Kosovo aims to secure largest ever investment amid political crisis

Kosovo aims to secure largest ever investment amid political crisis
By Clare Nuttall November 26, 2015

Pristina is moving towards a deal with US-based ContourGlobal on the planned Kosova e Re power plant, which at a cost of €1bn will be the largest investment in the country’s history.

The government says the project will solve Kosovo’s chronic electricity shortages by replacing the aging Kosova A thermal power plant - considered Europe’s worst polluter - with a modern 500MW plant. However, the strong opposition to the plans to build a new coal-fired power plant close to the capital could add to the ongoing unrest within Kosovo.

Minister of Economic Development Blerand Stavileci announced on November 20 that ContourGlobal, which has been working on Kosova e Re for a decade, has been given preferred bidder status. This follows news of a financing agreement for the project between ContourGlobal and the World Bank, though further details have not been disclosed.

Talks will continue for the next four to six months, after which a tender procedure will be launched. This would pave the way for construction work to start in late 2016 or early 2017, allowing Kosovo A to be commissioned by 2022.

In a statement emailed to bne IntelliNews, Garry Lesevely, ContourGlobal’s executive vice president and CEO Eastern Europe, said this would allow the company to “move ahead decisively” with the project, which both he and Stavileci say will resolve Kosovo’s electricity supply problems.

The latest Business Environment and Enterprise Performance Survey (BEEPS) found that electricity supply is among the top three obstacles faced by Kosovan companies, alongside competition from the informal sector and corruption. “Electricity issues were much worse in Kosovo than in most other transition countries and posed a huge problem for Kosovan firms in their day-to-business.” the survey said.

Lesevely stressed that Kosova e Re will be built “to the best environmental standards”. “When operational, this power plant will provide a clean, safe, reliable and affordable base load power supply to Kosovo, alleviating many of the reliability of supply issues the country regularly faces, which have hindered its wider economic development,” he said.

ContourGlobal’s website stresses its commitment to ethical business practices and minimising the environmental impact of its projects, which include both thermal power plants and renewables. It operates a total of 58 power plants across Europe, Africa and Latin America, most recently signing a deal to acquire Armenia’s Vorotan hydropower cascade.

However, opponents of the project are not convinced it will benefit Kosovo. The Kosovo Civil Society Consortium for Sustainable Development (KOSID), an umbrella organisation for local NGOs and think tanks, has accused Stavileci of striking an un-transparent deal with the energy company behind closed doors.

In a November 24 statement, the organisation also warned of a likely increase in electricity prices - a sensitive issue in one of Europe’s poorest countries - and questioned where the bulk of funding for the project would come from. Stavileci has already said that ContourGlobal will put up 30% of the cost, while the cost to the Kosovan state budget will be “0%”.

Previously, both KOSID and Bankwatch, which monitors the activities of international financial institutions in the CEE region, have raised concerns over the implications of Pristina’s plans for a new coal fired power plant as the country aims for EU membership. They believe a better starting point would be to tackle the losses that result in over half the electricity generated at Kosovo’s existing thermal power plants being wasted.

Bankwatch research co-ordinator Pippa Gallop contrasts the plans to build several new thermal power plants in the region with the almost total lack of investment into new coal power capacity within the EU. In another recent development, China’s Dongfang Electric Corp has been selected to build the Banovici thermal power plant in Bosnia & Herzegovina.

She accuses governments in the Western Balkans of being “stuck in old habits of seeing coal and hydropower as the only two electricity sources”, and points to the “economic disaster” of projects such as Slovenia’s Sostanj. The Sostanj project was initially estimated at €600mn but ended up costing more than €1.4bn.

“The Western Balkans countries’ coal plans are full of flaws that will surely backfire when the countries join the EU,” Gallop says. “Most of the plans rely on state support that may clash with EU state aid rules, and most have failed to take into account the costs of CO2 emissions and mine expansion in their economic calculations.”

Nonetheless, Prime Minister Isa Mustafa’s government, which signed a Stabilisation and Association Agreement with the EU in October, is determined to push ahead with Kosova e Re. Even though the current plan is less ambitious than the original concept of a 2,000MW plant to supply the surrounding region, a project of this size could still have a dramatic impact on in an economy plagued by low foreign direct investment (FDI) and high unemployment.

Kosovo’s official unemployment rate of 35.3%, according to the Kosovo Agency of Statistics, is among the highest in Europe, and the UNDP estimates that youth unemployment is as high as 60.2%. This makes the creation of several thousand new jobs on the construction of Kosova e Re an attractive proposition.

The €1bn project cost also dwarfs Kosovo’s annual FDI inflows, which slumped to just €150mn in 2014. Although FDI has rebounded this year, investment is still held back by numerous factors including the small size of the economy, high corruption and political uncertainty.

There is no immediate end in sight to the current political crisis. Opposition MPs have several times disrupted parliament sessions by letting off tear gas in protest against deals signed with Serbia and Montenegro, while their supporters have clashed violently with police.

Progress with this huge investment will send out a good signal at a time of growing political crisis. However, should the deal become delayed by popular opposition or become the source of more political unrest, this would further damage Kosovo’s reputation among investors.