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21st Century Dam Design

Advances and Adaptations

31st Annual USSD Conference

San Diego, California, April 11-15, 2011

On the CoverArtist's rendition of San Vicente Dam after completion of the dam raise project to increase local storage and provide

a more flexible conveyance system for use during emergencies such as earthquakes that could curtail the regions

imported water supplies. The existing 220-foot-high dam, owned by the City of San Diego, will be raised by 117

feet to increase reservoir storage capacity by 152,000 acre-feet. The project will be the tallest dam raise in the

United States and tallest roller compacted concrete dam raise in the world.

The information contained in this publication regarding commercial projects or firms may not be used for

advertising or promotional purposes and may not be construed as an endorsement of any product or

from by the United States Society on Dams. USSD accepts no responsibility for the statements made

or the opinions expressed in this publication.

Copyright 2011 U.S. Society on Dams

Printed in the United States of America

Library of Congress Control Number: 2011924673

ISBN 978-1-884575-52-5

U.S. Society on Dams

1616 Seventeenth Street, #483

Denver, CO 80202

Telephone: 303-628-5430

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Internet: www.ussdams.org

U.S. Society on Dams

Vision

To be the nation's leading organization of professionals dedicated to advancing the role of dams

for the benefit of society.

Mission USSD is dedicated to:

Advancing the knowledge of dam engineering, construction, planning, operation,

performance, rehabilitation, decommissioning, maintenance, security and safety;

Fostering dam technology for socially, environmentally and financially sustainable water

resources systems;

Providing public awareness of the role of dams in the management of the nation's water

resources;

Enhancing practices to meet current and future challenges on dams; and

Representing the United States as an active member of the International Commission on

Large Dams (ICOLD).

Privatized Hydroelectric Projects in Turkey 449

ECONOMIC ANALYSIS OF PRIVATIZED HYDROELECTRIC POWER PLANT PROJECTS IN TURKEY

Murat Gunduz1

Haci Bayram Sahin2

ABSTRACT Since Turkey has increasing energy consumption, electricity generating projects are recently very popular. In 2010 spring, privatization of energy projects including 52 hydroelectric power plant projects (HEPP), which are under operation, took place in Turkey. 617 companies responded to the bid and competition was very big. In this study, economic analyses of 19 group projects, which total 52-HEPP projects, were performed. 34 of those projects were investigated at the site and information of all projects was gathered. An economic analysis table is created for each group of projects. Based on the analyses, economic results of bid prices for each group were determined and compared with each other.

INTRODUCTION Turkey has witnessed a great competition in the energy sector, which has been a significant sector for five years. There was a tender for privatization of 19 groups of hydroelectric power plant projects (HEPP). These projects have been operated by the public for decades. By means of privatization, it was thought that productive efficiency would be improved in the short-term through better use of existing resources by private owners/managers, while over time allocative efficiency would also be improved by rendering the privatized plants more responsive to shifts in demand and relative prices (Kjellstrom, 1990). Due to the mismanagement of the public projects, the Government selected the privatization solution. It takes a long time for a developing country to plan the privatization process and to determine the priority of projects. The senior government official announced the key objectives of privatization as;

a) Transfer of the decision making process in almost half of the economy from the public sector to the private sector to make the economy more responsive to market forces; b) Develop a viable capital market by transferring passive savings into active investments in the capital market; c) Reduce the burden of the state economic enterprises (SEEs) on the government; d) As the lowest ranked objective, raise revenue for the Treasury.

1 PhD, Associate Professor, Department of Civil Engineering, Middle East Technical University, Ankara, Turkey, [email protected] 2Civil Engineer, GESTAS Construction Inc Co., Ankara, Turkey, [email protected].

