The World Bank Turkey Geothermal Development Project (P151739) REPORT NO.: RES39523 RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF TURKEY GEOTHERMAL DEVELOPMENT PROJECT APPROVED ON NOVEMBER 1, 2016 TO TURKIYE SINAI KALKINMA BANKASI A.S. (TSKB), TURKIYE KALKINMA VE YATIRIM BANKASI A.S. (TKYB) ENERGY & EXTRACTIVES EUROPE AND CENTRAL ASIA Regional Vice President: Cyril E Muller Country Director: Auguste Tano Kouame Regional Director: Lucio Monari Practice Manager/Manager: Sameer Shukla Task Team Leader(s): Almudena Mateos Merino, Ayse Yasemin Orucu The World Bank Turkey Geothermal Development Project (P151739) ABBREVIATIONS AND ACRONYMS CTF Clean Technology Fund GPP Geothermal Power Project TKYB Development Bank of Turkey TSKB Industrial Development Bank of Turkey RSM Risk Sharing Mechanism The World Bank Turkey Geothermal Development Project (P151739) BASIC DATA Product Information Project ID Financing Instrument P151739 Investment Project Financing Original EA Category Current EA Category Financial Intermediary Assessment (F) Financial Intermediary Assessment (F) Approval Date Current Closing Date 01-Nov-2016 31-Dec-2022 Organizations Borrower Responsible Agency Turkiye Sinai Kalkinma Bankasi A.S. (TSKB),Turkiye Turkiye Kalkinma ve Yatirim Bankasi A.S. (TKYB),Turkiye Kalkinma ve Yatirim Bankasi A.S. (TKYB) Sinai Kalkinma Bankasi A.S. (TSKB) Project Development Objective (PDO) Original PDO The Project Development Objective is to scale up private sector investment in geothermal energy development in Turkey. OPS_TABLE_PDO_CURRENTPDO Summary Status of Financing Net Ln/Cr/Tf Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed IBRD-86520 01-Nov-2016 30-Nov-2016 16-Feb-2017 31-Dec-2022 100.00 80.10 19.90 IBRD-86530 01-Nov-2016 30-Nov-2016 16-Feb-2017 31-Dec-2022 150.00 117.88 32.13 TF-A1532 30-Nov-2016 30-Nov-2016 04-Apr-2017 31-Dec-2022 39.80 .53 39.27 Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No The World Bank Turkey Geothermal Development Project (P151739) I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING 1. The project is financed with a US$39.8 million Clean Technology Fund (CTF) Grant (No. TF0A1532), US$100 million IBRD Loan (No. 8652-TR) and US$150 million IBRD Loan (No. 8653-TR). 2. Project Status: The progress towards achievement of the Project Development Objective (PDO) is rated Satisfactory and Implementation Progress is rated Moderately Satisfactory in the last ISR. The Recipient (Development and Investment Bank of Turkey, TKYB) and the Borrowers (TKYB and Industrial Development Bank of Turkey, TSKB) are on track to meet the development objectives. The detailed progress is described below. 3. Component 1: Risk Sharing Mechanism (RSM) for Resource Validation. This component, financed by a CTF Grant to TKYB, establishes a mechanism to promote private sector development of renewable geothermal energy investments in the early stages of geothermal exploratory and confirmation drilling by sharing the risk of failing to validate a geothermal energy resource with geothermal explorers through the RSM. It also provides technical assistance to TKYB to strengthen its capacity to supervise implementation of the RSM. 4. A Grant Agreement was signed on November 30h, 2016 between IBRD and TKYB for a grant in the amount of US$39.8 million for financing the RSM component, split as follows: a. US$38 million Contingent Recovery Grant for exploration drilling projects to be insured against unsuccessful wells (the RSM Fund); and b. US$1.8 million Grant for consultancy services under the technical assistance sub-component of the project, mainly to cover the cost of the RSM consultant to be hired to support TKB in the detailed design and implementation1 of the RSM for one round of applications. 5. In March 5, 2018, TKB hired a technical consultant (RSM consultant) to assist with preparation and implementation of the RSM. The RSM consultant assisted TKB to prepare the RSM documentation, including Beneficiary Manual, Operations Manual, sample Beneficiary Agreement (BA), RSM website, RSM database, as well as the workshop to launch the first RSM application round in July 2018. This first RSM round has so far been successful, with the following results: a. 20 applications to the RSM were received; b. 8 applications passed the technical and financial evaluation (2 applications have been combined); and c. A total of 7 project sponsors are in the process of negotiating or signing Beneficiary Agreements with the RSM, with all exploratory drilling sub-projects expected to start implementation in the first half of 2020. 