Document of The World Bank INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT IMPLEMENTATION COMPLETION AND RESULTS REPORT

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank Report No: ICR2926 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT IMPLEMENTATION COMPLETION AND RESULTS REPORT IBRD-77180; IBRD-79070; IBRD ON A SERIES OF THREE LOANS IN THE AMOUNT OF EURO 1,523.4 MILLION (US$ 2,100.0 MILLION EQUIVALENT) TO THE THE REPUBLIC OF TURKEY FOR FIRST PROGRAMMATIC ELECTRICITY SECTOR DEVELOPMENT POLICY LOAN (PEDPL1) AND SECOND AND THIRD PROGRAMMATIC ENVIRONMENTAL SUSTAINABILITY AND ENERGY SECTOR DEVELOPMENT POLICY LOANS (ESES DPL2 AND ESES DPL3) Sustainable Development Department Turkey Country Unit Europe and Central Asia Region December 23, 2013

2 TURKEY - GOVERNMENT FISCAL YEAR January 1 December 31 CURRENCY EQUIVALENTS (Exchange Rate Effective as of November 30, 2013) Currency Unit: Turkish Lira US$ 1.00 = TL 2.02 ABBREVIATIONS AND ACRONYMS AAA AFD AKP BOTAŞ CBCC CPS CTF DPL EBRD EIB EMRA ESES EU GDP IBRD IFC IMF KfW MENR MfEU MoD MoEU MoFW PA PEDPL PMR PMUM REGE TEIAŞ UNDP UNFCCC Analytical and Advisory Activities Agence Francaise de Dévelopment Justice and Development Party Pipeline Corporation of Turkey Coordination Board on Climate Change Country Partnership Strategy Clean Technology Fund Development Policy Loan European Bank for Reconstruction and Development European Investment Bank Energy Market Regulatory Authority Environmental Sustainability and Energy Sector European Union Gross Domestic Product International Bank for Reconstruction and Development International Finance Corporation International Monetary Fund Kreditanstalt für Wiederaufbau (KfW Development Bank) Ministry of Energy and Natural Resources Ministry for EU Affairs Ministry of Development Ministry of Environment and Urbanization Ministry of Forestry and Water Affairs Privatization Administration Programmatic Electricity Sector Development Policy Loan Partnership for Market Readiness Market Financial Settlement Center Restoring Equitable Growth and Employment DPL Turkish Electricity Transmission Corporation United Nations Development Program United Nations Framework Convention on Climate Change Vice President: Country Director: Sector Director: Sector Manager: Task Team Leader: ICR Team Leader: ICR Primary Author: Laura Tuck Martin Raiser Laszlo Lovei Ranjit Lamech Kari Nyman Kari Nyman James Moose

3 THE REPUBLIC OF TURKEY FIRST PROGRAMMATIC ELECTRICITY SECTOR DEVELOPMENT POLICY LOAN (PEDPL1) AND SECOND AND THIRD PROGRAMMATIC ENVIRONMENTAL SUSTAINABILITY AND ENERGY SECTOR DEVELOPMENT POLICY LOANS (ESES DPL2 AND ESES DPL3) IMPLEMENTATION COMPLETION AND RESULTS REPORT CONTENTS Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Program Performance in ISRs H. Restructuring 1. Program Context, Development Objectives and Design Key Factors Affecting Implementation and Outcomes Assessment of Outcomes Assessment of Risk to Development Outcome Assessment of Bank and Borrower Performance Lessons Learned on Issues Raised by Borrower/Implementing Agencies/Partners Annex 1: Bank Lending and Implementation Support/Supervision Processes Annex 2: Changes in Program Design Annex 3: Borrower s ICR Annex 4: List of Supporting Documents Annex 5: Prior Actions by Pillar and Development Objective MAP

4 A. Basic Information Program 1 Country Turkey Program Name Programmatic Electricity Sector Development Policy Loan (PEDPL) DPL1 Program ID P L/C/TF Number(s) IBRD ICR Date 09/19/2013 ICR Type Core ICR Lending Instrument DPL Borrower Original Total Commitment REPUBLIC OF TURKEY USD M Disbursed Amount USD M Implementing Agencies Undersecretariat of Treasury Cofinanciers and Other External Partners Program 2 Country Turkey Program Name Second Programmatic Environmental Sustainability and Energy Sector Development Policy Loan (ESES) DPL2 Program ID P L/C/TF Number(s) IBRD ICR Date 09/19/2013 ICR Type Core ICR Lending Instrument DPL Borrower Original Total Commitment REPUBLIC OF TURKEY USD M Disbursed Amount USD M Implementing Agencies Undersecretariat of Treasury Cofinanciers and Other External Partners Program 3 Country Turkey Program Name Third Programmatic Environmental Sustainability and Energy Sector (ESES) Development Policy

5 Loan (ESES) DPL3 Program ID P L/C/TF Number(s) IBRD ICR Date 09/19/2013 ICR Type Core ICR Lending Instrument DPL Borrower Original Total Commitment REPUBLIC OF TURKEY USD M Disbursed Amount USD M Implementing Agencies Undersecretariat of Treasury Cofinanciers and Other External Partners B. Key Dates Programmatic Electricity Sector Development Policy Loan (PEDPL) DPL1 P Process Date Process Original Date Revised / Actual Date(s) Concept Review: 03/18/2008 Effectiveness: 07/10/2009 Appraisal: 07/02/2008 Restructuring(s): Approval: 06/11/2009 Mid-term Review: Closing: 12/31/ /31/2009 Second Programmatic Environmental Sustainability and Energy Sector Development Policy Loan (ESES) DPL 2 P Process Date Process Original Date Revised / Actual Date(s) Concept Review: 11/19/2009 Effectiveness: 08/12/2010 Appraisal: 03/01/2010 Restructuring(s): Approval: 06/15/2010 Mid-term Review: Closing: 12/31/ /31/2010 Third Programmatic Environmental Sustainability and Energy Sector Development Policy Loan (ESES) DPL3 - P Revised / Actual Process Date Process Original Date Date(s) Concept Review: 01/13/2011 Effectiveness: 06/12/2012 Appraisal: 01/23/2012 Restructuring(s): Approval: 03/27/2012 Mid-term Review: Closing: 06/30/ /30/2013

