Document of The World Bank Report No: 64698-TR RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF PRIVATE SECTOR RENEWABLE ENERGY AND ENERGY EFFICIENCY PROJECT LOANS AND CLEAN TECHNOLOGY FUND (CTF) LOANS May 28, 2009 TO TÜRKİYE SINAİ KALKINMA BANKASI A.Ş. AND TÜRKİYE KALKINMA BANKASI A.Ş. WITH THE GUARANTEE OF THE REPUBLIC OF TURKEY September 30, 2011 ABBREVIATIONS AND ACRONYMS CO2 Carbon dioxide CTF Clean Technology Fund DSI State Hydraulic Works EE Energy Efficiency EIA Environmental Impact Assessment EMP Environmental Management Plan FI Financial Intermediary FM Financial Management GHG Greenhouse Gas GWh Gigawatt hour HPPs Hydroelectric Power Plants IBRD International Bank for Reconstruction and Development IDA International Development Agency MoEF Ministry of Environment and Forestry MoEU Ministry of Environment and Urbanization MoFW Ministry of Forestry and Water MW Mega Watt NBMS National Basin Management System OP Operational Policy OM Operational Manual PDO Project Development Objectives RE Renewable Energy SEA Strategic Environment Strategy SOE Statement of Expense Tcal Tera Calories TKB Türkiye Kalkınma Bankası A.Ş. TSKB Türkiye Sınai Kalkınma Bankası A.Ş. TWh Terawatt hour Regional Vice President: Philippe Le Houérou Country Director: Ulrich Zachau Sector Manager / Director: Ranjit J. Lamech Task Team Leader: Shinya Nishimura 2 TURKEY PRIVATE SECTOR RENEWABLE ENERGY AND ENERGY EFFICIENCY PROJECT CONTENTS P112578 A. SUMMARY ................................................................................................................ 45 B. PROJECT STATUS .................................................................................................... 45 C. PROPOSED CHANGES.............................................................................................. 56 D. APPRAISAL SUMMARY ........................................................................................... 89 ANNEX 1: RESULTS FRAMEWORK AND MONITORING...........................................1112 ANNEX 2: REALLOCATION OF PROCEEDS................................................................1314 3 PRIVATE SECTOR RENEWABLE ENERGY AND ENERGY EFFICIENCY PROJECT RESTRUCTURING PAPER A. SUMMARY 1. The proposed changes consist of (1) Categorization of small Hydroelectric Power Plants (HPPs) changed from “Emerging Renewable Energy� to “Commercial Renewable Energy�, (2) Additional environmental and social safeguards requirements, (3) Reallocation of funds, (4) Update of the applicable World Bank procurement guidelines to the latest edition, and (5) Revised results framework. PROJECT STATUS 2. To date, the project has performed well, and is expected to fully meet its development objective ahead of schedule. All project ratings have been “satisfactory� in the last 12 months, and the project is in substantial compliance with loan covenants. Under the project, 134 MW of Renewable Energy (RE) investments have been completed and US$87 million of Energy Efficiency (EE) investments have been committed as of end-December 2010. These investments are expected to contribute to greenhouse gas emissions reduction of 774,000 tons per annum. Within this portfolio, Clean Technology Fund (CTF) financing has supported the development of 9 small Hydroelectric Power Plants (HPPs), 4 wind and 12 EE projects, and 1 geothermal project is under review. The concessionality provided by the CTF has been particularly important in promoting EE investments in sectors such as petrochemicals. 3. As of December 2010, Türkiye Kalkınma Bankası (TKB) has committed 100 percent and Türkiye Sınai Kalkınma Bankası (TSKB) more than 77 percent of the original International Bank for Reconstruction and Development (IBRD) loan amount. TSKB had disbursed 39 percent of its IBRD loan and 42 percent of its CTF loan, and TKB had disbursed 71 percent of its IBRD loan and 25 percent of its CTF loan. Both institutions are expected to completely commit the original IBRD loan by the end of 2011. As a result, the IBRD loan is expected to close before the originally envisaged closing date of December 31, 2014. CTF disbursements stood at US$36.5 million as of end-December 2010, after a slow start due to their focus on more advanced RE technologies and EE investments, which are still relatively underdeveloped in Turkey, and which are taking a longer time to develop. 4. As a result, the two Borrowers have requested additional financing of US$500 million, which is currently being processed. 