6. Once the 7 Beneficiary Agreements are signed, about US$16 million would remain uncommitted in the RSM account. During the mid-term review mission in October 2019, the World Bank team and TKB agreed to prepare a second round of applications for the RSM, which is expected to be launched in May 2020. A third (and possibly final) round will only happen once most of the sub-projects from the first two rounds have been completed and there is clarity on the remaining funds available in the RSM. 1This includes support for the technical and financial evaluation of RSM proposals, negotiations with RSM Beneficiaries, and supervision of RSM sub-projects during implementation, including compliance with both technical requirements and environmental and social requirements. The World Bank Turkey Geothermal Development Project (P151739) 7. Component 2: Loan Facility for Resource Development: This component, financed by two IBRD credit lines to TKYB and TSKB, provides financing to geothermal developers to support license holders and financiers investing in geothermal project development at: (i) the capacity drilling stage; and (ii) the steam gathering, power plant, or direct use facility construction stage. TKB has provided financing to two geothermal projects under its credit line, namely the Özmen 3 Geothermal Power Plant (19 MW) and the Sanko I GPP (15 MW) and is currently finalizing due diligence on a third project, the Sanko II GPP (25 MW). As of October 2019, disbursements are US$60 million, or 60 percent of the loan. TSKB has provided financing to three geothermal projects under its credit line, namely the Kizildere III – Unit 1 GPP (95 MW), the Kizildere III - Unit 2 GPP (70 MW), and the Turcas GPP (18 MW) and is completing due diligence of Ida GPP (11.75 MW). As of October 2019, disbursements are US$118 million, or 79 percent of the loan and expected to reach US$130 million by end 2019. Rationale for Restructuring 8. The project’s first restructuring was approved on 8/20/2018. It was requested by TKYB to be able to cover its incremental operating costs associated with the implementation of the RSM from the CTF grant proceeds. These incremental costs included office supplies, office rental, publication of procurement notices, vehicle rental, office and equipment maintenance and repair, communication, travel and supervision costs, subscription to publications and databases, publication fees, ownership of intellectual property rights, and other miscellaneous expenses. Accordingly, the following changes were made to the CTF Grant No. TF0A1532: (i) Addition of a new disbursement category (Category 3) “Operating Costs and Training”; (ii) Reduction in the amount of Category 2 from US$1.8 million to US$1.67 million; (iii) Reallocation of US$130,000 from Category 2 to the new Category 3; and (iv) adding the definitions of “Operating Costs” and “Training”. 9. This would be the second restructuring of the Project and includes the request to: (i) amend the CTF Grant Agreement to reallocate US$1 million from Category (1) Payments out of the RSM under Part A of the Project to Category (2) Consultant’s services under Part A of the Project; and (ii) revise the intermediate results indicators for Components 1 and 2 of the project. 10. Rationale for amendment of the CTF grant agreement to re-allocate 1,000,000 USD from disbursement category (1) Payments out of the RSM under Part A of the Project to category (2) Consultant’s services under Part A of the Project: At project appraisal, it was estimated that a total of about 20 projects could be supported by the RSM (through 3 application rounds), based on the observed drilling success rates globally and in Turkey and on the estimated drilling costs. However, the CTF grant funding allocated for the RSM consultant (about 1,500,000 USD) was only sufficient to cover preparation and implementation of one round of application (based on the estimated number of sub-projects). Nevertheless, the Bank team and the Government of Turkey agreed to proceed with a project design that contemplated three application rounds in total with an understanding that the first round would serve to confirm an interest for the scheme from the geothermal market. However, if no additional RSM application rounds are organized, the project will fail to fully meet its objectives. In this context, and given the lack of funding at the level of the Government of Turkey (or TKB) to cover the costs of the RSM consultant for additional application rounds, the World Bank submitted a request on behalf of TKB to the CTF Trust Fund Committee to convert US$1 million from the CTF Contingent Recovery Grant into a CTF Grant to fund the consultancy services of the 2nd and, if applicable, the 3rd round of the RSM. 11. On September 25, 2019, the CTF Trust Fund Committee approved the request to convert US$1 million from the contingent recovery grant financing the RSM into a pure grant to provide additional funding to the RSM technical assistance sub-component. The conversion will change the amount of the contingent recovery grant from 38,000,000 USD The World Bank Turkey Geothermal Development Project (P151739) to 37,000,000 USD and the amount of the grant funding from US$1.67 million to US$2.67 million. The changes do not affect the original amount approved for the project of 39,800,000 USD. 12. Rationale for revision of the targets in the results framework for Component 1 of the project: