Document of The World Bank
FOR OFFICIAL USE ONLY Report No: 73647-TU
Public Disclosure Authorized PROJECT APPRAISAL DOCUMENT
ON
PROPOSED LOANS IN THE AMOUNT OF US$201 MILLION
TO
TURKIYE CUMHURIYETI ZIRAAT BANKASI A.$. (US$67 MILLION) TURKIYE VAKIFLAR BANKASI T.A.O. (US$67 MILLION) TfRKiYE HALK BANKASI A.$. (US$67 MILLION) Public Disclosure Authorized WITH THE GUARANTEE OF THE REPUBLIC OF TURKEY
AND
PROPOSED GRANTS FROM THE GLOBAL ENVIRONMENT FACILITY TRUST FUND IN THE AMOUNT OF US$3.64 MILLION
TO
TURKIYE CUMHURIYETI ZIRAAT BANKASI A.$. (US$ 0.9 MILLION)
Public Disclosure Authorized TURKIYE VAKIFLAR BANKASI T.A.O. (US$0.9 MILLION) TfRKiYE HALK BANKASI A.$. (US$0.9 MILLION) THE REPUBLIC OF TURKEY (US$0.94 MILLION)
FOR THE
SMALL AND MEDIUM ENTERPRISES ENERGY EFFICIENCY PROJECT
February 28, 2013
Sustainable Development Department Turkey Country Management Unit
Public Disclosure Authorized Europe and Central Asia Region
This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective: February 14, 2013)
Currency Unit = Turkish Lira US$1 = TL 1.7695 US$0.5651 = TL 1
FISCAL YEAR July 1 - June 30
ABBREVIATIONS AND ACRONYMS
BRSA Banking Regulation and Supervision IFI International financial institution Authority CAD Current Account Deficit IFR Interim unaudited financial report CAR Capital Adequacy Ratio IPA Instrument of Pre-Accession Assistance CBRT Central Bank of Republic of Turkey KOSGEB Small & Medium Enterprises Development Organization
CO 2 Carbon Dioxide M&V Measurement and verification CTF Clean Technology Fund MENR Ministry of Energy and Natural Resources EE Energy Efficiency NGO Nongovernmental organization EIE Electric Power Resources Survey and NPL Nonperforming loan Development Administration EIRR Economic Internal Rate of Return NPV Net present value ESCO Energy Service Company OECD Organization for Economic Cooperation and Development ESMAP Energy Sector Management Assistance PIU Project Implementation Unit Program EU European Union PMU Project Management Unit FI Financial Intermediary ROA Return on Assets FIRR Financial Rate of Return ROE Return on Equity GDEU General Directorate for EU Affairs and SDIF Savings Deposit Insurance Fund of Foreign Relations Turkey GDP Gross Domestic Product SME Small and Medium enterprise GDRE General Directorate of Renewable SSI Social Security Institution Energy GEF Global Environment Facility TA Technical assistance GHG Greenhouse Gas TL Turkish lira GWh Gigawatt-hour Toe Tons of oil equivalent HVAC Heating, ventilation and air USD United States Dollars conditioning
Regional Vice President: Philippe H. Le Hou6rou Country Director: Martin Raiser Sector Director: Laszlo Lovei Sector Manager: Ranjit J. Lamech Task Team Leader: Shinya Nishimura TURKEY Small and Medium Enterprises Energy Efficiency Project
TABLE OF CONTENTS Page
I. STRATEGIC CONTEXT ...... 1 A. Country Context ...... 1...... B. Sectoral and Institutional Context...... 2 C. Higher Level Objectives to which the Project Contributes ...... 8
II. PROJECT DEVELOPMENT OBJECTIVES ...... 8 A. Project Development Objectives...... 8...... 8 B. Project Beneficiaries ...... 9 C. PDO Level Results Indicators...... 9...... 9
III. PROJECT DESCRIPTION ...... 9 A. Project Components ...... 9 B. Project Financing ...... 13 C. Lessons Learned and Reflected in the Project Design...... 14
IV. IM PLEM ENTATION ...... 15 A. Institutional and Implementation Arrangements ...... 15 B. Results Monitoring and Evaluation ...... 17 C. Sustainability...... 18
V. KEY RISKS AND MITIGATION MEASURES...... 19 A. Risk Ratings Summary Table ...... 19 B. Overall Risk Rating Explanation ...... 19
VI. APPRAISAL SUM M ARY ...... 20 A. Economic and Financial Analyses ...... 20 B. Technical ...... 20 C. Financial Management...... 20 D. Procurement ...... 21 E. Social (including Safeguards) ...... 22 F. Environment (including Safeguards) ...... 22 G. Other Safeguards Policies Triggered ...... 23 Annex 1: Results Framework and Monitoring...... 24
Annex 2: Detailed Project Description ...... 27
Annex 3: Implementation Arrangements ...... 35
Annex 4: Operational Risk Assessment Framework (ORAF) ...... 51
Annex 5: Implementation Support Plan...... 54
Annex 6: Team Composition ...... 56
Annex 7: Economic and Financial Analysis ...... 57
Annex 8: Financial Intermediary Assessment of Borrowers ...... 59
Annex 9: Incremental Cost Analysis ...... 69
Annex 10: GEF Data Sheet...... 78
MAP: IBRD 33501R2 PAD DATA SHEET Turkey SME ENERGY EFFICIENCY (P122178) PROJECT APPRAISAL DOCUMENT
EUROPEAND CENTRAL ASIA ECSEG
Report No.: 73647-TU
Basic Information Project ID Lending Instrument EA Category Team Leader P122178 Specific Investment F - Financial Shinya Nishimura Loan Intermediary Assessment Project Implementation Start Date Project Implementation End Date 28-Mar-2013 28-Mar-2018 Expected Effectiveness Date Expected Closing Date 29-Apr-2013 28-Sep-2018 Joint IFC No Sector Manager Sector Director Country Director Regional Vice President Ranjit J. Lamech Laszlo Lovei Martin Raiser Philippe H. Le Houerou
Borrower: Vakif Bank, Ziraat Bank, Halk Bank Responsible Agency: Ministry of Energy and Natural Resources (MENR) Contact: Mr. Ali Murat Becerikli Title: Head, EU and IFI Dept. Telephone (90-312) 213-1124 Email: [email protected] No.:
Project Financing Data(US$M) [X] Loan [X] Grant [ ] Other ] Credit [ ] Guarantee For Loans/Credits/Others Total Project Cost (US$M): 305.89 Total Bank Financing 201.00 (US$M):
1 Financing Source Amount(US$M) BORROWER/RECIPIENT 61.25 International Bank for Reconstruction and 201.00 Development Global Environment Facility (GEF) 3.64 Sub-borrower(s) 40.00 Total 305.89
Expected Disbursements (in USD Million) Fiscal 2013 2014 2015 2016 2017 2018 2019 0000 0000 Year Annual 8.00 25.00 37.00 44.00 45.00 44.00 1.64 0.00 0.00 Cumulati 8.00 33.00 70.00 114.00 159.00 203.00 204.64 0.00 0.00 ve
Project Development Objective(s) The Project Development Objective (PDO) is to improve the efficiency of energy use in small and medium enterprises, by scaling-up commercial bank lending for energy efficiency investments. The global environmental objective is to reduce Greenhouse Gas (GHG) emissions through the removal of barriers to energy efficiency financing in the small and medium enterprises (SMEs) sector.
Components Component Name Cost (USD Millions) Component 1: Energy efficiency investments in SMEs 294.95 Component 2: Policy support and TA to GDRE 10.94
Compliance Policy Does the project depart from the CAS in content or in other significant Yes [ ] No [X] respects?
Does the project require any waivers of Bank policies? Yes [ ] No [X] Have these been approved by Bank management? Yes [ ] No [X] Is approval for any policy waiver sought from the Board? Yes [ ] No [X] Does the project meet the Regional criteria for readiness for implementation? Yes [X] No [ ]
Safeguard Policies Triggered by the Project Yes No Environmental Assessment OP/BP 4.01 X Natural Habitats OP/BP 4.04 X Forests OP/BP 4.36 X Pest Management OP 4.09 X
11 Physical Cultural Resources OP/BP 4.11 X Indigenous Peoples OP/BP 4.10 X Involuntary Resettlement OP/BP 4.12 X Safety of Dams OP/BP 4.37 X Projects on International Waterways OP/BP 7.50 X Projects in Disputed Areas OP/BP 7.60 X
Legal Covenants Name Recurrent Due Date Frequency Eligibility of Sub-borrowers X Yearly Description of Covenant A Sub-loan shall be made only to a sub-borrower that satisfies criteria including that the sub-borrower is: (i) an SME; (ii) a Mid-Cap Company; (iii) a Leasing Company; or (iv) an ESCO. Other criteria are listed in Loan Agreement Schedule 2 Section I B-7. Name Recurrent Due Date Frequency Eligibility of Sub-projects X Yearly Description of Covenant A Sub-loan shall be given for a Sub-project which is determined, on the basis of an appraisal carried out in accordance with procedures acceptable to the Bank and in accordance with the provisions of Loan Agreement Schedule 2, Section I B-8 Name Recurrent Due Date Frequency Limit on Loan Amounts to Mid-caps and X Yearly Leasing companies Description of Covenant Not more than 20% of the Loan proceeds shall be made available through Sub-loans to Sub-project Sponsors that are Mid-cap Companies; and not more than twenty percent (20%) of the Loan proceeds shall be made available, through Sub-loans to Sub-project Sponsors that are Leasing Companies, which are Subsidiaries of the Borrower. Loan Agreement Schedule 2, Section I.A.5 (e) Name Recurrent Due Date Frequency Limit on Loan Amount X Yearly Description of Covenant Limit each Sub-loan to: (a) Sub-project Sponsor that is an SME shall not exceed $3,500,000; and (b) Sub- project Sponsor that is a Mid-Cap Company, a Leasing Company or an ESCO shall not exceed $5,000,000. The aggregate principal amount under multiple Sub-loans made by the Borrower to any Sub- project Sponsor and its affiliates shall not exceed $10,000,000. Loan Agreement Schedule 2 Section I.B.2&3 Name Recurrent Due Date Frequency Co-financing Requirement X Yearly
111 Description of Covenant Upon Committing 50% of the Loan, the Borrower shall: (i) use its own funds to finance Sub-projects, which shall be appraised, selected and supervised in accordance with the Operational Manual; and (ii) ensure that by the Closing Date, the aggregate of such financing shall be equivalent to at least twenty-five percent (25%) of the Loan. Loan Agreement Schedule 2 Section I.A.5.
Conditions Name Type Adoption of Operational Manual Effectiveness Description of Condition The Borrower shall have adopted the Operations Manual - Loan Agreement Section 4.01 (a) Name Type Execution of GEF co-financing agreement Effectiveness Description of Condition The GEF co-financing agreement has been executed and delivered and all conditions precedent to its effectiveness have been fulfilled and a legal opinion is issued. Loan Agreement Sections 4.01 (b) and 4.02. Name Type Adoption of the Implementation Plan Effectiveness Description of Condition The time bound action plan for implementation of GEF funds, acceptable to the Bank, shall be adopted by Ministry of Energy and Natural Resources (MENR). GEF Grant Agreement, Article V, 5.01 (b) and Schedule 2, Section V, 1. Team Composition Bank Staff Name Title Specialization Unit Jasneet Singh Senior Energy Specialist Energy ECSEG Margaret Png Lead Counsel Legal LEGLE Yesim Akcollu Senior Energy Specialist Energy ECSEG Selma Karaman Program Assistant Logistics ECCU6 Jari Vayrynen Senior Environmental Energy ECSEG Specialist Shinya Nishimura Senior Energy Specialist Team Lead ECSEG Salih Kemal Kalyoncu Senior Procurement Procurement ECSO2 Specialist Chukwudi H. Okafor Senior Social Social Safeguards AFTCS Development Specialist Zeynep Lalik Sr Financial Financial Management ECSO3 Management Specialist
iv Regina Oritshetemeyin Senior Program Project Support ECSSD esama Assistant Alper Amiet Oguz Financial Sector Financial Sector ECSF2 Specialist Esra Arikan Environmental Specialist Environment Safeguards ECSEN Nan Bank Staff Name Title Office Phone City
Locations Country First Location Planned Actual Comments Administrative Division
Institutional Data Sector Board Energy and Mining
Sectors / Climate Change Sector (Maximum 5 and total% mist equal 100) Major Sector Sector % Adaptation Mitigation Co- Co-benefits % benefits % Energy and mining Energy efficiency in 75 100 [e1kat and Power Finance SME Finance 25 100
Total 100 ] I certify that there is no Adaptation and Mitigation Climate Change Co-benefits information applicable to this project.
Themes Theme (Maximum 5 and total % must equal 100) Major theme Itheme % Environent and natural resources Climate change 75 moaagement Financial and private sector development Micro, Small and Medium Enterprise 25 support Total 100
V
I. STRATEGIC CONTEXT
A. Country Context
1. Turkey is the 18th largest economy in the World, with a GDP of US$774.3 billion in 2011. Private consumption accounts for more than 70 percent of GDP and it is the main driver of the economic growth while exports only make up 23 percent of GDP. Domestic savings are very low (14.5 percent of GDP) and thus economic growth is largely financed by external inflows, most of which is of a short-term nature thus increasing the risk of volatility. The economy is based on services which constitute 55 percent of total economic activity while industrial production makes up about a quarter of the total economy. The share of the agricultural sector in the economy has been declining as Turkey has been urbanizing rapidly; and it accounted for 8 percent of GDP in 2011.
2. Turkey's development over the past decade is a story of notable turnaround thanks to successfully implemented structural reforms and sound macroeconomic management. Reforms include strong fiscal management, strengthening banking supervision, reforming the social security system and a shift to the flexible exchange regime with an independent central bank that is responsible for inflation targeting. These reforms yielded results. The financial sector remained profitable and highly capitalized. Despite the global crisis of 2008-2009, the Turkish economy expanded by an average of 5.5 percent during the 2002-2011 period. During the same period, per capita income more than tripled and reached US$10,469 in 2011; inflation declined to single digit levels and the EU defined public debt to GDP ratio eased from 74 percent in 2002 to 39.2 percent to 2011.
3. Turkey was hit by the global crisis with its GDP shrinking by 4.8 percent in 2009, but bounced back quickly. The economy expanded by 9.2 percent and 8.5 percent respectively in 2010 and 2011. However the strong recovery in economic growth was mostly domestic demand driven, linked to high credit growth, and coupled with higher energy prices, it caused a significant worsening in external balances and a rise in inflation. As a result the current account deficit to GDP ratio widened from 6.4 in 2010 to 9.9 percent in 2011 while net energy imports increased to 6.1 percent of GDP in 2011 from 4.7 percent of GDP in 2010. Consumer prices increased by 10.5 percent in 2011, well above the Central Bank's target of 5.5 percent. In response to increasing imbalances, the Central Bank has been taking a range of tightening policy measures since mid-2011 thus increasing funding costs.
4. On the back of a soft landing and significant economic rebalancing, Fitch ratings has upgraded Turkey to investment grade, but external financing remains a concern. The economy has been slowing down since the last quarter of 2011. In the first nine months of 2012, GDP expanded by 2.6% over the same period of last year, down from 2011's 8.5% as a result of the slowdown in domestic demand. 2012 GDP growth is expected to be reported at around 3 percent and the current account deficit is expected to ease to 7.1 percent of GDP, from 9.9 percent in 2011, while inflation has come down to 6.4 percent in November 2012. Nevertheless, given the global uncertainties, Turkey's external financing remains its key weakness and the financing quality remains a concern in the short-run. The main driver of the improvement in the current account deficit in 2012 has been real export growth, driven by export diversification and
1 facilitated by a significant nominal currency depreciation against the US Dollar in 2011. FDI and other long-term inflows only accounted for 20 percent of financing as of October 2012.
B. Sectoral and Institutional Context
5. Energy Sector overview: Electricity demand has been growing between 7 and 8 percent annually on average, driven by Turkey's rapid economic growth, industrialization and steady population growth. Energy efficiency (EE) has emerged as a policy priority due to the relative high energy intensity of the economy and its need to maintain its competitiveness. Although total primary energy supply per capita in Turkey is still low-1.44 tons of oil equivalent (toe)/capital in 2010, compared to the OECD average of 4.39 toe/capita--the Turkish economy is comparatively energy intensive. In 2010, the economy required 0.19 ton of oil equivalent (toe) for every US$1,000 of GDP, compared with the OECD average of 0.14.
6. Energy efficiency is critical to Turkey's energy security and a key component in Turkey's National Climate Change Strategy and Action Plan. According to World Bank estimates, the industrial and building sectors offer an aggregated energy savings potential of over 15 million toe of energy consumption per year, or 14 percent of total consumption, with corresponding greenhouse gas (GHG) emission reduction potential. Among its various initiatives, the Government has also taken measures to support specialized renewable energy and EE credit lines, including the use of the Clean Technology Fund (CTF). In an effort to accelerate the realization of Turkey's EE potential, the Government approved a new National Energy Efficiency Strategy in February 2012. The new Strategy sets an overall target of reducing Turkey's energy intensity (energy consumption of energy per unit of GDP) by 20 percent by the year 2023 from the year 2011 level. This is a realistic and achievable target as Turkey's economy is still relatively energy intensive. The Strategy identifies the following main activities to improve Turkey's EE: (a) promote EE in the industry and service sectors; (b) reduce energy demand of buildings; (c) promote energy efficient appliances and products; (d) improve the efficiency of electricity generation, transmission and distribution; and (e) building capacity, market and financing for EE products, investments and services.
7. Considerable achievements have been made in setting up regulatory and institutional frameworks to promote EE, but further support to the Ministry of Energy and Natural Resources (MENR) is needed. The legal, regulatory/pricing and institutional set-up to promote EE includes a comprehensive set of regulations issued in 2008 and 2011 under the 2007 Energy Efficiency Law. The work on alignment with relevant EU acquis and regulations is also ongoing and has mostly been completed. Work is also ongoing to align the government programs and legislative/regulatory framework to achieve the targets outlined in the adopted national EE strategy. The Electric Power Resources Survey and Development Administration (EIE), mandated with policy making and implementation of EE promotion, was integrated into the Ministry of Energy and Natural Resources (MENR) in November 2011. The reorganization is expected to streamline the institutional framework in the long-term, but requires additional resources and personnel in MENR in the near-term to ensure that the capacity is maintained and developed further. While the progress on regulatory framework is noteworthy, the recent institutional reorganization has led to an uncertainty in the policy development for EE and need for support.
2 8. In order to support this process further, the European Commission, MENR and the Ministry for EU Affairs are collaborating closely on the preparation of a multi-year technical assistance program with the World Bank for the enhancement of Turkey's energy sector, in line with Turkey's EU accession process. The funding source for these programs will be EU's Instrument of Pre-Accession Assistance (IPA) for Turkey. For 2012, EUR 11.8 million was allocated to this program, which includes the following components:
(a) Institutional review, capacity building and policy alignment with EU for MENR; (b) Support for unbundling of the national gas company, BOTA$, and design for gas trading platform; (c) Review of current situation, barriers and action plan in scaling up Renewable Energy; (d) Market development and capacity building for Energy Efficiency; and (e) Visibility and public awareness activities. 9. The program will provide the much needed support from the institutional and policy perspectives, and will support the further development of the energy sector policy framework of Turkey.
Banking Sector Overview:
10. The reforms undertaken after the 2001 crisis allowed the Turkish financial system to come through the global financial crisis relatively unscathed. Supportive measures taken by the Turkish authorities, rapid rebound in capital inflows and economic activity also played a role in the Turkish banking sector withstanding the impact of the global crisis. In recent years, the building of additional capital buffers and the strengthening of banking regulation and supervision, has led to the emergence of a more resilient, stable and profitable banking sector. The system has historically relied mostly on a stable domestic deposit base for funding and remains liquid. The Turkish Banking system remains highly-capitalized (Capital Adequacy Ratio or CAR of 17.4% as of November 2012) and profitable (Return On Assets or ROA and Return On Equity or ROE of 1.71% and 14.6%, respectively), with a significant improvement in asset quality (Non-Performing Loan ratio of 2.9% in November 2012, after reaching 5.0% in 2009).Turkey successfully implemented the BASEL II requirements which were expected to cause a decline in capital adequacy ratios because of the increased risk weights. However, even after this, Turkey still has the second highest capital adequacy ratio among G-20 countries after Indonesia. Table 1: Banking Sector FinancialStrength Indicators: 2007 2008 2009 2010 2011 2012 Percent (November) Gross Non-performing loans/ Total loans 3.5 3.7 5.3 3.7 2.7 2.97 Provisions/NPL 86.8 79.8 83.6 83.8 79.4 75.42 ROA 3.4 2.5 3.3 3.0 2.2 1.71 ROE 24.8 18.7 22.9 20.1 15.48 14.6 Loans/deposits 83.2 84.1 80.6 88.5 101.1 106.4 CAR 18.9 18.0 20.6 18.9 16.5 17.4 Source: Banking Regulation and Supervision Agency (BRSA).
3 11. The financial sector is expected to be a continued source of macroeconomic strength, but remains shallow. The largest share in the financial sector belongs to the banking sector with 87.9 percent. Banking sector assets increased from 63 percent of GDP in 2005 to 93 percent as of September 2012. This ratio is quite low when compared to EU-27 average of 354 percent and shows the growth potential of the Turkish Banking sector. In spite of the significant growth during the last decade Turkey's domestic financial system still lacks depth and breadth for an economy of Turkey's size, with total banking sector credit accounting for 58 percent, and deposits for 56 percent of GDP.
12. Following an expansion in bank lending after 2009, credit growth started to slow down in the third quarter of 2011 in line with the economic rebalancing and slow down in the economy. Credit growth decelerated from 29.9 percent in December 2011 to 14.7 percent in November 2012 due to the monetary and prudential tightening measures taken by authorities. Uncertainties regarding the global growth outlook and problems in the EU economy adversely affected domestic economic activity in the third quarter of 2012, thus weakening production and investments and bringing about a relatively faster deceleration in business loans and especially in the loans to small and medium sized enterprises (SMEs).
13. With deposits growing much slower than loans, banks are increasingly relying on foreign funding. Since the year-end 2009 system-wide loan to deposit ratios increased by 25 percentage points to reach to 106.4 percent in November 2012. Banks have bridged the gap between loan and deposit growth by using up liquidity in their balance sheet and increasing wholesale funding from abroad. The level of foreign funding is not high relative to other countries in the region but has been increasing. Currently, 14.7 percent of the total assets of the banking sector are funded by foreign liabilities. Deposits, placements and repos constitute almost three quarters of foreign funding while longer term sources of foreign debt, such as syndications and securitizations remain limited, comprising only 21.4 percent of total foreign funding2 . Foreign funding sources are relatively diversified however, increasing funding from abroad, particularly Euro zone countries which are accounting for about 39 percent of total foreign funding, over the past few years could make the Turkish Banks susceptible to potential liquidity squeezes in the Euro zone.