4 PROPOSED CHANGES 5. The following changes have been made to the legal agreements and/or Operational Manuals (OMs) (which apply to the Loan and the CTF financing) for the project. • Components 6. The categorization of small HPP (< 10MW) has been changed from “Emerging Renewable Energy� to “Commercial Renewable Energy� to discontinue CTF financing for small HPPs. Investments in the Commercial Renewable Energy category are not eligible for CTF financing. Currently, this category only includes HPPs above 10 MW; however, the project eligibility criteria have been modified such that all HPPs, regardless of size, will be included in this category in future. • Safeguards 7. Additional Environmental Safeguard requirements. In order to strengthen the framework for environmental assessments, the Operational Manuals have been revised as below: a) The procedures for environmental impact assessment for future investments have been revised to clarify the screening criteria for the categorization of sub-projects, and to include all supporting infrastructure (such as access roads and pipelines for HPPs) in the scope of Environmental Impact Assessments (EIAs) and Environmental Management Plans (EMPs). b) The wording of the Operational Manuals has been strengthened to clarify that, unless otherwise agreed by the Bank, the Borrower will not include sub- projects in: (i) Natural Habitats or Critical Natural Habitats as defined in the World Bank's Operational Policy 4.04, Annex A; or (ii) other areas designated as “sensitive areas� in Annex 5 of the Turkish Environmental Impact Assessment (EIA) regulation dated July 17, 2008 and amended on June 30, 2011. c) New HPP sub-projects involving water diversion and/or storage shall all be considered Category A, unless otherwise demonstrated through the results of the environmental screening process and agreed by the Bank. 8. Cumulative Impact Assessment requirements. The Operational Manuals have been revised to include requirements for cumulative impact assessments to be carried out as part of the EIA process for HPP and other relevant sub-projects when initial screening shows that the proposed sub-project may affect valued ecosystem components as defined in the Operational Manuals. 9. In order to support the implementation of cumulative impact assessments in an appropriate manner, all proposed HPP sub-projects will be subject to World Bank prior review. It is expected that 1 year after Loan Effectiveness of the proposed additional 5 financing or as otherwise agreed with the Bank, the Bank may review implementation of requirements concerning cumulative impact assessments as per the Operational Manuals. If the results of the reviews are satisfactory, the Bank may agree with the Borrowers to transition from prior to post-review. 10. Strengthening of safeguards implementation and reporting. The following additional requirements have been agreed and included in the revised Operational Manuals to further strengthen the Borrowers’ capacity on safeguards: (a) the Borrower shall designate specific, qualified staff members to be responsible for social and environmental safeguards screening, reviewing and reporting to the Bank; (b) on the basis of improved reporting templates included in the revised Operational Manuals, the Borrowers shall prepare periodic safeguards monitoring reports to be sent to the Bank as part of the implementation monitoring reports; (c) qualification requirements for contractors hired by the sub-project sponsors1 will include provisions to ensure they have the necessary skills and capacity to implement the required scope of works and to ensure compliance with all Turkish and World Bank policies; and, (d) sub-project sponsors shall be required to have an environmental specialist with appropriate qualifications to identify, propose mitigation measures for, and monitor environmental aspects throughout the sub-project cycle. 11. Additional Eligibility Criteria for new Sub-loans. To be eligible for new sub- loans, concerned sub-project sponsors will be required to have completed, to the satisfaction of the Bank, the mitigation measures set out in the Hydroelectric Power Plant EMPs (for background and context, refer to Environmental Monitoring Requirement in HPPs discussion on page 8 of this Paper). Each Borrower is required to ensure that the sub-project sponsors concerned implement the mitigation measures. The additional eligibility criterion have been reflected in revisions to legal agreements and to the Operational Manuals. 1 The term sub-project sponsor is used throughout this document and is defined as per the Loan Agreement, as follows: “Sub-project Sponsor� means an enterprise satisfying the appropriate criteria set forth in the Operational Manual to which the Borrower proposes to make or has made a Sub-loan or Financing Lease; and include its “Affiliate�, which means: (A) a subsidiary or holding company of the Original Sub-project Sponsor, (B) an enterprise which the Original Sub-project Sponsor exercises control over or has an interest in, or (C) an enterprise with which the Original Sub-project Sponsor has a collaborative relationship. 