The Intermediate Results Indicators for Component 1 (the RSM) will be revised based on the experience gained from the first application round. This pertains specifically to the expected installed capacity of projects selected for support under the RSM, the expected cost of exploration drilling for these projects, and the ratio between projects with 40% versus 60% coverage under the RSM. Originally, 8 projects by 5 developers were found to meet the RSM criteria, but during subsequent discussions, 2 projects in adjacent license areas were combined into one, resulting in a total of 7 projects on track to be supported by the RSM during the first application round. The total expected installed capacity ultimately resulting from the 7 projects would be 85 MW, and the total exploration drilling cost for the projects is estimated at US$33 million. The total commitment by the RSM for these projects is US$21 million, leaving US$16 million of the RSM funds available for the second round of applications. 13. For the purposes of revising the Intermediate Results Indicators, it is appropriate to make the conservative assumption that 50% of the projects covered under the RSM will ultimately result in successful development of geothermal power plants. This means that 3 to 4 projects selected for coverage from the first application round would be successful and about 42.5 MW of resources would be confirmed as a result of the first round. This would also mean that the pay-out from the RSM when these projects have been completed would be about US$10.5 million and that US$11.55 million (the unused 10,500,000 plus 10% success fee from the successful projects) would be available for the third round of applications. 14. The expected geothermal resources confirmed, and volume of direct financing catalysed by CTF financing during the second and third application rounds can be estimated following the same logic and using the same average project size, expected drilling cost, and RSM coverage ratio as for the first application round. This analysis yields 5 to 6 projects supported under the second application round (US$16 million available after the reallocation), resulting in 32 MW of confirmed resources and US$25.5 million of private capital mobilized. The corresponding numbers for the third round (estimated US$11.55 million available) are 4 projects supported, 23 MW confirmed, and US$18 million of private capital mobilized. 15. Based on the rationale above, the revised total number of projects supported under the RSM during the first three application rounds would thus be 16 (compared to 20 estimated at appraisal), the total power generation capacity confirmed would be 99.5 MW (compared to 208 MW estimated at appraisal) and $78 million of private capital would be mobilized (compared to $202 million estimated at appraisal). It must be noted that according to the above scenario, a total of about 15,500,000 USD would be left in the RSM available for subsequent application rounds, but these would be beyond the scope of the project, which is expected to close on December 31, 2022. 16. Rationale for revision of the targets in the results framework for Component 2 of the project: The end-targets for the indicators “geothermal resources developed through capacity drilling” (End Target - 120 MW) and “capacity drilling projects supported by the loan facility” (End Target - 5 projects) have already been achieved, with current values of 181 MW and 6 projects respectively. Given that there are only $20 million unallocated under the TSKB credit line, a conservative estimate is that the current values will not increase since the remaining funds, which will likely be allocated to a single project, may only finance power plant construction (i.e. as opposed to capacity drilling). As for the third indicator “volume of indirect financing catalyzed by CTF financing”, it was estimated, at appraisal stage, that capacity drilling for some of the successful exploratory drilling projects supported under the RSM would be financed under the Component 2 credit lines. However, it is expected that both IBRD credit lines will be fully committed and/or disbursed to other capacity The World Bank Turkey Geothermal Development Project (P151739) drilling and power plant construction projects by the time the first projects from the RSM have achieved results. Thus, it is proposed that this indicator is eliminated from the results framework. 