14. Despite recent gains, the maturity profile of liabilities remains short term in nature. Although Turkish banking system is funded largely by relatively diversified and stable core customer deposits, term structure is significantly short. Customer deposits fund more than 57 percent of assets in Turkish banks as a whole. As of September 2012, only 4.6 percent of the deposits were due to mature after one year and the average maturity of deposits was oscillating at around 76 days. In addition, following the BRSA's authorization in 2010 for banks to raise debt from domestic markets, most banks commenced issuing domestic bank bonds with tenures ranging between six to eighteen months, although weighted average of the maturity remains under one year. Currently, 1.6 percent of the total assets of the banking system are funded by
1CBRT Financial Stability Report and BRSA Financial Markets Report 2 CBRT Financial Stability Report, BRSA and Standard & Poor's- Ratings Direct
4 Turkish Lira bonds issued by the banks and as the volume becomes more significant, it is expected that domestic issuance will help diversify Turkish Banks' funding base3
SME Sector Context:
15. SMEs play a very important role in the Turkish economy owing to their crucial role in generating income and employment. The last Investment Climate Assessment-From Crisis to Private Sector Led Growth (May 2010)-found that there are strong indications that SMEs are disproportionately burdened by business regulations, face severe access to finance constraints, and seem to lack the ability to adopt and use the knowledge needed to make them and, ultimately, the entire Turkish economy more competitive internationally 4. SMEs play an important role for the economic development of Turkey since SMEs are estimated to account for 99 percent of all enterprises, 78 percent of employment, 55 percent of value added, 65 percent of sales, 50 percent of investments, and 59 percent of exports yet only receive 22.8 percent of total loans.5 The Turkish government has committed itself to a significant array of programs aimed at making industrial SMEs more competitive, more capable of applying modern technologies to improve production processes, and more effective exporters. One of the major priority areas for SME policies has been access to finance.
16. After being severely underserved in the aftermath of the 2008 global financial crisis, SMEs have been making inroads in gaining access to credit. While the largest proportion of loans (45 percent) is being allocated to corporate clients, SME credit accounts only for 22.8 percent of total banking sector credit (from a low of 21 percent in 2009)6. Nevertheless, while SMEs are usually in the market for medium- and long-term financing, banks do not usually have adequately structured resources to offer them. This is mostly a result of the short-term maturity structure of the Turkish banks' liability base, which leaves SMEs open to severe liquidity and interest rate risk, as evidenced by the events in the aftermath of the global financial crisis when major banks significantly cut their exposures to SMEs in a matter of weeks. In addition, lack of cash flow based financing (especially in the SME segment) and high collateral requirements further constrain access to finance to SMEs.
17. Consequently, market barriers exist for scaling up financing for EE investments in SMEs, including:
a. Lack of knowledge among banks and SMEs about EE opportunities, project performance and risks: Turkish banks have insufficient experience assessing EE opportunities and project benefits, assessing technical and repayment risks, and verifying EE savings estimates. As a result, perceived risks and thus risk premiums are prohibitively high. Further, there is a general lack of understanding
CBRT Financial Stability Report, BRSA and Standard & Poor's- Ratings Direct
4 A majority of surveyed firms noted access to finance as a key constraint to growth (26 percent of firms cited this as their single most important constraint). Tax rates (18 percent) and policy instability (18 percent) rank second and third, respectively. Data from Turkish Statistical Institute (TUIK) and Banking Regulation and Supervisory Authority 6 Data from Banking Regulation and Supervisory Authority
5 and thus low priority among SME and other managers about the opportunities for operational cost savings through EE investments.
b. High transaction costs for small SME EE investments: Turkish banks lack developed approaches to identify and assess projects for smaller investments, as technical reviews of detailed energy audits are only practical for much larger loans. Since investments in the SMEs are smaller (most under $1 million), the transaction costs for each project (identification, loan origination, technical assessment, energy savings estimation, technology review, etc.) can be prohibitively high. This has resulted in a lack of developed financing strategies and products (e.g., leasing, cash flow-based financing, energy service company or "ESCO" lending) which limit the potential market to only highly creditworthy SMEs with sufficient collateral/project equity and technical capacity to pursue EE improvements.
c. Financing constraints due to high collateral requirements: Under the current banking regulatory framework, the borrowing SMEs are often required to provide 100 - 120% of collateral. This high collateral requirement not only limits the borrowing capacity of the SMEs, but also often drives up the cost of credit as many borrowers are forced to purchase credit guarantees to supplement their collateral, which adds about 1% to their financing cost.
d. Limited institutional capacity to identify, prepare bankable EE projects: Smaller industries are generally unaware of the opportunities, costs and benefits of EE improvements, despite the recent legislative measures. High transaction costs hinder EE among SMEs due to the small-size of improvements and modest returns of EE investments relative to other investments (i.e., production expansion). Irrespective of cost, the number of improvements needed to realize substantial EE savings may require too much time, knowledge and effort to make EE investments attractive for many SMEs. There is also a lack of efficient delivery mechanisms to link financing and EE projects with acceptable transaction costs. Service companies and ESCOs lack viable business and financing models, and credibility among potential clients and financiers. This vicious cycle results in a lack of demand, in the form of well-prepared, bankable loan applications and the perception among banks and ESCOs that this is not yet a viable market.
18. The ESCO model has also been unable to gain traction within the Turkish market to date. ESCOs have, in many countries, proven to be an effective way of facilitating EE investments, including in emerging sectors and new technologies. ESCOs can provide a "one stop shop" solution to project owners, allowing them to effectively outsource the project from energy audit and development through implementation and monitoring. In some cases the ESCOs are also able to arrange or facilitate financing for the project. In order to promote the ESCO market, MENR has in recent years certified some 38 ESCOs under its accreditation program, mostly related to technical training. However, to date, none have undertaken actual ESCO projects and several have indicated they are unlikely to seek accreditation renewal. The
6 only ESCO project reported is with an international ESCO for a large shopping mall in Istanbul. One main reason for this situation is the limitations of ESCO models being promoted in Turkey today, namely the Shared Savings and Guaranteed Savingss models. The numerous small local ESCOs do not have sufficient balance sheets to take on the debt under a Shared Savings model, and lack a demonstrated track record and financial means to offer a credible performance guarantee under the Guaranteed Savings model. The slow uptake of ESCO models in Turkey as well as experience from other countries suggest that in order to strengthen the ESCO market in Turkey, it would be important to both broaden the range of ESCO models being promoted in Turkey today, as well as bring in other types of local companies (e.g., leasing firms, equipment suppliers, construction firms) into the ESCO market.
19. The three Financial Intermediaries, Tiirkiye Cumhurriyeti Ziraat Bankasi A.$. (Ziraat Bank), Tiirkiye Vakiflar Bankasi T.A.O. (VakifBank) and Tiirkiye Halk Bankasi A.$. (Halkbank) were chosen as the financial intermediaries for the Project given their strong SME client base and market presence in the SME sectors. Strengthening SME business development is a strategic priority for Ziraat Bank, which has particular strength in the agro-industry and food processing sectors. Ziraat Bank has a privileged advantage of access to these sectors, especially in the underserved areas, and their SME portfolio is already 42 percent of their total corporate portfolio. VakifBank is an important player in SME business, with a long lasting relationship with strong number of clients, low granularity in SME portfolio, and geographically diversified lending practice. It has introduced sector focused products before, including EE, and has experience in designing, marketing and implementing such sector specific loan products. VakifBank provides service to over 451,000 SME customers. Lastly, Halkbank is one of the leading SME lenders in Turkey. Halkbank's loans and advances to SME borrowers comprised 36 percent of its total loans and advances.
20. In addition to the changes made to the regulations and policies by the Government, the success of credit line operations in industrial EE investments contributed to an increase of support from IFIs to promote EE. The World Bank has been providing financing to both renewable energy (RE) and EE through two financial intermediaries (FIs), Turkiye Sinai Kalkinma Bankasi (TSKB) and Turkiye Kalkinma Bankasi (TKB) in the Private Sector Renewable Energy and Energy Efficiency Project. The Project, approved in 2009 with additional finance provided in 2011, provided US$1 billion in total financing with US$100 million from the Clean Technology Fund (CTF), a multilateral donor fund aiming to promote technologies which contribute to reduction in carbon emissions, to RE and EE investments. So far, the project financed 20 EE investments, paving the way for industrial EE investment financing. The European Bank for Reconstruction and Development (EBRD) has established the Turkey Sustainable Energy Financing Facility (TurSEFF) to support small scale RE and EE through five commercial banks, and the International Finance Corporation (IFC) supports leasing companies on EE equipment. Other institutions, such as Agence Franqaise de D6veloppement (AFD), and Kreditanstalt fir Wiederaufbau (KfW), have also provided support mainly through FIs to EE
7 Under a shared savings model, the ESCO generally borrows from a bank and finances the project directly, with the client repaying the ESCO from the accrued energy savings. In the event the savings are below expectations, the ESCO must repair or replace the equipment, or risk nonpayment from the client. 8 Under a guaranteed savings mode, the ESCO can help identify suitable financing for the client, but the client is the borrower. The ESCO provides a performance guarantee which generally stipulates that if the actual energy savings fall below the amount needed to service the debt, the ESCO will pay the difference.
7 investments. Currently, the FIs that have credit lines specifically for EE include some of the largest in the Turkish market - such as Akbank, Garanti Bank, Deniz Bank, Is Bank, Seker Bank, and TEB. Despite all these efforts, the EE investment needs in Turkey are still greater than the support provided. The Project aims to supplement the market development efforts of other credit lines through its development of alternative business models, such as ESCOs.
21. The CTF is expected to provide additional financing for the Project to further promote the ESCO market. Turkey has successfully implemented Phase I of its CTF Investment Plan, approved in 2009 by the CTF Trust Fund Committee. On November 3, 2012, the CTF endorsed Turkey's Phase 2 CTF Investment Plan for US$140 million. This includes US$50 million to be provided as additional financing for this Project at a later stage. The Investment Plan for Turkey, though endorsed, is not fully funded as resources are going through the CTF allocation process and the US$50 million CTF allocation for this Project is thus not yet available. The US$50 million in CTF financing, provided at IDA terms, would be provided to scale up financing for ESCO transactions which are being piloted using GEF funds. The CTF would allow the FIs to leverage the risk coverage provided by GEF funds, while reducing the level of concessionality of financing provided to the ESCO market. The lessons learned during the GEF supported phase of the Project will be utilized when processing and designing the use of the additional financing from the CTF.
C. Higher Level Objectives to which the Project Contributes
22. The project is consistent with the Country Partnership Strategy (CPS) for the FY12- 15 period, approved by the World Bank's Executive Board on March 27, 2012. The CPS has three main strategic objectives and pillars: Strategic Objective 1 - enhanced competitiveness and employment; Strategic Objective 2 - improved equity and public services; and Strategic Objective 3 - deepened sustainable development.
23. The project will support the Strategic Objectives 1 and 3. EE reduces firm operating costs and infrastructure bottlenecks thus improving their competitiveness. The improvement in the efficiency of energy consumption would also control the growth of demand and import of energy, thus contributing to the improvement in the current account deficit. The project would also enable SMEs to have access to longer term credit than is usually available to them. EE has been identified in Turkey's first National Communication to the United Nations Framework Convention on Climate Change (UNFCCC), the National Climate Change Strategy and Action Plan, and other government programs, as a crucial component for energy security and climate change mitigation in Turkey.
II. PROJECT DEVELOPMENT OBJECTIVES
A. Project Development Objectives
24. The Project Development Objective (PDO) is to improve the efficiency of energy use in small and medium enterprises, by scaling-up commercial bank lending for energy efficiency investments. The global environmental objective is to reduce Greenhouse Gas (GHG) emissions through the removal of barriers to energy efficiency (EE) financing in the small and medium enterprises.
8 B. Project Beneficiaries
25. The Project beneficiaries will be the small and medium enterprises (SMEs) and mid-cap companies that improve the efficiency of their production through investments to be financed by the implementing FIs, thereby lowering their operating costs and enhancing their competitiveness. FIs, equipment suppliers, service providers and others will also benefit from increased demand for their EE-related goods and services. There will also be fiscal benefits in terms of reduced energy imports as a result of the EE improvements. The Project would also benefit the SMEs and mid-cap companies by increasing and stimulating their productivity, growth, and resilience to economic downturns.
C. PDO Level Results Indicators
26. The PDO level results indicators will be as follows:
a. Estimated energy savings from investments financed under the project (GWh),
b. Associated GHG reductions from investments financed under the project (tons/year).
III. PROJECT DESCRIPTION
A. Project Components
27. The Project will provide 3 lines of credit for a total amount of US$201 million to three financial intermediaries (FIs): Halkbank (US$67 million), VakifBank (US$67 million), and Ziraat Bank (US$67 million) to support EE financing to SMEs, and a US$3.64 million Global Environment Facility (GEF) grant for technical assistance (TA) and risk sharing to the three FIs (Halkbank: US$0.9 million, VakifBank: US$0.9 million, Ziraat Bank: US$0.9 million), and policy and TA support to the General Directorate of Renewable Energy (GDRE) within MENR (US$0.94 million). The selected FIs have a strong client base in the SME sector, and possess strong institutional capacity for managing credit lines and lending programs. The Project will seek to expand their capacity in assessing EE investments and explore alternative financing models tailored to the Turkish SME market. GDRE is mandated with the policy and research on EE and RE within MENR. The Project will seek to enhance the capacity of GDRE to meet its mandate and increase the utilization and effectiveness of its EE support programs. The Project consists of two components-one to support investment lending and project development, appraisal and monitoring support for the three FIs; and, a policy and institutional development component for GDRE and project management support for GDRE-which are elaborated below.
28. Component 1: Energy efficiency investments in SMEs [Total cost of US$294.95 million, including US$201 million from the IBRD loan, US$2.7 million from the GEF grant, US$50.25 million from the FIs, US$1.0 million from MENR, US$40 million from project owners/ESCOs]
29. A total of US$201 million IBRD loan will be provided as 3 credit lines to three FIs, Halkbank, VakifBank, and Ziraat Bank to lend for EE improvements in SMEs. The Project has
9 identified target key, energy-intensive SME subsectors and common technical retrofits in each of these subsectors which can be replicated under a streamlined appraisal method. These measures help address the issue of transaction cost. Based on the market assessment conducted during project preparation, and as agreed with the three FIs, target subsectors will include: machinery and equipment, metal products, food and beverage, textiles, trade and services, pulp and paper, and hotels and other commercial buildings-although other sectors will also be eligible for financing. Based on this information, an ESMAP-supported 9 EE screening tool was developed to assist the three FIs conduct initial assessments of potential EE subprojects and determine project eligibility with the agreed criteria while lowering transaction cost for smaller loans. Detailed screening and eligibility criteria are included in Annex 2.
30. The Project will also foster alternative business models for financing and implementing EE projects. Two models in particular are envisaged: (a) equipment leasing, where lease payments are structured to be paid from the estimated energy cost savings; and (b) ESCOs, where a firm can offer a blend of services-from audits to design and implementation-typically with some form of guarantee to ensure the energy cost savings are sufficient to service the loan. Both of these models allow for project financing structure outside of the traditional commercial bank loan requirements, thus alleviating some of the collateral and project equity constraints typically faced by many SMEs. In addition, both options would allow for the loan to be repaid from the energy cost savings, thereby allowing the client to maintain a positive cash flow throughout the project. These models also help bring other service providers into the EE market, thereby helping to foster a more sustainable market infrastructure for the future. Grant funds from the GEF will be used to develop and promote access to financing through TA programs and a loan loss reserve fund mechanism.
31. This component consists of investment lending and includes support for sub-project development, appraisal and monitoring. Each segment is further elaborated below:
Investment Lending. [Total cost: US$292.60 million, IBRD US$201 million, GEF US$1.35 million, FIs US$50.25 million, project owners/ESCOs US$40 million]
32. IBRD on-lending - Each of the FIs would receive an allocation of US$67 million from the credit line to support EE lending in SMEs per the agreed criteria. The FIs would onlend the IBRD loan at commercial rates in accordance with their own lending policies and assume all financial risks. The equivalent of 25% of the respective IBRD loan shall be financed from the FIs' own resources, once 50% of the IBRD loan is committed to sub-borrowers. The projects financed out of the Fl's own resources shall be prepared, appraised and reported using the same procedure as outlined in the Operational Manual of the IBRD loan. The requirement will be revisited at the mid-term review of implementation if loans committed to sub-borrowers do not reach 50% of the IBRD loan at the time. By providing co-financing from their own funds, the FIs will provide leverage to the IBRD funds provided and will develop an internal capacity and procedure for providing loans to such investments after the project closes. The FIs may also
9 The Energy Sector Management Assistance Program (ESMAP) is a global, multi-donor trust fund administered by the World Bank. ESMAP assists low- and middle-income developing countries to increase energy sector know-how and institutional capacity in the areas of energy security, energy access and climate change.
10 require sub-borrower financing from project owners and ESCO in accordance with their own lending practices, which is estimated to total US$40 million.
33. Loan Loss Reserve Fund - A portion of the GEF grant would be made available to each FT (up to US$450,000 per FI) to help defray risks associated with new loan products and help address the issue of high collateral requirement for SMEs through a cash reserve fund type scheme. For those subprojects which utilize alternative financing such as ESCO credit or energy savings performance based leasing up to 20 percent of the sub-loan could be provided as Loan Loss Reserve by the GEF grant (see Graph 1). By lowering the risk exposure amount that the FIs take on for these transactions, the collateral and equity requirements are expected to be lower which will contribute to increasing access and lower cost of financing for ESCO transactions to be financed.
34. The funds will be managed by qualified professionals under the financial management/reporting requirements agreed with the Bank and outlined in the Operational Manual, as per OP 10.20. The Bank will retain its right to request an audit of the fund when deemed necessary and the FIs are required to have the funds managed in accordance with operational and financial policies and on basis of the relevant accounting/banking laws in Turkey. The Bank will also retain the right to request repayment by the FIs in case any of the conditions are in breach, except for amount of the grant that would be needed to meet the covered obligations under guarantees issued before the receipt of the repayment request by the FIs.
35. The Loan Loss Reserve will be held in an appropriate account which will be drawn down as first loss reserve. The GEF funds will be disbursed to the Reserve account in parallel to the IBRD on-lending funds, to be held in the account as long as they are not drawn down. Funds from the Reserve will be allowed to be drawn down in the event that the sub-loan becomes non- performing loan (NPL) as per definition under the banking regulation of Turkey.The Reserve will cover first loss and the FIs will be required to continue efforts to recover all funds and report periodically. FIs shall provide periodic report to the Bank on sub-loans with delay interest payments or repayments, and shall report immediately in the event of the drawdown from the Reserve. FIs will also be required to make reasonable efforts to recover the NPL, including the loan portion which was covered by the Reserve.
36. Any reflows resulting from the Reserve funds shall be placed back in the Reserve account, including (i) any interest gained while funds are held in the Reserve account, (ii) funds recovered for the loan loss covered by the Reserve on a pro-rata basis. The reflow of funds shall continue to be used as part of the Loan Loss Reserve for the eligible investments. If there are any outstanding balances remaining in the Reserve account at the end of the Project period, the FIs, the Bank, Treasury and GEF will hold consultation to (a) continue the Loan Loss Reserve Fund as set forth in the GEF Grant Agreements; or (b) if the objectives have not been achieved, use such funds in accordance with a plan acceptable to all parties in promoting energy efficiency investments.
37. Experiences from the early ESCO pilot transactions would be carefully reviewed and subsequent transactions refined, and lessons documented disseminated widely through GDRE and others, with consent of the sub-borrowers/final beneficiaries. The FIs, in addition to the individual pilot transactions as stated above, would be obliged to document the subproject results
11 on anonymous basis to be share with external parties as outlined in the Operational Manual. Captured reflows from the GEF grant from successful projects would then be retained in the special account to be used for the same purposes.
Graph 1: Loan Loss Reserve Fund Scheme:
Fl risk Sub-Borrower exposure Risk 20 Covered with Loan Loss Reserve* Reserve
Loan to Sub-borrower 100
80 Risk Exposure taken on by FI*
* Up to 20% of the risk exposure of ESCO transaction financing would be covered by reserve fund from GEF. After 50% of IBRD funds have been committed, the co-financing requirement of 25% of total funds will become effective.
38. Project development, project appraisal and monitoring. [Total cost: US$2.35 million, US$1.35 million from GEF grant, GDRE US$1.0 million] Under this sub-component, support will be provided to help ensure the successful implementation of the credit line and FIs' EE business development. Activities to be supported include: (i) targeted market and other technical studies; (ii) energy audits for potential clients; (iii) technical due diligence for early subprojects and those involving new mechanisms or technologies; (iv) technical training for FI staff assigned to work on this project; (v) development of special EE project financing products or structures, such as Leasing, ESCO shared savings contracts, etc.; and (vi) verification and monitoring of energy savings during sub-loan repayment period. Each FI has prepared detailed implementation and procurement plan for use of the TA funds, which were approved by the Bank during project appraisal. GEF funds of US$450,000 each will be provided to the FIs for this purpose.
39. Component 2: Policy support and Technical Assistance to GDRE [Total cost of US$10.94 million including ProjectManagement: Total cost for TA activities of US$3.79 million including US$0.79 million from the GEFgrant, US$3.0 million from MENR]
40. Further TA will be provided to support ongoing policy dialogue on EE, enhance the enabling environment, and foster broader EE market development in Turkey. Given the vast investment potential and limited size of the credit line, efforts will be made to broaden the market in three main areas, namely: (a) awareness and information dissemination on energy efficiency opportunities and sharing experience from the credit line; (ii) policy and market support for energy efficiency financing and ESCO development; and (iii) institutional support to GDRE to support its EE policy and programs. Two sub-components are envisaged under this component:
12 41. Market development and information dissemination. [Total cost: US$2.44 million, GEF US$0.44 million, MENR US$2.0 million] In order to fully realize the benefits of the credit line, efforts will be undertaken to broaden the impacts to the market broadly. With MENR in the lead, efforts would be made under this sub-component in the following areas: (i) awareness raising, training, and information dissemination to key market actors on the opportunities for EE and successful implementation schemes used in the credit line, including pilot ESCO project case studies and dissemination of EE screening tool to registered users; (ii) market studies, assessments and options papers for future investment programs beyond the SME market, such as the public and residential sectors; and (iii) stakeholder dialogue will be supported through roundtables and other forum to discuss various policy and market issues and develop recommendations to scale-up investments in the SME sector and address emerging financing and capacity barriers. A follow up survey on EE screening tool users would be conducted to provide input for these activities.
