China Eximbank provides $608.26 million preferential buyer’s credit for Phase 2 of the Kostolac B Power Plant Project (Linked to Record ID#42549, #66928)

China Eximbank provides $608.26 million preferential buyer’s credit for Phase 2 of the Kostolac B Power Plant Project On August 20, 2009, the Government of the People’s Republic of China and the Government of the Republic of Serbia entered into an Agreement on Economic and Technical Cooperation in the field of Infrastructure, which entered into force on June 25, 2010.

Then, on April 26, 2012, the Government of the People’s Republic of China announced that it had set up a 10 billion U.S. dollar line of credit to support cooperative projects with Central and Eastern Europe.

The credit line would be partially in the form of preferential loans and would fund projects in the infrastructure, technology and green economy sectors.

Then, on May 29, 2013, the Government of the Republic of Serbia submitted a preferential buyer’s credit (PBC) application to China Eximbank for Phase 2 of the Kostolac B Power Plant Project.

Then, on December 17, 2014, China Eximbank and the Government of the Republic of Serbia signed a PBC agreement [CHINA EXIMBANK NO. PBC (2014) 47 (341)] worth $608,260,000.00 for Phase 2 of the Kostolac B Power Plant Project.

On March 20, 2015, the Government of the Republic of Serbia and Elektroprivreda Srbije (EPS) — a Serbian state-owned power company — signed an on-lending agreement [No. 48-1642/2012-2] for Phase 2 of the Kostolac B Power Plant Project.

The proceeds from the on-lending agreement were used to finance 85% of the $715,600,000.00 cost of the commercial contract [number 127/26-13] between EPS, Termoelektrane i kopovi Kostolac d.o.o. (a project company and wholly owned subsidiary of EPS), and China Machinery Engineering Corporation (CMEC), which was signed on November 20, 2013.

The loan’s (principal) amount outstanding was $122,456,000 as of December 31, 2018, $137,382,000 as of December 31, 2019, $175,619,000 as of December 31, 2020, $229,303,000 as of December 31, 2021, and $346,852,000 as of September 31, 2022. Phase 2 has two sub-components.

The first sub-component involves the construction of a new 350MW power generating unit (B3) at the Kostolac B Power Plant. B3 is expected to produce 2.5 billion kWh of electricity annually, increasing the total output capacity of EPS by 5%. This subcomponent was originally expected to take approximately 52 months to complete.

Phase 2 also involved the expansion of the Drmno Open Cast Mine from an annual output of nine to 12 million tons of coal.

The expansion of the Drmno Mine consists of a rotary excavator, eight conveyors with 12 km-long conveyor system and a spreader with the capacity of 8,500 cubic meters per hour, as well as two new substations. This subcomponent was originally expected to take approximately 47 months to complete. CMEC was the EPC contractor responsible for implementation of both components of Phase 2.

The PBC that supported Phase 2 went into effect on May 25, 2015 when China Eximbank informed the borrower that it had met all of the 'conditions precedent' in the loan agreement.

This ‘Notification of Effectiveness’ triggered an advance payment worth 25% of the project value ($178.9 million) from EPS to CMEC in June/July 2015. Then, an opening ceremony for the expansion of the coal mine then took place on January 23, 2017.

Two construction permits for the B3 power generation unit — one for the chimney and one for the water treatment facility — were issued on July 14, 2017. Then, a formal Phase 2 commencement ceremony took place on November 20, 2017. A permit for construction of the B3 turbine, boiler, and generator was issued on April 15, 2019.

Then, on May 15, 2020, CMEC successfully started concreting the boiler foundation.

In March 2021, Serbia's Deputy Prime Minister and Minister of Mining and Energy, Professor Zorana Mihajlovic, met with representatives of CMEC to warn them about the project's slow pace of construction as well as the quality of the delivered equipment.

An announcement on the Ministry of Mining and Energy website quoted Mihajlovic as saying: '[t]he current dynamics and delays with Kostolac B3 project do not benefit anyone. [...] [W]e will not stand by and observe the realization of the project, we will work even harder to help you, but you have to invest more effort and work, to make up for the delays, because the realization so far is unacceptable, and there is no compromise on quality.' In October 2022, EPS announced that the construction of Kostolac B3 was entering its final stages.

Then, in November 2022, the last shipment of equipment arrived at the project site. By September 2023, the power plant was undergoing trial operations. However, as of January 2024, power plant had not yet official commenced operations.

Construction of power plant B3 (the second phase of the Kostolac B Power Plant Project) was originally scheduled for completion by the end of 2021, but it was subsequently delayed until 2022.

Then, it was delayed a second time; the contracted works and supervision services for B3 were rescheduled June 2023 while B3's commissioning was rescheduled for October 2023. Phase 2 of the Kostolac B Power Plant Project has encountered a variety of implementation obstacles and delays.

In late June 2016, the Serbian Administrative Court ruled the approval of the plant's environmental impact statement by the Ministry of Agriculture and Environmental Protection was illegitimate.

According to the ruling, the decision did not contain justification of reasons for not taking the cross-border impact of the new plant on neighboring Romania into account.

Although construction began in January 2017, a new environmental impact assessment (EIA) for the project had not yet been completed. A new EIA report was published for consultation in February 2017. Public hearings were planned for March 2017. The EIA report was later approved in September 2017. Then, in November 2017, environmental groups requested the building permit for the power plant.

According to Bankwatch, the only document disclosed was a permit for the B3 chimney (not for the entire power plant) and it was dated July 2017 (before the EIA was approved). The power plant's EIA was later challenged in court. The construction of the Drmno coal mine was also challenged on environmental and social grounds.

According to Bankwatch: '[t]here have been no environmental and social impact assessments of expanding the Drmno mine that will feed the power plant, and the local community’s request to be relocated from the mine borders has not been taken into account.

The project is also not in line with the latest pollution standards adopted this year by the EU.' In September 2018, the Centre for Ecology and Sustainable Development (CEKOR) and CEE Bankwatch Network submitted a formal complaint to the Energy Community Treaty Secretariat, claiming that the country had failed to require an EIA for the expansion of the Drmno mine that would feed the Kostolac B power plant.

Then, in February 2023, six people associated with Phase 2 of the Kostolac B Power Plant Project were arrested for allegedly defrauding EPS of $7.48 million. Those arrested were responsible for overseeing construction, and payments were approved for work that was never done.