6 C. Ratings Summary C.1 Performance Rating by ICR Overall Program Rating Outcomes Risk to Development Outcome Bank Performance Borrower Performance Satisfactory Substantial Satisfactory Satisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Overall Program Rating Bank Ratings Borrower Ratings Quality at Entry Satisfactory Government: Satisfactory Quality of Supervision: Satisfactory Implementing Agency/Agencies: Satisfactory Overall Bank Performance Satisfactory Overall Borrower Performance Satisfactory C.3 Quality at Entry and Implementation Performance Indicators Programmatic Electricity Sector Development Policy Loan - P (DPL1) Implementation QAG Assessments Indicators Rating: Performance (if any) Potential Problem Quality at Entry Program at any time No None (QEA) (Yes/No): Problem Program at any Quality of No None time (Yes/No): Supervision (QSA) DO rating before Closing/Inactive status

7 Second Environmental Sustainability and Energy Sector Development Policy Loan - P (DPL2) Implementation QAG Assessments Indicators Rating: Performance (if any) Potential Problem Program at any time (Yes/No): Problem Program at any time (Yes/No): DO rating before Closing/Inactive status No No Quality at Entry (QEA) Quality of Supervision (QSA) None None Third Environmental Sustainability and Energy Sector Development Policy Loan - P (DPL3) Implementation QAG Assessments Indicators Rating: Performance (if any) Potential Problem Program at any time (Yes/No): Problem Program at any time (Yes/No): DO rating before Closing/Inactive status No No Satisfactory Quality at Entry (QEA) Quality of Supervision (QSA) None None D. Sector and Theme Codes Programmatic Electricity Sector Development Policy Loan DPL1 P (DPL1) Original Actual Sector Code (as % of total Bank financing) Central government administration Energy efficiency in Heat and Power Transmission and Distribution of Electricity Theme Code (as % of total Bank financing) Climate change 5 5 Infrastructure services for private sector development Macroeconomic management Other public sector governance Regulation and competition policy 20 20

8 Second Programmatic Environmental Sustainability and Energy Sector Development Policy Loan - P (DPL2) Original Actual Sector Code (as % of total Bank financing) Energy efficiency in Heat and Power Forestry General water, sanitation and flood protection sector Solid waste management Transmission and Distribution of Electricity Theme Code (as % of total Bank financing) Climate change Environmental policies and institutions Infrastructure services for private sector development Regulation and competition policy Third Programmatic Environmental Sustainability and Energy Sector Development Policy Loan - P (DPL3) Original Actual Sector Code (as % of total Bank financing) General energy sector General industry and trade sector General water, sanitation and flood protection sector 6 6 Other Renewable Energy Transmission and Distribution of Electricity Theme Code (as % of total Bank financing) Climate change Environmental policies and institutions Infrastructure services for private sector development Macroeconomic management Regulation and competition policy 20 20

9 E. Bank Staff Programmatic Electricity Sector Development Policy Loan - P (DPL1) Positions At ICR At Approval Vice President: Laura Tuck Shigeo Katsu Country Director: Martin Raiser Ulrich Zachau Sector Manager: Ranjit Lamech Ranjit Lamech Task Team Leader: Kari Nyman Kari Nyman ICR Team Leader: Kari Nyman ICR Primary Author: James Sayle Moose Second Environmental Sustainability and Energy Sector Development Policy Loan - P (DPL2) Positions At ICR At Approval Vice President: Laura Tuck Philippe Le Houerou Country Director: Martin Raiser Ulrich Zachau Sector Manager: Ranjit Lamech Ranjit Lamech Task Team Leader: Kari Nyman Kari Nyman ICR Team Leader: Kari Nyman ICR Primary Author: James Sayle Moose Third Environmental Sustainability and Energy Sector Development Policy Loan - P (DPL3) Positions At ICR At Approval Vice President: Laura Tuck Philippe Le Houerou Country Director: Martin Raiser Martin Raiser Sector Manager: Ranjit Lamech Ranjit Lamech Task Team Leader: Kari Nyman Kari Nyman ICR Team Leader: Kari Nyman ICR Primary Author: James Moose F. Results Framework Analysis Program Development Objectives (from Program Document) The original program development objective as reflected in DPL1 was to support the implementation of the Government s program that aims to address the projected electricity supply-demand imbalance: (a) through energy efficiency measures to reduce the rate of growth of demand for electricity, and (b) by enhancing the efficient supply of electricity. Revised Program Development Objectives (as approved by original approving authority) The revised program development objective as reflected in DPL2 and DPL3 was to help: (a) enhance energy security by promoting private sector clean technology investments and operations; (b) integrate principles of environmental sustainability, including climate change considerations, in key sectoral policies and programs; and (c) improve the effectiveness and efficiency of environmental management processes.