21st Century Dam Design Advances and Adaptations 450

Originally the privatization ideology was based on economic efficiency arguments based on the myth that private sector decisions are based on optimization calculus, whereas the public sector is inherently corrupt and its policies lead to waste. It was announced that initially some of the major public enterprises would be restructured to improve their financial performance, and then they would be on the sale list at attractive prices (Yeldan, 2005). In this study economic analysis of each project group is analyzed and results are given. The competitions for tenders were controversial since the applications to tenders were very high in comparison with previous privatization bids in Turkey. Numbers of responded companies are given in Table 1.

Table 1. Number of Respondent Companies to Tenders Group No

Number of Respondent

Group No


Group No


Group 1 22 Group 8 27 Group 15 30





Group 6 29 Group 13 22

Group 7 54 Group 14 54 Total

617(some same companies are bidders for different groups)

PROPERTIES OF PROJECTS The privatization tender was organized for 52 HEPP projects which were gathered under 19 groups of projects according to their locations and operation center. Projects vary in their properties such as having installed capacity from 60 KW to 51.2 MW. Properties of all groups are given in Table 2.


Table 2. Properties of All Groups of Projects

Group No Number of Projects

Total Installed Capacity (MW)

Average Energy Production (KWh)

Group 1 3 0.98 3,905,279

Group 2 3 0.80 2,896,277

Group 3 1 2.56 8,351,371

Group 4 2 59.45 64,708,482

Group 5 1 0.55 1,903,890

Group 6 5 2.87 10,354,398

Group 7 3 12.00 62,756,370

Group 8 2 1.64 3,006,011

Group 9 1 0.46 2,066,333

Group 10 4 8.31 33,010,588

Group 11 3 1.17 3,544,525

Group 12 2 0.60 676,770

Group 13 4 5.92 8,821,264

Group 14 3 3.55 22,323,045

Group 15 2 1.34 4,967,236

Group 16 3 16.32 38,276,032

Group 17 4 2.97 6,199,252

Group 18 4 17.64 42,113,930

Group 19 2 2.82 7,694,220

PRINCIPALS OF ECONOMIC ANALYSIS The tender is based on operating the projects for 49 years and it should be relinquished to at the end of the period. In other words, the winner has rights to produce electricity and sell for 49 years. There is an option for tenderers that they can pay the bid price with five equal payments with an interest which is officially decided. The strong companies which have great credibility have an advantage of getting credit for each payment and they can spread the debt over years.


An economic analysis table is constructed and assumptions and principals of analysis are explained it this part.

Costs

In the economic analysis three different cost items are considered which are bid price&interest cost, operational&maintenance cost and investment cost. Since the tender policy requires the offers in US dollars all costs and revenues are also determined as US dollars. Bid price is divided into five equal payments in the table as the cost of principal capital. For each payment it is assumed that financial credit is going to be used. Debt equity ratio in the analysis is 20% and this ratio is valid for all the payments. During the operation of the project there are going to be operational costs which are mainly human resources cost, and maintenance cost. Taxes and depreciation costs are equally distributed over the operation years and are considered under this cost item. Income In the economic analysis only one item provides income which is the selling of electricity produced by powerhouses. There are two main points, which determine the revenue. One is the unit price of electricity and the other is the yearly amount of generated electricity. Assumptions One of the important points while economically analyzing the projects is determining how much electricity the projects produce. Thirty-four projects were visited at the site and data were gathered. It is assumed that there is no considerable possibility to increase capacity of electric production. Privatized projects have been operated by public entities for 30-40 years and there are records about amount of generated electricity. Therefore the yearly electricity generation amount is taken as the average production of the projects for last five years. The other important point is deciding the unit price of electricity (US cent/kwh) which directly affects the yearly income. Although at the beginning of each year the authority announces the electricity prices for the upcoming year, market prices differ from the declared price. Consequently, the average electricity market price for 2009 is taken as the unit price of electricity which is 10 US cent/kWh. The tender price is going to be paid in five equal yearly payments. After discussing with the investor company, financial credit is going to be used for every yearly payment with 20% equity. Repayment period of the financial credit is four years in equal payments and it will start at the end of the same year. For example; financial credit for the third payment of tender price is going to be taken in the third year and repayment period of the third credit will start at the end of the third year till the end of the seventh year. Hence the repayment period of financial credit is going to be spread over eight years whereas bid


price is paid in four years. In other words, last credit is going to be taken for last bid price payment at the fourth year and repayment period of this credit is going to start at the end of forth year and finish at the end of eighth year. Financial credit conditions used in economic analysis are given in Table 3.