6 • Reallocations 12. TSKB has requested a reallocation of Loan funds designated between Energy Efficiency sub-projects and Renewable Energy sub-projects as shown below. The Loan allocations for TKB will not change. ORIGINAL PROPOSED TSKB Amount of Amount of Amount of Amount of Loan Allocated Loan Allocated Loan Allocated Loan Allocated Category (US$) (EUR) (US$) (EUR) (1) Sub-Loans and Financial Leases: (a) for Energy Efficiency sub-projects 20,948,000 10,933,000 101,100,000 10,933,000 (b) for Renewable Energy sub-projects 188,527,000 98,393,000 108,375,000 98,393,000 (2) Front-end Fee 525,000 274,000 525,000 274,000 (3) Interest Rate Cap or Collar Premium - - - - TOTAL 210,000,000 109,600,000 210,000,000 109,600,000 • Procurement 13. For all future sub-projects, procurement will be carried out in accordance with the World Bank’s "Guidelines: Procurement of Goods, Works and Non-Consulting Services under IBRD Loans and IDA Credits & Grants" dated January 2011 (Procurement Guidelines); and procurement of consultant services will be carried out in accordance with the World Bank’s "Guidelines: Selection and Employment of Consultants under IBRD Loans and IDA Credits & Grants by World Bank Borrowers" dated January 2011 (Consultant Guidelines) and the provisions stipulated in the Loan Agreement (LA). • Results Framework 14. Annex 1 shows the revised indicators targets that are now part of the Results Framework. The targets for renewable capacity and extent of savings from energy efficiency have been revised based on the above reallocation of loan proceeds for TSKB (pursuant to the reallocation, the total RE loan allocation is reduced by 39%, and the EE loan allocation is increased by 45%). These targets were updated by adjusting the original annual targets by the change in the loan allocation, and then adding this adjusted target to the 2010 actual performance. 7 APPRAISAL SUMMARY • Technical 15. Change in category of small HPP (< 10MW) from “Emerging Renewable Energy� to “Commercial Renewable Energy.� At the appraisal stage, developers of small HPPs faced constraints in securing financing for their projects. As a result, to help stimulate this market, a substantial portion of the IBRD loan plus a small portion of the CTF were directed to HPPs. However, during the project implementation period, conditions have improved considerably in Turkey particularly with respect to developers’ capacities to prepare bankable projects and financial institutions’ capacity to assess the projects. Private financiers, in competition with public banks such as TKB and TSKB, have begun regularly supporting HPPs, particularly those developed by major corporate players. 16. The Government continues to place a high priority on the diversification of RE technologies in Turkey and to this end, in December 2010, the Government amended the Renewable Energy Law (enacted in 2005), raising the feed-in tariffs for renewable energy technologies such as geothermal, solar and biomass. Investors had been waiting for this amendment as geothermal and biomass investments, in particular, are now expected to become more financially viable. However, it is expected that such projects will remain difficult for private financiers to consider in the near term while the application of the technologies is new in Turkey. 17. The lower cost financing offered by the CTF and the availability of long-term IBRD funds under this project allow the two Borrowers to respond to the changing market conditions, in particular by assisting them to take up projects that are still considered new in Turkey, such as investments that utilize advanced RE technologies (such as wind, geothermal, biomass, etc) and less developed EE investments. By discontinuing the concessionality provided by the CTF to all HPPs and providing CTF resources only for other RE technologies and EE, the change aims to promote increased funding towards non-HPP investments. • Environment 18. Environmental Monitoring Requirement in HPPs. During site visits in February/March 2011 to several HPP sub-project sites financed under the loan, environmental management issues during construction were noted at a subset of the sites. These include needs for improvements in temporary disposal of construction materials by ensuring suitable waste disposal areas with more effective erosion controls, soil/slope stabilization along access roads and dam sites, and construction and design of fish ladders. Both Borrowers, with the assistance of environmental consultants, have completed a full review of all HPP sub-project sites and have prepared mitigation plans (the HPP environmental mitigation plans, HPP EMPs) to address the issues that were identified. The sub-project sponsors have begun addressing these issues and started 8 implementation of these HPP EMPs under an agreed schedule and monitoring plan. The HPP EMPs were submitted for review by the Bank in July 2011 and the final versions were accepted by the Bank in August 2011. 