Chinese firms invest in emerging markets energy for EU toehold
STANARI, Bosnia, June 11 (Reuters) - When China's Dongfang Electric Corp. bid to build the Stanari power plant in northern Bosnia, the strategy was simple: sacrifice profits for a toehold in emerging Europe.
Against little competition from European investors still hurting from the debt crisis, Dongfang's offer for the 550 million euro ($713.18 million) Stanari plant was too good for its project managers, UK-based Energy Financing Team, to refuse.
"The logic was clear," said Savo Markovic, head of the 300 megawatt (MW) plant where construction began in May. "Dongfang offered to carry out the job at almost half the cost and the China Development Bank lent 350 million euros for the project at favourable terms".
It's a trade-off increasingly occurring as Chinese firms take on discounts and risks in exchange for access to central and southeastern Europe. The Balkans and neighbouring regions offer economic growth, looser regulation - and a place at the gates of the European Union for firms that can help countries progress to EU power generation standards and EU membership.
"Chinese companies are clearly searching for an entry point into Europe and they see the region as an entry point into Europe," said Gabor Gion, Deloitte's Central Europe Chinese Services Group Leader.
"They are willing to spend the money when the rest of the world is in need of money. This is a perfect match".
For Dongfang the Stanari project was indeed a strategic fit.
"We were ready to lower our profit margin as we are hoping the project will serve as a springboard for expanding our market strategy," said Hu Minsheng, the Dongfang project manager. "We are interested in exploring the market in Bosnia and surrounding countries and unexploited hydro potential."
Bosnia is particularly popular because it is one of few Balkan nations able to export electricity due to significant hydro power, which can store surplus, and is seeking the cash and know-how from foreign investors to enable it to expand.
China's state-run hydro power engineering firm Sinohydro was picked to build a 35 MW 120 million Bosnian marka ($79 million) plant on the Neretva river, and five Chinese firms are short-listed to partner Bosnia's top utility EPBiH in a 450 MW coal-fired plant worth 1.5 billion marka - the country's largest investment since the end of its 1992-95 war.
ENERGY ENTRY POINT
According to Chinese Ministry of Commerce figures cited by consulting group Deloitte, the value of all Chinese investment in Europe grew to $77 billion in 2012 from $59 billion in 2010.
If similar trends continue, that figure could rise to $100 billion in 2014 with about half the total amount flowing into emerging Europe, stretching from the Balkans to the Baltics.
Underscoring China's ambitions in central and southeastern Europe, former Chinese Premier Wen Jiabao announced last April the opening of a $10 billion credit line and $500 million investment fund dedicated to increasing trade with the region.
Experts say the energy sector in particular is drawing China's interest because so much of that part of Europe is still dependent on aging, polluting coal-fired power plants.
Polish boiler maker Rafako, for example, has recruited North China Power Engineering to its consortium to build a 900 MW coal-fired power unit for Polish utility Tauron at its Jaworzno site.
But the need is most acute in the Western Balkans where mostly state-run utilities have invested little since the wars of the 1990s when many power plants, grids and other energy infrastructure were destroyed or badly damaged.
As a result, Balkan governments have offered concessions such as building and land rights - allowing ownership to companies over a period of years before they must be handed back to the State - as well as simplifying regulations relating to planning and permits.
"The region is getting more interesting for the Chinese because of less strict public procurement procedures," said Zeljko Lovrincevic, analyst at Croatia's Institute of Economics.
"Chinese firms... are not strictly profit-driven. They look at a project as an opportunity to expand business presence and engage part of their own workforce," he added.
Close historical links also help. China was a staunch supporter of Yugoslavia's communist regime and maintained strong links with the states created after its break-up - particularly Serbia, which opened its doors to Chinese immigrants and goods during a time of international isolation in the 1990s.
In return, Serbia has received substantial Chinese funds, including a 1 billion euro soft loan from Export-Import Bank of China in 2011 to upgrade its national power grid. It is currently negotiating another loan to add a new unit at the Kostolac coal-fired plant and Serbian power utility EPS is in talks with China Environmental Energy Investment Ltd and Shenzhen Energy Group Co Ltd. on a 2 billion euro investment.
Montenegro also hopes to attract more than 1.5 billion euros in Chinese investment, half of that into the energy sector.
Slovenia is the only Western Balkan nation to have become an EU member. Croatia will join the bloc next month, Montenegro has started membership talks and Serbia expects the go-ahead to start the talks soon. Macedonia, Albania and Bosnia are all at earlier stages of the process.
For Dongfang's Hu Minsheng in Bosnia, winning projects on the edge of the EU is a step towards striking deals inside it.
"This is our pioneer project on European soil and we... want to expand our market Europe-wide starting from this project. We have to prove here that Chinese companies can do a good job."
(Additional reporting by Petar Komnenic in Podgorica and Michael Kahn in Prague; Editing by Sophie Walker)