

I Investment Plan I 344 I 344 I 344 1 344 1 344 I 345 I 347 I 349 I 351 1 352 I 354 1 Source: TEDAS, World Bank estimate

3 8 . Tariff Equalization Mechanism In Turkey, retail tariffs are kept at a uniform level across the nation and i t i s the plan o f the Government to continue with uniform tariffs over the next 5 years. However, different distribution companies have different cost profiles as a result o f different levels o f efficiency, costs, load profiles, geography etc. At present, consumers in the same category in different parts o f the country are charged the same tariff, and this “tariff equalization” i s achieved by charging different distribution companies different wholesale electricity purchase prices. This approach however, i s not preferred because it sends distorted price signals to consumers as well as to potential generators.

39. In order to enable the adoption o f a different tariff equalization mechanism during the transition period o f 5 years (till December 3 1, 20 lo), the Government has recently amended the Electricity Market Law. Pursuant to the amendment, EMRA has issued a communique regarding the new equalization mechanism.

40. Special Cost Account The privatization approach that has been selected will require that existing assets remain with TEDAS while the operating rights on those assets are vested in the regional distribution companies. New investments will be made by the distribution companies and, upon their capitalization, the investments will shift not to the fixed assets account or to TEDAS’ books but to a “special cost account” (SCA) in the distribution company’s books. The ownership o f the new assets will however be retained by TEDAS. Pursuant to amendments in the Tax Procedure Law No. 213, the SCA will be amortized according to standard depreciation rates, and the distribution company will be allowed to charge this amortization (as well as financing costs associated with these investments) to tariffs. The recovery o f amortization and other costs (relating to the new investments) from tariffs will be tracked separately in a “tracking account”. This approach will allow the investments made and financed by the private distribution company to be tracked separately, in order to provide the investor comfort that upon

75

the expiry o f the license/ operating right, they will be compensated for their investments. The following figure demonstrates the accounting associated with this approach using indicative numbers .

Figure 9.8: Special Cost Account and ' 7834sBalS* "

I Tdrl im I im

1 Tdrl 1181 118

racking Accounts Os1)BSaestret

TA ~ ITA Tda 221 22

Forecast Financial Performance - Distribution Companies (DISCOs)

4 1. There are eight distribution companies (DISCOs) in which the investments will be made in this project; Toroslar, Meram, Gediz, Uludag, AYEDAS, Osmangazi, Menderes, and Akdeniz. As part o f the preparation for privatization, preparation o f individual financial statements for each o f the DISCOs has started from 2005. The assumptions used in the analysis were formulated by World Bank staff based on past data provided by TEDAS staff.

76

42. The analysis for the 7 distribution companies (excluding Akdeni~)~' highlighted the risks o f continued poor collections. In the case o f 3 companies - Toroslar, Meram and Osmangazi - cash flows are likely to continue to be affected by poor collection efficiencies. Sensitivities done to simulate the impact o f improved collections however show that the three companies turn around in the medium term, and begin generating adequate levels o f cash. The problem o f collections arises mostly from street lighting in the case o f most companies. In the case o f Meram, Toroslar and Gediz, collections from agricultural consumers are an additional problem - in the case o f Meram, agriculture dues are the more serious problem, accounting for about 40% o f total receivables on the company's books in 2005.

43. The other four companies are forecast to be able to manage their financial requirements reasonably comfortably with minimal increases in tariffs in the later years. Most o f these companies are also forecast to begin paying down their accounts payable by the end o f the forecast period.

44. In summary, it appears that under conservative assumptions on collection efficiency, some o f the distribution companies may require continued cash support from the Government, as has been the case in the past. Most recently in March 2006, the Government injected cash into TEDAS in order to enable payment o f power purchase bills to TETAS. TETAS in turn paid EUAS, which paid the coal company and BOTAS, to enable them to meet their cash requirements. This situation may create some residual risk for the tari f f equalization mechanism, which would in turn create cash f low problems for TETAS, which i s expected to operate the equalization mechanism.

The detailed information for the regional companies i s not being disclosed here at the request o f PA, in order to maintain confidentiality because o f the ongoing privatization process. The regional company o f Akdeniz wi l l be analyzed when the feasibility study and financial data o f this company are made available to the Bank.