19. As there are additional analysis, implementation and monitoring requirements on environmental issues by sub-project sponsors, additional provisions to enhance project implementation will be included in the Operational Manuals. In this regard, sub-project sponsors are required to designate a qualified staff member or hire an environmental consultant to conduct all necessary environmental assessments and supervision, including but not limited to: screening of the sub-project prior to loan application; preparing the necessary environmental assessment documentation to meet both national and World Bank requirements; and, supervision of EMP implementation by contractors. 20. To ensure that sub-project sponsors complete their mitigation measures set out in the Hydroelectric Power Plant EMPs before accessing new sub-loans, a new eligibility criterion has been added as discussed on page 6 of this paper. 21. Cumulative Impact Assessment requirements. Since 2009, when the project was approved, there has been a rapid and significant increase in the number of HPPs licensed, constructed and operated in Turkey. As a result, the possible cumulative impact of multiple HPPs on river basins is an issue of growing concern in the country. Although the framework for undertaking cumulative impact assessments has not been specifically provided for in current regulations or in the current draft of the by-law on the Strategic Environmental Assessment (SEA), the government has responded to concerns about cumulative impacts in the following ways. First, the Ministry of Environment and Urbanization (MoEU)2 has tightened its procedures for HPP feasibility study review and EIA screening, requiring additional analysis on possible effects on ecosystems in the environmental assessment for HPP projects. Second, the Government reports that DSI are preparing to conduct river basin management case studies in two river basins, namely Iyidere in Rize and Solaklidere in Trabzon. Once completed, these two case studies are expected to provide guidance on how to address cumulative impact of hydropower and other developments in these basins. The Government currently expects these case studies to be completed in 18 months. 22. With this restructuring, the Borrowers have updated the Operational Manuals based on good international practice with specific requirements for identification and evaluation of potential cumulative impact associated with newly proposed sub-projects. The proposed screening criteria and procedures for cumulative impact assessments of 2 Ministry of Environment and Forestry (MoEF) has recently been restructured. In June 2011, the MoEF was merged with the Ministry of Public Affairs and Settlement to form the Ministry of Environment, Forestry and Urbanization. In July 2011, the Ministry of Environment, Forestry and Urbanization was split into two new ministries: the Ministry of Environment and Urbanization (MoEU) and the Ministry of Forestry and Water (MoFW). The MoEU is in charge of environment and urban issues, and it includes the Directorate General for Environmental Impact Assessment (EIA) and Planning. The MoFW is responsible for all policies with regard to the preservation and sustainable development of forests and water resources, and it includes the State Hydraulic Works (DSI). 9 HPPs were discussed at a technical workshop on May 9 and 10, 2011. Relevant ministries, agencies, stakeholders and key technical specialists participated and provided guidance on specific screening criteria and regulatory requirements. The final agreed criteria and guidance have been included in the Operations Manuals by the Borrowers. The Borrowers will monitor the process of carrying out such assessments throughout project implementation so as to take into account lessons learnt over time. If necessary, the Operational Manuals may be updated from time to time to reflect such lessons. 23. As part of the Country Partnership Strategy with Government of Turkey, the Bank has been engaging in a policy dialogue on watershed and resource management, in particular through the provision of technical assistance to the government as it formulates a new National Basin Management Strategy (NBMS). The NBMS aims to strengthen institutional coordination for basin planning and prioritization of watershed rehabilitation investments and is expected to be drafted by end-2011. 