10 (a) PDO Indicator(s) Programmatic Electricity Sector Development Policy Loan P (DPL1) Original Target Formally Actual Baseline s (from Revised Achieved at Indicator approval Target Completion or documents) s Target Years Indicator 1 : Improved management of electricity demand-supply imbalance. (quantitative or Turkey was projected to Target of the face an insufficient program was to supply of electricity. avoid imbalances. Monitoring to continue but indicator was dropped when the program was revised for DPL2 and DPL3 and number of energy indicators was reduced. Imbalances have been avoided. Date achieved 01/01/ /30/ /30/ /30/2013 (incl. % achievement) 100% achievement. Indicator 2 : Improved functioning of the wholesale market. Improved payment performance for transactions through the wholesale market. At least 90% by 2011 added Quantitative target in DPL2. At (quantitative or 37% payment record. Over 99% not formally set. least 95% by 2012 added in DPL3. Date achieved 01/01/ /31/ /31/ /30/2013 (incl. % achievement) Targets exceeded.

11 Indicator 3 : (quantitative or Provision of budgetary allocations on a priority basis in line with approved transmission system investment plans. Monitoring to continue but PDO indicator was dropped when the program was TL 600 million in At least TL 600 TL 295 million in revised for 2011 and TL 650 million in DPL2 and million in DPL3 and the number of energy indicators was reduced. Date achieved 01/01/ /31/ /31/ /30/2013 (incl. % achievement) 100% achievement. Indicator 4 : Cost-reflective tariffs achieved. (quantitative or Cost-reflective tariffs achieved and maintained No tariff adjustments through the since Tariff rates implementation of below cost of service. the quarterly pricing mechanism. Cost-reflective tariffs achieved by 2009 and maintained from Date achieved 01/01/ /31/ /30/2013 (incl. % Objective accomplished. achievement) Indicator 5 : Improved financial performance of the power companies. (quantitative or Main power companies making losses and accumulating receivables and payables. Losses reduced/eliminated receivables and payables reduced. Main power utilities achieved profitability EUAS 2009, TEIAS 2010, and TEDAS Collection improved, payables to private generators eliminated. Date achieved 01/01/ /31/ /30/2013 (incl. % Objective achieved in achievement)

12 Indicator 6 : (quantitative or Improved operational efficiency in privatized companies. Offer for sale all 18 Offer for sale 11 distribution Privatization program distribution companies, to start. companies. transfer at least 15 by end transferred by June, all 18 by September Date achieved 01/01/ /31/ /31/ /30/2013 (incl. % achievement) Targets exceeded, after a delay. Distribution privatization program completed. Privatized companies have improved bill collection and eliminated payables to electricity suppliers. Indicator 7 : Attraction of private sector investments in new generation. (quantitative or 11,684 MW in the period. 11,684 MW in the period. 10,000 MW in the period and 12,500 in the period. 11,200 MW in ,000 MW in Date achieved 01/01/ /31/ /31/ /30/2013 (incl. % Original and higher revised targets exceeded. achievement) Indicator 8 : Enhanced public awareness of benefits of energy efficiency. Rate of electricity demand (GWh) growth contained. Less than Growth rate in No quantitative Less than 5% for (quantitative or 7%/annum for 2007 over 8%/annum. target set Date achieved 01/01/ /31/ /31/ /30/2013 (incl. % achievement) Higher than targeted reduction realized. (Impact of public awareness campaigns could not be assessed.) Second Programmatic Environmental Sustainability and Energy Sector Development Policy Loan - P (DPL2) Original Target Formally Actual Indicator Baseline s (from Revised Achieved at approval Target Completion or documents) s Target Years Indicator 1 : Day-ahead electricity market launched and operates effectively. At least 90% 37% payment record. payment record by Over 99%. Dayahead launched in Regulation for dayahead market to be issued. Day-ahead by Regulation At least 95% (quantitative or December issued. market by January Date achieved 01/01/ /31/ /31/ /30/2013 (incl. % Objective accomplished. Original and revised higher payment targets exceeded. Day-ahead market established and operating.

13 achievement) Indicator 2 : (quantitative or Cost reflective tariffs maintained. Cost-reflective tariffs achieved and maintained No tariff adjustments through the since Tariff rates implementation of below cost of service. the quarterly pricing mechanism. Cost-reflective tariffs achieved by 2009 and maintained from Date achieved 01/01/ /31/ /30/2013 (incl. % Objective accomplished. achievement) Indicator 3 : Improved financial performance of power companies, with loss for TEDAŞ and receivables for TEIAŞ and EÜAŞ reduce Main power utilities achieved profitability EUAS Main power companies Losses 2009, TEIAS 2010, making losses and reduced/eliminated and TEDAS (quantitative or accumulating receivables and Collection receivables and payables reduced. improved, payables payables. to private generators eliminated. Date achieved 01/01/ /31/ /30/2013 (incl. % Objective achieved in achievement) Indicator 4 : Private investment in the power sector. (quantitative or Distribution privatization program to start. 11,684 MW generation investment target for the period. Offer for sale all 18 distribution companies, transfer at least 15 by end Offer for sale 7 of the 18 companies under DPL2. 10,000 MW private generation investment in the period and 12,500 in the period. Distribution target revised from 15 to 12 by distribution companies by 2012, 17 at completion, and all 18 were privatized by September ,200 MW in ,000 MW in Date achieved 01/01/ /31/ /31/ /30/2013 Targets exceeded, ahead of schedule in generation investment, after a delay (incl. % distribution privatization. achievement)

