As China extends loans to the Western Balkans, the EU must step in to ensure that this money benefits the region, writes Wawa Wang.
Wawa Wang is responsible for public finance policy at CEE Bankwatch Network. She monitors public financing in the Western Balkans and works to strengthen safeguard mechanisms within Chinese and multilateral development banks.
While the EU remains busy with its economic and political crises, China has become one of the main financiers in the eastern part of the continent.
China has considerable reach Belt and Road The initiative to create mega connectivity corridors on land and sea, notably between China and Europe, is made viable thanks to Chinese financing and the development of large-scale infrastructure projects in key strategic sectors of the transport and energy of an enlarged Europe.
But there is much more going on. China is financing at least five new coal-fired power plants in the Western Balkans that would not be eligible for financing from multilateral development banks and export credit agencies, which have moved away from coal in recent years.
China is strengthening 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 “16+1” Central and Eastern Europe-China frameworkwhich includes the annual signing of trade agreements.
In the rush for Chinese money, the Western Balkans are striking trade deals that could prove problematic for their path to EU membership.
The problem is that there are not enough mechanisms to ensure that Chinese investments in the Western Balkans meet European standards. In the Western Balkans, which are not yet members of the Union, the EU has fewer tools and does not sufficiently use those at its disposal.
Take for example the about nine new coal-fired power plants currently planned by the Western Balkan countries. Of these, at least five – Kostolac B3 in Serbia and Tuzla 7, Banovići, Gacko II and Kamengrad in Bosnia and Herzegovina – are expected to involve Chinese companies and receive financing from China Exim Bank, Industrial Commercial Bank of China and potentially other Chinese banks.
None of them are guaranteed to comply with current European anti-pollution standards., called LCP BREF. Environmental impact assessments are generally of poor quality and all those carried out so far have been challenged in court.
Only one of the projects was the subject of a tender procedure which appears to be regular. For Kostolac B3 in Serbia there was none at all – with Serbia and China instead signing an intergovernmental agreement to waive the requirement.
The Chinese loans discussed so far would be backed by state guarantees on unknown terms, which could conflict with the countries’ policies. State aid commitments within the framework of the Treaty establishing the Energy Community. In the case of Kostolac B3, it was the Serbian state that took out the loan instead of the state-owned company Elektroprivreda Srbije (EPS), thus protecting EPS from any real risk. Other forms of state aid, e.g. Coal mining subsidies also harm the sector in these countries.
Even with state assistance, most projects are unlikely to be profitable. Their supporters are too optimistic about likely electricity sales prices and coal production prices, and almost none of them took future CO2 costs to take into account. Addition of even low CO2 price of plants like Kostolac B3 and Gacko II which makes factories unprofitable.
A coal-fired power plant financed by China, Stanari, in Bosnia and Herzegovina, has already been built in the region and started operating in 2016. EU pollution control legislation for new power plants has been updated twice since the Large Installations Directive of combustion to which Stanari was supposed to conform, rendering it obsolete before it even began operating. In May 2017, the media reported that the promoter of the EFT project can sell the Stanari factory or a part to Croatian state-owned Hrvatska Elektroprivreda, raising questions about its profitability.
Current Chinese financing in the Western Balkans energy sector allows non-compliant coal projects to flourish, thereby endangering the harmonization of European regulations.
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 prospect of accession quickly enough to motivate the Balkan countries Western countries to comply with EU law, while countries have not made enough progress for the EU to promise rapid accession.
The only way to resolve this conundrum is for the EU to intervene and ensure compliance with its laws when Chinese investors propose deals with the Western Balkans.
See you this week EU-Western Balkans Summit In Sofia, Bulgaria, the EU is expected to reaffirm its commitment to its Western Balkan partners and strengthen connectivity with and within the region. This follows his Strategy for the Western Balkans published on February 6 this year, which constitutes the EU’s clearest statement on the prospects for membership in years.
This summit represents a real opportunity for the EU to assert its position and make clear to China and the Western Balkan countries what it expects.
To ensure that Chinese-funded projects in the Western Balkans comply with EU standards, the EU has several tools at its disposal. On the one hand, it has funding that can be redirected, increased or withdrawn. He also has the Community Energy Treaty (a mechanism to integrate the energy markets of pre-accession countries), which must be strengthened to make the application more credible. It could also develop mechanisms to help countries – for example in the event of energy shortages – or to dissuade them from certain policy directions – for example by limiting energy imports from sources that do not comply with EU law .
Western Balkan governments will only be interested in European standards when they understand that non-compliance will lead to serious consequences and when they understand what they can gain.
It is also in China’s interest to pay more attention to adhering to European standards, because if it does not do so, it will end up closing more and more doors to its participation in projects in the EU. Declaratively, China committed to doing so, but in reality we found that its regulators and banks were too willing to believe the assurances of Western Balkan governments without exercising sufficient independent due diligence.