Table 3. Financial Credit Conditions Used in Economic Analysis

Credit Conditions

Credit Ratio (CR) 80,00%

Credit Amount Payment x CR

Equity Ratio (ER) 20,00%

Equity Amount Payment x ER

Interest Rate 8,0%

Repayment Period (year) 4

Starting of Repayment (year later) 1

ECONOMIC ANALYSIS

All groups of projects (19 groups) were put into bid individually. Tenders were selected for eighteen of the groups and tender prices for each group were tabulated. Table 4 shows the tender prices of each group. Only tender of group 12 projects couldnt be done due to some problems.

Table 4. Tender Prices for Each Group Projects

Group No

Tender Price (Thousand US$)

Group No


Group No


Group 1 $ 6.600 Group 8 $ 5.700 Group 15 $ 6.550




Group 5 $ 2.760 Group 12 - Group 19 $ 14.700

Group 6 $ 13.520 Group 13 $ 13.800

Group 7 $ 86.400 Group 14 $ 29.050 Total $ 439.910

As shown in Table 4 tender prices differ from $2.7 million to $86.4 million depending on the size of the project. In order to see unit costs of projects given in the tender Figure 1 and Figure 2 are created. Although the most expensive project group is group 7 out of


tender prices, group 9 is most expensive group project based on the installed capacity unit cost and energy production unit cost.

Figure 1. Unit Cost of Groups Based on Installed Capacity

Figure 2. Unit Cost of Groups Based on Produced Electricity


Economic analysis of all group projects are done with specified conditions. Two criteria are taken into account while evaluating the tender prices. These criteria are internal rate of return (IRR) and profitability ratio of the project. Profitability is taken as the ratio of total income to total cost.

RESULTS Number of responding companies to the tenders shows that tender prices should be very competitive. Moreover auction type tender increases the tender prices. Therefore the results of the economic analysis are not feasible results. Reasons for the unfeasible tender prices are expressed. Group 1: Profitability of this group is bigger than one which is 1.028 and IRR is 8.56%. Total income minus total cost is $163.353, along the rental life of the project which means that there is no prospective profit. Group 2: Profitability of this group is smaller than one which is 0.688 and IRR is 2.38%. Total cost is $1.607.284, more than total income along the rental life of the project which means that this is out of pocket. Group 3: Profitability of this group is smaller than one which is 0.957 and IRR is 7.31%. Total cost is $551.207, more than total income along the rental life of the project which means that this is out of pocket. Group 4: Profitability of this group is bigger than one which is 1.494 and IRR is 30.52%. Total income minus total cost is $26.174.542, along the rental life of the project which means that this seems to be a profitable group. Group 5: Profitability of this group is bigger than one which is 1.013 and IRR is 8.24%. Total income minus total cost is $29.359, along the rental life of the project which means that there is no prospective profit. Group 6: Profitability of this group is bigger than one which is 1.074 and IRR is 9.50%. Total income minus total cost is $870.572, along the rental life of the project which means that there is no prospective profit. Group 7: Profitability of this group is bigger than one which is 1.139 and IRR is 10.61%. Total income minus total cost is $9.348.281, along the rental life of the project which means that this seems to be a profitable group. Group 8: Profitability of this group is smaller than one which is 0.585 and IRR is 1.64%. Total cost is $1.791.799, more than total income along the rental life of the project which means that this is out of pocket.