42. Policy dialogue and capacity building within MENR. [Total cost: US$1.35 million, GEF US$0.35 million, MENR US$1.0 million] There is also a need to strengthen the policy and regulatory regime for EE more broadly within Turkey. Although the Energy Efficiency Law and some supplemental legislation exist, there remain gaps as well as areas for further revisions and strengthening. Further, institutional support to the newly established GDRE is needed to assist them to building their internal capabilities. Under this sub-component, the following activities are envisaged: (i) review ongoing EE primary and supplemental policies to identify deficiencies and recommend actions for their resolution with a focus on the SME sector; (ii) review EE incentive and informational programs, conduct impact assessments, and develop a set of recommendations to improve utilization and impact of those programs; (iii) review institutional arrangements to strengthen the policy and implementation function for EE in all sectors; and (iv) staff training.
43. Project Management [Total cost of US$7.15 million, including US$6.0 million from the FIs, US$0.15 million from the GEF grant, US$1.0 million from MENR]
44. The bulk of project implementation costs will be borne by the executing agencies themselves. The FIs will incur costs to implement and administer the EE credit line, including the recurrent costs of their respective project implementation units (PIUs) which will be responsible for coordinating project activities. Project implementation costs will also include the costs incurred by the Fl's operational departments in identifying, appraising and monitoring subprojects that will be financed from the credit line. Similarly, MENR will cover a portion of the operating costs of their project team, which will be responsible for managing their portion of the GEF grant.
B. Project Financing
Lending Instrument
45. The proposed Loans will be Specific Investment Loans denominated in US dollars with level repayments of the principal. The Loans to Halkbank and Ziraat Bank would be Fixed Spread while the Loan to VakifBank would be a Variable Spread. The Loans would be guaranteed by the Republic of Turkey.
13 46. The proposed loan amount for each bank will be as follows:
FT name Loan allocation Halkbank US$67 million VakifBank US$67 million Ziraat Bank US$67 million
Alongside the IBRD resources, GEF resources are proposed to be made available to eligible sub- projects through the three FIs as a loan loss reserve fund, used to lower the FIs' collateral requirements for the subprojects (see Project Description).
Project Cost and Financing
Project cost Counterpart GEF IBRD Financing (US$, Financing % Million)Million)Projec) C(US$, Million) Million) (US$, Financing
Energyinvents EfficiencyEffinc S293.78 90.25 2.70 200.83 68.36 investments in SMEs Policy Support and 3.79 3.00 0.79 0.00 0.00 Technical Assistance Project Management 7.15 7.00 0.15 0.00 0.00 Total Baseline Costs 304.72 100.25 3.64 200.83 65.91 Physical contingencies Price contingencies Total Project Costs 304.72 100.25 3.64 200.83 65.91 Interest During Implementation Front-End Fees 0.50 0.33 0.17 Total Financing Required 305.22 100.58 3.64 201.00 65.85
C. Lessons Learned and Reflected in the Project Design
47. The design of the project draws upon experience and lessons learned from previous World Bank financed energy efficiency projects using credit lines within and outside the region-China Second Energy Conservation (2002), China Energy Efficiency Financing (I in 2006, II in 2010), India Financing Energy Efficiency at MSMEs (2010), Tunisia Energy Efficiency (2009), Turkey Private Sector Renewable Energy and Energy Efficiency (2009), Ukraine Energy Efficiency (2011) and Uzbekistan Energy Efficiency Facility for Industrial Enterprises (2010), as well as recent World Bank and ESMAP publications. Key lessons include:
14 * Selection of strong banking partners with a demonstrated interest and commitment to establish their energy efficiency lending businesses is critical to success. * Early successes and well-documented case studies are needed to establish program credibility and help demonstrate that EE is real and can save money. * Standardization of assessments to help lower transaction costs is critical, particularly for smaller investments. * When introducing innovative business models to support subproject implementation and financing, such as ESCOs, it is advisable to begin with simpler models and introduce more complex transactions as the market develops and supporting systems evolve. * Strong technical energy diagnoses, clear and transparent eligibility criteria, sound measurement and verification procedures, and a strong initial pipeline are critical to ensure quick disbursements and achievement of desired outcomes. Building the pipeline aggressively through a variety of channels, and maintaining some flexibility as the market continues to evolve, are also needed. * Ongoing policy dialogue and TA is critical to overcome emerging obstacles during implementation and enhance the enabling environment for EE financing, ESCO development, etc.
IV. IMPLEMENTATION
A. Institutional and Implementation Arrangements
48. For Component 1, the FIs (Halkbank, VakifBank and Ziraat Bank) will on-lend IBRD funds to SME for eligible EE investments. The lending procedure and process will be implemented in accordance with the Operations Manual prepared by each FT and agreed with the Bank. The three FIs have well-equipped Project Implementation Units (PIU) in-charge of marketing, project evaluation, appraisal, safeguards aspects and implementation from their earlier loan with the World Bank, and these PIUs will continue to operate under the proposed Project. Their skills are proposed to be expanded to cover EE investments and expected to be covered also by the TA component of the project.
49. Subprojects will be approved by the FIs based on compliance with their respective Operations Manuals, which cover aspects such as eligibility, safeguards compliance, monitoring requirements, etc. The IBRD and GEF funds will be provided in parallel to eligible subprojects. The GEF may be provided for up to 20% of the total sub-loan amount to each eligible subproject based on the criteria set up in the operations manual. The broad terms for the IBRD sub-loans and GEF grants are summarized here:
* SME is defined as private enterprises with less than TL 40 million in turnover and fewer than 250 employees.
15 * Up to 20% of the total IBRD loan amount may be used for financing Mid-Cap Companies 10, defined as less than TL150 million in turnover, fewer than 1,500 employees, and not categorized as SMEs.
* The sub-loan principal amount should not exceed US$3.5 million for SMEs and US$5 million for Mid-caps, Leasing companies and ESCOs;
* Aggregated principal amount to any beneficiary enterprises and its affiliates must not exceed US$10 million for each FIs.
* Up to 20% of the IBRD loan amount may be used for financing the FIs' subsidiary leasing companies (as defined in the Turkish banking law) that finance leasing transactions specifically based on energy savings to the eligible beneficiaries (i.e. SMEs and Mid-caps companies). Leasing companies will be required to go through prior evaluation on eligibility and all sub-projects will also be prior reviewed by the Bank.
* Retroactive financing would be allowed for eligible sub-loans made after April 16, 2012 and up to 10% of the IBRD loan amount.
* Sub-loans will be used for EE improvements in subprojects that (a) reduce a technical system's energy intensity (energy per unit of output) by at least 20 percent, or (b) generate at least 50 percent of the financial benefits from energy cost savings.
* Other subproject criteria include the following, unless otherwise agreed with the Bank: (a) all subprojects must have a financial rate of return (FIRR) of at least 8 percent; and (b) sub-borrowers must have a minimum debt service coverage ratio of 1.2.
* Sub-projects, which include supply/discharge operations within the following river basins, shall be eligible for finance: Susurluk, North Aegean, Gediz, Kuquk Menderes, Buyuk Menderes, Western Mediterranean, Antalya, Sakarya, Western Black Sea, Yesilirmak, Kizilirmak, Konya Kapali, Eastern Mediterranean, Seyhan, Ceyhan, Eastern Black Sea, Burdur, Afyon, Orta Anadolu and Van. Investments that involve potential use or discharge into other river basins shall not be eligible.
* The following shall not be eligible; (a) Any of the activities listed, or activities that produce and/or use materials listed, in the Operations Manual and which are classified and referred to as part of the negative list in said manual, (b) An investment that is classified as a Category "A" Sub-project, (c) An investment that entails land acquisition or involuntary resettlement or would give rise to Displaced Persons, (d) An investment that involves the construction of a new dam or will rely on the performance of an existing dam or a dam under construction.
10 Allowing a portion of the credit line to go to Mid-caps allows for larger projects with more creditworthy borrowers, which together can help further bring new ESCOs into the EE market. International experience has shown that while ESCOs are generally willing to assume project performance risks, they are much less able and willing to take on client credit risks which are generally higher with SMEs.
16 * GEF funds may be used as cash reserve fund of up to 20% of total sub-loan amount to projects in the following categories: (a) An ESCO, which enters into energy saving guarantee contract, (b) Eligible borrowers (SME or Mid-cap Companies) that will finance EE investments under ESCO energy saving guarantee contract, (c) Leasing, where lease payments are structured to be paid from the estimated energy cost savings.
* Prior review by the IBRD will be required for the following sub-loans: o First two sub-loans each for SMEs and Mid-caps, irrespective of size, O Leasing transactions based on energy savings, and " Sub-loans that utilize the GEF financed Loan Reserve Fund.
* The equivalent of 25% of the respective IBRD loan shall be financed from the FIs' own resources, once 50% of IBRD loan to each FT is committed. The sub-projects financed out of own resources shall be prepared, appraised and reported on the same procedure as outlined in the Operational Manual of the IBRD loan. The requirement will be revisited at the end of second year of implementation if the 50% of the IBRD loan is not committed at the time.
50. Component 2 is managed by the General Directorate of EU Affairs and Foreign Relations (GDEU) within MENR. The Department of EU Affairs and IFIs of the GDEU is in charge of project coordination, and a Project Management Unit (PMU) is established within it. PMU staff are responsible to undertake work such as fiduciary responsibilities and technical supervision. The project is also supported by the technical expertise of the General Directorate of Renewable Energy (GDRE), which is mandated with the policy and research on EE and RE within MENR.
B. Results Monitoring and Evaluation
51. Project monitoring and evaluation involves: (i) Project results indicators, as noted in Annex 1; (ii) semi-annual progress reports on Project implementation; and (iii) a midterm review of implementation progress. Project results indicators will be based on initial sources of data that will be collected on a semi-annual basis by the FIs from subproject owners. The PIUs within the FIs and MENR will be responsible for overall monitoring and evaluation of implementation results and preparing semi-annually and midterm review progress reports. Project implementation progress will be reviewed using the intermediate results indicators. As the Project advances, monitoring will focus on the PDO-level results indicators.
52. For individual subprojects, pre-project energy consumption and estimated savings will be estimated based on technical feasibility reports commissioned by the FIs and their clients; post- project energy savings will be based on data at commissioning. As subprojects are implemented, commissioning testing will be carried out to document actual subproject performance and document energy savings. Commission tests will be done by equipment providers, FT technical consultants or FT technical staff after the projects are completed, and signed off by the clients. Tests would measure energy use to achieve agreed levels of output and compared with the baseline consumption. Differences between the estimated savings and actual would be documented to allow the FIs and clients to improve their technical analyses in subsequent projects. The FIs shall ensure that all energy savings of sub-loans above US$1.5 million, and 20% of sub-loans below US$1.5 million shall be reported to the World Bank as per agreed
17 format. These data will be aggregated and reported in the IBRD progress reports. Since investments will precede the energy savings and corresponding emission reductions, project indicators include a time lag between them. Projected energy savings and emission reductions have been estimated based on a sample of representative projects already financed by the FIs, current technical data on energy savings potential, fuel mix, target industries and systems, and other assumptions.
C. Sustainability
53. Financial sustainability is likely owing to the credit process governed by the banking regulatory framework, successful marketing of the loan and the availability of a robust pipeline of projects. Most EE investments have low technical and operational risk, with short payback period, thus being financially sustainable to begin with. Environmental sustainability is likely given the subproject eligibility requirements and the subproject selection and appraisal process. Institutional sustainability is also expected due to: (i) the successful credit delivery and implementation supervision mechanisms of the FIs - which are three of the largest commercial financial institutions in Turkey; and (ii) institutional capacity and processes, strengthened through support provided by the Project, both with the FIs and the Government enabling it to continue the promotion and scaling up of EE investments.
54. To ensure development and expansion of financing source for EE investments, it is important not to distort the market by subsidized interest rates that may discourage new financiers from entering the market. GEF funds, which are grants, will be used in a specific targeted approach, focusing on lowering the risk exposure for FIs (and thus, their collateral/equity requirements) for transactions and/or sub-borrowers to expand access of finance for alternative business models such as ESCOs. The use of GEF in this fashion is considered sustainable, on the basis that the GEF is designed to finance the incremental cost of new business models with global benefits of climate change mitigation. As the business models take hold and become accepted, it is expected that the enhancement provided through the grant co-financing would eventually become unnecessary, as was the case in the World Bank China Second Energy Conservation Project.
55. In order to avoid market distortion and to ensure that the Borrowers will gain appropriate returns from investments made under this loan, FIs will follow their respective pricing policies according to the market rates. All three FIs price their loans comparable to the market price for each currency on average. The Borrowers have been implementing broadly the same approach in their earlier Bank projects and the only significant market advantage that the Halkbank, VakifBank and Ziraat Bank derive from the Bank loan is the long-term funding that will allow them to provide longer-term financing without taking on significant maturity mismatch.
56. Another aspect that is important in ensuring sustainability will be the continued availability of adequate resources and skilled staff in the FIs. The technical and operational risks associated with EE investments require that the financial institutions have a strong technical capacity to appropriately identify, appraise and monitor the projects. Intensive training and marketing to promote the effectiveness and viability of EE will be required for the investments to be scaled up. The TA effort as part of the Project will help address this issue by further
18 developing capacities in these FIs, as well as the beneficiary companies and the responsible government agency (MENR) to promote investments in EE.
V. KEY RISKS AND MITIGATION MEASURES
A. Risk Ratings Summary Table
Stakeholder Risk Rating Implementing Agency Risk - Capacity High - Governance Low Project Risk - Design Moderate - Social and Environmental Low - Program and Donor Moderate - Delivery Monitoring and Sustainability Moderate - Other (Optional) - Other (Optional) Overall Implementation Risk Moderate
B. Overall Risk Rating Explanation
57. The overall implementation risk is proposed to be moderate as: (i) Although all the banks have prior experience in World Bank projects and have well established banking procedures, the implementation may be affected as there is lack of experience in new appraisal process (i.e. product line based financing), new business models such as ESCO contracts and attractive business opportunities based on them are not established - specifically the capacity risk in the implementation agency risk is rated as high for this reason. Upfront portfolio and market assessment to identify target market segments, development of ESCOs and project lines to improve pipeline and lower transaction costs, risk sharing, and marketing measures will collectively help mitigate these risks; (ii) EE lending and ESCO markets are difficult to develop and generally take 2-3 project cycles, not one, (iii) Though Government support is currently clear, the future change in the institutional priority of the MENR and/or Government may lead to lack of support for the project, that may affect implementation of the lending operations as well as policy support component. Ongoing dialogue with Treasury, MENR and other key ministries, use of stakeholder roundtables on key policy issues, completion of international reviews of policy options, as well as the TA provided to MENR as part of the Project will help mitigate this risk.
19 VI. APPRAISAL SUMMARY
A. Economic and Financial Analyses
58. A financial assessment of the participating FIs has been carried out and their eligibility as intermediary has been assessed (see Annex 8 for details). All three FIs are well established and respected commercial financial intermediaries, with substantial scale within the Turkish Banking sector. As of end 2011, Halkbank, VakifBank and Ziraat Bank were 6 h, 7 h and 2 nd largest banks in Turkey based on asset size respectively. Halkbank and VakifBank are listed on Istanbul Stock Exchange, and all three FIs have large national network of branches and have very strong client based in corporate financing and in SMEs specifically. Their financial status is strong and robust as indicated below (Table 3).
Table 1: Selected Financial Indicators for the FIs
Banking Ziraat (as of end 2011) Sector Halkbank VakifBank Bank Capital Adequacy Ratio 16.7 14.3 13.4 15.6 Gross NPL/Total Loans 2.7 2.9 3.8 1.1 Net NPL/Total Loans 0.5 0.5 0.2 0.4 Return on Assets 1.6 2.5 1.4 1.3 Return on Equity 13.8 25.4 13.2 16.2
59. Given that the Project is a FI operation, the actual sub-projects to be financed are not known upfront. Each of the participating banks has provided a tentative pipeline of potential projects. The financial and economic analysis therefore focused on a review of a sample of representative projects that have already been financed by the participating banks but that would meet the eligibility requirements for this Project. The sample of projects with EE improvement only (i.e. with no increase in production capacity and output) reviewed demonstrates attractive economic and financial returns ranging between 14.9 and 34.9 percent and 13.4 and 30.5 percent, respectively. Sample projects with increased production capacity exhibited a wide range of economic rates of return between 9.3 and 81.1 percent and financial rates of return between 9.2 and 67.0 percent.
B. Technical
60. The majority of EE investments expected consist of replacing or upgrading existing industrial equipment. The equipment are based on well established technologies and have very low technical and operational risk. However, the technical capacities to properly identify, assess and implement EE investments among SMEs are scarce. The project will address this through TA programs and promotion of ESCO transactions, which will act as an intermediary providing technical capacity for the SMEs to identify and implement EE investments.
C. Financial Management
61. The World Bank has carried out an assessment of the project financial management systems at Halkbank, Ziraat Bank and VakifBank. In addition, in-depth meetings have been held
20 with the Department of EU Affairs and IFI Relations of MENR that will serve as the PMU for the activities under the implementation responsibility of the GDRE. The Project will be implemented through these four self-standing PIUs.
62. All three FIs have prior experience in implementing World Bank financed projects. They have established teams that manage project implementation in an acceptable manner. The current financial management arrangements for the project are moderately satisfactory at all FIs and an action plan has been prepared to bring the arrangements to a satisfactory level. Halkbank, Ziraat Bank and VakifBank will each maintain records and will ensure appropriate accounting for the funds provided. Interim unaudited financial reports (IFR) will be prepared semi-annually and will be submitted to the World Bank within 45 days after the end of each calendar semester. The content and format of the IFR has been agreed with the FIs as referenced in their respective Operational Manuals. The entity financial statements prepared in accordance with the International Financial Reporting Standards and project financial statements will be audited by private external auditors on an annual basis with Terms of Reference (TOR) acceptable to the World Bank. The Financial Management risk associated with the three participating FIs is rated as Moderate.
63. MENR has no prior experience or relevant financial management capacity for project implementation purposes. The PMU within MENR will be responsible for maintaining the accounts and preparing the reports. The PMU will also be responsible for the disbursements and fund flows. The IFRs will be prepared on a semi-annual basis and will be submitted to the World Bank within 45 days after the end of each calendar semester. The audit of this portion of the Project will be undertaken by the Treasury Controllers who will submit their report within six months after the calendar year-end. MENR and the World Bank agreed on an action plan to bring the financial management arrangements to a satisfactory level for the effectiveness stage. The Financial Management risk associated with the Ministry is high but its impact on the overall project is assessed as low given the relatively small portion of the GEF grant under the responsibility of MENR.
D. Procurement
64. Procurement of goods, works and non-consulting services for the proposed Project will be carried out in accordance with the World Bank's "Guidelines: Procurementof Goods, Works and Non-Consulting Services under IBRD Loans and IDA Credits & Grants by the World Bank Borrowers" 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 Agreements (LAs). World Bank's "Guidelines on Preventing and Combating Fraud and Corruption in Projects Financedby IBRD Loans and IDA Credits and Grants", dated October 15, 2006 and revised in January2011 (Anti-CorruptionGuidelines) will apply to this Project.
65. Private Sector Commercial Practices may be followed for Goods, Works and Non- Consulting Services contracts below US$10.0 million equivalent in accordance with paragraph 3.13 of the Procurement Guidelines; and for Consulting Services contracts below US$1.0 million equivalent in accordance with paragraph 3.13 of the Consultant Guidelines under credit line
21 investment lending sub-component of the Project. The procurement arrangements under the credit line investment lending sub-component will be conducted as agreed in the operational manual for each FT.
66. An assessment of FIs, VakifBank, Halkbank, Ziraat Bank and MENR has been carried out and concluded that FIs have adequate capacity to oversee the procurement activities under the credit line investment lending sub-component of the Project. All three FIs are familiar with World Bank procurement procedures through their experiences with implementing similar SME projects financed by the Bank. However, the FIs have limited and MENR has no experience in carrying out their own procurement through Bank's procurement procedures under TA sub- components. FIs will maintain their existing PIUs. Each PIU will be supported by at least one experienced procurement staff. MENR has recently established a PMU to oversee/carry out the procurement activities under the Project. Procurement function of the PMU will be supported by a full time engineer and recently established International Agreements Unit under the GDEU The procurement plans for the TA sub-components of the Project have been discussed and agreed with each FT and with MENR. The procurement risk associated with the MENR is substantial but given the size of the financing allocated to the MENR, the overall procurement risk assessed as moderate for the project. A brief summary of the procurement arrangements is provided in Annex III including risk mitigation measures which have been discussed and agreed by the FIs and MENR.
E. Social (including Safeguards)
67. There are no social safeguards triggered by this project, since all project activities will be done within existing facilities with no land acquisition. Project activities are expected to reduce the large number of products manufactured by SMEs using outmoded energy-inefficient processes and contribute in the short- to medium-term to diversification of the economy and a new set of employment opportunities. However, there might be risks associated with implementation with the SMEs, such as high transaction costs in the monitoring and verification activities, including cost associated with retraining of workforce on new operating practices and data/records collection methods. These challenges will be mitigated by long term benefits accruing from the positive environmental, social and economic impacts of the investments. Further, the percentage of female owned SMEs financed under the Project will be included as a monitoring indicator in the Project results framework.
68. The project will conduct campaigns and workshops to raise awareness on EE among small firms and ensure that information about the EE is publicly available through media activities and government websites. The project will also target business and industry associations in workshops and seminars. Stakeholders, including relevant NGOs and business organizations, will be involved in workshops during project implementation as well as in midterm reviews.
