Italy’s A2A is expected to exit its investment in Montenegrin power monopoly EPCG after a tumultuous seven years, leaving Montenegro free to ignore concerns over economic viability, environmental damage and transparency as it presses ahead with an investment in a new power plant at Pljevlja. 

After months of discussions, a new management contract was signed between A2A, which owns  41.75% of EPCG, and the Montenegrin government on August 29. The deal is valid only until the end of this year, and gives A2A a €250mn put option to sell its stake back to the government. In return, the Italian utility will not block Podgorica’s plans to build a new unit of the coal-fired Pljevlja power plant. 

A2A had previously been dragging its feet on the investment in Pljevlja, but Podgorica had been reluctant to allow the Italian utility to pull out of EPCG. Now, however, the Montenegrin government is under time pressure to get the Pljevlja project started, which most likely contributed to its agreement to the put option. 

A Bankwatch report on the power plant points out that in addition to the upcoming general election in Montenegro, new OECD rules on coal-fired power plant financing are due to come into effect in early 2017. The new rules are intended to align export credit policies in OECD countries with climate change objectives. After they enter into force, the Czech Export Bank, which is expected to be the main source of finance for the Pljevlja expansion, would not be able to fund the project. 

Podgorica wants to expand the power plant, which currently has a single 210MW unit built in the early 1980s, by building a new unit will have higher capacity and better energy efficiency. The government has already approved a draft agreement with Skoda Praha on the construction of the new unit, after the Czech company was ranked the preferred bidder following a tender process. 

A2A, which is listed on the Milan Stock Exchange and answerable to its shareholders, was reportedly not keen to put more capital into EPCG to finance the power plant. However, it is by no means the only opponent to the project, which has been attacked on numerous fronts. 

Podgorica clearly wants to benefit from a sub-sea power line to Italy due to be completed in 2018, but it is not the only Balkan country looking to boost its electricity generation in the hope of becoming a major exporter and the region is expected to have a substantial surplus if all the planned power plants are built.

At the same time, the EU is expected to have a power surplus over the next decade. This means demand for additional power from Pljevlja is questionable, especially since the government has also approved plans for two major hydropower plants as well as investments into smaller renewables projects. Demand from Montenegro’s population of just over 610,000 is not expected to grow much, and the future of some of its largest industrial plants is doubtful. 

Creative accounting

EPCG and the Montenegrin government have been citing three studies - by Fichtner, Poyry and Deloitte - that appear to show the project is economically viable. However, Bankwatch claims the project is “viable only with creative accounting”. 

The NGO points out that a Montenegrin-language presentation from Deloitte says the project would only be feasible if certain stringent conditions were met, among them a doubling of electricity prices by 2040, a 10% fall in CO2 costs and production costs at the Pljevlja mine, and a delay in implementing the EU Emissions Trading Scheme (ETS) in Montenegro until 2026. 

Bankwatch also criticises the informal selection process through which Skoda Praga was chosen. “It is planned for an inter-governmental agreement to be signed by the Czech government, and a special law passed in Montenegro, as a means to legalise the bypassing of a standard tender procedure,” its report says. “While it is unclear whether this is legally allowed according to Montenegrin law, it does not represent good practice.” 

Further questions about transparency are raised by the connection to Montenegro’s first family. The economy ministry said on August 23 that construction of the second unit at Pljevlja would secure the long-term future of the Pljevlja coal mine - in which the prime minister’s brother Aco Djukanovic holds an 11% share. But while the power plant will benefit the mine’s owners, the reverse is not true. Bankwatch cites questions over whether the mine has large enough exploitable resources of lignite to supply the power plant over its lifetime. 

“Montenegro’s decision-makers - as well as the Czech Export Bank which is considering financing the project - would be well advised to examine the project documentation with a fine-toothed comb and see the numbers for what they are - a desperate attempt to make a rotten project palatable,” the Bankwatch report concludes. 