14 Indicator 5 : Rate of electricity demand growth contained. Less than Growth rate in Less than 5% for (quantitative or 7%/annum for 2007 over 8%/annum Date achieved 01/01/ /31/ /30/2013 (incl. % Higher than targeted reduction realized. achievement) Indicator 6 : A new gas import contract signed by BOTAŞ or a private gas importer. Contract to be Contract signed in (quantitative or Contract not yet signed. signed in Date achieved 01/01/ /31/ /30/2013 (incl. % achievement) Indicator 7 : (quantitative or Contracts for the purchase of 6 bcm and transit of 10 bcm to Europe signed in 2011.(bcm=billion cubic meters) An inter-ministerial Climate Change Coordination Board and a Climate Change Department at the Ministry of Environment are working to ensure complimentarity between sector specific climate actions; and ii) a framework for monitoring the implementation of the National Climate Change Strategy and Action Plan is agreed. Strategy, Plan and framework to be established. Strategy and framework under DPL2, Action Plan under DPL3. Strategy and framework May 2010, Action Plan May Date achieved 01/01/ /31/ /30/2013 (incl. % Targets achieved ahead of deadlines. Impact long-term. achievement) Indicator 8 : Program-based Sectoral Environmental Assessment used to identify environmental priorities in a key economic sector. (quantitative or Sectoral environmental assessments not carried out. The transposition of EU s Strategic Environmental Assessment (SEA) Directive 2001/42/EU Not achieved. Regulation transposing the EU s Strategic Environmental Assessment (SEA) Directive delayed. Date achieved 01/01/ /31/ /30/2013 Not achieved. Action and indicator replaced in DPL3 - please see PDO (incl. % Indicator 8 in DPL3. achievement)

15 Indicator 9 : (quantitative or Increased transparency, accountability and public participation in the environmental consent process. Transposition of EU Directive 85/337/EEC as Government's EU amended with Integrated 97/11/EC and Environmental 2003/35/EC on Approximation Strategy calls for harmonization. Environmental Impact Assessment into law. Transposition completed. Date achieved 01/01/ /31/ /30/2013 Completed. EU Directive 85/337/EEC as amended with 97/11/EC and (incl. % 2003/35/EC on Environmental Impact Assessment transposed into law. achievement) Indicator 10 : Increased share of population served by sanitary landfills. (quantitative or Regulation on landfill of waste to be approved. 47% of population served by sanitary landfills. Regulation approved. 55% of population served by landfills. 55% of population served by landfills. Regulation approved. 55% of population served by landfills by Date achieved 01/01/ /31/ /31/ /30/2013 (incl. % Revised target achieved; original target achieved with one year delay. achievement) Indicator 11 : Clean Air Center in Marmara fully functioning and staffed to implement the Clean Air Action Plan. Clean Air Action Clean Air Action Plan approved Clean Air Action Plan Plan approved. (quantitative or April to be approved. Marmara Center Marmara Center functional. functional Date achieved 01/01/ /31/ /30/2013 (incl. % achievement) Targets achieved. Indicator 12 : At least 15 of the 25 river basins have developed watershed protection action plans. (quantitative or Areas for improved Areas for improved management of management of water water resources resources and quality to and quality be designated. designated. At least 17 action plans prepared. Areas for improved management of water resources and quality designated. 19 action plans prepared by Date achieved 01/01/ /31/ /30/2013 Areas designated. Target for action plans exceeded after a delay.

16 (incl. % achievement) Third Programmatic Environmental Sustainability and Energy Sector Development Policy Loan - P (DPL3) Original Target Formally Actual Baseline s (from Revised Achieved at Indicator approval Target Completion or documents) s Target Years Indicator 1 : Day-ahead electricity market launched and operates effectively. (quantitative or 37% payment record. Regulation for dayahead market to be issued. At least 95% payment record by Over 99%. Date achieved 01/01/ /31/ /30/2013 Objective accomplished. Payment target exceeded. Day ahead market (incl. % operating. achievement) Indicator 2 : Cost reflective tariffs maintained. (quantitative or Cost-reflective tariffs achieved and maintained No tariff adjustments through the since Tariff rates implementation of below cost of service. the quarterly pricing mechanism. Cost-reflective tariffs achieved by 2009 and maintained from Date achieved 01/01/ /31/ /30/2013 (incl. % Objective accomplished. achievement) Indicator 3 : Improved financial performance of power companies, with loss for TEDAŞ and receivables for TEIAŞ and EÜAŞ reduce Main power utilities achieved profitability EUAS Main power companies Losses 2009, TEIAS 2010, making losses and reduced/eliminated and TEDAS (quantitative or accumulating receivables and Collection receivables and payables reduced. improved, payables payables. to private generators eliminated. Date achieved 01/01/ /31/ /30/2013 (incl. % Objective achieved in achievement)

17 Indicator 4 : (quantitative or Private investment in the power sector. Offer for sale all 18 distribution companies, transfer at least 12 Distribution by end privatization program to Offer for sale 7 of start. 11,684 MW the 18 companies generation investment under DPL3. target for the ,000 MW of 2012 period. private electricity generation in the period and 12,500 in the period. 10 distribution companies by 2012, 17 at completion, and all 18 were privatized by September ,200 MW in ,000 MW in Date achieved 01/01/ /31/ /30/2013 Targets exceeded, ahead of schedule in generation investment, after a delay (incl. % distribution privatization. achievement) Indicator 5 : Rate of electricity demand growth contained. (quantitative or Growth rate in over 8%/annum. Less than 7%/annum for Less than 5% for Date achieved 01/01/ /31/ /30/2013 (incl. % Higher than targeted reduction realized. achievement) Indicator 6 : A new gas import contract signed by BOTAŞ or a private gas importer. Contract to be Contract signed in (quantitative or Contract not yet signed. signed in Date achieved 01/01/ /31/ /30/2013 (incl. % achievement) Indicator 7 : (quantitative or Contracts for the purchase of 6 bcm and transit of 10 bcm to Europe signed in (bcm=billion cubic meters) An inter-ministerial Climate Change Coordination Board and a Climate Change Department at the Ministry of Environment are working to ensure complimentarity between sector specific climate actions; and ii) a framework for monitoring the implementation of the National Climate Change Strategy and Action Plan is agreed. Strategy, Plan and framework to be established. Strategy and framework under DPL2, Action Plan under DPL3. Strategy and framework May 2010, Action Plan May Date achieved 01/01/ /31/ /30/2013 (incl. % Targets achieved ahead of deadlines. Impact long-term. achievement)