F. Environment (including Safeguards)
69. The project has been assigned Category "Fl" in accordance with World Bank safeguard policy OP/BP/GP 4.01 (Environmental Assessment), since the project will be executed by intermediary banks. Environmental issues of sub-borrowers and their sub-projects will be addressed through the sub-project environmental assessments. Environmental assessments will
22 be carried out in accordance with both Ministry of Environment and Urbanization (MoEU) Environmental Assessment Regulation (Official Gazette No: 26939, dated 17 July 2008) and World Bank environmental assessment (OP 4.01) requirements. Most of the sub-loans to be financed are expected to be rehabilitation/renovation activities or small scale construction works. It is anticipated that there will be no large-scale significant and/or irreversible impacts from the project, so the sub-loan applications are expected to be Category B or C. Category A projects and projects triggering World Bank policy on Safety of Dams (OP/BP 4.37), projects on International Waterways (OP/BP 7.50), and projects that would entail Involuntary Resettlement (OP/BP 4.12) will not be eligible for financing. All of the investments will be within existing facilities; therefore, OP 4.04 and OP 4.36 are not triggered. It is not expected that any sub-projects will have impact on physical cultural resources so OP 4.11 is not triggered although the standard "chance finds" provision will be applied. It is possible that some of the sub-projects may have some impact on water usage (e.g., more efficient pumps which enable abstraction of more water; technology changes in small industries which affect wastewater effluents). The Operational Manuals indicate that in such cases the FT will determine whether or not an international water body is involved and the Operational Manual also states clearly that any project involving international water bodies will not be eligible for financing. In order to eliminate the risk of involving international waterways, a 'positive list of Turkey water basins', which are legally accepted as national waterways, were also included in the Operational Manuals. Environmental Assessment, public consultation and disclosure procedures that the sub-project should comply with are explained in detail in the environmental review sections of the FT Bank's Operational Manuals. The environmental review procedures (environmental frameworks) in the Manuals were disclosed in country and the documents were also shared in Bank's Infoshop.
70. Under GEF funding the project will also provide TA to support successful implementation of the credit line and of the FIs' EE business development. While the details regarding how each of the FIs will use the TA funds remain to be determined, they will not be used for technical feasibility works (any physical tests, drilling, etc.) of the sub-projects. For the cases where the TA component will finance feasibility studies of the sub-projects, such as structuring and justifying the EE investment proposals, the TORs of the consultants will be required to include provisions for ensuring that the sub-project designs are consistent with WB Operational Policies.
71. Selected number of first sub-project applications (detailed in Operational Manuals) FIs will provide information on the sub-project to the World Bank on a "prior review" basis, together with its proposed classification of the sub-project (Category A vs. B) and the advice it proposes to give to the sub-project borrower regarding additional actions needed to fulfill World Bank requirements. This will help to ensure that any potential Category A projects is excluded. Following this "pilot" period, if World Bank and FI agree, the World Bank will change to spot checking the screening and environmental review process on a "post review" basis. During the implementation support missions, the overall screening process and implementation of environmental recommendations for selected sub-borrowers/sub-projects will be supervised. Detailed explanation on the environmental review procedures of the project has been provided in the Fl's Operational Manuals.
G. Other Safeguards Policies Triggered
72. No other safeguard policies will be triggered.
23 Annex 1: Results Framework and Monitoring TURKEY SME ENERGY EFFICIENCY (P122178)
Project Development Objectives PDO Statement The Project Development Objective (PDO) is to improve the efficiency of energy use in small and medium enterprises, by scaling-up commercial bank lending for energy efficiency investments. The global environmental objective is to reduce GHG emissions through the removal of barriers to EE financing in the SME sector.
Project Development Objective Indicators Cumulative Target Values Responsibility Uni ofData Source! for Indicator Name Core UnitBaseline YR YR2 YR3 YR4 YR5 Frequency Measure Methodology Data Collection Estimated . Estimted. Sub-Borrowers, energy savings 'Semi- SbBroes GWh/Year 0.00 0.00 53.00 114.00 186.00 307.00 Commission- Borrowers (from project annual ing reports investments) Associated GHG reductions Tons of 0.00 0.00 26.40 57.30 93.60 154.40 Semi- Sub-Borrowers Borrowers from project CO 2e/year annual investments
Intermediate Results Indicators Cumulative Target Values Responsibility Unit of FeunyDt ore o Indicator Name Core Measure Baseline YR1 YR2 YR3 YR4 YR5 Frequency Data Source/ for Measure Methodology Data Collection Volume of bank Amount semi- funding: lines of (USD 0.00 18.00 39.00 63.00 90.00 121.00 annual Borrowers Borrowers credit - SME million)
24 1Amount. Total value of A u semi- EE investments (USD 0.00 34.90 75.70 123.70 204.10 292.60 annual Borrowers Borrowers million) Number of EE mSemi- loansenof EE E Number 0.00 30.00 65.00 105.00 150.00 200.00 annua Borrowers Borrowers loans given annual Number of loans given using Semi- Boowr Booes altennative Number 0.00 3.00 10.00 19.00 30.00 45.00 Borrowers Borrowers alternative annual business models No of active emi- loan accounts - Number 0.00 24.00 52.00 84.00 120.00 160.00 annual Borrowers Borrowers SME Percentage of project- supported Percentage 0.00 100.00 100.00 100.00 100.00 100.00 Annual Borrowers Borrowers institutions that are reporting on this indicator Portfolio at Risk semi- 2.00 annual Borrowers Borrowers - SME ~ Percentage 0.00 0.00 0.00 1.00 2.00 Percentage of project- supported Percentage 0.00 100.00 100.00 100.00 100.00 100.00 Annual Borrowers Borrowers institutions that are reporting on this indicator Percentage of active loans to Semi- women-onedtPercentage 0.00 15.00 20.00 25.00 25.00 25.00 aemua Borrowers Borrowers women-owned annual businesses EE investments Amount Midterm, Borrowers, Borrowers using the EE (USD 0.00 0.00 30.00 90.00 150.00 225.00 at ICR Registered ' MENR GDRE screening tool million) Stage user survey
25 Policy and Final set of Final set of Policyoad Set of draft amendmen amendmen MENR, institutional Diagnostic recommen ts ts Semi- GDRE, amendments to Text n/a n/a assessment dations submitted submitted annual Consultant MENR, GDRE improve EE completed daod for for programming approval/a approval/a Reports doption doption
Number of Borrowers, .MENR SMEs attending Semi- MERBorrowers, SMEwatendg Number 0.00 600.00 1400.00 2400.00 3600.00 4000.00 Semi- GDRE, BoR awareness annual MN DEE, raising activities Consultant Reports Notes: Estimated energy savings is currently not a Bank Core Indicator but has been proposed to OPCS as a core indicator for EE and is expected to be adopted shortly. Alternative business models would include energy efficient equipment leasing, ESCOs, and cash flow-based financing. Women- owned businesses would include all credit line sub-borrowers with at least 30% of the company shares owned by women.
26 Annex 2: Detailed Project Description TURKEY: SME Energy Efficiency
1. The Project Development Objective (PDO) is to improve the efficiency of energy use in small and medium enterprises, by scaling up commercial bank lending for energy efficiency investments. The global environmental objective is to reduce GHG emissions through the removal of barriers to EE financing in the SME sector. Expected key results include: (i) energy savings from Project investments; and (ii) associated GHG reductions.
2. The Project will achieve the stated PDO by extending a US$201 million IBRD line of credit to three financial intermediaries (FIs)-VakifBank, HalkBank, and Ziraat Bank- to support EE lending to SMEs, and a US$3.64 million GEF grant for technical assistance (TA) and risk sharing to the three FIs, and policy and TA support to GDRE. The selected FIs have a strong client base in the SME sector, and possess strong institutional capacity for managing credit lines and lending programs. The Project will aim to build upon and expand that capacity to enable FIs to develop, assess and monitor lending to energy efficiency (EE) investments in the SME market. The Project will also seek to explore alternative business and financing models tailored to the Turkish SME market, which are capable of helping to package, finance and implement projects in SME clients.
3. The Project consists of two components- an investment and TA component for the three FIs and a policy and institutional development component for GDRE -which are elaborated below.
Component 1: Energy efficiency investments in SMEs [Total cost of US$294.95 million, including US$201 million from the IBRD loan, US$2.7 million from the GEF grant, US$50.25 million from the FIs, US$1.0 million from MENR, US$40 million from project owners/ESCOs] 4. A US$201 million IBRD credit line will be provided to three FIs, VakifBank, Halkbank, and Ziraat Bank (US$ 67 million each) to lend for EE improvements in SMEs. As these FIs are among the largest in Turkey, it is expected they will be able to leverage their client bases and branch networks to develop the EE market on a national level. For the SME sector, the Project has identified target key, energy-intensive subsectors and common technical retrofits in each of these subsectors which can be replicated under a streamlined appraisal method. Based on the market assessment conducted during project preparation, and as agreed with the three FIs, target subsectors will include: machinery and equipment, metal products, food and beverage, textiles, hotels, trade and services, pulp and paper, and other commercial buildings-although other sectors will also be eligible for financing.
5. In order to overcome the critical barrier of high transaction costs for these smaller investments, simple, standard technical product lines have been developed. During project preparatory work, with support from the Energy Sector Management Assistance Program (ESMAP), an EE screening tool was developed, which would allow loan officers to input some basic parameters and get a quick preliminary calculation about the scale and cost of energy savings. This will help the banks identify new projects with existing clients, verify realism of EE estimates from client and audit reports, check eligibility of subprojects with agreed subproject
27 eligibility criteria, etc. The tool was shared with the three FIs and well received, as well as with GDRE and KOSGEB for wider dissemination. Within the target subsectors noted above, the main technical systems included in the tool are: boilers and steam systems; furnaces, ovens and kilns; cogeneration; motors, fans and blowers; compressors; heating, ventilation and air conditioning (HVAC), water and pumping systems; and lighting.
6. In addition to standardizing smaller loan appraisals using the above mentioned "technical product lines", the Project will also foster alternative business models for financing and implementing EE projects. Two models in particular are envisaged: (a) equipment leasing, where lease payments are structured to be paid from the estimated energy cost savings; and (b) ESCOs, where a firm can offer a blend of services-from audits to design and implementation- typically with some form of guarantee to ensure the energy cost savings are sufficient to service the loan. Both models allow for project financing structure outside of traditional commercial bank loan requirements in Turkey, thus relaxing some of the collateral and project equity constraints typically faced by many SMEs. In addition, both options would allow for the loan to be repaid from the energy cost savings, thereby allowing the client to maintain a positive cash flow throughout the project. And, these models help bring other service providers into the EE market, thereby helping to foster a more sustainable market infrastructure for the future.
7. In order to provide flexibility to the FIs, and to take into account the realities of changing economic and market conditions, the credit line will seek to be as open and flexible as possible. The FIs will be allowed to finance projects in all sectors and geographic areas of the country. In terms of sub-borrower criteria, an SME is defined as private enterprises with less than TL40 million in turnover and fewer than 250 employees. Up to 20% of IBRD loan amount may be used to finance eligible investments implemented by Mid-cap Company", defined as less than TL150 million equivalent in annual sales, fewer than 1,500 employees and not categorized as SMEs. Sub-loans will be used for EE improvements, which will require subprojects (a) reduce a technical system's energy consumption or energy intensity (energy per unit of output) by at least 20 percent, or (b) generate at least 50 percent of the financial benefits from energy cost savings. Other subproject criteria include: (i) all subprojects must have a financial rate of return (FIRR) of at least 8 percent; (ii) the sub-loan size not greater than US$3.5 million for SMEs and US$5 million for Mid-cap companies, Leasing companies and ESCOs; and (iii) sub-borrowers must maintain at least a minimum debt service coverage ratio of 1.2 throughout the sub-loan. Subprojects that would result in significant environmental impacts or risks of impacts (i.e., Category A), or involve any land acquisition will not be eligible for financing under this Project. Additional details on appraisal procedures, energy savings calculations and reporting, monitoring, etc. are contained in the banks' Operations Manuals, which will be finalized at Project Appraisal.
8. Since commercial bank lending for EE improvements is relatively new in Turkey, there are a number of potential risks not associated with typical SME lending. These include: (i) asymmetric information, which result in low interest and prioritization of EE investments by SME managers and skepticism about the levels of energy savings among SMEs and financiers;
" Allowing a portion of the credit line to go to Mid-caps allows for larger projects with more creditworthy borrowers, which together can help further bring new ESCOs into the EE market. International experience has shown that while ESCOs are generally willing to assume project performance risks, they are much less able and willing to take on client credit risks which are generally higher with SMEs.
28 (ii) lack of developed delivery mechanisms for packaging and implementing such projects with acceptable transaction costs; and (iii) lack of developed financing strategies and products (e.g., leasing, cash-flow based financing, ESCO lending) which generally limits financing to only highly creditworthy SMEs with ample collateral/equity and technical capacity to invest in EE. Under the current banking regulatory framework, the borrowing SMEs are often required to provide 100 - 120% of collateral. This high collateral requirement not only limits the borrowing capacity of the SMEs, but also often drive up cost of credit as many borrowers are forced to purchase credit guarantees to supplement their collateral, which adds about 1% to their interest cost. While the FIs have agreed to develop their businesses in this area, their perceived risk regarding such novel schemes is high, particularly for ESCO and cash flow-based financing. During project preparation, an EE financing workshop was held with a broad range of project stakeholders to review subproject risk profiles and develop potential risk mitigation strategies. It was concluded that, while some of these issues can be addressed through well-designed information and TA activities, some risk sharing from the GEF grant was deemed necessary to allow these alternative schemes to be tested, documented and further developed.
9. This component consists of an Investment Lending section and a TA section. Each are further elaborated below:
(a) Investment lending.
[Total cost: US$292.60 million, IBRD US$201 million, GEF US$1.35 million, FIs US$50.25 million, project owners/ESCOs US$40 million]
(i) IBRD On-lending - Under this section, each of the FIs would receive an allocation of US$67 million from the credit line to support EE lending in SMEs per the agreed criteria. The FIs would onlend the IBRD loan at commercial rates in accordance with their own lending policies and assume all financial risks. An amount of up to 20 percent of their IBRD loan would be eligible to onlend to the FT subsidiary leasing companies to develop their energy-efficient equipment leasing businesses; additionally, up to 20 percent of the loan can be used for finance Mid-Cap companies (less than TL150 million in annual turnover, fewer than 1,500 employees and not categorized SMEs). During Project Appraisal, detailed investment plans were submitted to the Bank team and approved.
The FIs shall provide lending of equivalent to 25% of the respective IBRD loan shall be financed from the FIs' own resources, once 50% of IBRD loan is committed to sub-borrowers. The projects financed out of own resources shall be prepared, appraised and reported on the same procedure as outlined in the Operational Manual of the IBRD loan. The requirement will be revisited at the end of second year of implementation if loans committed to sub-borrowers do not reach 50% of IBRD loan at the time. By providing co-financing from their own funds, the FIs will provide leverage to the IBRD funds provided and will develop an internal capacity and procedure for providing loans to such investments after the project closes.
29 (ii) Loan Loss Reserve Fund - A portion of the GEF grant would be made available to each FT (up to US$450,000 per FI) to help defray risks associated with new loan products and help address the issue of high collateral requirement for SMEs through a cash reserve fund -type scheme. Up to 20 percent of the sub-loan could be provided as Loan Loss Reserve Fund by the GEF grant (see Graph 1) in the following categories: (a) An ESCO, which enters into energy saving guarantee contract, (b) Eligible borrowers (SME or Mid-cap Companies) that will finance EE investments under ESCO energy saving guarantee contract, (c) Leasing, where lease payments are structured to be paid from the estimated energy cost savings. All GEF financed sub-projects will be subject to prior review of the Bank. By lowering the risk exposure amount that the FIs take on for these transactions, the collateral and equity requirements are expected to be lowered. It is expected that this will contribute to increasing access and lower cost of financing for ESCO transactions and other alternative business models.
The co-mingling of the GEF funds with IBRD loan was initially proposed, but faced issues on being a taxable cash income. This would mean that the value of the cash amount would diminish immediately upon draw down, and that this would in turn diminish the credit enhancement function that the cash amount was intending to cover. The above Loan Loss Reserve Fund allows the FIs to retain the cash value by keeping it as contingent asset, only to be taxed when it is drawn down on default from the borrower and becomes FI assets.
In parallel to the disbursement request for IBRD for funds to be onlent as sub- loan, FIs will make a separate disbursement request for the Loan Loss Reserve portion for the eligible investments. A loan or leasing transactions based on Energy Performance Contracts (EPC) are eligible for credit enhancement by the Reserve. Given the nascent state of ESCOs in Turkey today, it is proposed that in addition to the Guaranteed Savings and Energy Saving Sharing models, that a Verified Energy Savings model be included. Verified Energy Savings will consist of an agreement with an EE service provider or equipment supplier that helps identify an eligible EE project, agrees to implement the project on behalf of an SME client, and agrees that at least 50 percent of the final ESCO remuneration from the client will be contingent upon the verified energy savings after subproject commissioning. Such a scheme would be simpler than the other ESCO schemes commonly understood in Turkey and would help overcome the two main barriers with ESCOs in Turkey to date-namely the numerous small ESCOs with insufficient balance sheets to implement the Energy Shared Savings model and without sufficient track record to provide a credible performance guarantee under the Guaranteed Savings model.
30 Graph 2.1: Loan Loss Reserve Fund Scheme:
Fl risk Sub-Borrower exposure Risk 20 Covered with (GEF) Loan Loss Reserve* Reserve
Loan to Sub-borrower 100
80 Risk Exposure taken on by FI*
* Up to 20% of the risk exposure of ESCO transaction financing would be covered by reserve fund from GEF. After 50% of IBRD funds have been committed, the co-financing requirement of 25% of total funds will become effective.
Two separate disbursement schedules and letters will be structured to accommodate this structure. The GEF funds will be disbursed to an appropriate account earmarked for the Loan Loss Reserve Fund, in parallel to the funds for the sub-loan. The Reserve will be held in the account and FIs will be required to provide financial report of the account. Funds from the Loan Loss Reserve Fund will be allowed to be drawn down in the event that the sub-loan becomes non- performing loan (NPL) as per definition under the banking regulation of Turkey. The Reserve will cover first loss and the FIs will be required to continue efforts to recover all funds and report periodically. FIs shall provide periodic report to the Bank on sub-loans with delay interest payments or repayments, and shall report immediately in the event of the drawdown from the Reserve. FIs will also be required to make reasonable efforts to recover the NPL, including the loan portion which was covered by the Reserve Fund. The funds will be managed by qualified professionals under the financial management/reporting requirements agreed with the Bank and outlined in the Operational Manual, as per OP 10.20. The Bank will retain its right to request an audit of the fund when deemed necessary and the FIs are required to have the funds managed in accordance with operational and financial policies and on basis of the relevant accounting/banking laws in Turkey. The Bank will also retain the right to request repayment by the FIs in case any of the conditions are in breach, except for amount of the grant that would be needed to meet the covered obligations under guarantees issued before the receipt of the repayment request by the FIs.
Any captured reflows resulting from the Reserve Funds shall be placed back in the Reserve account, including (i) any interest gained while funds are held in the Reserve account, (ii) funds recovered for the loan loss covered by the Reserve on a pro-rata basis., The reflow funds shall continue to be used as part of the Loan
31 Loss Reserve for the eligible investments. Assuming that half of the GEF capital is drawn down for each subproject, this scheme would still leverage the IBRD funds 8:1, while introducing new viable models to the market. If there are any outstanding balances remaining in the Reserve account at the end of the Project period, the FIs, the Bank, Treasury and GEF will hold consultation to (a) continue the Loan Loss Reserve Fund as set forth in the GEF Grant Agreements; or (b) if the objectives have not been achieved, use such funds in accordance with a plan acceptable to all parties in promoting energy efficiency investments. Experiences from the early ESCO pilot transactions would be carefully reviewed and subsequent transactions refined, and lessons documented disseminated widely through MENR and others, with consent of the sub-borrowers/final beneficiaries. The FIs, in addition to the individual pilot transactions as stated above, would be obliged to document the subproject results on anonymous basis to be share with external parties as outlined in the Operational Manual. Experiences gained under this Project are expected to help develop more nascent markets and demonstrate the viability of these markets and bank strategies to serve them, thereby ensuring that the FIs continue to finance such projects after the IBRD loan funds are fully disbursed.
(b)Project development, project appraisaland monitoring. [Total cost: US$2.35 million, US$1.35 million from GEF grant,MENR US$1.0 million] Under this component, GEF funds of US$450,000 will be provided to each FIs in an effort to help ensure the successful implementation of the credit line and FIs' EE business development. Activities to be undertaken are summarized below: Table 2.1: Summary of TA program by Fl TA activity Amount (US$) Halkbank Training (300 staff) 50,000 Awareness Raising (1000 attendants) 150,000 Technical Consultants 250,000 VakifBank Technical Consultants 290,000 Individual Consultants 130,000 Training/Logistics 20,000 Office Equipment 10,000 Ziraat Bank Training (400 staff) 155,000 Technical Consultants (20 projects) 285,000 Office Equipment 10,000
Component 2: Policy support and TA to GDRE [Total cost of US$10.94 million including Project Management: Total cost for TA activities of US$3.79 million including US$0.79 million from the GEF grant, US$3.0 million from MENR] 10. Further TA is necessary to support the Bank's ongoing policy dialogue on EE, enhance the enabling environment, and foster broader EE market development in Turkey. Given the vast
32 investment potential and limited size of the credit line, efforts will be made to broaden the market in three main areas, namely: (i) awareness and information dissemination among industrial and building owners, ESCOs, and financiers on EE opportunities and modalities and sharing experience from the credit line; (ii) policy and market support for EE financing and ESCO development; and (iii) institutional support to GDRE to support its EE policy and programs. Two sub-components are envisaged under this component:
(a) Market development and information dissemination.
[Total cost: US$2.44 million, GEF US$0.44 million, MENR US$2.0 million]
In order to fully realize the benefits of the credit line, efforts will be undertaken to broaden the impacts. Under this sub-component, efforts would be made in the following areas: (i) awareness raising,training, and information dissemination to key market actors on the opportunities for EE and successful implementation schemes used in the credit line, including pilot ESCO project case studies and dissemination of EE screening tool to registered users; (ii) market studies, assessments and options papers for future investment programs beyond the SME market, such as the public and residential sectors; and (iii) stakeholder dialogue will be supported through roundtables and other forum to discuss various policy and market issues and develop recommendations to scale-up investments in the SME sector and address emerging financing and capacity barriers. Follow up survey on EE screening tool users would be conducted to provide input for these activities.
(b) Policy dialogue and capacity building within MENR.
[Total cost: US$1.35 million, GEF US$0.35 million, MENR US$1.0 million]
There is also a need to strengthen the policy and regulatory regime for EE more broadly within Turkey. Although the Energy Efficiency Law and some supplemental legislation exist, there remain gaps as well as areas for further revisions and strengthening. Further, institutional support to the newly established GDRE is needed to assist them to building their internal capabilities to refine existing initiatives as well as formulate regulations and programs in outer years. Under this sub-component, the following activities are envisaged: (i) review ongoing EE primary and supplemental policies to identify deficiencies and recommend actions for their resolution with a focus on the SME sector; (ii) review EE incentive and informational programs and develop a set of recommendations to improve utilization and impacts; (iii) review institutional arrangements to strengthen the policy and implementation function for EE in all sectors; and (iv) staff training.
