PROJECT BRIEF
BACKGROUND: With the move towards a competitive wholesale power market, as a result of the Electricity Market Law, and the ending of Treasury guarantees, private developers of power generation projects found it more difficult to obtain financing since Treasury support is no longer available. Moreover, private developers of environmentally clean renewable energy projects found it to be even more difficult since they tend to be smaller, are mainly Turkish and are less able to access both international capital markets and export credit agencies. This is the case even though:
1) many renewable projects are economically viable on the basis of life-cycle costs;
2) Turkey is considered to have very large renewable energy resources in the form of small hydropower, geothermal and wind power sites; and
3) energy from renewable resources will reduce pollution and emissions of green house gases (GHG). Local private sponsors of generation projects based on renewable energy resources face the following barriers:
a) higher pre-investment costs, relative to those that would be incurred for conventional power generation projects using fossil-fuels, due to poor availability of, and/or lack of access to, technically reliable information on renewable energy resource endowments at potential sites, the costs of validating available data and conducting additional studies (pre-feasibility, detailed feasibility engineering design, etc.)
b) lack of medium-to-long term debt financing that is necessary to achieve financial viability for such small but capital intensive infrastructure projects. Due to the higher initial ratio of capital costs to operational costs compared to natural gas fired plants, there typically is a mismatch between electricity sales revenues and debt service obligations, unless a portion of the financing can be sourced as debt with long maturity.
The local private sponsors of prospective renewable power generation projects asked the Government for assistance to overcome the barriers identified above. Taking into account that these barriers were previously mainly overcome using the BOT model which has now been eliminated; the Government was very anxious to develop a new approach and asked the Bank to assist. The purpose of the Renewable Energy project is therefore to assist the Government by providing a financing facility to help all types of renewable power generation projects to obtain long-term debt thus reducing pollution and GHG emissions.
PROJECT OBJECTIVE: To increase privately owned and operated distributed power generation from renewable sources, without the need for government guarantees, and within the market-based framework of the new Turkish Electricity Market Law.
The project also ties into the three priorities of the World Bank in the Europe and Central Asia region which are to:
a) support key global public goods including environmental commons;
b) help create the conditions for a vibrant private sector; and
c) develop a sound public sector by reducing government contingent liabilities and by leveraging Government investment with private funds.
PROJECT DESCRIPTION: The project has one main component:
The Special Purpose Debt Facility (SPDF) for Renewable Energy Generation Financing.
Total investment in renewable energy generation financing under the project is expected to be around $500 Million which would include equity financing from the private sponsors, debt financing from export credit agencies, the World Bank Special Purpose Debt Facility ( SPDF) as well as commercial banks.
The SPDF is a term lending facility which is operated by two financial intermediaries (FIs). The two FIs selected are:
a) Turkiye Sinai Kalkinma Bankasi (TSKB) - the Turkish Industrial Development Bank (private)
b) Turkiye Kalkinma Bankasi (TKB) - the Turkish Development Bank (Government)
The World Bank loan for the SPDF is on-lent from Treasury (the Borrower) to the FIs. The FIs utilize the SPDF to provide long-term debt financing to private sponsors of renewable energy projects. The SPDF is intended to leverage equity investment from local private developers, export credit financing and other financing for the construction of qualified renewable generation projects.
The two FIs were selected based on their financial strength, and their capacity to appraise and supervise project implementation. In addition, their status as development banks allows the Turkish Treasury to on-lend public funds to these organizations.
IMPLEMENTING and MONITORING: Management of the project is done by TSKB and TKB. In both banks, specific bank staff are in charge of Project management (including financial management) and implementation. There are also designated personnel who are responsible for financial reporting, document control, environmental issues and disbursement from the special account.
In TSKB, marketing of the loan is done by the Corporate Marketing Division and project appraisal is carried out by the Technical Services Division. In TKB, marketing of the loan and appraisal are done by the Project Appraisal Department. Each project proposal submitted to the banks is evaluated by a team of specialists comprised of an engineer(s), a financial analyst(s), and a project economist, who then prepare a project evaluation report. In TSKB, these project evaluation reports are submitted to a credit committee comprised of the chief executive officer and the executive vice presidents. In TKB, project evaluation reports are submitted to a credit committee.
Upon approval by the credit committees, these reports are submitted to the boards of directors of each bank for approval. After the approval by the boards and signing of the (sub)-loans agreement, the (sub)-loans are ready for disbursement. The first two projects of each bank were sent to the World Bank for prior review.
BENEFITS: The World Bank project assists the Government of Turkey in establishing a comprehensive framework for renewables development, and a credible financial intermediation mechanism, that should enable Turkey to attract grant, concessional and bilateral sources of funds for renewable energy resource development.
The project will also enable Turkey to add a significant amount of non- polluting generating capacity to its current base of power plants.
PROJECT STATUS: The project is under implementation. It became effective on July 30, 2004. So far seven sub-projects have been finalize, three by TKB and four by TSKB. Four of these are smaller hydropower plants, two are geothermal and the last is wind. Another 9 or so subproject are under active preparation including several larger hydropower projects.
The project was restructured in May 2006 to try to make it easier to use the funds in the SPDF.. There were three major changes. First, sponsors of sub-projects are now allowed to use loan funds to pay their own construction companies, as long as an independent outside source certifies that the costs incurred are reasonable and the amount of financing for the contractor is $ 15 Million or less. Second, the maximum size of any sub-loan for a project was increased from $ 20 Million to $ 40 Million. Third, the maximum size of hydropower projects was increased from 50 MW to 100 MW. There were also several changes to clarify various issues.
As a result of these changes the interest of sponsors in using these funds has considerably increased. However, there are still some funds still available in the SPDF for new projects. Companies who are interested in using this financing should contact TKB or TSKB directly. Information on the contacts at these organizations is given above.
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