31

77

Annex 10: Safeguard Policy Issues TURKEY: Electricity Distribution Rehabilitation Project

Air Pollution-Dust Air Pollution-machinery/ Vehicular emissions Noise

Environmental Safeguards

Delivery vehicles carrying construction materials shall be covered Regular maintenance of machineryhehicles will be required

Construction activities confined to davtime hours

1. In accordance with Wor ld Bank policies and procedures for Environmental Assessment (OP/BP/GP 4.0 l), the Electricity Distribution Rehabilitation Project i s rated Category B. TEDAS has prepared very good quality draft Environmental Management Plans (EMPs) to mitigate and monitor potential environmental impacts o f the distribution network projects financed by the Loan. TEDAS will complete the consultation and disclosure o f the EMPs for the projects included in Group 1 before the appraisal mission. Consultation and disclosure o f Group 2 projects wil l be completed after the completion o f their feasibil i ty reports and before issuance o f their bidding documents.

PCBS Cultural Properties

ODeration

2. The network rehabil itation projects financed by this Loan are not expected to have significant safeguard-related impacts. The projects will include works such as rehabilitation o f existing equipment (transformers, capacitors etc.), replacement o f l o w and medium overhead l ines with underground cables and expansion o f the network by construction o f new underground cables and possibly overhead lines both at l o w and medium voltages. The potential impacts are considered to be minor o f l imi ted duration and l imi ted area. They are pr imar i ly associated with construction activities. Al l impacts can be readily managed with standard procedures o f good engineering and construction practice. During operation, the ch ief potential issues are effects o n the public (if any) o f exposure to electric and magnetic fields. The chief issues associated with construction and operation, and the manner in which they will be mitigated, are presented as follows:

Prohibited from purchase or use Areas with known official cultural assets will follow Turkish Law on "Protection of Cultural and Natural Assets" No. 2863 revised as No. 5226.

Areas with no known official cultural assets will follow Turkish chance find procedures.

Table 10.1: I Environmental ImDact

Summarized Environmental Impacts and Mitigation Mechanisms I Mitiaation Mechanism

Construction Phase Excavated Material 1 DisDosed at sites aDDroved bv the local MuniciDalitv Surface Water Pollution Access Roads

I No disposal of excavated material to surface waters permitted 1 Onlv existina access roads will be used

1 Public Safety Dangerous work areas will be fenced, in other areas appropriate signals will be installed

Health (Electromagnetic Cables will be buried to a level that would minimize surface levels of field 1 strenath.

78

3. below for those project components that have had EMPs prepared. incorporated into the contractor bidding documents for a l l components.

A schedule summary for environmental assessment procedures i s presented in the Table The EMP will be

Public Consultation Subproject Designation Method of Date Location

Announcement

Disclosure Date Location

GEDIZ-I

AYEDAS-I

AYE DA$-I I

u LU DAG-I

Konya TV (March 29)

Nigde TV (March 28)

Nevsehir Municipal Announcement System (March 29)

Alasehir Municipal Announcement System (January 27)

Manisa Faxed and written (December 27,2005)

Radio 7 (December 30, 2005)

Radio 7 (December 30, 2005)

Balikesir Brochures and Nritten :January 3,2006)

March 30,2006

March 29,2006

March 30,2006

January 28,2006

January 30,2006

January 02,2006

January 02.2006

January 04,2006

Training Hall of MEDAS Gen. Dir.

Training Hall of MEDAS-Nigde Operations Dir.

Meeting Hall of the Municipality

Meeting Hall of the Municipality

Training Hall of

Manisa Operations Dir.

GEDIZ EDAS-

General Directorate Meeting Room

General Directorate Meeting Room

Meeting Hall of UEDAS-Ball kesir Provincial Dir.