Group 9: Profitability of this group is smaller than one which is 0.548 and IRR is 1.87%. Total cost is $2.319.975, more than total income along the rental life of the project which means that this is out of pocket. Group 10: Profitability of this group is smaller than one which is 0.821 and IRR is 5.37%. Total cost is $8.781.874, more than total income along the rental life of the project which means that this is out of pocket. Group 11: Profitability of this group is smaller than one which is 0.743 and IRR is 3.65%. Total cost is $1.498.807, more than total income along the rental life of the project which means that this this is out of pocket. Group 13: Profitability of this group is smaller than one which is 0.965 and IRR is 7.38%. Total cost is $389.704, more than total income along the rental life of the project which means that this is out of pocket. Group 14: Profitability of this group is bigger than one which is 1.111 and IRR is 10.23%. Total income minus total cost is $2.724.186, along the rental life of the project which means that this is a profitable group. Group 15: Profitability of this group is bigger than one which is 1.060 and IRR is 9.21%. Total income minus total cost is $343.276, along the rental life of the project which means that this is no prospective profit. Group 16: Profitability of this group is bigger than one which is 1.344 and IRR is 16.83%. Total income minus total cost is $11.987.778, along the rental life of the project which means that this seems to be a profitable group. Group 17: Profitability of this group is bigger than one which is 1.164 and IRR is 12.30%. Total income minus total cost is $1.069.889, along the rental life of the project which means that this is a profitable group Group 18: Profitability of this group is bigger than one which is 1.249 and IRR is 13.45%. Total income minus total cost is $10.256.164, along the rental life of the project which means that this is a profitable group Group 19: Profitability of this group is smaller than one which is 0.833 and IRR is 5.33%. Total cost is $1.881.176, more than total income along the rental life of the project which means that this is out of pocket. All results are given in Table 5.

Table 5. Economic Results of Projects

Group No IRR Profitability Ratio

Income-Cost (Total $)

Group 4 30,52% 1,49398529 26.174.542

Group 7 10,61% 1,13864787 9.348.281

Profitable Projects


Group 14 10,23% 1,11080831 2.724.186

Group 16 16,83% 1,34410905 11.987.778

Group 17 12,30% 1,16424564 1.069.889

Group 18 13,45% 1,24855078 10.256.164

Group 5 8,24% 1,01276605 29.359

Group 6 9,50% 1,07379941 870.572

Group 15 9,21% 1,05987315 343.276

Neutral Projects

Group 1 8,56% 0,833 -1.881.176

Group 2 2,38% 0,68793262 -1.607.284

Group 3 7,31% 0,95688538 -551.207

Group 8 1,64% 0,58519761 -1.791.799

Group 9 1,87% 0,54808707 -2.319.975

Group 10 5,37% 0,82138074 -8.781.874

Group 11 3,65% 0,74313484 -1.498.807

Group 13 7,38% 0,96514648 -389.704

Group 19 5,33% 0,83343416 -1.881.176

Non Profitable Projects

Economic results are categorized into three groups which are profitable projects, neutral projects and non-profit projects. There are some reasons that affect the tender prices thereby the economic results.

a) In order to embark into the energy sector and for prestige reasons companies behave ambitiously and they can tolerate the cost according to their willingness and expectations.

b) New companies in the energy sector may not decide properly due to lack of experience. They think that installed capacity of the projects can be increased.

c) There is a positive atmosphere in the energy sector from the investors point of view. The price of electricity for the next ten years is not clear. Expected electricity prices differ from company to company and they used different electricity prices while determining the tender prices.

Why economic results are different from each other that is, why some projects are profitable whereas others are not should be explained. In addition to the mentioned reasons, the locations of projects are also important. Projects that are close to huge electricity consumption areas are very popular. Those non-profitable projects are located in low population areas.

REFERENCES Kjellstrom Sven B., (1990). Privatization in Turkey, Report for World Bank.


Yeldan Erinc A., (2005) Assessing the Privatization Experience in Turkey: Implementation, Politics and Performance Results, Report Submitted to Economic Policy Institute, Washington DC.

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