33 Table 2.2: Breakdown for GEF TA to GDRE (in USD '000) TA Activities GEF Awareness raising, SME training and marketing/information dissemination: SME 150 workshops, PR campaign, expos, SME-bank-ESCO conferences, case study development and sharing, dissemination and training on the EE screening tool, websites, follow-up surveys Market studies and assessments: Additional market studies on new SME subsectors/ 145 product lines/technologies, assessments for new markets (e.g., public buildings, residential) Stakeholder dialogue: Industrial/bank/ESCO roundtables on implementation challenges 165 and options, dialogue on policy gaps and barriers, policy option papers, model ESCO contracts, M&V guidelines Policy gaps analysis: Review of existing and planned EE legal framework and 250 development of draft legislative outputs to fill in gaps or enhance areas of deficiency GDRE development: Support further development of GDRE for EE including staff 80 training, study tours, etc. TOTAL 790
Project Management [Total cost of US$7.15 million, including US$6.0 million from the FIs, US$0.15 million from the GEF grant, US$1.0 million from MENR] 11. The bulk of project implementation costs will be borne by the executing agencies themselves. The FIs will incur costs to implement and administer the EE credit line, including the recurrent costs of their respective project implementation units (PIUs) which will be responsible for coordinating project activities. Project implementation costs will also include the costs incurred by the FI's operational departments in identifying, appraising and monitoring subprojects that will be financed from the US$201 million credit line. Similarly, MENR will cover a portion of the operating costs of their project management unit (PMU), which will be responsible for managing their portion of the GEF grant, and participation of its operational units in implementing activities co-financed by the GEF. Specific items that would be supported with GEF grant resources may include (i) recruitment of consultants to support project implementation, including procurement, project monitoring, evaluation, and reporting activities, and (ii) PIU/PMU incremental operating costs, such as office rental, basic equipment, utilities, and travel.
34 Annex 3: Implementation Arrangements TURKEY: Turkey SME Energy Efficiency
Project Institutional and Implementation Arrangements
1. The FIs (Halkbank, VakifBank and Ziraat Bank) will onlend IBRD and GEF funds to sub-project sponsors for eligible EE investments. The lending procedure and process will be implemented in accordance with the Operations Manual prepared by each Borrower and agreed with the Bank.
Projectadministration mechanisms
2. For Component 1, all three Borrowers have well-equipped Project Implementation Unit (PIU) in-charge of marketing, project evaluation, appraisal, safeguards aspects and implementation from their earlier loan with the World Bank, and these PIUs will continue to operate under the proposed Project. Their skills are proposed to be expanded to cover EE investments and expected to be covered also by the TA component of the project.
3. Subprojects will be approved by the FIs based on compliance with their respective Operations Manuals, which cover aspects such as eligibility, safeguards compliance, monitoring requirements, etc. The IBRD and GEF funds will be provided in parallel to eligible subprojects. The GEF may be provided up to 20% of the total sub-loan amount to each eligible subproject based on the criteria set up in the operations manual. The broad terms for the IBRD and GEF sub-loans are summarized here:
a. SME is defined as private enterprises with less than TL 40 million in turnover and fewer than 250 employees. b. Up to 20% of the total IBRD loan amount may be used for financing Mid- Cap Companies, defined as less than TL150 million in turnover, fewer than 1,500 employees and not categorized as SMEs. c. Up to 20% of the IBRD loan amount may be used for financing subsidiary Leasing companies that finance leasing transactions specifically for EE investments. Leasing companies will be required to go through prior evaluation on eligibility and all sub-projects will also be prior reviewed. d. Retroactive financing would be allowed for eligible expenditures made after April 16, 2012 and up to 10% of the IBRD loan, e. Sub-loans will be used for EE improvements, which will require subprojects (a) reduce a technical system's energy intensity (energy per unit of output) by at least 20 percent, or (b) generate at least 50 percent of the financial benefits from energy cost savings. f. Other subproject criteria include the following unless otherwise agreed with the Bank: (a) financial rate of return (FIRR) of at least 8 percent; (b) any sub-loan principal amount shall not exceed US$3.5 million for SMEs, and US$5 million for mid-cap companies, leasing companies and ESCOs;
35 (c) aggregated principal amount to any beneficiary enterprises and its affiliates must not exceed US$10 million per Fl, and (d) sub-borrowers must maintain at least a minimum debt service coverage ratio of 1.2.
g. GEF funds may be used to provide cash reserve fund of up to 20% of total sub-loan amount to projects with below eligibility: (a) An ESCO, which enters into energy saving guarantee contract, (b) Eligible borrowers (SME or Mid-cap Companies) that will finance EE investments under ESCO energy saving guarantee/sharing contract, or (c) Leasing, where lease payments are structured to be paid from the estimated energy cost saving. h. Prior review by the IBRD will be required for the following sub-loans: * First two sub-loans each for SMEs and Mid-caps, irrespective of size, * Leasing transactions based on energy savings, and * Sub-loans that utilize the GEF financed Loan Reserve Fund. i. Sub-projects, which include supply/discharge operations within the following river basins, shall be eligible for finance: Susurluk, North Aegean, Gediz, Kuquk Menderes, Buyuk Menderes, Western Mediterranean, Antalya, Sakarya, Western Black Sea, Yesilirmak, Kizilirmak, Konya Kapali, Eastern Mediterranean, Seyhan, Ceyhan, Eastern Black Sea, Burdur, Afyon, Orta Anadolu and Van. Investments that involve potential use or discharge into other river basins shall not be eligible. j. The following shall not be eligible; (a) Any of the activities listed, or activities that produce and/or use materials listed, in the Operations Manual and which are classified and referred to as part of the negative list in said manual, (b) An investment that is classified as a Category "A" Sub-project, (c) An investment that entails land acquisition or involuntary resettlement or would give rise to Displaced Persons, (d) An investment that involves the construction of a new dam or will rely on the performance of an existing dam or a dam under construction. k. The equivalent of 25% of the respective IBRD loan shall be financed from the FIs' own resources, once 50% of IBRD loan is committed. The projects financed out of own resources shall be prepared, appraised and reported on the same procedure as outlined in the Operational Manual of the IBRD loan. The requirement will be revisited atthe end of second year of implementation.
4. Component 2 of the Project will be managed by MENR through its General Directorate for EU Affairs and Foreign Relations (GDEU). Within the GDEU, the Department for EU Affairs and IFI Relations is in charge of project coordination and will be responsible for the financial management. A Project Management Unit (PMU) will be established within the Department. The PMU will be responsible for coordinating the preparation of the ToRs, technical evaluation of consultants' proposals, monitoring and reporting the progress throughout
36 the project's life span. The work will be supported by technical expertise of General Directorate of Renewable Energy (GDRE), which is mandated with the policy and research on EE within MENR.
Financial Management, Disbursements and Procurement
FinancialManagement
5. The Project will be implemented through four self-standing PIUs. The Project design did not envisage the establishment of an oversight mechanism by a selected PIU as there is no need for a coordinated activity for the Project: three implementing banks will provide loans for their eligible clients and projects and all implementing agencies will use the TA GEF funds in line with their predetermined needs. Accordingly, there will not be a consolidated Project report but rather four sets of semi-annual reports and four sets of project audit reports.
6. Halkbank, VakifBank and Ziraat Bank are currently implementing World Bank financed projects and have financial management ratings ranging between moderately satisfactory to satisfactory. They have established project implementation units (PIU) composed of qualified professionals. The same teams will work during the implementation of this project.
7. Halkbank, VakifBank and Ziraat Bank will maintain records and will ensure appropriate accounting for the funds provided for the project. All three FIs have well-functioning accounting systems and the project transactions will be integrated into these systems. The banks will establish the accounting and reporting sub-systems that will allow them to extract the necessary information from their management information systems and prepare the necessary reports to ensure satisfactory implementation of the project by effectiveness. The FIs will pay particular attention to the accounting flow of the Loan Loss Reserve Fund to capture the necessary information needed until the closing of the Project.
8. All three FIs will regularly report the progress on the disbursements and expenditures of the project through interim un-audited financial reports (IFR) that will be prepared on a semi- annual basis and will be submitted to the Bank within 45 days after the end of each calendar semester. The IFR templates are agreed upon and included in the Operational Manuals.
9. Halkbank, VakifBank and Ziraat Bank prepared detailed Operational Manuals (OM) to facilitate implementation and document the necessary arrangements. Accordingly, in the credit- line portion of the Project, the three FIs will fully integrate the EE sub-loans to SMEs into their existing credit evaluation and approval processes that will be strengthened in line with the project's specific requirements as agreed with the World Bank team. The FIs also provided detailed plans for the activities they envisage undertaking under the GEF TA portion of the Project.
10. Halkbank, VakifBank and Ziraat Bank have established internal control and audit departments and the EE loans provided to eligible companies will be subject to the internal auditors' review. All banks will submit a report on the findings of their internal auditors on specific transactions of the Project. The reports will be prepared on an annual basis, covering the operation for the calendar year and submitted within six months following the year-end.
37 11. Halkbank, VakifBank and Ziraat Bank will have their entity financial statements prepared in accordance with the International Financial Reporting Standards or equivalent standards such as the Turkish Financial Reporting Standards, as per BRSA regulation audited on an annual basis. The FIs will also have the project financial statements, audited by their external auditors. A sample terms of reference for the auditors is provided by the World Bank to the FIs for their convenience. The audit reports will be submitted within six months following the year- end. The entity audits are mandatory for all banks as per the Banking Regulation and Supervision Agency requirements and therefore do not represent an additional burden for Halkbank, Vakifbank and Ziraatbank. These will be used to monitor compliance with prudential regulations.
12. Halkbank, VakifBank and Ziraat Bank are expected to complete the following actions by the specified dates:
Table 3.1: Financial Management Action Plan for Implementing Banks
Action Responsibility Deadline Establish the accounting and reporting systems to comply with Banks By Effectiveness the Project requirements, including the design of the accounting and reporting flows as well as the tailoring of the chart of accounts in the main information system Open the Designated Accounts Banks By Effectiveness
13. The Ministry of Energy and Natural Resources portion of the GEF grant will be implemented by the General Directorate of Renewable (GDRE) through the coordination and administration of the GDEU, Department of EU and IFI Relations. The Department, which will be the project management unit (PMU) for the Project, does not have a financial management capacity and recently recruited staff that will be responsible for the disbursements, accounting, reporting, auditing and other relevant FM processes. The teams agreed on an action plan to ensure that the financial management arrangements are acceptable by effectiveness.
Table 3.2: Financial Management Action Plan for MENR
Action Responsibility Deadline MENR through GDEU will nominate one or two of its own staff MENR GDEU Completed to work on the financial management of the project. An experienced FM Consultant will be hired to assist and train MENR GDEU Completed MENR GDEU staff during the design and initial implementation of the financial management system. World Bank will support MENR GDEU in the design of the World Bank By Effectiveness financial report templates. MENR GDEU will prepare the accounting and reporting MENR GDEU By Effectiveness spreadsheets of the Project. A draft project financial management manual will be prepared to MENR GDEU By Effectiveness reflect the work flows and financial management arrangements of the project. The draft financial management manual will be finalized. MENR GDEU Two months after effectiveness.
38 14. The project accounting, reporting and corresponding documentation for the MENR portion will be centralized in the PMU. The Department will ensure that financial management staff with adequate qualifications will be maintained during the lifetime of the Project. MENR is a general budget institution. Accordingly, its accounting is maintained in the Public Information Management System in Turkish Lira, in line with the chart of accounts predetermined by the Ministry of Finance. The main transactions of the Project will be accounted by the accrual officer located at the Ministry of Science, Industry and Technology. However, the PMU will need to maintain a separate accounting system to follow up the fund flows on a cash basis in USD and to produce data necessary to prepare regular project reports requested from the stakeholders. Given the small amount of GEF financing, the PMU will keep the data in detailed Excel spreadsheets, sufficiently detailed to follow up the project transactions and regularly reconciled to external records.
15. The PMU will maintain records and prepare the interim un-audited financial reports (IFR) on a semi-annual basis. The IFR will be submitted to the Bank no later than 45 days after the end of the semester. The IFR will include the following tables:
* Expenditure Tables per activities, including explanation of significant variances between budgeted and actual figures; * Expenditure Tables per categories, including explanation of significant variances between budgeted and actual figures; * Designated Account Statement; and * A brief narrative section on the implementation status of each planned activity.
16. The PMU will prepare a financial management manual (FM Manual) that describes the financial management arrangements of the project. This document will mainly cover: (a) the financial and accounting policies and procedures for the project; (b) organization of the financial management unit, functions, staffing and relevant job descriptions with special emphasis on the segregation of duties; (c) the financial management information system; (d) disbursements; (e) project budgeting, planning procedures and financial forecasting; and (f) project reporting. The draft FM Manual will be ready by negotiations and will be updated within two months after effectiveness.
17. The PMU will establish working relationships with the GDRE for the implementation of the Project. GDRE will assume technical leadership in the preparation of the TORs as well as determination of technical specifications, bid evaluation and contract execution. GDRE will ensure receipt of the services from the contractors and will certify readiness for payment to the PMU. The GDRE will submit all documentation including authorizations and approvals for payment to the PMU. The PMU will prepare the payment orders/ bank transfer orders for execution of payments. The transactions will be booked in Excel spreadsheets on a cash basis. Corresponding workflows and respective responsibilities will be documented in the financial management manual.
39 18. MENR has a functional Internal Audit Unit (IAU). The IAU prepares an annual audit plan and determines the activities and processes of MENR that will be subject to internal audit. The IAU reports directly to the Undersecretary of MENR. Given the small amount of GEF financing under the Project, an internal audit report for the Project will not be required.
19. MENR portion of the Project will be audited by the Treasury Controllers on an annual basis. The audit report will be submitted within six months after each calendar year-end.
20. MENR will start working with an experienced financial management consultant to provide guidance and training to their newly recruited financial management staff. Accordingly, MENR is expected to establish an adequate system for the financial management of the Project by effectiveness.
Disbursements
21. The banks will open a designated account for IBRD loan. An appropriate account shall be opened, in a manner acceptable to the Bank, as the Loan Loss Reserve Fund to be financed by GEF. The GEF TA components with the FIs will either be paid directly or through reimbursements without a designated account. The MENR will open a designated account at the Central Bank of Turkey or an agreed-upon accredited bank. The accounts will be in the currency of the financing.
22. Disbursements will follow the transaction-based method, i.e., traditional Bank procedures: Advances, Direct Payments, Special Commitments and Reimbursement (with full documentation and against Statements of Expenditures (SOEs). The withdrawal applications will be prepared and authorized by Halkbank, Ziraat Bank, VakifBank and the PMU within GDEU for their respective portions.
23. A detailed Disbursement Letter explaining all procedures will be provided to all implementing agencies during negotiations. Disbursements below agreed thresholds indicated in the Disbursement Letter will be made according to certified Statement of Expenditure (SOEs). Full documentation in support of SOEs would be retained by all implementing agencies for at least seven years after the World Bank has received the audit report for the fiscal year in which the last withdrawal from the Loan/Grant 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 of SOE disbursements and the quality of the associated record-keeping.
Procurement
24. Procurement of goods, works and non-consulting services for the proposed Project 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 by World Bank Borrowers" 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
40 Loan Agreements (LAs). World Bank's "Guidelines on Preventing and Combating Fraud and Corruption in Projects Financedby IBRD Loans and IDA Credits and Grants ", dated October 15, 2006 and revised in January2011 (Anti-CorruptionGuidelines) will apply to this Project. A General Procurement Notice shall be published for the procurements under the Project by each FI and MENR.
A. Procurements under Credit Line Investment Lending Sub-component of the Project
25. Private Sector Commercial Practices may be followed for Goods, Works and Non- Consulting Services contracts below US$10.0 million equivalent in accordance with paragraph 3.13 of the Procurement Guidelines; and for Consulting Services contracts below US$1.0 million equivalent in accordance with paragraph 3.13 of the Consultant Guidelines, and the provisions stipulated in the Operational Manual(s) (OM). For the procurements higher than above thresholds Internationally Competitive Bidding (ICB) and Quality and Cost Based Selection (QCBS) methods will be applied as specified in the Procurement Guidelines and Consultant Guidelines respectively. Because of the demand-driven nature of the project, it is not possible to estimate neither the sub-borrowers nor their procurement requirements under credit line financing of the sub-loans under the investment lending component of the Project at the appraisal stage of the Project. Therefore, it is not possible for the FIs to develop a Procurement Plan which provides the basis for the procurement methods. All ICB and QCBS contracts are subject to the Bank's prior review and all other contracts will be post reviewed by the Bank as specified in the agreed OM.
26. The procurement method and prior review thresholds are indicated in Table 1.
Table 3.3: Procurement Thresholds under Credit Line Investment Lending Sub- component
Procurement Method
Procurement Category Private Sector Commercial Practices
Goods (Including Design, Supply and No threshold Installation Contracts; (apply when needed) <10.0 and Performance Based Contracts)
Works (Including No threshold Performance Based (apply when needed) <10.0 Contracts) No threshold Non-consulting services (apply when needed) <10.0 No threshold Consulting services - (apply when needed) <1.0 All contracts will be All contracts will be There will be no prior Prior Review threshold subject to prior review subject to prior review review
41 B. Procurement of Goods, Non-consulting Services and Consulting Services under Technical Assistance Sub-components of the Project
27. The procurement of goods and non-consulting services under the Technical Assistance (TA) Component shall be carried out in accordance with the ICB procedures. The goods and non-consulting services contracts below US$100,000 may be procured through shopping procedures in accordance with the provisions of paragraph 3.5 of the Procurement Guidelines. All ICB contracts and first shopping contract from each FIs and MENR are subject to the World Bank's prior review. There will be no domestic preference in the procurements.
28. The consultants shall be selected by FIs and MENR for (i) pipeline development and marketing; (ii) development of simple "product line" assessments; (iii) technical due diligence for early subprojects; (iv) development of special EE project financing products or schemes, such as ESCO financing, equipment leasing, trust/escrow accounts, etc.; (v) developing enhanced systems for monitoring energy savings after the projects have been financed and implemented; (vi) bank training; (vii) project management and other TA. The employment of technical experts will be conducted through the selection of individual consultant in accordance with the provisions of the Section V of the Consultant Guidelines. In case the service is required from a consultancy firm, QCBS method will be applied in accordance with the Section II of the World Bank's Consultants' Guidelines. For the contracts below US$300,000 equivalent Selection Based on Consultants' Qualification (CQS) method may be used in accordance with paragraph 3.7 of the Consultants' Guidelines. The short list can comprise entirely national consultants, if the contracts with the firms are below US$300,000 equivalent.
29. Logistical and organizational services for International and National Symposia, Seminars, Workshop and other training programs (if needed) would be procured using Shopping (S) procedures. In case of very large training programs, exceeding the threshold of US$100,000 the procurement would be advertised at least 30 days in advance in the national or international press as appropriate, and bidding documents agreed by the Bank will be used. Training activities in the form of study tours, or participating in national or international workshops and training programs shall be procured in accordance with the procedures agreed with the Bank.
30. The procurement methods and prior review thresholds are indicated in Table 2.
Table 3.4: Procurement Thresholds under Component 2-Technical Assistance Procurement method Thresholds (US$ million)
Procuremen Prior Review thresholds Individual Sole t Category (US$ million) ICB Shopping QCBS CQS Consultant Source (S) (IND) Selection (SSS) Goods CB aNo threshold All ICB and first (apywe non-(apywe need) 0.1 - - - consultingcons shoppingeahF contractn ER from needed) - servicessevie each FI and MENR Consulting All QCBS, first CQS No No No services and first IND contracts - - threshold <0.3 threshold threshold from each FI and (apply
42 MENR. All SSS when contracts (including needed) sole sourcing of individuals) and all IND contracts > US$ 100,000
31. The Bank will review the procurement arrangements performed by FIs and MENR including contract packaging, applicable procedures, and the scheduling of the procurement processes for its conformity with Bank's Procurement and Consultant Guidelines, the proposed implementation program and disbursement schedule. The Bank's prior review thresholds are also provided in the agreed procurement plans. The procurements not prior reviewed by the Bank will be subject to the Bank's ex-post review in accordance with the procedures set forth in Appendix 1 to the Procurement and Consultant Guidelines respectively on a random basis. One in five contracts for TA sub-components of the Project will be post reviewed. Post review of the procurement documents will normally be undertaken during the Bank's supervision mission or as the Bank may request to review any particular contracts at any time. In such cases, the FIs and MENR shall provide the Bank for its review the relevant documentation.
32. The procurement capacity assessment of the FIs and MENR concluded that the FIs and MENR have adequate technical capacity for implementing the procurement activities with some weaknesses that need to be mitigated.
33. The Department of EU Affairs and IFI Relations of MENR will be responsible from the implementation of the TA component of the Project. The assessment of the Bank has revealed that MENR does not have any experience in the implementation of the Bank's procurement procedures. MENR has recently established a PMU under the Department of EU Affairs and IFI Relations to implement and coordinate the project activities with different units within and outside the MENR. An engineer has been assigned to PMU to undertake the procurement responsibility. However, this engineer has no experience in the Bank's procurement procedures. Two lawyers, who attended the procurement training held in October 2012 by the Bank's procurement specialist, will provide support to PMU from the International Agreements Unit under the GDEU. The General Directorate of Renewable Energy of MENR will provide technical support to the Department of EU Affairs and IFI Relations but there is no written document between GDEU and GDRE establishing the terms of cooperation under the Project. Following risks are determined in the procurement activities: * Improper implementation of the procurement activities * Delay to project processing and implementation due to lack of proper planning * Poor quality of contract deliverables
34. Above risks will be mitigated (i) by hiring a procurement expert to PMU immediately after the effectiveness of the Project; (ii) by establishing a protocol between GDRE and GDEU before the Project effectiveness date in order to agree on the terms of cooperation under the Project; and (iii) by close working of the Bank's procurement specialist with PMU throughout the Project implementation duration.