June 19,2006

June 19.2006

June 19,2006

June 19.2006

June 19,2006

In TEDAS Web site (www.TEDA$.gov .tr

In TEDAS Web site (www.TEDA$.gov .tr

In TEDAS Web site (www.TEDA$ .gov .tr

In TEDAS Web site (www.TEDA$.gov .tr

In TEDAS Web site (www.TEDA$.gov .tr

79

Land Acquisition Safeguards

4. The project wil l not require the acquisition o f private land. Underground cables will all be located under city streets owned by the Municipalities. The transformer substations upgrades or expansion will be carried out on existing substations or land that i s owned by TEDAS or by the Municipalities. Therefore, the projects financed by this Loan will not entail any resettlement.

80

Annex 11: Project Preparation and Supervision

TURKEY: Electricity Distribution Rehabilitation Project

Planned Acutal PCN review August 3, 2006 August 3,2996 Initial PID to PIC September 23,2005 September 13, 2005 Initial ISDS to PIC September 14,2005 September 14, 2005 Appraisal June 21,2006 June 21,2006 Negotiations December 22,2006 February 27,2007 Board/RVP approval April 19, 2007 Planned date of effectiveness April 30, 2007 Planned date of mid-term review December 31, 2008 Planned closing date December 31, 2012

Key institutions responsible for preparation o f the project: TEDAS

Bank staff and consultants who worked on the project included: Name Title Unit

Ranjit Lamech Task Team Leader Sameer Shukla Task Team Leader ECSSD Gurhan Ozdora Senior Operations Officer ECSPF lftikhar Khalil Lead Energy Specialist ECSSD

ECSSD/ EASEG

Husam Mohamed Beides Senior Power Engineer ECSSD

Shinya Nishimura Salih Kemal Kalyoncu Sunil Kumar Khosla

Financial Analyst Procurement Specialist

Senior Energy Specialist

ECSSD/ IFC ECSPS SASE1

James Moose Economist ECSSD Dilek Barlas Senior Counsel Bernard Baratz Environment Specialist Devesh Chandra Mishra Lead Procurement Specialist

LEGEC ECSSD ECSPS

Norval Stanley Peabody Social Scientist ECSSD Ayse Seda Aroymak Sr. Financial Mgt Specialist ECSPS

Zeynep Lalik Mete Financial Mgt. Specialist ECSPS Andrina Ambrose Senior Finance Officer LOAG 1

Hannah Koilpillai Ergun Ergunes Selma Karaman

Senior Finance Officer Power Engineer

P rog ra m Assistant

LOAGI Consultant

ECCU6 Yukari Tsuchiya Program Assistant ECSSD

Bank funds expended to date on project preparation: 1. Bank resources: $232,000 2. Trust funds: $0 3. Total: $232,000

Estimated Approval and Supervision costs: 1. Remaining costs to approval: $146,000 2. Estimated annual supervision cost: $80,000 - $100,000

81

Annex 12: Documents in the Project File

TURKEY: Electricity Distribution Rehabilitation Project

Feasibility Reports for Gediz, Meram, AyedaS and Uludag provinces - January-May 2006 Improvement o f Operational Efficiency and Service Quality in the Electricity Distribution Grid - McKinsey Financial analysis o f TEDAS and regional distribution companies - June 2006 Financial model for TEDAS and regional distribution companies - June 2006 Environmental Management Plans for provinces - June 2006

82

Annex 13: Statement of Loans and Credits

TURKEY: Electricity Distribution Rehabilitation Project

Original Amount in US$ Millions

Difference between expected and actual

disbursements

Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev’d

PO66149 2005 SEC EDUC 104.00 0.00 0.00 0.00 0.00 96.49 0.00 0.00 PO77328 2005 PO78359 2005 PO81880 2005 PO93568 2005 PO94167 2005 PO94176 2005 PO82801 2004 PO82996 2004 PO75094 2004 PO74053 2004 PO70950 2004 PO72480 2004 PO59872 2003 PO74408 2002 PO70286 2002 PO69894 2001 PO68368 2000

PO44175 2000 PO09073 1999 PO48852 1998

RAIL RESTRUCT SEISMIC RISK MITIGATION MUNICIPAL SERVICES EFIL 3 (CRL) PSSP 2 ECSEE APL #2 (TURKEY) (CRL) EFlL 2 PFPSAL 3

WATERSHED REHAB (GEF) HEALTH TRANSIT (APL #I) ANATOLIA WATERSHED REHAB RENEW ENERGY BASIC ED 2 (APL #2) SRMP ARlP PRlV SOC SUPPRT MARMARA EARTHQUAKE EMG RECON BlODlVMTRL RES MGMT (GEF) INDUSTRIAL TECH NAT’L TRNSM GRID