10 ANNEX 1: Results Framework and Monitoring TURKEY: PRIVATE SECTOR RENEWABLE ENERGY AND ENERGY EFFICIENCY PROJECT Project Development Objective (PDO): The Project’s development objective is to help increase privately owned and operated energy production from indigenous renewable sources within the market-based framework of the Turkish Electricity Market Law, enhance energy efficiency, and thereby help reduce gas emissions. Revised Project Development Objective: No Change D=Dropped Cumulative Target Values** C=Continue N= New Core PDO Level Results Unit of Status Data Source/ Responsibility for R=Revised YR 1 YR 2 YR 3 YR4 Frequency Indicators* Measure 2010 Methodology Data Collection 2011 2012 2013 2014 Renewable energy Indicator One: Capacity of R MW 134 315 481 615 630 Semi Annually TSKB/TKB TSKB/TKB renewable electricity of thermal Reports heating plants Indicator Two: Potential R GWh 148 1144 1746 2233 2287 incremental production of electricity Indicator Three: Incremental R 000 tons 90 686 1048 1340 1372 emission reduction potential CO2 Indicator Four: Renewable R % 26 26 26 27 27 electricity generation as a percent of total generation Energy efficiency Indicator Five: Extent of R Tcal 1422 1703 1864 2024 2225 savings in heat or electricity Indicator Six: Emission R 000s 684 796 859 923 1002 reduction potential tons Cost-effectiveness of CTF 10 10 10 (US$ of CTF per ton CO2) INTERMEDIATE RESULTS Intermediate Result indicator C % 77 50 75 100 Semi Annually TSKB Reports TSKB One: TSKB loan commitments Intermediate Result indicator C % 39 35 65 90 100 Two: TSKB loan disbursements Intermediate Result indicator R % 26 30 Three: % of RE+EE in TSKB Portfolio: Intermediate Result indicator C % 100 50 75 100 Semi Annually TKB Reports TKB Four: TKB loan Commitmetns Intermediate Result indicator C % 71 35 65 90 100 Five:TKB loan disbursements Intermediate Result indicator % 51 60 Six: % of RE+EE in TKB Portfolio 12 ANNEX 2: Reallocation of Proceeds _______________________________________________________________________ TURKEY — PRIVATE SECTOR RENEWABLE ENERGY AND ENERGY EFFICIENCY PROJECT P112578 LN 7715-TU Restructuring Paper 1. Proceeds for Turkey, PRIVATE SECTOR RENEWABLE ENERGY AND ENERGY EFFICIENCY PROJECT, [Loan No 7715-TU], P112578 will be reallocated as follow: TSKB CURRENT ALLOCATION REVISED ALLOCATION % of FINANCING* Category (US$) (EUR) (US$) (EUR) CURRENT REVISED (US$) (US$) (1) Sub-Loans and Financing Leases: (a) for Energy 20,948,000 10,933,000 101,100,000 10,933,000 Efficiency Sub- projects 6% 29% (b) for 188,527,000 98,393,000 108,375,000 98,393,000 Renewable Energy Sub-projects 54% 31% (2) Front-end Fee 525,000 274,000 525,000 274,000 (3) Interest Rate Cap or collar Premium Total for 210,000,000 109,600,000 210,000,000 109,600,000 Component (1) * Current and Revised US$ allocation as % of TSKB’s IBRD loan amount of US$ 350 million 2. Project implementation progress. To date, the original project has performed well, and is expected to fully meet its development objective ahead of schedule. All project ratings have been “satisfactory� in the last 12 months, and there is substantial compliance with loan covenants. Environmental management issues during construction have been identified at a subset of the hydroelectric power plant (HPP) project sites and these are being addressed by the two borrowers Türkiye Sınai Kalkınma Bankası (TSKB) and to Türkiye Kalkınma Bankası (TKB). Under the project, 134 MW of Renewable Energy (RE) investments have been completed and US$87 million of Energy Efficiency (EE) investments were committed as of end-December 2010. These investments are expected to contribute to greenhouse gas emissions reduction of 774,000 tons of CO2 equivalent per annum. Both borrowers have utilized the funds faster than anticipated, and because of the continuing growth in demand for RE and EE investments, an additional financing of US$ 500 million is being processed at this time. 3. The proposed change in the allocation of loan proceeds between the sub- categories, Category (1)(a) Energy Efficiency and Category (1)(b) Renewable Energy, is necessitated by the strong growth in demand for energy efficiency investments by TSKB. The US dollar allocation of US$20.9 million has already been used up fully. EE subprojects so far financed cover a wide range of industry, petrochemicals, plastics, glass, chemicals, etc. Increased demand is being seen from these sectors as well as from additional sectors such as cement, iron and steel, etc. 14