43 35. With regard to Halkbank, VakifBank and Ziraat Bank the procurement capacity assessment concluded that all banks have adequate resources and capacity for implementing the credit line operations of the Project through their current PIUs established under the ongoing Access to Finance for SMEs Project. However, considering sector specific nature of the proposed Project and its countrywide implementation through banks' branches, and experiences learned from the ongoing SME project, following risks were identified in the credit line operations: * Lack of understanding of Halkbank, VakifBank and Ziraat Bank branch staff on actual application of the procurement process correctly and consistently * Implementation delays and poor quality of contract deliverables * Inflated prices on the procured goods, works and services
36. Above risks will be mitigated by conducting each bank an intensive training program for its branch staff. Training program will be supported by a web-based continuous online training and accreditation tool. All banks will also prepare and disseminate one pager outlining the procurement procedures under the proposed Project for their branch staff as well as the beneficiaries. Technical departments of all banks will be integrated into the PIUs. The banks will also employ technical experts from TA funds for the appraisal of the sub-projects and inspection of the delivered goods, works and services. All such mitigation measures will be in place immediately after the effectiveness of the project.
37. The PIUs of all three banks have limited experience in conducting their own procurement under Bank's procurement procedures. This may cause delays and poor quality of contract deliverables. This risk will be mitigated by assigning the banks an experienced procurement staff in the PIUs at the effectiveness date and also by the close working of the Bank's procurement specialist with them throughout the project implementation.
38. Halkbank, VakifBank, Ziraat Bank and MENR developed a Procurement Plan for the first 18 months of TA Sub-components of the Project which provides the basis for the procurement methods and review thresholds. These plans have been agreed between Halkbank, VakifBank, Ziraat Bank, MENR and the World Bank individually on December 19, 2012 and will be published in the World Bank's external web-site before the Loan effectiveness. Agreed procurement packages and their schedule are given in Table 3.
44 Table 3.5 Procurement Packages and Schedule from Each FIs and MENR for TA Sub- components
GDRE Procurements
Expected Expected 2 Procurement Review Bid/Proposal Contract SContractC c Descriptionr nMethod Type Method Opening Completion Date Date Procurement of Office G Prior Sept 2014 Equipment for Project Team Consultant Services for energy 2 efficiency awareness and market CS CQS Prior Aug 2013 Dec 2014 studies Consultant Services for policy 3 gap analysis, E program CS CQS Prior Aug 2013 Dec 2014 evaluation and institutional review
Expert service for the preparation of guideline for EPC 4 contracting for ESCOs and case CS IND Prior Oct 2013 Sept 2014 study development (Foreign consultant) Expert service for the preparation of guideline for EPC 5 contracting for ESCOs and case CS IND Post Oct 2013 Sept 2014 study development (Local consultant) 6 Expert service for staff training CS IND Post Jan 2014 Jan 2015 in GDRE (2 experts) Expert service for establishing 7 monitoring mechanism for CS IND Post Jan 2014 Jan 2015 implementing EE projects 8 Procurement Specialist for CS IND Prior Sept 2013 Dec 2014 MENR/PCU 9 Project Coordinator for MENR CS IND Prior Sept 2013 Sept 2015 Logistical Services for ESCO TR/ 10 workshops, seminars and NCS S Prior Feb 2014 Feb 2016 meetings Study tours, participating 1 I international, national TR/ S Post Sep 2013- Dec2014 workshops and seminars NCS Dec 2014 (Multiple)
45 Halkbank Procurements
Expected Expected Procurement Review Bid/Proposal Contract Contract Description Type Method Method Opening Completion Date Date
Procurement of Office G S Prior July 2013 July 2013 Equipment for project team
Purchase of project related 2 software (i.e. carbon footprint G S Post Sept 2013 Oct 2014 calculator for Halkbank) Consultant Services for energy CS CQS Prior Aug 2013 Dec 2014 audits Consultant Services for EPC CS CQS Post Aug 2013 Dec 2014 projects Expert services for 5 implementation support to CS IND Post June 2013 Dec 2014 Halkbank PIU: Hiring an environmental specialist Expert services for implementation support to 6 Halkbank PIU: Hiring a CS IND Prior June 2013 Dec 2014 procurement specialist Logistical services for training of 30 Halkbank employee on TR/ . Project scope in Bursa, Antalya, NCS Gaziantep, Adana, Denizli Logistical services for training of 8 30 Halkbank employee on TR/ S Post Feb 2014 Sept 2014 Project scope in Gebze, Izmir, NCS Konya, Kayseri, Ankara Logistical services for awareness meeting with stakeholders in TR/ S Post July 2013 Feb 2014 Bursa, Antalya, Gaziantep, NCS Adana, Denizli Logistical services for awareness 10 meeting with stakeholders in TR/ S Post Feb 2014 Sept 2014 Gebze, Izmir, Konya, Kayseri, NCS Ankara
46 VakifBank Procurements
Expected Expected Typ Procurement Review Bid/Proposal Contract Contract Description e Method Method Opening Completion Date Date
Procurement of Office Equipment G Prior Sept 2014 Oct 2014 for Project Team
2 Consultant Services for. 2 CnutnSevcsfrCS CQS Prior Aug 2013 Dec 2014 implementation support to Vakif PIU Expert services for Vakif PIU (2 CS IND Prior Sept 2013 Dec 2014 Energy Specialists) Logistical services for the training of TR/ VakifBank staff on Project scope in NC S Prior Sept 2013 Oct 2013 Istanbul (travelling and S accommodation costs)
Ziraat Bank Procurements
Expected Expected Procurement Review Bid/Proposal Contract Contract Description Type Method Method Opening Completion Date Date
Procurement of Office. 1 rcrmn fOfc G S Prior Sep 2014 Oct 2014 Equipment for Ziraat Bank PIU
Consultant Services for 2 implementation support to Ziraat CS CQS Prior Aug 2013 Dec 2014 Bank PIU Expert service for the training of CS IND Prior Aug 2013 Sept 2013 Ziraat Bank personnel Procurement of Logistical Services for the awareness TR/ . training of 400 Ziraat Bank NCS Personnel Procurement of Logistical Services for the technical TR/ S Post Aug 2013 Sept 2013 training of 30 Ziraat Bank NCS Personnel Procurement of Non-technical TR/ 6 services for web-based training NCS S Post Nov 2013 Jan 2014 modules
G: Goods; CS: Consultant Services; NCS: Non-consulting Services; TR: Training
47 Environmental and Social (including safeguards)
Environmental
39. The project has been assigned Category "Fl" in accordance with World Bank safeguard policy OP/BP/GP 4.01 (Environmental Assessment), since the project will be executed by intermediary banks. All sub-loans to be financed will be subjected to an environmental review process and the reviews will be carried out in accordance with both Ministry of Environment and Urbanization (MoEU) Environmental Assessment Regulation and World Bank environmental assessment (OP 4.01) requirements. Environmental clearances from Turkish authorities will be a pre-requisite and then the FT Banks will assess the sub-projects in accordance with the WB O.P. 4.01. In addition to that, Category A projects and projects triggering World Bank policy on Safety of Dams (OP/BP 4.37), Projects on International Waterways (OP/BP 7.50), Involuntary Resettlement (OP/BP 4.12) will not be eligible for financing. Most of the sub-loans to be financed are expected to be rehabilitation/renovation activities or small scale construction works. It is anticipated that there will be no large scale significant and/or irreversible impacts from the project, so the sub-loan applications are expected to be Category B or C. Although the environmental review and categorization of the sub-project applications will focus on the proposed new investment rather than on the existing facility/operation, through use of the Screening Forms FIs should ascertain that the existing facility/operation is in compliance with Turkish environmental regulations and has all required licenses and permits.
40. During the implementation support missions, the overall screening process and implementation of environmental recommendations for selected sub-borrowers/sub-projects will be supervised. Detailed explanation on the environmental review procedures of the project has been provided in the Fl's Operational Manuals.
Social
41. There are no social safeguards triggered by this project, since all project activities will be done within existing facilities. Project activities will reduce the large number of products manufactured by SMEs using outmoded energy-inefficient processes and provide short- to medium-term indirect social benefits which will significantly contribute to diversification of the economy; and a new set of employment opportunity, which will result in poverty reduction. However, there might be risks associated with implementation of SMEs, such as high transaction costs in the monitoring and verification activities, including cost associated with retraining of workforce on new operating practices and data/records collection methods, which might impact the price which small businesses, are willing to bear to be sustainable. These challenges will be mitigated by long term benefits accruing through the social, environmental policies and triple bottom line. Further, the training and capacity building activities of the project will be gender sensitive for sustainability. As monitoring indicator, the FIs will be required to track the % of SMEs financed under the Project which are female owned.
42. The project will conduct campaigns and workshop to raise awareness about EE among small firms and ensure that information about the EE are publicly available through media
48 activities and will target business and industry associations and in government websites as well as in workshops and seminars for business. Stakeholders, including women, relevant NGOs and business organizations, will be involved in workshops during project implementation, and midterm reviews, and lessons learned will be incorporated in the mid-course adjustments to realize project objectives.
Monitoring & Evaluation
43. The Project will be monitored by teams in each FIs based on agreed monitoring arrangements and required reporting procedures. The FIs have gained significant experience in monitoring implementation and the outcomes. Progress will be reviewed using the intermediate outcome indicators. As the Project advances, monitoring will shift to the outcome indicators.
44. For individual subprojects, pre-project energy consumption and estimated savings will be estimated based on technical feasibility reports commissioned by the FIs and their clients; post- project energy savings will be based on commissioning reports. As subprojects are implemented, commissioning testing will be carried out to document actual subproject performance and document energy savings. Commission tests will be done by equipment providers, FT technical consultants or FI technical staff after the projects are completed, and signed off by the clients. Tests would measure energy use to achieve agreed levels of output and compared with the baseline consumption. Differences between the estimated savings and actual would be documented to allow the FIs and clients to improve their technical analyses in subsequent projects. The FIs shall ensure that all energy savings of sub-loans above US$1.5 million, and 20% of sub-loans below US$1.5 million shall be reported to the World Bank as per agreed format. These data will be aggregated and reported in the IBRD progress reports. Since investments will precede the energy savings and corresponding emission reductions, project indicators include a time lag between them. Projected energy savings and emission reductions have been estimated based on a sample of representative projects already financed by the FIs, current technical data on energy savings potential, fuel mix, target industries and systems, and other assumptions.
Role ofPartners
45. On November 3, 2012, the Clean Technology Fund (CTF) committee endorsed US$140 million of Phase 2 Investment Plan submitted by Turkey. CTF, one of two Climate Investment Funds, is multilateral donor fund with the objective of promoting scaled-up financing for demonstration, deployment and transfer of low-carbon technologies with significant potential for long-term greenhouse gas emissions savings. Out of US$140 million, US$50 million has been allocated as additional financing for this project. The Investment Plan submitted by Turkey consists of below:
49 Table 3.6: Phase II Indicative financing (US$ million)
EBRD RE/EE World Bank Financing Source IFC CSEF 11 11, 'urSEFFSME Energy ResiSEFF, MunSEFF)MunSEFF) Efficiency CTF 20 70 50 140 World Bank 200 200 IFC 80-100 80-100 EBRD 250 250 Turkey12 175 45 220 Others 80 5 11 96 Total 180-200 500 307 987-1007
46. The Investment Plan for Turkey, though endorsed, is not fully funded as resources are going through the allocation process. The CTF financing, provided at IDA terms, would be provided to the Project at a later stage as additional financing, to scale up and supplement the pilot ESCO projects supported by GEF funds. The CTF would allow the FIs to leverage the risk coverage provided by GEF funds to significantly scale up the ESCO transactions, while controlling the level of concessionality provided to the market. The lessons learned obtained during the initial pilot phase of the Project will be reflected in the process of additional financing.
12 The Government, banks (incl. TSKB, TKB, Halkbank, etc.), and ESCOs
50 Annex 4: Operational Risk Assessment Framework (ORAF) TURKEY: SME Energy Efficiency Project Stage: Negotiations
Project stakeholder Riss Stakeholder Risk Rating Low Descnption: Risk Management Four groups of stakeholders exist financiers, ESCOs and oler equipment suppliers' Ongoing stakeholder dialogue, round tables, etc. will be part of preparatory work to ensure ownership and benefits service providers, subborrowers, and government entties. If the project is developed are shared among all parties in such a way to benefit one group over another, it could delay preparation or implementalion. Resp SIatus Stage: Recurrent Due Date Frequency Bank Competed Preparation I I 3-Oct-2012 Implnement Agency (IAN Raisks (including Ifiduciday Rikd Capacty Rating High Descnption: Risk Management Commercial demand for the EE market is insurficient and the financial intermedlaies Uprontporiolio and market assessmentto idenlitytarget market segments, development of ESCOs and project cannot find a steady stream of subprojects, or are olfiefise unable to make the EE lines to improve pipeline and lower iransaction couts, risk sharing, marketing measures will collectively help build lending business viable under the new business models to be introduced under the business case project MfNR is unable to efficienil and effectively manage their prtion of the OFFTT grant Resp Satus Stage Recurrent Due Date Frequency Client Completed Preparation i3-Mar-2012 The project aims to introduce new business models such as product line based financing and ESCOs, which represents a challenge to the current capacity of our Risk Management. counterpart institutions. Upfront training to MENR on Bank operaional procedures and preparaton of a project operations manual Resp: Status: Stage: Recurrent Due Date: Frequency Bank Completed Preparation I 31-Jul2012 Governance Rating Low Descripsion: Risk Management: Banking partners utilize GEF resources for subprojects they would have financed Developmentofclearsubproject eligibilly cnteria, assessmentof FI credit apraisal methods, and pio review for anyway, or for projects with excessive risks. GEF expendilures related to suproject investments, close early supevision MENR is unable to cause crttical policy changes idenlified to be implemented. Resp Status Stage Recurrent Due Date Frequency 'Bank Completed Preparation 1)-Oct-2012 Risk Management Ongoing dialogue wiTh Treasury and other key ministries, use of stakeholder roundtables on key policy ssues, completon of intemational reviews of policy options, close early supervision Resp: Status: Stage: Recurrent fDue Date Frequency Bank In Progress Implementation I 2Jun-2013 Risk Management Prior reviews for GEF TA contracts, ex-pt reviews for smallr contracts, close supervsion
51 Resp Status: Stage Recurfent Due Date Frequency Bank Not Yet Due Implementation a Red 2014
Design Raing Moderate Descipto: Risk Management Project does not provide sufficiently stong incentives far banking parrners to Work with MENR Treasury, key mnistnres to secure Focal Point endorsement oegoing CMU dialogue with aggressively develop SME EE market and work wiTh ESCOs, ESCOs to parlicipate, Government, early submission and discussion of PIF wit GF Secretariat. suffil,orufierstoainvest which will adfverselyalffdet disbursementsT Resp: Status: Stage: Recurrent Due Date: Frequency Policy component and ESCO development work is at risk if GEF funds are not Bank Completed Preparation 26Apr-2012 mobilized Social and Environmental Rating Low Description: Risk Management: Social and environmental safeguards are not followed- Uptront training on safeguard plcies, strong projct operatons manual, close early supervsion Resp: Status Stage Recurrent Due Date Frequency Bank Completed Preparation 14-Dec-2012 Proganm and Donor Rating Moderate Description: Risk Management: Policy component, ESCO development work, project schedule, etc. are jeoardized by Work with MENR, Treasury, key hnistres to secure endorsement; ongoing CMIU dialogue with Government lack of GEF Focal Point endorsement or other surable sources tr TA lnds. Resp: Status Stage Recurrent Due Date Frequency Poor perfornance of parallel EE credit lines with IFIs, which undermines Fl's Bank Completed Preparation 26-Apr-2012 dadicatl to BE marke. Risk Management: Ongoing coordination with other daors, strong project design which helps Fis move all EE lines of business intensive EE program markeing, designing project to build an experiences and lessons learned Resp Status Stage Recurrent Due Date Frequency Bank Compled Preparation 11-Oct 2012 Delivery Monitoring and Sustainability Rating Moderate Descipton: Risk Management Fls see EE lending has being viable or desirable market (ie having high costisilow denlilication of suiiable project lines and markets with sulficietly high retums development of Turkey-specific profits, etc) and thus does not pursue EE lending market alter project is completed. product line based tnancing and ESCO models hat work with FIs, strong program marketing by the Fls Resp: Status: Stage Recuffent Due Date Frequency Bank Completed Preparation 11-Oct-2012 Other (Optional) Ratng Description: Risk Management:
Resp staus: stage Recuffent Due Date Frequency
Other (Optional) Ratng
52 [resuaeri n Risk Martvienvort r
Resp: Status Stage RecuTent Dtue Date Frequency
kmplemntation Risk Rating: Moderate Comments: The overall iplerentation risk is provosed to be moderate as: (i) The Projeot implemenlaion may be afected if ssainable banking pmroedures (produet line based linancing) and attactve business opporbunities are notesablished - specifically the caacity risk inle implementalion agency kis raed as high forths reason, (iI E Iending and ESCO markets are drfficult~o develop and generallytke 2-3 project cycles, not ore,miii)Thourgh Govemmrent support is currentIy clear, thefuure change in the insttutonal piorilyofthe MENR and/or Govemmnt may lead olaC ofsupportforlhe project, hat i aaf"ectimplerentation the lendingoperatonsas eI asolicysppoicompanent
53 Annex 5: Implementation Support Plan TURKEY: SME Energy Efficiency Project
Strategy and Approach for Implementation Support
1. The implementation support strategy was developed taking into account the risks and mitigation measures identified in the ORAF and targets the provision of flexible and efficient implementation support to the clients.
a. Technical Support - IBRD implementation support missions will include an EE specialist throughout project implementation to help guide the use of the project criteria, subproject commissioning, innovative business models, and policy dialogue.
b. Procurement - A country office-based procurement specialist will carry out ongoing supervision under the IBRD loan and GEF grant. The specialist will also participate in project implementation support missions and site visits, respond to just-in-time requests and provide ongoing guidance to the three FIs and MENR based on their procurement activities.
c. Financial Management - During project implementation, the Bank will supervise the project's FM arrangements as follows: (a) during the Bank's implementation support missions financial management and disbursement arrangements will be reviewed to ensure compliance with the Bank's minimum requirements; and (b) project's interim unaudited financial reports as well as the project's annual audited financial statements and auditor's management letter will be reviewed. A Bank-accredited FM Specialist, located in the WB Ankara Office, is a core member of the project team and will supervise FM aspects during formal supervision visits and in-between as required.
d. Safeguards - The implementing agencies in this Project, Halkbank, VakifBank, Ziraat Bank and MENR, all require capacity building on safeguard compliance functions. Project Implementation Units (PIUs) are already established at each of the FIs, which already have implemented World Bank loans before. However, the implementation support will especially be needed to be provided by the Bank specialists on Environmental Safeguards.
54 Implementation Support Plan
2. Implementation support is summarized below:
Time Focus Skills Resource Estimate Year 1 Task management Project management (HQ 8 staff weeks (SWs) based) EE, technical reviews EE specialist (HQ based) 6 SWs Review of bidding Procurement specialist 3 SWs documents and contracts, (Ankara based) procurement support FM supervision FM specialist (Ankara 3 SWs based) Safeguards Environmental specialist 2 SWs (Ankara based) Years 2-5 Task management Project management (HQ 6 SWs per year based) EE, technical reviews EE specialist (HQ based) 4 SWs per year Review of bidding Procurement specialist 2 SWs per year documents and contracts, (Ankara based) procurement support FM supervision FM specialist (Ankara 3 SWs per year based) Safeguards Environmental specialist 2 SWs per year (Ankara based)
55 Annex 6: Team Composition TURKEY: SME Energy Efficiency Project
Name Title Specialization Unit Jas Singh Senior Energy Energy efficiency ECSEG Specialist Margaret Png Lead Counsel Legal LEGLE Yesim Akcollu Energy Specialist Energy sector ECSEG Selma Karaman Program Assistant Program Assistant ECCU6 Jari Vayrynen Senior Environmental Environmental and ECSEG Specialist economic analyses Shinya Nishimura Senior Energy Task Team Leader ECSEG Specialist Salih Kemal Kalyoncu Senior Procurement Procurement ECSO2 Specialist Chukwudi H. Okafor Senior Social Social safeguards ECSSO Development Specialist Zeynep Lalik Sr Financial Financial Management ECSO3 Management Specialist Alper Ahmet Oguz Financial Sector Banking ECSF2 Specialist Esra Arikan Environmental Environmental ECSEN Specialist safeguards Regina Oritshetemeyin Senior Program Program support ECSSD Nesiama Assistant Non Bank Staff Name Title Office Phone City
56 Annex 7: Economic and Financial Analysis TURKEY: SME Energy Efficiency Project
1. Given that the Project is a FT operation, the actual projects to be financed are not known upfront. The FIs participating in the proposed Project will be responsible for selecting eligible subprojects for EE financing. The primary financial benefits will derive from energy savings, but projects with expansion in output capacity which achieve overall lower energy per unit of output will also be eligible. Experience from other Bank EE credit line projects, including the Turkey Private Sector Renewable Energy and Energy Efficiency Project, shows that EE projects are economically and financially feasible and this is also expected to be the case for EE investments in SMEs.
2. The participating FIs have each identified a potential pipeline of projects, consisting of retrofit and capacity extension projects in various sectors, including metals, plastics, textile, machinery manufacturing, food and beverage industries, and tourism (mainly hotels). The projects utilized a range of commercially mature technologies including upgrades in manufacturing machinery and equipment, compressors, cogeneration equipment, motors, pumps, lighting, heating and cooling, insulation, refrigeration, and control systems. The size of the total investment in the representative project pipelines has a wide range from US$25,000 to several million US$.
3. A sample of eight representative projects financed by the FIs through their other credit lines was reviewed for financial and economic viability. Considered in the calculation were costs of the EE-related investment and incremental operational expenditures. Benefits considered for the analyses included energy savings and environmental benefits priced at US$10/ton of C02 mitigated. Benefits from reduced costs of operation and maintenance were not included in this analysis to be conservative. The economic lifetime of the equipment was assumed to be 15 years. The FIRR was calculated using the same methodology but does not include any quantified C02 benefits. The simple payback periods were also calculated. The assumptions used in the analysis are summarized in the table below.