Total:

184.70 400.00 275.00 305.00 465.40

66.00 303.10

1,000.00 0.00

60.61 20.00

202.03 300.00 500.00 600.00 250.00 505.00

0.00

155.00 270.00

0.00 0.00 0.00

0.00

0.00 0.00 0.00 0.00

0.00

0.00 0.00 0.00 0.00

0.00

0.00 0.00

0.00

0.00 0.00

0.00

0 0 0 000 0 0 0 000 000 000 000 000 000 0 0 0 000 0 0 0 0 0 0 000 000 000 000 000 0 0 0 000 0 0 0 000 000 000

0 0 0 700 0 0 0 0 0 0 000 030 0 0 0 000 010 000 0 0 0 101 000 0 0 0 000

000 000 000 0 0 0 000 000 000 0 0 0 000 0 0 0 000 0 0 0

0 0 0 8 19 000

0 0 0 000 000 0 0 0 000 3448

173.32 0.00 373.91 3.91 257.43 0.00 298.04 I .67 434.21 5.00

61.03 0.00 65.20 -159.07

500.00 0.00 6.75 0.30

56.74 9.5s 19.55 0.32

190.83 5.15 291.46 283.75 220.08 196.50 268.71 268.71

7.2 1 7.21 279.82 279.82

4.12 3 . 6 1

13.15 13 .15 105.99 140.47

0.00

0.00 0.00 0.00

0.00 0.00 0.00

0.00

0.00 0.00 0.00 0.00

97.13 -3.79 75.74

-22.79 45.60

0.28 0.00

80.3 I

5,965.84 0.00 0.00 15.19 35 89 3,724.04 1,060.05 272.48

TURKEY STATEMENT OF IFC’s

He ld and Disbursed Portfolio In Mi l l ions o f US Dollars

Committed Disbursed

IFC IFC

FY Approval Company Loan

2005 Acibadem 20 00 Alternatif Bank 0 25

I99610 1/03/05 Arcelik 96 87 2000 Arcelik LG Klima 7 77 2002105 Assan 20 00 2002 Atilim 6 50 2000 Banvit 8 33

Equiry 0 00

0 00 0 00

0 00

0 00

0 00 5 00

Quasi

0 00

0 00 0 00

0 00

10.00 0 00 0 00

Partic

0 00

0 00 96 87 0 00

0 00 0 00

0 00

Loan Equity Quasi

I O 00 0 00 0 00 0 25 0 00 0 00

96 87 0 00 0 00

7 77 0 00 0 00

0 00 0 00 0 00

6 50 0 00 0 00 8 33 5 00 0 00

Partic

0.00 0.00

96.87 0.00 0.00

0.00 0.00

2002 200 1 I994196197 2004 1994 1990102 2002 2004 1995 I999 2004 I999 200 I I998 2005 1998100102 1990 I988190 2004 1991 2003

