China Eximbank provides EUR 613.99 million buyer's credit loan for 450MW Tuzla Thermal Power Plant Unit 7 Project (Linked to Project ID#42328)

On November 27, 2017, the Export-Import Bank of China and Elektroprivreda BiH (also known as JP Elektroprivreda Bosne i Hercegovine d.d., Public Enterprise Electric Utility of Bosnia and Herzegovina, and EPBiH) — a power utility that is majority-owned by the Federation of Bosnia and Herzegovina (FBiH) — signed an EUR 613,990,000 (roughly $732 million) buyer's credit loan (facility) agreement (contract ID #1530002052017210002) for the 450MW Tuzla Thermal Power Plant (TPP) Unit 7 Project. The loan carries the following borrowing terms: a 20-year maturity, a 5-year grace period, an interest rate of 6-month EURIBOR (-0.274% in November 2017) plus a 2.3% margin, a 1% default (penalty) interest rate, a 0.5% commitment fee, a 0.5% management fee, a 3.6% exposure fee, and a 5.8% insurance fee (i.e. 5.8% of the loan’s principal amount plus interest). The FBiH Ministry of Finance issued a sovereign guarantee in support of this loan on July 10, 2018. Sinosure also provided 15 years of buyer’s credit insurance. The sovereign guarantee issued by the FBiH Ministry of Finance runs from the expiration date of the Sinosure credit insurance policy (in 2032) until the end of the loan repayment period (in 2037). Additionally, the borrower (EPBiH) pledged all of the property — assets and future profits — of the Tuzla Thermal Power Plant Unit 7 (also known as ‘TZ B7’) as sources of collateral to China Eximbank in the event that it could not repay the loan. However, the mortgage on the TZ B7 property only applies during a five year period: from the expiration date of the Sinosure credit insurance policy (in 2032) until the end of the loan repayment period (in 2037). The borrower was expected to use the proceeds of the loan to finance 85% of the $722,345,000 cost of a commercial (EPC) contract between EPBiH and China Gezhouba Group Company Ltd. and China Energy Engineering Group Guangdong Electric Power Design Institute Co., Ltd (GEDI), which was signed on August 27, 2014. The purpose of this project is to construct a new 450 MW unit at the Tuzla Thermal Power Plant (TPP) in the city of Tuzla and replace the capacity of the existing blocks 3, 4 and 5 and generate additional 270 MW thermal energy. Tuzla Thermal Power Plant (exact locational coordinates: 44°31′12″N 18°36′22″E) is a coal-fired thermal power plant in the city of Tuzla with an installed capacity of 715 MW. It is the largest power plant in Bosnia and Herzegovina. The construction of its blocks 1-6 was realized in stages from 1959 to 1978. TPP Tuzla produces electricity in thermoblocks 3 (100 MW), 4 (200 MW), 5 (200 MW), and 6 (215 MW); blocks 1 and 2 are permanently out of operation. The plant is supplied with coal from the Kreka-Banovići coal basin, the largest in Bosnia and Herzegovina, which has significant reserves of lignite and brown coal. The power plant takes cooling water from the Modrac Reservoir, the same source as much of the drinking water for Tuzla. This reservoir is fed mainly by the Turija River and the Spreča River; it already suffers from pollution caused by coal production and separation. TPP Tuzla is operated by EPBiH, of which 90.369% of shares are owned by the Federation of Bosnia and Herzegovina, while 9.631% are owned by private investment funds and small individual shareholders. China Gezhouba Group Company Ltd. and China Energy Engineering Group Guangdong Electric Power Design Institute Co., Ltd (GEDI) are the contractors responsible for project implementation. Construction began on June 24, 2020 after a project commencement order was issued to the consortium of Chinese firms by EPBiH. This project has become a source of controversy and scrutiny among civic monitors. The Aarhus Resource Centre, Sarajevo and CEE Bankwatch Network filed a formal complaint against the China Eximbank-financed Tuzla 7 Coal-Fired Power Plant with the EU’s Energy Community Secretariat in September 2018. One part of the complaint was that the sovereign guarantee issued by the BiH Ministry of Finance in support of the China Eximbank loan (to a BiH power utility) underestimated the true nature of its financial liability (because the environmental permit for the Tuzla 7 Coal-Fired Power Plant only requires the project owner to use the best available techniques/technologies for desulphurisation, denitrification and efficient dust filtering as of 2006 rather than 2017). The legal limits for PM2.5 (fine particles) and SO2 pollutants were breached in Tuzla during the long winter of 2017–2018. The Clean Air Movement—a group of citizens living in Tuzla concerned about the worsening health condition as a result of air pollution exposure—took to the streets to demand that authorities find long-term solutions to the problem. The air pollution reached its peak in 2018 and the beginning of 2019, with the air quality index reaching more than 500, which is by all standards hazardous for all people. Then, in June 2021, the FBiH government was informed by EPBiH that China Gezhouba Group Company Ltd. had requested an amendment to its commercial contract. The FBiH government responded that changing any details of the commercial contract would involve a renegotiation process and re-approval process. The amendment request came after the US-based company General Electric (GE) canceled its subcontract with China Gezhouba Group Company Ltd. The commercial contract signed by EPBiH and China Gezhouba Group Company Ltd. and GEDI on August 27, 2014 specified a list of approved subcontractors, including GE (which was to supply equipment for Unit 7). GE ultimately withdrew from the project due to pressure from the European Union, which has taken a position that does not support the construction of any coal-fired power plants. Then, in December 2021, Energy Community Secretariat reportedly determined that the sovereign guarantee for the 450MW Tuzla Thermal Power Plant Unit 7 Project was issued illegally. Under the Energy Community Treaty, FBiH must follow EU rules on subsidies in the energy sector, which stipulate that in most cases state guarantees may only cover up to 80% of the total loan amount. The sovereign guarantee for the 450MW Tuzla Thermal Power Plant Unit 7 Project, however, covers 100% of the loan amount, plus interest and other associated costs. Despite this constraint, the FBiH House of Representatives and House of Peoples approved the sovereign guarantee for the 450MW Tuzla Thermal Power Plant Unit 7 Project on March 7, 2019, and April 1, 2019, respectively. On July 14, 2022, the FBiH government announced that it would reject a proposal for an alternative Chinese subcontractor for the proposed Tuzla 7 coal fired power plant. This Bosnian government’s decision was based on the analysis of Slovenian experts hired by EPBiH, who delivered their conclusions at the end of May 2022, and after the country’s State Aid Council had revoked its decision to approve a sovereign guarantee for the China Eximbank loan, four years after the Council’s initial clearance. ‘Several factors have led to this moment – the EU’s Energy Community Ministerial Council decision that found BiH to be in breach of the EU acquis – the agreements entered by EU candidate countries; the subsequent recommendations by Bosnia’s State Aid Council to end state guarantees to Chinese banks; at the global level, Chinese leadership pledged to exit construction of overseas coal-fired power plants; and the two-year construction delay of Tuzla 7 due to two major Western providers of the necessary equipment deciding to stop supporting the fossil fuel industry,’ said Boris Mrkela, Campaigner at Just Finance International.