18 Indicator 8 : (quantitative or An integrated system for environmental e-permits is operational. Permitting, monitoring and inspection An integrated An integrated conducted by different system for system for units of the MoEU; environmental environmental provincial directorates permits and permits and lacking standard rules licensing in place licensing in place at for environment permits at MoEU. MoEU by and compliance checks. Date achieved 01/01/ /31/ /30/2013 (incl. % achievement) Achieved. In addition, there is the establishment of permitting, monitoring and inspection departments in MoEU s provincial directorates and certification of more than 5,000 environmental officials by end Indicator 9 : Increased transparency, accountability and public participation in the environmental consent process. (quantitative or Government's EU Integrated Environmental Approximation Strategy calls for harmonization. Transposition of EU Directive 85/337/EEC as amended with 97/11/EC and 2003/35/EC on Environmental Impact Assessment Transposition completed. Date achieved 01/01/ /31/ /30/2013 Completed. EU Directive 85/337/EEC as amended with 97/11/EC and (incl. % 2003/35/EC on Environmental Impact Assessment transposed into law. achievement) Indicator 10 : Increased share of population served by sanitary landfills. (quantitative or Regulation on landfill of waste to be approved. 47% of population served by sanitary landfills. Regulation approved. 55% of population served by landfills. 55% of population served by landfills. Regulation approved. 55% of population served by landfills by Date achieved 01/01/ /31/ /31/ /30/2013 (incl. % achievement) Revised target achieved; original target achieved with one year delay. In 2003 there were 15 sanitary landfills, whereas by 2013 this number has increased to 69 Indicator 11 : Clean Air Center in Marmara fully functioning and staffed to implement the Clean Air Action Plan. (quantitative or Clean Air Action Plan to be approved. Clean Air Action Plan approved. Marmara Center functional. Clean Air Action Plan approved April Marmara Center functional Date achieved 01/01/ /31/ /30/2013 (incl. % achievement) Targets achieved.. The Marmara Clean Air Centre has been established with 21 technical staff and a regional network of 39 air quality monitoring stations, Regional Calibration Laboratory, Regional Data Centre, and Analytical

19 Indicator 12 : (quantitative or Laboratory. The center is structured to conduct air quality assessments, modeling of emission data and preparation of clean air plans At least 15 of the 25 river basins have developed watershed protection action plans. Areas for improved Areas for management of improved water resources and Areas for improved management of quality designated. management of water water resources 19 action plans resources and quality to and quality prepared by be designated. designated. At All 25 basin least 17 action protection plans to plans prepared. be completed by end-2013 Date achieved 01/01/ /31/ /30/2013 (incl. % Areas designated. Target for action plans exceeded after a delay. achievement) (b) Intermediate Outcome Indicator(s) Programmatic Electricity Sector Development Policy Loan P (DPL1) Original Target Actual Formally s (from Achieved at Indicator Baseline Revised approval Completion or Target s documents) Target Years Indicator 1 : Offer for sale the first four distribution companies. (quantitative or Privatizatio n program to start. The first four companies offered for sale. The first four companies were offered for sale on schedule. Date achieved 01/01/ /31/ /30/2013 (incl. % achievement) Achieved. This first phase of the distribution privatization program successfully completed. Second Programmatic Environmental Sustainability and Energy Sector Development Policy Loan P (DPL2) Indicator Baseline Original Target Actual Formally s (from Achieved at Revised approval Completion or Target s documents) Target Years Indicator 1 : Offer for sale the next seven distribution companies. (quantitative or Privatizatio n program to start. The next seven companies offered for sale. The next seven companies were offered for sale on schedule. Date achieved 01/01/ /30/ /30/2013 (incl. % achievement) Achieved. This second phase of the distribution privatization program successfully completed.

20 Third Programmatic Environmental Sustainability and Energy Sector Development Policy Loan - P (DPL3) Original Target Actual Formally s (from Achieved at Indicator Baseline Revised approval Completion or Target s documents) Target Years Indicator 1 : Sell 12 distribution companies by end 2012? (quantitative or Date achieved (incl. % achievement) 10 sold, 2 in progress and 6 behind 12 by end of 2012 All offered for sale 10 privatized end of Rest privatized in 2013 Mostly achieved by end of 2012 and all achieved before loan closed in G. Ratings of Program Performance in ISRs Second Environmental Sustainability and Energy Sector Development Policy Loan - P (DPL2) Actual Date ISR No. DO IP Disbursements Archived (USD millions) 1 01/11/2011 Satisfactory Satisfactory Third Environmental Sustainability and Energy Sector Development Policy Loan - P (DPL3) No. Date ISR Archived DO IP Actual Disbursements (USD millions) 1 08/14/2012 Satisfactory Satisfactory /04/2013 Satisfactory Satisfactory H. Restructuring (if any) None