2004 2002 1998102 1991

2004 2004 2005 2005 2002 I998 2000 I999

1990 2002103 2002 2005 1982183189l91196199 2002105 200 I I999

1999 1998

2005

Bayindirbank A.S Beko

Bilgi

Borcelik

Borusan Holding

CBS Holding

Conrad

EKS

Ege Entek

Finansbank

Garanti Leasing

Gumussuyu Kap

Gunkol

Indorama Iplik

Intercity

lpek Paper

Kepez Elektrik Kiris

Koclease

Kula

MESA Group

Meteksan Sistem

Milli Re

Modem Karton

NASCO OPET

Oyak Bank

PALEN

PALGAZ

Pasabahce

Pinar ET

Pinar SUT

SAKoSa

Silkar Turizm

Sise ve Cam

Soktas

TSKB

Trakya Cam

Turk Ekon Bank

Turkish PEF

Unye Cement

Uzel

Viking

YUCE

1.50 30.69 8.00 8 .18 30.00 3.50 2.80 10.27 10.00 18.00 2.22

10.00 4.00 4.24 4.38 15.00 10.17 1.62 10.61 30.00

5.05 1 1 .oo 0.00 50.00

8.33 3.95 25.00 50.00 2.00 10.00 I .88

3.14 11.04 9.29 I .63 41.17 2.00 0.00

0.00

0.00 0.00 5.13 8.40 7.36 4.50

0 00 0 00

0 00

3 21 0 00

0 00

0 00

0 00

0 00

0 00

0 00 0 00 0 00

0 00

0 00

5 00

0 00

0 00

0 00

0 00

0 00

0 00 0 00 0 00

0 00

0 00

0 00 0 00 0 00 0 00 0 00

0 00

0 00

0 00 0 00 0 00 0 00

0 00

0 20 0 00

9 59 0 00

0 00 0 00 0 00

0 00

0.00

0.00

0.00

7.85 0.00 0.00 0.00 0.00

0.00

0.00

0.00

3.43 0.00 0 00 0.00

0.00 0.00

0.00 0.00

0.00

0.00

8.50

0.00 0.00

0.00

0.00

0.00

0.00

0.00

0.00 0.00

0.00

6.19

0.00 18.18 0.00

50.00 0.00

50.00 0.00

0.00

0.00

0.00 0.00

0.00 21.92 0.00 0.00 0.00

0.00 0.00 0.00

8.00

8.28

0.00 0.00

0.00

0.00

0.00 27.75 0.00 0.00

0.00 0.00 0.00 0.00

0.00 0.00 0.00 1.38

40.00 0.00

0.00

0.00 0.00 0.00

0.00

6.22

1.86 34.93 0.00 0.00 0.00 0.00 0.00 0.00 4.95 0.00 0.00

I 5 0 30 69

8 00 8 18

30 00

3 50 2 80

10 27

10 00 I 8 00 2 22

I O 00

4 00

4 24 4 38

6 26 I O 17

I 6 2 10 61 30 00

5 05 11 00 0 00

0 00

8 33 3 95 8 33

50 00 0 00 0 00

I 8 8 3 14 7 60 9 29 I 6 3

41 17 2 00 0 00 0 00 0 00 0 00 5 13 8 40 7 36 0 00

0 00

0 00 0 00 3 21 0 00

0 00 0 00

0 00

0 00

0 00

0 00 0 00 0 00

0 00

0 00

5 00

0 00

0 00

0 00

0 00

0 00

0 00

0 00 0 00 0 00 0 00

0 00

0 00

0 00

0 00 0 00

0 00

0 00

0 00

0 00

0 00 0 00

0 00

0 20 0 00

2 25 0 00 0 00

0 00

0 00

0 00

0 00

0 00 0 00 7 8 5 0 00

0 00 0 00

0 00

0 00

0 00 0 00

3 43 0 00

0 00

0 00

0 00

0 00

0 00

0 00

0 00

0 00

8 50 0 00 0 00

0 00

0 00

0 00

0 00

0 00 0 00

0 00

0 00

6 19 0 00

18 I 8 0 00

50 00

0 00

50 00

0 00

0 00

0 00

0 00 0 00

0 00 21 92 0 00

0 00

0 00

0 00

0 00 0 00 8 00 8 28 0 00

0 00

0 00

0 00 0 00

II 59

0 00 0 00 0 00

0 00

0 00 0 00

0 00 0 00 0 00

1 3 8 25 00

0 00

0 00 0 00 0 00

0 00 0 00

6 22 186

34 93

0 00

0 00 0 00

0 00

0 00 0 00

4 95 0 00

0 00

Total portfolio: 635.77 23.00 154.15 252.16 510.42 15.66 144.15 221.00

84

Approvals Pending Commitment

FY Approval Company Loan Equity Quasi Partic

200 1 Akbank 0.03 0.00 0.00 0.00

2004 Akbank BLoan Inc 0.00 0.00 0.00 0.02

2005 Assan IV 0.00 0.00 0.00 0.03 2005 Avea 0.12 0.00 0.00 0.30 2005 Bandirma Dogalga 0.00 0.00 0.00 0.00 2005 Eren Expansion 0.00 0.00 0.00 0.02

