With China pouring loans into the Western Balkans,
the EU must step in to ensure this money benefits the region, writes Wawa Wang.
Wawa Wang is
Public Finance Policy Officer at CEE Bankwatch Network. She monitors public
financing in the Western Balkans and works to tighten safeguard mechanisms at
Chinese and multilateral development banks.
While the EU has
kept busy with its economic and political crises, China has become a main
financier in the eastern part of the continent.
far-reaching Belt and Road initiative to create mega connectivity corridors on
land and by sea, including from China to Europe, is made viable with Chinese
financing and development of big ticket infrastructure projects in wider
Europe’s key strategic transport and energy sectors.
But there’s more
going on. China is financing at least five new coal plants in the Western
Balkans that would not qualify for financing from multilateral development
banks and export credit agencies, which have stepped away from coal in the last
increasing its ties not only with the Western Balkans but also with
investment-hungry eastern EU member states, mainly through a China-led
platform, the so-called Central and Eastern Europe-China “16+1” framework, that
comprises annual signing of trade agreements.
In the rush for
Chinese cash, the Western Balkans are agreeing to business deals that could
prove problematic for the countries’ path towards EU accession.
The trouble is,
there are insufficient mechanisms to ensure that Chinese investments in the
Western Balkans adhere to EU standards. In the Western Balkans, not yet members
of the union, the EU has fewer tools at its disposal, and those which it does
have, it does not use sufficiently.
Take for example
the nine or so new coal-fired power plants planned by Western Balkan countries
at the moment. Of these, at least five – Kostolac B3 in Serbia, and Tuzla 7,
Banovići, Gacko II and
Kamengrad in Bosnia-Herzegovina – are expected to involve Chinese companies and
receive financing from the China Exim Bank, the Industrial Commercial Bank of
China and potentially other Chinese banks.
Not one of them
is guaranteed to be in line with the EU’s current pollution control standards,
the so-called LCP BREF. The environmental impact assessments are generally of
low quality and all the ones done so far are being challenged in court.
Only one of the
projects has been subject to a tender procedure which appeared to be regular.
For Kostolac B3 in Serbia there was none at all – with Serbia and China instead
signing an intergovernmental agreement to waive this requirement.
The Chinese loans
discussed so far would be backed by state guarantees with unknown conditions,
thus potentially clashing with the countries’ state aid commitments under the
Energy Community Treaty. In the case of Kostolac B3 the Serbian state actually
took the loan instead of the state-owned company Elektroprivreda Srbije (EPS),
thus shielding EPS from any real risk. Other forms of state aid eg. subsidies
for coal mining also plague the sector in these countries.
Even with the
state aid, most of the projects are unlikely to be profitable. Their proponents
are too optimistic about likely electricity sales prices and coal production
prices, and hardly any of them have taken future CO2 costs into account. Adding
even low CO2 prices for plants like Kostolac B3 and Gacko II results in the
plants being unprofitable.
Chinese-financed coal plant, Stanari, in Bosnia-Herzegovina, has already been
built in the region and started operating in 2016. EU pollution control
legislation for new plants has been updated twice since the Large Combustion
Plants Directive which Stanari was designed to comply with, rendering it out of
date before it even started to operate. In May 2017 media reported that project
promoter EFT may sell the Stanari plant or a share in it to Croatia’s
state-owned Hrvatska Elektroprivreda, raising questions about its
financing in the Western Balkans’ energy sector is enabling non-compliant coal
projects to thrive, thus putting European regulatory harmonisation at risk.
At the same time,
the EU and the Western Balkans are caught in a chicken-and-egg situation: The
EU has not been able to offer a quick enough accession perspective to motivate
the Western Balkans countries to comply with EU law, while the countries have
not made enough progress for the EU to promise rapid accession.
The only way to
solve this conundrum is for the EU to step in and ensure its legislation is
adhered to when Chinese investors offer deals to the Western Balkans.
At this week’s
EU-Western Balkans summit in Sofia, Bulgaria, the EU is expected to reaffirm
its commitment towards its Western Balkans partners and strengthen connectivity
with and within the region. This follows its Western Balkans Strategy issued on
6 February this year, which constituted the EU’s clearest statement in years on
the prospects for accession.
constitutes a clear opportunity for the EU to assert its position and clearly
let China and the Western Balkans countries know what it expects.
To ensure the
Chinese-financed projects in the Western Balkans are in line with EU standards,
the EU has several tools at its disposal. For one, it has funding, which can be
redirected, increased or withdrawn. It also has the Energy Community Treaty (a
mechanism to integrate energy markets of pre-accession countries), which needs
to be strengthened to make enforcement more credible. And it could also develop
mechanisms to assist countries – for example in case of energy shortages – or
to dis-incentivise them from certain policy routes – for example limitations on
imports of energy from sources that don’t comply with EU law.
Balkans’ governments will only become interested in EU standards when they see
there are serious consequences to not following them and when they see what
they can gain by doing so.
It is very much
in China’s interest too to be more interested in adherence to EU standards,
however, as failure to do so will eventually result in more and more doors
being closed to its involvement in projects in the EU. Declaratively, China is
committed to doing so, but in reality we have found its regulators and banks
too ready to believe the assurances of Western Balkans’ governments without carrying
out sufficient independent due diligence.