Table 7.1: Key assumption of economic and financial appraisal
Electricity tariff, US$/MWh 105* Gas tariff, US$/1000m3 359** Assessment period 15 years Corporate tax rate 20% Discount rate 10% * Turkish Electricity Distribution Company, TEDAS ** Turkish Petroleum Pipeline Corporation, BOTAS
4. Based on the analysis, sample projects with EE benefits only (i.e. retrofits with no new revenues from added capacity) demonstrate attractive economic and financial returns ranging between 14.9 and 34.9 percent and 13.4 and 30.5 percent, respectively, and simple payback periods from 1.8 to 2.5 years. Sample projects that had in addition to the energy savings additional revenues from increased production capacity exhibited a wide range of economic rates
57 of return between 9.3 and 81.1 percent and financial rates of return between 9.2 and 67.0 percent, and payback periods from 4.1 to 10.1 years. The financial returns of these projects are somewhat lower than the economic rates of return primarily due to tax liabilities and exclusion of the C02 benefit. The table below shows the results of the economic and financial analysis for the sample projects, including an EIRR stress test which assumed 15% lower electricity and gas prices (and thus reduced benefits from EE savings).
Table 7.2: Economic analysis of a sample of representative projects
Sub-sector Investment Investment NPV EIRR EIRR FIRR Payback technology/system Cost (US$) (US$) (%) Stress (%) (years)* Test EE savings only, no increase in capacity Textile Lighting 37,019 32,240 28.8 23.1 24.8 2.5 Textile Motors 155,393 184,038 34.9 28.4 30.5 2.2 Machinery Plastic injection 479,821 495,358 14.9 10.9 13.4 2.5 and mold machinery equipment Metal Aluminum press 570,000 990,012 27.7 22.8 26.4 1.8 Products machinery Increased capacity Metal Aluminum 2,600,000 9,698,907 81.1 78.6 67.0 5.8 products continuous casting line and furnace Food and Chocolate and 1,900,117 929,456 15.4 14.2 14.0 3.3 Beverage cake production line equipment Machinery Cogeneration and 528,765 484,492 27.9 26.5 23.3 10.1 and compressors Equipment Metal Cooling tower 26,000 2,490 13.3 9.6 11.9 4.1 products I I_I *Calculated based on the cashflow from energy savings only.
58 Annex 8: Financial Intermediary Assessment of Borrowers TURKEY: SME Energy Efficiency Project
1. Summary of the financial intermediary assessments conducted on the three FIs, Halkbank, VakifBank and Ziraat Bank is provided below:
Turkiye Halk Bankasi A.S.
Overview
2. Turkiye Halk Bankasi A.S. (Halkbank) is a full-service commercial and retail banking group and provides a broad range of products and services to more than 7 million retail, small and medium-sized ("SME"), commercial and corporate customers across Turkey. Halkbank's name has been associated with tradesmen, artisans and other SMEs in Turkey since 1938, and SMEs remain at the core of Halkbank's customer base today. Halkbank offers a nationwide network of services to its customers, which as of end 2011 consisted of 766 domestic branches (with at least one branch in every province of Turkey).
3. Halkbank was the sixth largest bank in Turkey in terms of total assets and had 13,707 employees as of June 2012. With a 12.3 percent market share, Halkbank retains its position as the market leader in SME loans.
Table 8.1: Summary of Financial Status - Halkbank
June (million USD) 2012 2011 2010 2009 2008 Total Assets 55,890 48,242 47,439 40,779 33,576 Loan Portfolio 33,474 29,761 28,809 21,823 16,977 Securities 13,529 12,360 13,142 14,370 12,047 Deposits 43,286 35,072 35,628 29,550 26,463 Shareholders' Equity 5,705 4,574 4,842 3,872 2,818 Net Profit/(Loss) 694 1,083 1,307 1,097 669 Source: Banks Association of Turkey
Main Shareholders
4. 51.1 percent of shares are owned by the government, while around 48,9 percent of shares are quoted to the stock exchange. In addition, cooperatives and chamber of commerce as well as municipalities have minority shares.
59 Shareholder Paid Capital (TRY) Shareholding Name (%) Privatization Administration* 638.825.500 51,1060400 Free Float 610.716.119 48.8572895 Other** 458.381 0,0366705 Total 1.250.000.000 100,0000000
* TRY 549,932 shares out of total shares (TRY 638,825,500) belonging to Privatization Administration are eligible to be traded at IMKB, the Istanbul Stock Exchange. ** Referring to the shares belonging to 14,721 shareholders who have not registered their shares on their behalf and which are held with Central Registry Agency (CRA) in one single account.
Suitability of Halkbank as a Counterpart
5. Halkbank has the leading SME branch network in Turkey. Halkbank's mission, defined by its foundation is to support SMEs, artisans, and craftsman. Halkbank's principal products and services provided to SMEs include deposits, working capital loans, specialized loans (including cooperative loans and fund loans, some of which are unique to Halkbank in the Turkish banking sector), non-cash loans (i.e., guarantees and letters of credit), treasury products and cash management services. Halkbank's loans and advances to SME borrowers comprised 36% of its total loans and advances. In addition Halkbank was a borrower under the SME I project which was closed in March 2012.
Financial Soundness and Risk Exposures
6. The section below includes a detailed evaluation of Halkbank's financial performance. Halkbank maintains an overall sound financial and operational structure, and is fit to undertake the financial liability and operational commitments of the proposed Project.
Solvency
7. Halkbank's capital adequacy ratio is well above the minimum requirement. With a capital adequacy ratio of 14.7 percent, Halkbank is highly solvent when measured against risk weighted assets.
Banking Sector June June
______2012 2012 2011 2010 2009 2008 Capital Adequacy Ratio 16.6 14.7 14.3 15.9 16.0 14.5 Shareholders Equity/Total Assets 12.6 10.2 9.5 10.2 9.5 8.4 Source: Banks Association of Turkey
Credit Risk and Loan Portfolio Performance
8. The recent performance of Halkbank's loan portfolio is sound. Its borrowers are widely dispersed and there are no concentrations. The ratio of the Halkbank's non-performing loans to
60 the total loans is 2.9 percent. Unlike other institutions in the Turkish banking sector, Halkbank has not, written-off or sold to third parties any of its non-performing loans between 2008 and 2011. Approximately one-third of Halkbank's non-performing loans dates back to 2001 and earlier, and were classified as NPLs in the aftermath of the economic crisis in Turkey in 2000- 2001 and subsequent reorganization of state banks.
Banking Sector June June 2012 2012 2011 2010 2009 2008 Gross NPLs/ Total loans 2.6 2.9 3.0 4.0 5.1 4.8 Net NPLs/ Total loans 0.5 0.5 0.5 0.7 1.0 0.8 Loan Provisions/NPL 79.8 83.9 84.0 83.3 81.4 82.9 Source: Banks Association of Turkey
Profitability
9. The Halkbank had a 1.2 percent rate of return on assets and a 12.2 percent rate of return on equity as of June 2012. Both percentages are significantly higher than sector averages.
Banking Sector June June 2012 2012 2011 2010 2009 2008 Return on Assets 0.9 1.2 2.2 2.8 2.7 2.0 Return on Equity 7.3 12.2 23.7 27.0 28.3 23.7 Source: Banks Association of Turkey
Liquidity
10. Halkbank's primary source of funding has been its deposits from customers. Deposits represent approximately 73 percent of Halkbank's total liabilities. Investment securities portfolio consists mainly of held-to-maturity investments. As of 30 September 2011, approximately 42 percent of Halkbank's investment securities portfolio was composed of available-for-sale investment securities, whereas the remaining 58 percent was composed of held-to-maturity investment securities. Roll over ratio for time deposits and demand deposits are 95.9 percent and 84.8 percent respectively as of March 2012. In addition, average duration for demand deposits is 3.45 years. All pointing that Halkbank's liquidity is considerably good.
Banking Sector June June 2012 2012 2011 2010 2009 2008 Liquid Assets/ Total Assets 30.2 21.6 19.9 18.2 15.4 14.9 Liquid Assets/ Short-term 52.2 33.07 31.7 28.0 24.2 24.1 Liabilities Source: Banks Association of Turkey
61 Market Risk
11. Halkbank manages foreign currency risk primarily by using natural hedges that arise from offsetting foreign currency denominated assets and liabilities. When deemed necessary, Halkbank enters into foreign currency swap transactions with other FIs.
Banking Sector June June 2012 2012 2011 2010 2009 2008 Net foreign exchange -36.4 -37.6 -17.0 -14.7 -26.6 -29.3 position on bs/equity
Net foreign exchange 0.0 -3.0 -4.0 -4.2 -4.1 -3.9 position on and off bs/equity Source: Banks Association of Turkey
Turkiye Vakiflar Bankasi T.A.0
Overview
12. Turkiye Vakiflar Bankasi T.A.0 (VakifBank) was established in 1954, and was publicly listed on the Istanbul Stock Exchange in 2005. The General Directorate of the Foundations (GDF) is the largest shareholder in the VakifBank with a 58.45 percent stake. It is the seventh largest bank in Turkey with $53.3 billion asset size as of June 2012. The GDF is a government body which administers and regulates all Turkish charitable foundations. VakifBank employs 12,222 people at 680 branches located throughout the country. VakifBank offers retail, commercial, investment, private and international banking services as well as foreign exchange, money market and investment security transactions to over 10 million customers. The VakifBank's major financial subsidiaries are also involved in providing insurance, private pension fund services, leasing, brokerage and securities trading, factoring, capital market activities and portfolio management. 13. June (million USD) 2012 2011 2010 2009 2008 Total Assets 53,531 47,215 48,102 43,567 34,297 Loan Portfolio 34,430 30,340 29,176 23,245 20,044 Securities 10,416 10,209 11,769 12,441 7,557 Deposits 35,212 32,262 31,023 30,022 24,392 Shareholders' Equity 5,653 4,923 s,566 4,963 3,727 Net Profit/(Loss) 390 649 753 841 495 Source: Banks Association of Turkey
Main Shareholders
14. GDF: The GDF manages foundations owning 58.45 percent of the shares of VakifBank (43.0 percent in the form of Class A shares and 15.45 percent in the form of Class B shares). The GDF was established in 1924 to administer and regulate existing and future Turkish charitable foundations as a governmental entity directly reporting to the Prime Minister. The GDF is a
62 separate legal entity and has its own budget. The GDF was given the authority to establish a bank subject to the Incorporation Law for the purpose of managing the foundations' revenues and expenses. Class A shares belong to affiliated Foundations which are represented and managed by the GDF. There are also 273 non-affiliated foundations which are independent foundations with separate boards of trustees rather than GDF representation. They currently hold Class B shares, constituting 0.13 percent of VakifBank's equity. VakifBank Pension Fund has a 16.10 percent interest in VakifBank's capital as a Class C shareholder. The other shareholders consist of individuals or legal entities who together own 0.06 percent of VakifBank's equity as Class C Shareholders and the Class D shareholders that acquired 25.20 percent of the outstanding shares of VakifBank in the IPO. None of the Class D shareholders owns more than 5 percent of the outstanding shares of VakifBank.
Class Shareholder CAPITAL(tl Percent of Number Of of thousands) Outstanding Shareholders Shares 2.500.000.000-TL Shares A Foundations managed by 1.075.059 43,00 1 GDF (Affiliated Foundations) B Non-affiliated Foundations 386.225 15,45 1 managed by GDF B Other Appendant 3.162 0,13 273 Foundations B Other Registered 1.448 0,06 197 Foundations C VakifBank Pension Fund 402.553 16,10 1 C Individual and legal entities 1.560 0,06 440 D Free float 629.993 25,20 - TOTAL 2.500.000.000,00 100 913
15. VakifBank has been selected as a counterpart, which will provide credit to smaller SMEs all over Turkey. VakifBank is an important player in SME business, with long lasting relationship with strong number of clients, low granularity in SME portfolio & geographically diversified lending practice. It has introduced sector focused products designed to serve wide range of SME's in different sectors including energy efficiency. The SME portfolio managers have been specially trained on their segments. VakifBank provides service to over 451.498 SME customers. In addition VakifBank is currently one of the FIs under the SME II Project.
Financial Soundness and Risk Exposures
16. The section below includes a detailed evaluation of VakifBank's financial and operational performance. VakifBank's liquidity and investment securities portfolio continued to be effectively managed so as to ensure that VakifBank's activities and profitability remained unaffected by the uncertainties in the global markets.
63 Solvency
17. VakifBank's capital adequacy ratio is well above the minimum requirement. With a capital adequacy ratio of 13.4 percent as of June 2012, VakifBank is highly solvent when measured against risk weighted assets
Banking Sector June June 2012 2012 2011 2010 2009 2008 Capital Adequacy Ratio 16.6 13.4 13.4 14.4 15.4 14.3 Shareholders Equity/Total Assets 12.6 10.6 10.4 11.6 11.4 10.9 Source: Banks Association of Turkey
Credit Risk and Loan Portfolio Performance
18. The recent performance of VakifBank's loan portfolio is sound. Its borrowers are widely dispersed and there are no concentrations. The ratio of VakifBank's non-performing loans to the total loans is 3.6 percent and is marginally greater than the sector's, but adequate provisioning is provided as indicated in net NPL ratio.
Banking Sector June June 2012 2012 2011 2010 2009 2008 Gross NPLs/ Total loans 2.6 3.6 3.8 5.1 6.1 4.8 Net NPLs/ Total loans 0.5 0.2 0.2 0.1 0.4 0.3 Loan Provisions/NPL 79.8 94.2 95.0 98.9 93.7 94.2 Source: Banks Association of Turkey
Profitability
19. VakifBank had a 0.7 percent rate of return on assets and a 6.9 percent rate of return on equity in June 2012, comparable to the overall sector trend.
Banking Sector June June 2012 2012 2011 2010 2009 2008 Retumn on Assets 0.9 0.7 1.4 1.6 1.9 1.4 Return on Equity 7.3 6.9 13.2 13.5 17.0 13.3 Source: Banks Association of Turkey
64 Liquidity
20. VakifBank's liquidity ratios are above the regulatory limits. Given its asset mix it remains very liquid and able to place funds.
Banking Sector June June 2012 2012 2011 2010 2009 2008 Liquid Assets/ Total Assets 30.2 26.5 25.5 29.5 37.3 30.4 Liquid Assets/ Short-term 52.2 47.8 44.3 52.7 69.0 64.4 Liabilities I Source: Banks Association of Turkey
Market Risk
21. VakifBank's FX exposures are given below. VakifBank's market risk exposures are moderate and significantly lower than the sector averages. As a policy it offers hedging products to all customers thus effectively managing the FX risk for itself and for clients.
Banking Sector June June 2012 2012 2011 2010 2009 2008 Net foreign exchange -36.4 9.6 20.5 -0.7 -3.6 2.5 position on bs/equity
Net foreign exchange 0.0 4.1 4.2 2.1 4.1 2.6 position on and off bs/equity
Source: Banks Association
Turkiye Cumhuriyeti Ziraat Bankasi A.S.
Overview
22. Turkiye Cumhuriyeti Ziraat Bankasi A.S. (Ziraat Bank) was established in 1863. Ziraat Bank employs 23.4 thousand people at 1,486 branches located throughout the country. It is the second largest bank in Turkey by asset size and has the largest branch network. Ziraat Bank has the most extensive global presence of any Turkish Bank with 24 international branches, 7 subsidiary banks and 1 representative office active at 76 locations in 16 countries in the world. Ziraat Bank is the only state bank primarily serving agricultural customers and sole distributer of subsidized agricultural loans. After 2001 they served the commercial firms and SME customers as well as individuals throughout Turkey. Ziraat Bank's founding mission is providing contribution to economical development by providing the required source to the agricultural sector. Ziraat Bank is the leader of the agricultural banking sector in Turkey.
65 23. The Ziraat Bank currently has the Undersecretariat of Treasury as its sole shareholder, and was financially and operationally restructured in 2001. Restructuring has contributed to the Ziraat Bank in terms of corporate governance, financial soundness as well as profitability. Ziraat Bank's strategic mission is to maintain its leadership in the agricultural business and enhance its capabilities at commercial, SME and corporate banking through its strong local and international network.
June (million USD) 2012 2011 2010 2009 2008 Total Assets 85,515 85,396 98,219 83,728 68,611 Loan Portfolio 37,497 37,045 36,542 24,692 20,263 Securities 37,230 37,464 49,657 47,729 38,456 Deposits 58,979 59,803 81,153 66,247 55,121 Shareholders' Equity 8,226 7,003 8,745 6,962 4,837 Net Profit/(Loss) 708 1,117 2,413 2,361 1,402 Source: Banks Association of Turkey
Suitability of Ziraat Bank as Counterpart: 24. Ziraat Bank has been selected as counterpart, in order to provide credit to SMEs especially in agro-industry and in food processing sector. Ziraat Bank has a privileged advantage of these sectors especially in the underserved areas. Ziraat Bank has access to SMEs located all over the country with its branches in over 400 county seats and townships where no other bank has a presence. Ziraat Bank has 50 percent of its SME loan portfolio in three big cities (i.e. Ankara, Istanbul, izmir) and has 50 percent (as of end December, 2011) in other cities including underserved areas.
25. One of Ziraat Bank's key strategic objectives is to grow its SME business. Ziraat Bank's participation in the project is thus well aligned with its strategy. Ziraat Bank is seeking to strengthen its position as an SME bank by increasing its product range and growing its portfolio to that segment. For this purpose, Ziraat Bank established a new department in 2008 in-charge of SME loans. Loans provided to SMEs have a significant share within Ziraat Bank's total commercial lending, with nearly 42 percent as of December 2011. In addition, Ziraat Bank is currently one of the borrowers under the SME II project.
26. Pursuing above mentioned targets, Ziraat Bank started a restructuring program to strengthen its commercial and SME banking in late 2011. In order to maintain a sustainable and diversified loan portfolio, over 150 branches were taken under restructuring as dedicated Corporate, Commercial and SME branches and are exempted from mass operations.
Financial Soundness and Risk Exposures
27. Ziraat Bank continues to resolutely deploy its strategies while also abiding by its policy of lending in support of the real sector and maintaining its standing as the bank with the highest level of deposits. Ziraat Bank's liquidity and investment securities portfolio continued to be effectively managed, with keeping an eye on the risk-reward balance. Ziraat Bank maintains an
66 overall sound financial and operational structure, and is fit to undertake the financial liability and operational commitments under the proposed Project.
Solvency of Ziraat Bank
28. Ziraat Bank's capital adequacy ratio is well above the minimum requirement of 12 percent. The capital adequacy ratio of the Ziraat Bank for June 2012 stands at 17.4%. Ziraat Bank is highly solvent when measured against risk weighted assets.
Banking Sector June June 2012 2012 2011 2010 2009 2008 Capital Adequacy Ratio 16.6 17.4 15.6 19.2 23.2 20.1 Shareholders Equity/Total Assets 12.6 9.6 8.2 8.9 8.3 7.1 Source: Banks Association of Turkey
Non-Performing Loans
29. The recent performance of Ziraat Bank's loan portfolio is sound. Ziraat Bank's borrowers are widely dispersed and there are no concentrations. Ziraat Bank adopted a cautious and selective lending policy that helps carrying a healthy portfolio. The ratio of Ziraat Bank's non- performing loans to the total loans is 1.5% which is significantly below the sector's 2.6% ratio
Banking Sector June 2012 June 2012 2011 2010 2009 2008 Gross NPLs/ Total loans 2.6 1.2 1.1 1.2 2.3 2.0 Net NPLs/ Total loans 0.5 0.4 0.4 0.5 0.5 0.4 Loan Provisions/NPL (incl. substandard)* 79.8 75.9 70.3 67.0 79.9 81.1 Source: Banks Association of Turkey * Ziraat bank does not have to set aside provisions for external fund-sourced lending whose risk does not belong to them. (The amount of NPL fund sourced loans is USD 82 Million as of December 2011). When fund sourced loans and other receivables are excluded, Ziraat Bank's Gross NPLs/gross loans ratio is 1.0 %, loan provisions/NPL ratio is 84.4% as of Dec.11.
Profitability
30. Ziraat Bank had a 0.8 percent rate of return on assets and an 8.6 percent rate of return on equity. The same ratios are 0.9 percent and 7.3 percent in the sector respectively.
Banking Sector June June 2012 2012 2011 2010 2009 2008 Return on Assets 0.9 0.8 1.3 2.5 2.8 2.0 Return on Equity 1 7.3 8.6 16.2 27.6 33.9 29.0 Source: Banks Association of Turkey
67 Liquidity
31. Ziraat Bank's liquidity ratios are above the regulatory limits. Ziraat Bank's sources of funds are mainly formed of deposits. Ziraat Bank's deposits do not fluctuate considerably. Ziraat Bank directs these funds to assets with high return and low risk. These assets include predominantly domestic government bonds and loans. Ziraat Bank's liquidity structure covers the financing of all liabilities at due date. Moreover, they adopt high return principle for its long- term placements.
Banking Sector June June 2012 2012 2011 2010 2009 2008 Liquid Assets/ Total Assets 30.2 33.0 33.5 36.3 32.7 21.9 Liquid Assets/ Short-term 52.2 46.7 44.6 49.6 44.3 30.7 Liabilities Source: Banks Association of Turkey
Market Risk
32. Ziraat Bank's market risk exposures are moderate and significantly lower than the sector averages. The securities held by Ziraat Bank, although they have long maturities, carry little interest rate risk because they are repriced frequently. Ziraat Bank pays attention not to change the position materially in the view of foreign exchange position management and maximum position amount is limited. Also, there is position limit application for limiting interest rate risk stated within the context of market risk of Ziraat Bank.
Banking Sector June June 2012 2012 2011 2010 2009 2008 Net foreign exchange -36.4 -17.8 -8.8 -13.2 -0.4 0.3 position on bs/equity Net foreign exchange 0.0 5.5 -0.2 1.2 -0.4 0.3 position on and off bs/equity Source: Banks Association of Turkey
68 Annex 9: Incremental Cost Analysis TURKEY: SME Energy Efficiency Project
Country and sector context
1. Although total primary energy supply per capita in Turkey is low-1.44 toe/capital in 2010-compared to the Organization for Economic Cooperation and Development (OECD) average of 4.39 toe/capita, the Turkish economy is comparatively energy intensive. In 2010, the economy required 0.179 toe for each US$1,000 of gross domestic product (2000 US$ terms), above the OECD average of 0.14 toe.
2. In recent years the Turkish government has made improving EE a priority. As laid out in 13 a recent World Bank EE assessment report in Turkey , EE has become of critical importance for three reasons: (i) energy supply security is at risk due to rapid growth in demand; (ii) EE is crucial for competitiveness and long-run sustainable economic growth; and (iii) mitigating the impacts of climate change is a policy priority and commitment of the government. Further, a strong EE agenda fits in with Turkey's accession to full European Union membership. Turkey's Climate Change Strategy and the National Climate Change Action Plan 2011-2023 echoes these statements by setting targets to: a) to reduce energy intensity by 10% in 2015 compared to 2008 figures; b) increase subsidies for promoting EE by 100% by 2015; and c) aiming to reduce CO 2 emissions per capita of GDP equivalent from industry by 2023. Energy Efficiency Strategy 2012 - 2023, approved by the High Planning Council on February 27, 2012, sets the long-term target as 20% reduction in energy intensity by 2023 compared to 2011 figures.