2005 Gemlik Dogalgaz 0.00 0.00 0.00 0.00

2002 Milli Reasurans 0.00 0.0 1 0.00 0.00 2005 Sivas Dogalgaz 0.00 0.00 0.00 0.00 2002 TEB 111 0.00 0.00 0.00 0.05

Total pending commitment: 0.15 0.01 0.00 0.42

85

Annex 14: Country at a Glance

TURKEY: Electricity Distribution Rehabilitation Project

POVERTY and S O C I A L Turkey

2 0 0 3 Population. midyear (millions) 70.7

2.800 197.8

GNI per capita (Atlas method, US$) GNI (Atlas method, US$ billions)

Average annual growth, 1997.03

Population (%) 1.7 Laborforce(%) 2.3

M o s t recent es t imate ( la tes t year avai lable, 1997-03 )

Poverty (% o f population below national po verty line) Urban population (%of totalpopulation) 66 Life expectancy at birth (years) 70 infant mortality(per IOOOlive births) 35 Child malnutrition (%ofchildren under5) 8 Access to an improvedwater source (%ofpopulation) 82 Illiteracy(%ofpopulation age a+) 14 Gross primary enro llment (%of scho 01-age population) 94

Male 98 Female 91

KEY ECONOMIC RATIOS and LONG-TERM T R E N D S

1983 1993

GDP (US$ billions) 61.5 179.4 Gross domestic investment1GDP 16.3 27.6

Gross domestic savings1GDP Q.2 21.9 Gross national savingsIGDP 15.3 24.8

Current account baianceIGDP -3.1 -3.6

Total debtlGDP 33.0 38.2 Total debt servicelekports 39.2 31.6 Present value of debtIGDP Present value of debtiexports

Ekports o f goods and servicesiGDP 2 .5 0 . 7

Interest paymentsIGDP 2.9 2.2

1983.93 1993-03 2 0 0 2 (average annualgrovdh) GDP 5.0 2.7 7.9 GDP DercaDita 2.8 0.9 6.2

Europe B Lower - Cent ra l m ldd le -

As ia I n c o m e

473 2,570 1,2l7

0.0 0.2

63 69 31

91 3

103 tJ4 M2

2 0 0 2

183.9 21.3 29.2 19.8

20.8

-0.8 3.8

7 1.3 50.7 73.1

234.2

2,655 1,480

3,934

0.9 1.2

50 69 32 11

81 tJ

12 10 111

2 0 0 3

240.4 22.6 27.4 19.5 19.5

-2.8 3.2

61.2 40.3

2003 2003.07

5.8 5.6 4.2 4.1

STRUCTURE o f the E C O N O M Y

(%of GDP) Agriculture Industry

Services

Private consumption General government consumption Imports of goods and sewices

Manufacturing

(average annual gro vdh) Agriculture Industry

Services

Private consumption General government consumption Gross domestic investment imports of goods and services

Manufacturing

Deve lopment d iamond"

Life expectancy

GNI Gross per primary

enrollment capita

I j Access to improved water source

- "--"- Turkey

Lo wer-middle-income gro up

E c o n o m i c ra t ios '

Trade

T

E c o n o m i c ra t ios '

Trade

Domestic savings

Indebtedness

---Turkey

Lo wer-middle-income group

Indebtedness

---Turkey

Lo wer-middle-income group

1983 1993 2002 2 0 0 3 1 G rowth o f inves tment and G D P (Oh)

21.4 16.2 t3.0 0 .4 25.0 29.8 23.7 21.9 16.8 18.3 14.0 0 . 3 53.6 54.0 63.3 64.7

78.4 65.0 66.2 66.9 9.4 t3.0 14.0 0 .6

16.6 19.3 30.7 30.7

1983-93 1993-03 2 0 0 2 2 0 0 3

15 10 7 4 -2 4 6 7 2 2 5 6 5 0 6 9 3 0 6 2 8 4 4 3 3 0 7 3 6 4

4 7 19 2 2 6 7 4 0 3 9 5 4 -2 4 7 7 10 359 204 11 4 7 8 158 27 1

I -GDI -GDP I

i Growth o f expor ts and i m p o r t s (Oh)