21 1. Program Context, Development Objectives and Design This ICR evaluates three predominantly energy and environment-oriented development policy loans (DPL). The first loan, entitled Programmatic Electricity Sector DPL (PEDPL1) 1, was designed and approved in 2009 as an energy (primarily electricity) DPL under the Turkey Country Partnership Strategy (CPS) FY The CPS was adjusted at mid-term to support the transition from weathering the global financial crisis to returning to sustainable growth. In that context it was agreed to deepen the engagement in the area of sustainability and inter alia agreed to broaden the energy DPL program to also support policies, strategies and specific measures related to climate change and environmental management in the re-named new Environmental Sustainability and Energy Sector (ESES) DPL program. This design provided an integrated approach to the energy security - energy efficiency - environment nexus and is consistent with the European Union s (EU) energy, climate and environmental goals. The second and third of the operations, accordingly entitled ESES DPL2 2 and the ESES DPL3 3, were approved in 2010 and 2012, respectively. This ICR evaluates the series of three operations termed PEDPL1, ESES DPL2 and ESES DPL3. For ease, we refer to these operations throughout the report as DPL1, DPL2 and DPL3, respectively and the series is referred to as the ESES DPL series. The predominant energy and environment-orientation of the ESES DPL series was possible as the Bank was implementing in parallel a separate series of predominantly macro-oriented DPLs. The Second Programmatic Public Sector DPL 4 was prepared in parallel with DPL1 and was approved in It was followed by two DPLs in the Restoring Equitable Growth and Employment (REGE) DPL series 5. They were prepared in parallel with DPL2 and DPL3 and approved in 2010 and 2011, thereby supporting Turkey in managing the impact of the global financial crisis. An Implementation Completion and Results Report of these macro-oriented operations was prepared in While predominantly energy and environment-oriented, the ESES DPL series also supported the macro economy by helping to contain large energy-related import costs, supporting large-scale energy privatizations helping produce significant privatization proceeds and providing a complementary contribution to strengthening the public sector s long-term sources of financing. 1 Programmatic Electricity Development Policy Loan (PEDPL1), Report No TR, May 18, Second Environmental Sustainability and Energy Sector Development Policy Loan (ESES DPL2), Report No TR, May 14, Third Environmental Sustainability and Energy Sector Development Policy Loan (ESES DPL3), Report No TR, February 29, Second Programmatic Public Sector Development Policy (PPDPL2), Report No TR, May 17, Restoring Equitable Growth and Employment DPL1, Report No TR, February 23, 2010 and DPL2, Report No TR, April 7, Implementation Completion and Results Report, Report No. ICR2344, June 26,

22 1.1 Context at Appraisal The ESES DPL program was grounded in the development goals articulated in Turkey s Ninth Development Plan ( ). The top priorities of the Ninth Plan included: (a) sound macroeconomic and related structural fiscal policies to maintain stability and reduce short and medium term vulnerabilities; (b) investment climate, labor market, and skills reforms to increase competitiveness and create jobs, especially for women and youth; (c) fundamental education reforms and continuing health and social welfare reform to increase productivity and help share the gains from growth through equal opportunities; and (d) continuing energy and water sector reforms and investments to further increase energy efficiency, the use of renewable energy, and energy security and help reduce greenhouse gas emissions and mitigate and adapt to climate change. The Ninth Development Plan linked growth and sustainable development focusing inter alia on energy, mining, environment, water and natural resources. After a banking crisis in 2001, when GDP contracted by 5.7 percent, and an expensive recapitalization of its banks; Turkey had embarked on a path of concerted reform. Turkey s macroeconomic policies and structural reforms over the past decade had yielded robust economic growth. However, in 2008 the global economic downturn hit Turkey s economy through the export and financial channels. Growth decelerated and GDP actually fell in the 4 th quarter of 2008 bringing the annual growth for the year down to 1.1 percent. The government forecast Turkish economic growth to be -3.6 percent in 2009 and the outlook for 2010 was uncertain. Actual decline in 2009 turned out to be even deeper at -4.8 percent, but the economy rebounded quickly and registered a growth of 9 percent for The Country Partnership Strategy (CPS) for FY08-11 was endorsed by the Board of Directors on February 28, 2008 and the Progress Report on January 7, The FY08-11 CPS was shaped directly by Turkey s Ninth Development Plan to contribute to three of the Plan s development pillars: (a) improved competitiveness and employment, (b) equitable human and social development, and (c) efficient provision of high-quality public services. During the preparation of the CPS, the Government expressed strong interest in DPLs to accompany and support Turkey s ongoing reform agenda, primarily because of the Bank s comparative advantage in policy advice and support linked to flexible budget financing. In the CPS Progress Report in 2010, Turkey and the Bank adjusted the Partnership Strategy in light of the global crisis. The program for the remainder of the CPS period was focused sharply on areas crucial for renewed growth: stimulating private sector, especially small and medium enterprises, business and job creation; sustainable energy and infrastructure; and human capital. The Government and the Bank also agreed to broaden the Electricity DPL program launched in FY09, to include climate change and key environmental sustainability reforms in the re-named ESES DPL program (which is the subject of this ICR). It was triggered by Turkey s signing of the Kyoto Protocol and the opening of the EU Environment Chapter for negotiations. 2