Additional details

1. This project is also known as the Tuzla 7 Lignite Power Plant Project. The Chinese project title is 图兹拉燃煤电厂项目 or 图兹拉燃煤电站. The Bosnian project title ii Projekta Izgradnja bloka 7 - 450 MW TE Tuzla or Termoelektrana Tuzla. 2. The Overseas Development Finance Dataset published by Boston University’s Global Development Policy Center in December 2020 identifies the face value of the China Eximbank loan that supported this project as $882 million. It also identifies the loan commitment year as 2011. However, AidData records a loan commitment value of EUR 613.99 million and a loan commitment year of 2017 based on the loan agreement itself (which can be accessed in its entirety via https://www.dropbox.com/s/58ajlczx1y17hcb/MC112020_Annex8a.pdf?dl=0). 3. In order to guarantee the claims of the Federation of the BiH under the “EPBiH Agreement” (the Agreement on Issuing of the [Sovereign] Guarantee between the Federation and EPBiH), EPBiH agreed to issue promissory notes to the Federal Ministry of Finance and set-up a first-rate mortgage to the benefit of the Federation of the BiH over the land of the Tuzla 7 project and the immovable property of the project. 4. According to the Facility Agreement, the loan is secured with an insurance policy contracted with Sinosure. The base of the calculation of the Sinosure premium amounts to EUR 904.84 million and total insurance premium at the rate of 5.31% amounts to EUR 48 million. This must be paid by EPBiH in 3 installments within 2 years. The Sinosure insurance is valid for a period of 15 years. 5. The China Eximbank loan agreement states that upon any payment by Sinosure to China Eximbank under the Sinosure Insurance, Sinosure will have the right to be subrogated to the rights of China Eximbank against EPBiH (see Section 2.3 of the loan agreement). 6. The Energy Community Treaty creates an internal market in electricity and natural gas bringing together the 28 Member States of the European Union (EU) and 6 European states and territories in the Balkans.

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25

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