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Granting of an Export Credit Guarantee for the Ilisu Dam Project in Turkey

26 March 2007

I. Present state of the proceedings

On account of improvements to the project, which have been achieved in the meantime, the Interministerial Committee for Export Credit Guarantees (IMC) approved the change of the decision of general principle taken in November 2006 into the final issuance of an export credit guarantee for the German share in the planned hydroelectric power plant on 24 March 2007. Further measures to improve the project are to be implemented as the project progresses and are to guarantee that it will meet international standards.

From the start of the proceedings the Federal Government made the granting of an export credit guarantee conditional upon strict requirements being met. Its most important objective was to minimize the dam's effects on the people living in the region and on the environment and cultural assets in accordance with the standards fixed by the World Bank for such projects. After intensive and positive negotiations with Germany, Austria and Switzerland, as well as the international construction consortium, Turkey agreed to measures which exceed the practice so far customary in connection with dam construction projects by far.

In Austria, Switzerland and Germany export credit cover for deliveries and services having a total value of about EUR 450 million has been applied for. The overall contract value totals about EUR 1.2 million. The Federal Government covers a share of EUR 93.5 million for the construction of three diversion tunnels and three pressure tunnels by Ed Züblin AG, Stuttgart. To that, reinsurance in the amount of about EUR 100 million for German supplies to the Austrian partner in the consortium has to be added. Turkey will spend an additional amount of EUR 800 million on project-related measures, such as the resettlement of the population living in the region and the protection of cultural assets and the environment. Hence the overall costs of the project are estimated at EUR 2 billion.

II. Application of World Bank standards

1. The Federal Government's approach (in close cooperation with Austria and Switzerland)

The first close scrutiny by the three Export Credit Agencies (ECAs), which took place during the first six months of 2006, revealed serious omissions in the studies and implementation plans, which were initially presented. It would have been impossible to meet the World Bank standards on the basis of those plans. However, a rejection of the application for state export credit guarantees in Germany, Austria and Switzerland at that time would have resulted in the project being implemented without involvement, and, consequently, without the possibility to take influence, of the three European states, e.g. by Chinese competitors, whose export credit insurers do not apply standards to supported projects similar to the OECD environmental guidelines. The Turkish government in determined to realize the project in any case. The laying of the foundation stone by Prime Minister Erdogan himself last year and the fact that the work is already under way near and on the construction site are ample proof of that. Therefore, a withdrawal of the three export credit agencies from the project would have had negative consequences for the local population, the cultural assets and the environment in the project area because it would have been impossible to get the necessary improvements accepted. It is highly likely that the shortcomings of the resettlement plan and the planned income maintenance measures, which the ECAs found when checking the project, would have materialized during the implementation.

Because of the considerations explained above the governments in Germany, Austria and Switzerland decided to continue working together with the Turkish government on substantial improvements of the project. For this purpose the ECAs submitted a host of suggestions for improvements from May 2006 on, which the project consortium and the Turkish side worked into the project planning. The intensive and positive cooperation and a plan that was jointly drafted in August led to a weeklong, intensive Final Assessment Meeting (FAM) in October 2006, at which the still necessary project improvements and tasks for the project planning and implementation were agreed with the Turkish Water Authority and laid down in writing. The Following parties attended that meeting from 1 to 6 October:

  • DSI as sponsor
  • project consortium as applicant
  • ECAs from Germany, Austria and Switzerland
  • 4 independent experts for environment, social affairs and culture

Applying the World Bank standards and taking into account the recommendations of the World Commission on Dams about 150 tasks ("Terms of Reference") were put down which have to be accomplished by Turkey during the implementation of the project, more than 30 of them prior to the final decision of the IMC.

It was also decided to set up an interdisciplinary Project Implementation Unit ("PIU") which has sufficient resources. The PIU will prepare the still outstanding documents and implement the action plans based on them. In addition to Turkish experts on the three subjects resettlement, cultural assets and ecology, representatives of the communities and population affected are designated as members of the unit. When the plan for the PIU was drafted, among other things suggestions made by Prof. Cernea, an internationally renowned resettlement expert, who prepared a quite critical appraisal of the project for some non-governmental organizations, were taken up. In discussions the mandataries held with Prof. Cernea, he later judged the results obtained at the FAM positively and agreed to oversee the project as an independent expert.

What is regarded as particularly important for an implementation of the project in accordance with the international standards is the installation of a Committee of Experts (CoE), which is independent from the PIU. It advises the PIU, monitors all details of the project implementation and regularly reports to the ECAs. Due to the improvements of the project, which were achieved, internationally renowned experts could already be recruited as members of the CoE. However, the cooperation of those experts - as well as the setting up of an appropriately staffed Project Implementation Unit (PIU) - stands or falls on the involvement of the three export credit agencies in the project.