23 1.2 Original Program Development Objectives (PDO) and Key Indicators (as approved) The original program development objective as reflected in DPL1 was to support the implementation of the Government s program that aims to address the projected electricity supply-demand imbalance: (a) through energy efficiency measures to reduce the rate of growth of demand for electricity, and (b) by enhancing the efficient supply of electricity. The original key indicators for the program were: (i) Improved management of electricity demand-supply imbalance; (ii) Improved functioning of the wholesale market; (iii) Improved payment performance for transactions through the wholesale market; (iv) Provision of budgetary allocations on a priority basis in line with approved transmission system investment plans; (v) Cost-reflective tariffs achieved; (vi) Improved financial performance of the power companies; (vii) Improved operational efficiency in privatized companies; (viii) Attraction of private sector investments in new generation; and (ix) Enhanced public awareness of benefits of energy efficiency (x) Rate of electricity demand (GWh) growth contained. 1.3 Revised PDO and Key Indicators, and Reasons/Justification In accordance with the request of the Government for the Bank to provide broader support to the Government s sustainability agenda, the revised program development objectives as reflected in DPL2 and DPL3 were to help: (a) enhance energy security by promoting private sector clean technology investments and operations; (b) integrate principles of environmental sustainability, including climate change considerations, in key sectoral policies and programs; and (c) improve the effectiveness and efficiency of environmental management processes. The Government had concluded that energy efficiency, energy security and environmental issues are most effectively addressed in an integrated program. Furthermore, this energy security - energy efficiency - environment nexus is consistent with the EU s energy, climate and environmental goals and effectively contributes to Turkey's EU accession process (the Environment Chapter had been opened for negotiations in 2009). Details are provided in Annex 2. The revised key indicators for the program s main policy areas are. Energy Sector: (i) day-ahead electricity market launched and operates effectively; (ii) cost reflective tariffs maintained; (iii) improved financial performance of power companies, with losses for TEDAŞ and receivables for TEIAŞ and EÜAŞ reduced; (iv) attraction of private investment in the power sector; (v) rate of electricity demand growth contained; and (vi) a new gas import contract signed by BOTAŞ or a private gas importer; Climate Change: (i) An inter-ministerial Climate Change Coordination Board and a Climate Change Department at the Ministry of Environment and Urbanization are working to coordinate and ensure complementarity between 3

24 sector specific climate actions; and (ii) a framework established for monitoring the implementation of the National Climate Change Strategy and Action Plan agreed; and Sustainable Environmental Management: (i) An integrated system for environmental e-permits is operational; (ii) Increased transparency, accountability and public participation in the environmental consent process; (iii) increased share of population served by sanitary landfills; (iv) Clean Air Center in Marmara fully functioning and staffed to implement the Clean Air Action Plan; and (v) at least 15 of the 25 river basins have developed watershed protection action plans. 1.4 Original Policy Areas Supported by the Program (as approved): The program was originally focused exclusively on the energy sector. DPL1 included nine prior actions. They are discussed in section 2.1. The implementation of the energy program continued under the broadened ESES DPL series. Eight energy sector policy actions were originally (at the time of DPL1) envisioned as prior actions for the energy PEDPL2. Seven of these original eight energy sector actions were completed by the Government. Three of these completed actions were included as prior actions for ESES DPL2. The other completed energy actions originally envisaged for PEDPL2 were not included as prior actions for ESES DPL2, for reasons of program balance and focus i.e. too many energy actions. One of the original eight actions a capacity mechanism for electricity generation - was removed from the Government s agenda and was substituted in DPL2 with the electricity generation privatization strategy Thus, the prior energy actions for DPL2 were focused on the most important measures within the expanded ESES program For DPL3 some further energy actions were added. 1.5 Revised Policy Areas In accordance with the request of the Government for the Bank to provide broader support to the Government s sustainability agenda, the program was expanded to support policies, strategies and specific measures related to climate change and environmental management. For that purpose the original Energy Sector Pillar was complemented by two additional pillars, one for Climate Change and one for Sustainable Environmental Management. The new prior actions are discussed in section Other significant changes (in design, scope and scale, implementation arrangements and schedule, and funding allocations) The original program design, focused on the energy sector, envisioned a series of two DPLs: PEDPL1 in FY09 and PEDPL2 in FY10. The revised program design, expanded to included climate change and sustainable environmental management, consisted of a series of three DPLs; PEDPL1 ( DPL1), ESES DPL2 and ESES DPL3. PEDPL2 became ESES DPL2 and was approved in FY10. Fund allocations were determined in the 4

25 context of the Country Partnership Strategies FY08-11 (DPL1 and DPL2) and FY12-15 (DPL3). Therefore, notwithstanding the expanded scope of ESES DPL2, at Euro million (US$ 700 million equivalent), the loan amount was less than the Euro million (US$ 800 million equivalent) of PEDPL1. The loan amount of ESES DPL3 was the smallest in the series at Euro million (US$600 million equivalent). The total program amounted to Euro 1,523.4 million (US$2,100 million equivalent). 2. Key Factors Affecting Implementation and Outcomes 2.1 Program Performance DPL1 (=PEDPL1) May 2009 Prior actions from Legal Agreement/ Program Document Status 1. Approval of an Electricity Market and Security of Supply Strategy Approved May Amendments of the Electricity Market Law to monitor, evaluate and Law No of adopt measures to ensure security of electricity supply. July Revision of retail electricity prices to offset the impact of increases in Adjustments in the cost of supply. January, July and 4. Approval of a cost-based pricing mechanism that automatically covers future increases in justified costs incurred by the electricity sector State Owned Enterprises. 5. Adoption of legislative amendments to improve the payment for street lighting. 6. The bidding process for the first two lots of distribution companies (for four companies) launched by the Privatization Administration, with winning bidders determined. 7. Issuance by the Energy Market Regulatory Authority EMRA of the modified balancing and settlement regulations. 8. A decision to provide on a priority basis the necessary budgetary allocations in line with approved transmission system investment plans. 9. Issuance of the first set of secondary regulations related to energy efficiency. October Approved March 2008, became effective in July Law No of July Accomplished July and September 2008 respectively. Issued in April Approved May Issued July- October DPL2 (=ESES DPL2) May 2010 Prior actions from Legal Agreement/ Program Document 1. Implementation of the energy regulator EMRA s wholesale electricity market regulation by the transmission system and electricity market operator TEIAŞ. 2. Sustained implementation of the cost-based pricing mechanism by the energy regulator EMRA. 3. Launching of the bidding process and determination of the winning bidders for seven electricity distribution companies by the Privatization Administration. Status Milestones accomplished December Quarterly implementation as required. Accomplished November 2009 (three companies) and February 2010 (four companies). 5