Finally, there are the environmental objections. In February 2015, a group of 16 NGOs from Montenegro, its neighbours and Italy appealed to A2A not to back the plans for the new unit, which they said would prevent Montenegro from complying with EU legislation and climate policy. There are already high levels of pollution in the town of Pljevlja, and the new unit is expected to worsen the problem if it runs concurrently with the existing unit. 

However, without a major international listed company involved in EPCG, the Montenegrin government will have more scope to ignore these concerns and forge ahead with the project.

While A2A has not announced its intentions for EPCG, and did not respond to a request from bne IntelliNews for information, analysts forecast that the company will exercise the option to exit its Montenegrin investment.

“The put option is an exit strategy for A2A from this investment which has been really troublesome since the beginning. The fact that the new agreement is valid only till the end of the year provides some likelihood they will actually go out,” one analyst who preferred not to be named told bne IntelliNews. Previously, A2A was not able to exit the deal as “there was no market, the only possible buyer was going to be the government of Montenegro.” 

Electricity hub

The Milan-based company first invested in EPCG in a privatisation deal back in 2009, taking a 43.7% stake in EPCG and taking over management of the company. A2A’s total investment was around €436mn, making this one of the largest-ever privatisations in the tiny Adriatic country.

Plans to build a sub-sea electricity transmission link between Montenegro and Italy are believed to have been factored into the decision, as this would turn Italy into a hub for electricity exports from the Balkans to the EU, making Montenegro strategically interesting for the Italian company

However, A2A admits on its website that relations between it and EPCG have included “confrontations”. In particular, it stresses that as electricity tariffs fell by around 30% in the two years following its original investment, at one point EPCG was supplying the country’s largest electricity consumer, Kombinat Aluminium Podgorica (KAP) at below the cost of production.

In 2013, A2A was reportedly considering selling its stake back to the Montenegrin government and filing for international arbitration. The fall in the electricity price also resulted in A2A failing to meet its investment targets for EPCG. 

Under a deal struck between the two sides the following year, part of EPCG’s tax debt was converted into state capital, and the government’s stake in the company was raised by two percentage points. Meanwhile, A2A’s holding fell to 41.75%. 

The company also came under scrutiny when the funds for the privatisation were deposited with Priva Banka, which is owned by Aco Djukanovic, though A2A has pointed out that EPCG’s funds deposited with the bank decreased over time. 

Despite the chequered history of the investment, another analyst also speaking on condition of anonymity said that A2A’s wish to exit EPCG was based on developments in Italy, not Montenegro. He forecast that A2A would be active in the coming consolidation in the Italian electricity market, which “will require 100% of management resources and time.

Montenegro is a lower priority,” he told bne IntelliNews. “I wouldn’t link the disposal to past clashes with the government of Montenegro. It’s more to do with how relevant exposure to Montenegro is now, and how time consuming Montenegro is in terms of management effort.” 

The new deal will see A2A exit EPCG for less than it put into the company, but it is believed to be satisfactory for the Italian utility.

However, the deal has not been universally welcomed in Montenegro, where it nearly scuppered a power-sharing deal under which three opposition parties joined the government in advance of this autumn’s general election. One of the three parties, United Reform Action (URA) announced it would quit the government after the new deal with A2A was agreed. 

The opposition had previously asked for the agreement to be changed to give Montenegro seven years to pay the €250mn, but A2A turned down the proposal. Alternatively, the opposition had called for the deal to be postponed until after the election. Instead the parliament, where Prime Minister Milo Djukanovic’s Democratic Party of Socialists (DPS) and its allies have a majority, approved the deal in its current form. 

“We left the government … because we do not agree to be a cover for the robbery of citizens,” URA official Zoran Mikić said according to an August 6 statement on the party’s Facebook page. “DPS has breached the agreement as, with a corrupt majority in parliament, it has adopted agreements and laws that are harmful for the state and the citizens.”