3. Considerable achievements have been made in setting up regulatory and institutional frameworks to promote EE. The Energy Efficiency Law (No. 5627), enacted in 2007, provides the framework to promote EE throughout the economy, including SMEs. Supplemental legislative documents as well as a National EE Strategy Paper provide for procedures, programs, targets, etc., and are now operational. Secondary regulations related to energy service companies (ESCOs) are also being developed, including considering alternative business models and increased subsector specializations. In parallel, the government is implementing a three-year program to establish a data collection and aggregation system, which is designed to provide information on energy consumption patterns and benchmarks on a sector level, in order to help inform the government on priority areas and actions.
4. Cost-based pricing mechanisms for energy have been recently implemented and are an important step toward a more energy efficient economy. Prior to 2008, Turkey's energy pricing had not been cost reflective and, hence, did not provide appropriate signals for EE. During the 2002-07 period, despite significant increases in power generation costs, retail electricity prices changed little. However, pricing reforms were introduced in 2008, and today electricity prices in Turkey are on par with those of the Western Balkans and Central European countries. The Government recognizes that cost-reflective tariffs, coupled with regular bill collections, provide appropriate incentives to consumers for energy conservation and economically viable EE investments and are now committed to cost-reflective tariffs.
13 Turkey: Tapping the Potential for Energy Saving, World Bank Report No. 52210-TR. October 2010, Washington, D.C.
69 Opportunities for Energy Efficiency Investments
5. According to World Bank estimates, the industrial and the buildings sectors offer an aggregated energy savings potential of over 15 million toe of energy consumption per year, or 14 percent of total consumption. 14 The industrial sector accounts for about 39 percent of total final consumption and represents the sector with the greatest energy use and high projected energy demand growth. Therefore, it offers the largest potentials for energy savings, making it a priority sector for promoting EE lending in the commercial banking sector.
6. Over 99% of all businesses in Turkey are classified as SMEs, thus broadening and deepening the EE market requires explicit approaches to address SME lending. World Bank estimates indicate that the country could save some US$3.0 billion annually (8 million toe) in the industrial sector, or about 25 percent of 2007-level consumption. Many of the large, energy- intensive industries are already receiving support from the ongoing World Bank/CTF EE financing program and other financing both public and private, but 99% of factories in Turkey are considered SMEs with limited capacity and access to financing.1 5 In 2009, the government initiated a support program for small-scale EE investments. This initiative and the EE law provides for mechanisms for promoting EE investments such as voluntary agreements and subsidy programs. Such projects, largely in the SME sector, are expected to help improve competitiveness while helping to constrain increase in energy imports as the Turkish economy grows. Various incentive and awareness programs are in place now, but will be revamped and boosted in order to enhance uptake and effectiveness. Similar efforts are planned for the energy audit grant program, which is being implemented by KOSGEB 1 6 in partnership with the GDRE. An enhanced awareness and communications program is also being planned to increase participation in such programs.
Financing Needs and Major Barriers
7. Given these huge opportunities and strong commitments from the government, there is an urgent need to tap commercial financing in order to realize these improvements in the SMEs. However, at present, significant barriers exist in the Turkish market, which prevent this commercial lending from taking place:
* Lack of knowledge among banks and SMEs about EE opportunities,project performance and risks: Turkish banks have insufficient experience assessing EE opportunities and project benefits, assessing technical and repayment risks, and verifying EE savings estimates. As a result, perceived risks and thus risk premiums are prohibitively high. Further, there is a general lack of understanding and thus low priority among SME and other managers about the opportunities for operational cost savings through EE investments. * High transaction costs for small investments: Turkish banks lack developed approaches to identify and assess projects for smaller investments, as technical reviews of detailed energy
14EE potential was calculated based on international benchmarking exercises conducted by EIE and IBS research. Additionally, short survey of nineteen plants from four sectors was conducted, which provided qualitative insight into EE potential and investment opportunities available 15 Based on KOSGEB's definition published in the No. 25997 official paper, a micro, small or medium size enterprise is one that has less than 250 employees and a net revenue that does not exceed 40 million TL and are categorized accordingly 16 The Small and Medium Enterprise Development Administration of Turkey
70 audits are only practical for much larger loans. Since investments in the SMEs are expected to be mostly under $1 million, the transaction costs for each project (identification, loan origination, technical assessment, energy savings estimation, technology review, etc.) can be prohibitively high. This has resulted in a lack of developed financing strategies and products (e.g., leasing, cash flow-based financing, ESCO lending) which limit the potential market to only highly creditworthy SMEs with sufficient collateral/project equity and technical capacity to pursue EE improvements. * Financing constraints due to high collateral requirements: Under the current banking regulatory framework, the borrowing SMEs are often required to provide 100 - 120% of collateral. This high collateral requirement not only limits the borrowing capacity of the SMEs, but also often drive up cost of credit as many borrowers are forced to purchase credit guarantees to supplement their collateral, which adds about 1% to their financing cost. * Limited institutional capacity in market to identify, prepare bankable EE projects: Smaller industries are generally unaware of the opportunities, costs and benefits of EE improvements. High transaction costs hinder EE among all end-users due to the small-size of improvements and modest returns of EE investments relative to other investment opportunities. Irrespective of cost, the number of improvements needed to realize substantial EE savings may require too much time, knowledge, effort, risks (hassles) to make EE investments attractive for many end-users. There are also a lack of efficient delivery mechanisms to link financing and EE projects with acceptable transaction costs. Service companies and ESCOs lack viable business and financing models, and credibility among potential clients and financiers. This vicious cycle results in a lack of demand, in the form of well-prepared, bankable loan applications and the perception among banks and ESCOs that this is not yet a viable market.
Baseline Scenario
8. There are a number of donor-funded programs that are underway related to EE. In 2009, the World Bank/CTF financed the Private Sector Renewable Energy and Energy Efficiency project. This includes an IBRD loan of US$500 million and CTF loan of US$100 million. Additional financing of US$500,000 was approved in 2011 to help further scale up activities. EBRD has a project valued at 6400 million, under which it provides credit lines to at least four commercial banks in Turkey (including VakifBank) for onlending to private sector borrowers for mid-sized EE, RE, and waste-to-energy investments (MidSEFF). An additional 6300 million of co-financing is anticipated from other multilateral or bilateral financing institutions. UNDP has a series of GEF-funded projects dealing with EE in the industrial, buildings and residential appliance sectors. Since these projects include mostly TA support, the proposed Project will complement them well with its TA and investment financing. In 2011, AID launched a C100 million SME credit line with Halkbank for EE and small-scale RE projects, with about 660 million going towards EE improvements in SMEs.
9. Despite the recent proliferation of credit lines, none have focused on developing replicable product lines for financing, promoted leasing or developed simplified ESCO contracts. Further, only AfD is seeking to target SMEs and with one bank only. Nevertheless, coordination is needed and being done to ensure synergies are fully identified and exploited and emerging lessons shared. GDRE, which serves as the main counterpart for all the EE TA efforts will also
71 help to coordinate the ongoing policy and capacity building efforts to maximize effectiveness and impacts.
10. Due to the prevailing barriers noted above to EE lending and the generally underdeveloped EE market in Turkey, commercial lending for EE in the SMEs is very low. All of the commercial EE lending under the World Bank/CTF program, for example, has been for large investments in large industrial enterprises. While commercial banks do lend to the SME sector, their focus has been on larger investments, asset based loans, production expansion, working capital, expired equipment replacement, etc., rather than operating cost reduction and retrofits. While some of this lending leads to EE improvements, it is largely based on conventional lending practices rather than cash flow-based loans, leasing, ESCO models, product line retrofits, etc. The perception in the market is that EE loans would have prohibitively high transaction costs, due to their small sizes and need for technical appraisals. Further, the ESCO market remains nascent, given their inability to take on project financing on their balance sheets or provide credible performance guarantees, which has limited the availability of service providers capable of packaging and delivering portfolios of projects to these banks.
11. Therefore, it is expected that, in the absence of the project, conventional SME lending would persist, without much lending for EE other than ongoing equipment renewal and expansion. Demand would remain low for EE investments and services, thus, minimal uptake by other banks or a sustained lending market. EE business models, cash flow-based lending, leasing, ESCOs, and other innovative banking products would remain underdeveloped, as would meaningful dissemination of successful EE investment experiences across the market. Banks would continue their marketing and lending focus on the major industrial and tourism centers of Turkey, leaving other geographic areas and SME sectors with potential for EE largely untapped.
12. Given these realities, the World Bank would provide a US$201 million IBRD loan in order to begin to develop expertise in three dominant, commercial banks (VakifBank, Halkbank, and Ziraat Bank) and foster the nascent domestic experience with EE lending for SMEs in Turkey. As the participating banks are among the largest in Turkey, it is expected they will be able to leverage their client bases and branch networks to develop the EE market on a national level. GEF resources would be used to complement the loan with primarily TA and policy support to broaden the market development impacts of the loan. The project would also seek to pilot financial and implementation models for EE investments in commercial.
13. Baseline energy savings and GHG benefits: Under the baseline scenario, the analysis presented here assumed that in Year 1, US$10 million in investments would be made in the targeted SME market segments, and that those investments would grow at a modest rate of 3% per year to a cumulative total of US$114.6 million over a period of 10 years. The energy saving estimates were based on an analysis of twenty representative sample projects from past portfolios of the participating FIs, across the expected sub-sectors and technologies covered by the proposed Project. Based on this approach, the estimated cumulative baseline scenario energy savings during a 20 year period of analysis would be 1,730 GWh and the GHG emission reductions 870,323 tonnes of C02 equivalent. 17
17 Following emission factors and coefficients were used throughout the analysis presented in this annex: electricity C02 coefficient 0.56 tCO2/MWh (based on UNFCCC CDM methodology); gas C02 emission coefficient 2.020 kg/m3 (Defra/IPCC);
72 Project/GEF Alternative Scenario
14. In the Project Scenario the Bank will extend (i) US$201 million IBRD line of credit to three FIs (Halkbank, VakifBank, and Ziraat Bank) to support EE financing to SMEs, and (ii) a US$3.64 million GEF grant for TA and risk sharing for ESCO models to the three FIs, as well as for policy and TA support to GDRE within MENR. In addition, the equivalent of 25% of the respective IBRD loan shall be financed from the FIs' own resources, once 50% of IBRD loan is committed to sub-borrowers.
15. The selected FIs have a strong client base in the SME sector, and possess strong institutional capacity for managing credit lines and lending programs. The Project will also seek to explore alternative business and financing models tailored to the Turkish SME market, which are capable of helping to package, finance and implement projects in SME clients. The Project consists of two components-an investment and policy support component for the three FIs; and a policy and institutional development component for GDRE.
16. Within the overall Project, the GEF contribution is distributed as follows:
Table 9.1: GEF Co-Financing in the proposed Project (in US$ million) Component GEF Total GEF as % Cost Project of Total Cost 1. EE Investments in SMEs * Investment lending 1.35 292.6 0.5% * Project development, appraisal and monitoring 1.35 2.35 57.4% 2. Policy support and TA to GDRE * Market development and information dissemination 0.44 2.44 18.0% * Policy dialogue and capacity building with GDRE 0.35 1.35 25.9% Project Management 0.15 7.15 2.1% TOTAL 3.64 305.89 1.2%
17. Specific activities financed by GEF are defined in Annex 2 - Detailed Project Description. A summary table of Project barriers and proposed measures are presented in the Table below:
gas kWh coefficient 11.13 kWh/m3 (Defra). For sake of conservativeness projects that led to reduction in use of coal were excluded from the analysis of the representative sample projects.
73 Table 9.2: Market Barriers and Project Actions to Address Them Barrier Actions Lack of knowledge among banks and SMEs about EE opportunities, projectperformance and risks: * Insufficient experience assessing 0 Participating FT staff training in EE opportunities and project both headquarters and branch benefits, risks and EE savings offices estimates. * Technical consultants * General lack of understanding 0 Awareness raising, program about the opportunities for marketing, public campaigns operational cost savings through EE investments. High transaction costs for small investments: 0 Dissemination and use of EE Tool * Lack of developed approaches to 0 Product lines -based pipeline identify and assess smaller projects development & technical due * High transaction costs per project diligence leading to lack of developed 0 Market studies and assessments on financing strategies and products new SME subsectors/ product limiting the market potential lines/technologies * Energy audits on selected projects
Financing constraints due to high collateral requirementsM * High collateral requirements 0 Develop specialized banking limiting borrowing capacity of products for EE SMEs and purchased credit 0 Cash Reserve Fund Scheme guarantees driving up cost of credit for many borrowers Limited institutionalcapacity * Lack of capacity and awareness 0 GDRE development, staff training, among administration, banks, study tours, etc. SMEs and others 0 Stakeholder dialogues on * Lack of efficient delivery implementation challenges & mechanisms and support programs options, policy gaps, barriers * Remaining policy gaps 0 Assessment and enhancement of * Service companies and ESCOs lack existing EE programs viable business and financing 0 Policy option papers, policy gap models, and credibility among analysis, review of legal framework potential clients and financiers. Evaluate existing institutional framework sModel ESCO contracts, M&V * guidelines
74 18. As the barriers are addressed, the EE market develops (including e.g. leasing and ESCO models) and SMEs in Turkey become increasingly familiar with the benefits of EE investments, demand for SME EE financing is expected to grow rapidly and become self-sustained. Therefore, in addition to the Baseline Scenario investments, in the Project/GEF Alternative Scenario the FIs participating in the proposed Project will substantially increase their lending to SME EE investments - initially with the financing provided by the Project, and thereafter as a significant business line sustained and grown by their own resources. Furthermore, the implementation of the proposed Project is expected to lead to a demonstration and replication effect in other banks, creating another, growing stream of investment in SME EE.
19. The Project/GEF Scenario thus consists of three investment streams, creating corresponding EE savings and global benefits: a) Investments in the baseline, as described above. b) Investments financed by the FIs participating in the proposed Project. The proposed project would provide financing in Years 1 to 5 and the FIs would continue and significantly grow this line of business in Years 5 to 10. Accordingly, the proposed Project will generate investments of US$292.6 million in Years 1 to 5. This includes US$201 million from IBRD, US$50.25 million from the FIs, US$40 million equity contributions from the sub-borrowers and ESCOs, and US$1.35 million in GEF funds. These assumptions are considered conservative as they assume conservative equity contribution from the project owners. It is quite likely that higher leverage would be realized case as the FIs become more familiar with EE business and develop partnerships with equipment suppliers and ESCOs. In Years 5 to 10 the participating FIs are expected to continue financing SME EE investments from their own sources and IBRD loan reflows, combined with equity from the project owners/ESCOs. These investments are assumed to grow at a rate of 10% per year over the levels reached by Year 5, i.e. by the end of the investment phase of the proposed Project. The total cumulative investments financed by the participating FIs are conservatively projected to reach US$894.1 million by Year 10. c) Investments generated by a replication effect in other banks (i.e. banks not participating in the proposed Project). The other banks are expected to replicate the EE business models of the participating FIs as well as the leasing, ESCO and other innovative business models demonstrated by the proposed Project. Replication is also induced by the marketing and awareness raising among all stakeholders by GDRE, KOSGEB and the participating FIs, as well by dissemination of information, specific case studies and the EE screening tool. For this stream, it was conservatively assumed that the replication effect would kick only in Year 2 and that the other banks would in Year 2 finance US$20m in SME EE investments, and that those investments would grow at a rate of 10% annually through Year 10. The cumulative investments from this replication would thus reach US$271.6 million by Year 10.
20. Project/GEF Alternative Scenario energy savings and GHG benefits: The investment costs in the Project/GEF Alternative Scenario are expected to lead to substantial energy savings and environmental benefits over the 20 year period of analysis, as follows: (a) benefits from the baseline of 1,730 GWh in energy savings and 870,323 tonnes of CO 2 equivalent in GHG emission reductions (b) benefits from investments financed through the participating FIs of
75 13,552 GWh and 6.8 million tonnes CO 2 equivalent, and (c) benefits from replication effect in other banks of 4,115 GWh and 2.07 million tonnes of C02 equivalent. The total energy savings and GHG benefits in the Project/GEF Alternative Scenario therefore are 19.396 GWh and 9.8 million tonnes of CO 2 equivalent.
Incremental Benefits and Costs
21. The incremental costs and benefits are the total costs and benefits of the Project/GEF Alternative scenario less those of the Baseline Scenario.
22. The benefits are summarized in the table below for Year 5 (i.e. the end of the investment period of the proposed Project), Year 10 (i.e. the end of the period for which investments were analyzed) and Year 20 (the full period of analysis based on a conservative equipment life period assumption of 10 years in average). The lifetime incremental cumulative energy savings are 17,667 GWh and the GHG emission reductions 8.9 million tonnes of C02 equivalent.
Table 9.3: EE Investments, Energy Savings and Emission Reductions from Proposed Project
Units Year 5 Year 10 Year 20 Baseline Scenario Cumulative Investments US$ million 53.09 114.64 Cumulative Energy Savings GWh 79.20 171.00 1,729.51 Capacity
Cumulative Emission tCO2 e 39,853 86,053 870,323 Reductions Capacity Project Scenario Cumulative Investments US$ million 440.86 1280.34 Cumulative Energy Savings GWh 657.63 1,909.86 19,396.34 Capacity
Cumulative Emission tCO2 e 330,930 961,076 9,760,593 Reductions Capacity Incremental Costs and Benefits Cumulative Investments US$ million 387.77 1165.70 Cumulative Energy Savings GWh 578.43 1,738.85 17,666.83 Capacity
Cumulative Emission tCO2 e 291,077 875,023 8,890,270 Reductions Capacity Note: For the purposes of Project monitoring in Annex 1, it is assumed that the actual energy savings and emissions reductions will lag investments by about a year. Thus, in Annex 1, savings presented are derived from investments in the previous Project year and include only those benefits that are generated from investments by the participating FIs.
23. Based on the cost of the investment component cost of the proposed Project, the total undiscounted unit incremental cost for the lifetime eliminated CO 2 emissions is US$33.1 per ton of CO 2 equivalent. The GEF cost for the lifetime eliminated CO 2 emissions is US$0.41 per ton of
76 CO 2 equivalent. These incremental costs are considered to be highly cost-effective from a CO 2 mitigation standpoint.
24. A summary GEF Incremental Cost and Benefits Matrix as well as a detailed breakdown of GEF co-funding in the proposed Project are provided in the tables below.
Table 9.4: GEF Incremental Costs and Benefits Matrix Baseline Alternative Incremental reductions attributed to GEF project Domestic benefit * Inefficient use of 0 Substantial energy Over 20-years electricity and fuels savings in retrofitted period, 17,667 in SMEs SME facilities. GWh of * Limited investments 0 Barriers to incremental energy in energy efficiency development, savings measures implementation and financing of energy efficiency investments reduced
Global Base case energy Investments in energy Incremental Environmental efficiency investments efficiency yield 9,760,593 reduction of Benefit lead to 870,323 tonnes of tonnes of direct and 8,890,270 tonnes of CO2 emission reduction. indirect CO2 emission CO2 in 20-year reduction. period GEF 0.0 3.64 Incremental Cost (mio. USi)nvest
77 Annex 10: GEF Data Sheet TURKEY: SME Energy Efficiency Project
PROJECT INFORMATION Project Title: Small and Medium Enterprise Energy Efficiency Project Country(ies): Turkey GEF Project ID: 4957 GEF Agency(ies): WB GEF Agency Project ID: P122178 Other Executing MENR, VakifBank, Halkbank, Submission Date: n/a Partner(s): Ziraat Bank GEF Focal Area (s): CC Project Duration 66 months (Months) Name of parent n/a Agency Fee ($): 360,000 program (if applicable): For SFM/REDD+ NO
A. FOCAL AREA STRATEGY FRAMEWORK
A. GEF FocAL AREA STRATEGY FRAMEWORK Focal Trust Grant Co-financing Area Expected FA Outcomes Expected FA Outputs Fund Amount Amount Objectives $
CCM-2 Outcome 2.2: Sustainable Output 2.2: GEF TF 2,700,000 292,250,000 financing and delivery Investments mobilized mechanisms established and operational Output 2.3: Energy savings achieved CCM-2 Outcome 2.1: Appropriate Output 2.1: Energy 790,000 3,000,000 policy, legal and regulaory efficiency policy and frameworks adopted and regulation in place enforced Project Management 150,000 7,000,000 Cost Total project costs 3,640,000 302,250,000
78 B. PROJECT FRAMEWORK
Please see PAD Annex 1: Results Framework (attached), and the PAD Project Cost and Financing:
Project cost Counterpart GEF IBRD Project Components (US$, Financing (US$, Financing Million) (US$, Million) Million) (US$, Million) Energy Efficiency inventsEffinc S293.78 90.25 2.70 200 .83 68.36 investments in SMEs Policy Support and 3.79 3.00 0.79 0.00 0.00 Technical Assistance Project Management 7.15 7.00 0.15 0.00 0.00 Total Baseline Costs 304.72 100.25 3.64 200.83 65.91 Physical contingencies
Price contingencies
Total Project Costs 304.72 100.25 3.64 200.83 65.91 Interest During Implementation Front-End Fees 0.50 0.33 0.17 Total Financing 305.22 100.58 3.64 201.00 65.85 Required
C. SOURCES OF CONFIRMED COFINANCING FOR THE GEF FINANCING BY SOURCE AND BY NAME (US$) 18 Sources of Cofinancing Name of Cofinancier Type of Cofinancing Amount ($) GEF Agency IBRD Hard Loan 201,000,000 Private Sector Participating Financial In-kind, Hard Loan 56,250,000 Institutions (Cash and in-kind) National Government MENR (cash and in- In-Kind 5,000,000 kind) Private Sector End users, ESCOs Unknown at this stage 40,000,000 (project equity) I_I _I
D. GEF TRUST FUND - RESOURCES REQUESTED BY AGENCY, FOCAL AREA AND COUNTRY
Type of Trust GEF Focal Country GEF Grant Agency Fee Total c=a+b Fund Area Name/Global Amount (a) (b) GEFTF Climate Turkey 3,640,000 360,000 4,000,000 Change Total Grant Resources 3,640,000 360,000 4,000,000
18 Defined as per the GEF Cofinancing Policy, whereby the WB loans/grants and other funds are counted as 'cofinancing' to the GEF portion, not implying that these funds flow through this operation.
79 TURKEY
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