17. Based on the rationale above, the end-targets of Component 2 for the indicators “geothermal resources developed through capacity drilling” and “capacity drilling projects” would be modified to reflect the current values and the third indicator “volume of indirect financing catalyzed by CTF financing” would be removed. II. DESCRIPTION OF PROPOSED CHANGES 18. The proposed changes include the following: 19. Amendment of the CTF Grant Agreement to re-allocate 1,000,000 USD from disbursement category (1) Payments out of the RSM under Part A of the Project to category (2) Consultant’s services under Part A of the Project. Current Allocation Contingent recovery grant funding 38,000,000 USD Grant Funding 1,800,000 USD Consultants' Services Part A 1,670,000 USD Operating Costs 130,000 USD Total 39,800,000 USD Proposed Allocation Contingent recovery grant funding 37,000,000 USD Grant Funding 2,800,000 USD Consultants' Services Part A 2,670,000 USD Operating Costs 130,000 USD Total 39,800,000 USD 20. Revision of the targets in the results framework for Component 1 and Component 2 of the project to reflect the findings from the first round of applications as follows: Targets At Appraisal Proposed Component 1: Exploration drilling projects supported under the 20 16 RSM Total power generation capacity confirmed 208 MW 99.5 MW Total private capital mobilized 202,000,000 USD 78,000,000 USD Component 2: Geothermal resources developed through 120 MW 181 MW capacity drilling The World Bank Turkey Geothermal Development Project (P151739) Number of Capacity drilling projects 5 6 Volume of indirect financing catalysed by CTF 117 Removed financing (USD m) III. SUMMARY OF CHANGES Changed Not Changed Results Framework ✔ Reallocation between Disbursement Categories ✔ Technical Analysis ✔ Implementing Agency ✔ DDO Status ✔ Project's Development Objectives ✔ Components and Cost ✔ Loan Closing Date(s) ✔ Cancellations Proposed ✔ Disbursements Arrangements ✔ Disbursement Estimates ✔ Overall Risk Rating ✔ Safeguard Policies Triggered ✔ EA category ✔ Legal Covenants ✔ Institutional Arrangements ✔ Financial Management ✔ Procurement ✔ Implementation Schedule ✔ Other Change(s) ✔ Economic and Financial Analysis ✔ Social Analysis ✔ Environmental Analysis ✔ The World Bank Turkey Geothermal Development Project (P151739) IV. DETAILED CHANGE(S) OPS_DETAILEDCHANGES_REALLOCATION _TABLE REALLOCATION BETWEEN DISBURSEMENT CATEGORIES Financing % Current Allocation Actuals + Committed Proposed Allocation (Type Total) Current Proposed TF-A1532-001 | Currency: USD iLap Category Sequence No: (1) Current Expenditure Category: Payments Risk Sharing Mechanism P.A 38,000,000.00 0.00 37,000,000.00 100.00 100.00 iLap Category Sequence No: (2) Current Expenditure Category: Consultants' Services Part A 1,670,000.00 502,467.40 2,670,000.00 100.00 100.00 iLap Category Sequence No: (3) Current Expenditure Category: Operating Costs and Training Part A 130,000.00 23,401.29 130,000.00 100.00 100.00 Total 39,800,000.00 525,868.69 39,800,000.00 . The World Bank Turkey Geothermal Development Project (P151739) . Results framework COUNTRY: Turkey Turkey Geothermal Development Project Project Development Objectives(s) The Project Development Objective is to scale up private sector investment in geothermal energy development in Turkey. Project Development Objective Indicators by Objectives/ Outcomes RESULT_FRAME_TBL_PDO Indicator Name DLI Baseline Intermediate Targets End Target 1 Mobilization of private capital Private Capital Mobilized (Amount(USD)) 0.00 0.00 619.00 Increased generation capacity from geothermal resources Generation Capacity of Renewable Energy (other 0.00 110.00 than hydropower) constructed (Megawatt) Generation Capacity of Renewable Energy 0.00 110.00 constructed-Geo-thermal (Megawatt) Reduction of CO2 emissions Potential CO2 emissions reductions (Metric 0.00 650,927.00 tons/year) PDO Table SPACE Intermediate Results Indicators by Components RESULT_FRAME_TBL_IO Indicator Name DLI Baseline End Target Risk Sharing Mechanism for Resource Validation (Action: This Component has been Revised) The World Bank Turkey Geothermal Development Project (P151739) RESULT_FRAME_TBL_IO Indicator Name DLI Baseline End Target Volume of direct financing catalyzed by CTF financing 0.00 78.00 (Amount(USD)) Action: This indicator has been Revised Exploration drilling projects supported under the Risk Sharing 0.00 16.00 Mechanism (Number) Action: This indicator has been Revised Geothermal resources (for electricity and heat) confirmed 0.00 99.50 through exploration drilling (Megawatt) Action: This indicator has been Revised Grievance registered related to delivery of project benefits addressed within stipulated service standards for response times 0.00 100.00 (Percentage) Loan Facility for Resource Development Volume of indirect financing catalyzed by CTF financing – (Core) 0.00 117.00 (Amount(USD)) Action: This indicator has been Marked for Deletion Geothermal resources developed through capacity drilling 0.00 181.00 (Megawatt) Action: This indicator has been Revised Capacity drilling projects supported by the Loan Facility 0.00 6.00 (Number) Action: This indicator has been Revised Grievance registered related to delivery of project benefits addressed within stipulated service standards for response times 0.00 100.00 (Percentage) The World Bank Turkey Geothermal Development Project (P151739) RESULT_FRAME_TBL_IO Indicator Name DLI Baseline End Target Portfolio at risk 90 days (Percentage) 0.00 4.00 IO Table SPACE The World Bank Turkey Geothermal Development Project (P151739)