The secretariat of the Energy Community has urged the parliament of Bosnia & Herzegovina’s Muslim-Croat Federation to halt its plans to approve a guarantee for a loan from China’s Exim Bank for the construction of a new unit at the Tuzla coal-fired plant, as it might be illegal.

In July, Bosnia’s state aid body approved a guarantee for the €614mn loan. However, two environmental NGOs have objected that the guarantee that is supposed to be provided by the Federation’s government is not state aid and might be illegal.

In September, the Sarajevo-based NGO Aarhus Resource Centre and CEE Bankwatch Network signalled to the Energy Community secretariat that the Federation’s plan to guarantee the loan does not comply with EU rules and should be investigated.

The proposed guarantee covers 100% of the loan instead of up to 80%. According to the statement from the two NGOs, while there are circumstances in which this is allowed, they consider the relevant conditions are not fulfilled in this case.

“Given the extremely complicated nature of legislation on subsidies, the mere fact that the State Aid Council of Bosnia-Herzegovina approved this guarantee within eight working days of receiving the request from the Federal Ministry of Finance casts doubt on the quality of the assessment,” said Nina Kreševljaković of the Aarhus Resource Centre, Sarajevo.

Their position has since been reinforced by the statement from the Energy Community secretariat. 

“[T]he Secretariat has strong doubts as to whether the argumentation and conclusion by the State Aid Council is compliant with Energy Community State aid acquis,” it said in a letter to the Federation’s parliament.

It noted that the guarantee does not only cover the loan but also all unexpected additional costs and that, if approved by the parliament, “could lead to lengthy and costly recovery procedures”.

“Besides, the Secretariat may have to open infringement procedures against Bosnia and Herzegovina pursuant to the Energy Community Dispute Settlement Rules,” the secretariat also said.

Bosnia has already nearly lost the deal for the construction of the new unit at Tuzla TPP as three Chinese companies – Gezhouba Group and Guandong Electric Power Design Institute and Dongfang Electric Corporation Limited – reportedly plan to pull out of the agreement with Bosnia to build the new unit, because the Federation’s parliament failed to approve the guarantee on time.

This gave the Bosnian authorities an impetus to try to save the deal at the last minute, but the parliament has still not yet voted on the project.

In September, the deal was approved by the shareholders of EPBiH at an extraordinary session, while the Federation’s government gave a green light at the end of 2017.

The 450 MW unit is estimated to cost €722mn and was supposed to replace units 3 and 4 that are due to be shut down, updating the facility but keeping its capacity the same. It was agreed to be built, as well as funded, by Chinese companies.

Bosnian state-owned power company EPBiH selected the consortium of China Gezhouba Group and Guandong Electric Power Design back in 2014 to build the new unit after the original frontrunner, Hitachi, pulled out.

In November, EP BiH signed an agreement with Chinese Exim Bank that was to lend the Bosnian company €614mn. Exim Bank’s loan was to be extended for 20 years with a five-year grace period.

The project was supposed to be completed within 56 months and the new unit had to generate 2,740 GWh of electricity and around 390 GWh of thermal energy a year.

The Chinese companies expected that the parliament of Bosnia’s bigger entity would approve the deal at the beginning of 2018, but it has been delayed for almost a year now.

The Tuzla power plant expansion is one of a numerous coal-fired power plant investments in the Western Balkans — five in Bosnia alone — most funded by Chinese banks, that are either at the planning stage or underway. Indeed, the existing Tuzla plant and the brand new Banovici plant are just 30km from each other, which raises questions about their economic viability. Both lined up funding from Chinese banks, and multilateral development banks are increasingly wary about financing new coal projects.