L O T

--oyx Exp or1 s --o- Imports I

86

B A L A N C E o f P A Y M E N T S

$983

5 90s 1331

BE! J 8dri 9 235

a3 3 851 2 311

69 ' 0 3 P M

3 w3 274

4

96 327 UP 46 0

1993

66 4 27 8

8 0 3 1

2 0

1893

969 3 903 7 498

92

1983

7 782 11046 7

1993

Fir, 605 5 185

142

b 664 183

7

403 740

6 x.4 fill P9

'0' 354 i 5.3

Export and rmport I B Y S I S 4VSS milt 1

to G

4

b

87

88

MAP SECTION

Karaman

Konya

Aksaray

NevsehirKayseri

Malatya

Adiyaman

Elazig

Tunceli

Erzincan

BingölMus

Bitlis

Batman Siirt

SirnakMardin

Hakkari

Van

Erzurum

Kars

Artvin

RizeTrabzon

Gümüshane¸Bayburt

Giresun

Ordu

Tokat

Sivas

Amasya

Samsun

Sinop

KastamonouKarabük

Zonguldak

BoluDüzce

Sakarya(Adapazari)

Kocaeli(Izmit)

Bilecik

Eskisehir

Kütahya

Bursa

Yalova

IstanbulTekirdag

Edirne

Çanakkale

ManisaIzmir

Usak

Denizli

BurdurIsparta

Afyon

Antalya

Çorum

Yozgat

Icel(Mersin)

Adana

Hatay(Antakya)

Osmaniye

Kahramanmaras

Gaziantep

Kilis

Ardahan

Mugla

ANKARA

SYRIAN ARABREPUBLIC

IRAQ

ISLAMICREP. OF

IRAN

ARMENIA

GEORGIA

BULGARIARUSSIAN FEDERATION

AZER-BAIJAN

AZER.

GRE

ECE

GREECE

TuzGölü

HoyranGölü

BaysehirGölü

AksehirGölü

Lake Van

Çoruh

Murat

Kura

Aras

Tigris

Euphrates

Sakarya

Devrez

CekerekSe

yhan

Göksu

Ceyhan

Kelkit

B l a c k S e a

Medi terranean Sea

Sea ofMarmara

Gulf ofAntalya

Bosporus

Dardanell

26°E 28°E 30°E 32°E 34°E 36°E 38°E

42°E 44°E30°E28°E 32°E 34°E

36°N

38°N

40°N

42°N

40°N

42°N

TURKEY

,GEDIZ EDAS

,TRAKYA EDAS ,AYEDAS

,SAKARYA EDAS

,OSMANGAZI EDAS

˘

,BOGAZIÇIEDAS

,KAYSERI VECIVARI T.A.S.

,MENDERES EDAS ,GÖKSU EDAS

, ,YESILIRMAK EDAS

,DICLE EDAS

,VAN GÖLÜ EDAS

,ARAS EDAS

,ÇORUH EDAS

,FIRAT EDAS

,ÇAMLIBEL EDAS

,TOROSLAR EDAS

,MERAM EDAS

, ,BASKENT EDAS

,AKDENIZ EDAS

,ULUDAG EDAS˘

˘

Nigde˘

,

,

,

,

˘˘

,

,

,

,

,

,

˘

,

,

This map was produced by the Map Design Unit of The World Bank.The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.

0 50 150100

0 50 100 150 Miles

200 Kilometers

IBRD 34858

MA

RCH

2007

T U R K E Y

ELECTRICITY DISTRIBUTION REHABILITATION PROJECTPROVINCE CAPITALS*

NATIONAL CAPITAL

RIVERS

PROVINCE BOUNDARIES*

INTERNATIONAL BOUNDARIES

*Province names are the same as their capitals.

REGIONAL DISTRIBUTION COMPANIES WITH PROJECT INVESTMENT

REGIONAL DISTRIBUTION COMPANY HEADQUARTERS

REGIONAL DISTRIBUTION COMPANY BOUNDARIES