Another central aspect which is indispensable for a project realization in line with World Bank standards is to make sure that the export credit agencies remain capable of taking influence even after granting an export credit guarantee. Since a number of task have to be performed by the Turkish side only after a relevant decision is taken by the three ECAs (e.g. construction and operation of three-stage wastewater treatment plants in the project area in order to guarantee the water quality also after the commissioning of the dam), it is necessary to create mechanisms which guarantee a responsible dealing with the agreements reached.

  • The work will be continuously controlled by the independent Committee of Experts on the basis of the time schedules, which were prepared, and the progress as well as any shortcomings will be regularly reported to the ECAs. This procedure guarantees that both the experts and the ECAs will always have up-to-date information on the implementation of all measures.
  • Clauses that enable the Federal Government to take legal action through the exporter and/or the bank as policyholders in case the DSI breaches any of the agreements reached will be included in the export contracts and loan agreements between the exporters/financing banks and the buyer/borrower. The relevant contracts have to be worded in such a way that in the course of the further planning and implementation any breach of obligations assumed may lead to a so-called "Event of Default", which in turn entitles the exporters/banks to discontinue the deliveries and the disbursement of the credit as well as to demand the immediate repayment of the entire credit if remedial action is not taken within a fixed period of time.
  • In order to make sure that the fixed standards are met during the implementation of the project a smooth cooperation between the Turkish side and the independent Committee of Experts must be guaranteed throughout the entire project period. Pursuant to the agreements already reached and other agreements planned for the future, the Turkish side, too, depends on a working relationship with the CoE because it is planned to include not only of the Terms of Reference but also the existence of the (PIU and) CoE for the entire horizon of the risk as a condition in the loan agreement. If the necessary funds for the CoE are not made available or if the CoE discontinues its work for lack of cooperation that may also constitute an "Event of Default" with the pertinent legal and economic consequences. The close cooperation with the CoE is embodied in suitable passages of the Annexes 1 and 2 to the Agreed Minutes of the FAM and thus acknowledged by Turkey through the signature of the DSI, e.g." In identifying necessary actions and developing mitigation measures, PIU will work in coordination with the CoE and also incorporate any such recommendation or advice about their works (reports etc.) in order to create quality and efficient output" (Annex 1).
  • The close direct cooperation of the three export credit agencies with the Turkish buyer, which exceeds the scope customary in connection with the checking of applications for export credit guarantees by far, is shown in the Agreed Minutes of the FAM, which were signed by the three ECAs and the DSI. Consequently, due to this agreement reached directly between the ECAs and the Turkish side, the possibilities to take political influence if problems arise later during the project implementation are better than with other projects where the agreements on environmental and social aspects are on principle made by the exporter/bank and foreign buyer.

2. Improvements achieved

Turkey agreed, among others, to the following measures:

a) Resettlement

  • Exact investigation of the individual needs of the persons affected and schedule of measures
  • Measures to restore the livelihood in the long term ("Income restoration"),
  • Inclusion of all groups, even of the underprivileged, such as e.g. non-property owners
  • Detailed resettlement planning in time before each resettlement measure is implemented
  • Choice between land-for-land compensation, education and further training,
  • Guaranteed jobs for the population affected (at least 60 %) at the construction and operation of the hydroelectric power plant
  • Information and participation of the affected population during the further course of the project
  • Transparency e.g. through the publication of the documents which have yet to be prepared

b) Cultural assets

  • Relocation of the cultural monuments in the medieval town of Hasankeyf that are threatened by destruction to a cultural park
  • Participation of the inhabitants of Hasankeyf in the maintenance and conservation (tourism)
  • Guaranteed minimum quota (50 %) for the employment of locals at the relocation work

c) Flora and fauna

  • Further, intensive investigations into the exact effects (species affected, degree of threat, etc.) of the dam
  • Implementation of abatement and mitigation measures

d) Water quality

  • Construction of three three-stage wastewater treatment plants in three major towns in the project area
  • Improvement of irrigation and fertilization in the project area in order to reduce the leaching of nutrients into the river Tigris
  • Rehabilitation of a waste disposal site and measures against the illegal dumping of refuse on the banks of the river Tigris

e) Neighbouring states

  • Information and consultation of Iraq and Syria
  • Guarantee of a minimum flow rate of 60 m³/sec. (for comparison: In Switzerland 10 m³/sec are required by law)
  • Experts' assessment of the effects of the minimum flow rate on the downstream riparians
  • No interruption of the flow (except for a maximum of three days during the impounding, which are required for technical reasons)

f) Total financing

  • Revision of the total budget taking into account the additional measures
  • Issuing of a Letter of Comfort by the Turkish government, which deals with the obligation to provide the total financing for the construction work and the agreed additional measures

The Turkish authorities, especially the management of the water authority DSI, assumed the above-mentioned agreements and obligations because they see advantages for the population if international experience and guidelines are applied. This is a success brought about by the respectful approach to which the Federal Government subscribed in the national "Guiding Principles Environment" for export credit guarantees. The Federal Government's decision to provide export credit cover for the financing of the German supplies and services for this project acknowledges the commitment of the Turkish authorities and assists them in the proper and professional implementation.

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