26 4. Determination of the strategy for electricity generation privatization by the Privatization Administration, EMRA and the Ministry of Energy and Natural Resources. 5. Government approval of a National Climate Change Strategy and an assessment of clean technology options for the energy sector. 6. Government approval of an EU Integrated Environmental Approximation Strategy. 7. Transposition of EU Directive 85/337/EEC as amended with 97/11/EC and 2003/35/EC on Environmental Impact Assessment into law. 8. Issuance of a Regulation on Landfill of Waste by the Ministry of Environment and Forestry. 9. Approval of a Clean Air Action Plan by the Ministry of Environment and Forestry. 10. Designation and publication by the Government of sensitive and less sensitive areas for the improved management of water resources and water quality. Published March Approved May Approved February Issued July Issued March Approved April Published June DPL3 (=ESES DPL3) February 2012 Prior actions from Legal Agreement/ Program Document 1. Launching of the day-ahead wholesale electricity market by the transmission system and electricity market operator TEIAŞ. Launched December Enactment of an Amendment of the Renewable Energy Law. Enacted January Government approval of an Energy Efficiency Strategy. Approved February Government s Climate Change Coordination Board approval of a National Climate Change Action Plan. 5. Issuance by the Ministry of Environment and Urbanization of a Regulation transposing Directive 2001/80/EC on Large Combustion Plants (for licensing of new installations. 6. Issuance by the Ministry of Environment and Urbanization of a Regulation, and amendments to the Regulation, on Permits and Licenses in Accordance with the Environmental Law. 7. Issuance by the Ministry of Environment and Urbanization of an amendment to the Regulation on Industrial Air Pollution Control. 8. Issuance by the Ministry of Environment and Urbanization of a Regulation on the Control of Soil Pollution and Contaminated Sites by Point Sources. Approved May Issued June Issued April 2009, amended February 2010, April 2010 and August October June The prior actions are summarized by pillar and policy objective supported in Annex Major Factors Affecting Implementation: Overall, the implementation of the program supported by the DPL series went as planned. One of the major factors underpinning such performance was Turkey s stable political situation throughout the program period. Turkey has been governed by the Justice and Development (AK) Party, which has an overall majority in Parliament since 2002 and 6

27 was most recently reelected in June The program implementation reflected this political stability and benefited from continuity and strong Government ownership, as well as Government commitment and implementation capacity. While there were delays in some individual components including a major setback in the third phase of the electricity distribution privatization program (discussed below), overall the program implementation progressed steadily and adjustments/replacements were agreed within the overall framework. The macroeconomic situation varied in an unusually pronounced manner during the program period. After years of solid growth after the 2001 banking crisis, growth decelerated as the global crisis hit Turkey in 2008 and the economy contracted by almost 5 percent in A considerable change in the direction of government policy, tilting away from structural reforms and towards efforts to contain the impact of the crisis, was necessary. The crisis and the resulting shift in government policy did not affect the design of the program supported by the ESES DPL: the assessment was that energy reforms needed to continue and the Government even expanded the scope of the program to climate change and sustainable environmental management as important long-term priorities. There was, however, a significant reorientation in the Bank s parallel primarily macro-oriented DPL operations resulting in the REGE DPL program which supported Turkey s transition from crisis management to recovery and growth. The crisis affected the electricity distribution privatization program. The winning bidders in the third phase of the program could not fulfill their bid obligations, ultimately rebidding became necessary and the privatization program was finally completed in 2013 instead of the original 2011 schedule. This risk had been identified in the program design. 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization: The Undersecretariat of the Treasury was responsible for coordinating actions among other concerned ministries and agencies. A number of other agencies were involved in the implementation of the program supported by the ESES DPL series including: (1) the Ministry of Development (MoD); (2) the Ministry of Energy and Natural Resources (MENR); (3) the Ministry of Environment and its successor entities the Ministry of Environment and Urbanization (MoEU) and the Ministry of Forestry and Water Affairs (MoFW); (4) the energy regulator (EMRA), (5) the Privatization Administration (PA), and 6) the energy utilities. The Treasury played an effective role in monitoring progress on agreed policy areas and maintaining frequent contact with the Bank team. Treasury staff and the Bank team had joint meetings with line ministries. The Treasury also maintained separate lines of communication with the Ministry of Development and the participating line ministries and the Privatization Administration. The Bank reviewed the progress of the program and helped identify and participated in discussions on adjustments as the program evolved. Reviews focused on the impacts of the various prior actions. Monitoring indicators were tracked. A noteworthy feature in project design was the agreement to set the closing date of the March 2012 DPL3 loan as June 30, 2013, to allow for the monitoring to continue longer than usual after the approval of the final loan in the ESES DPL program. 7