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Germany has introduced facilitations for obtaining state guarantees for energy investments in the Western Balkans

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German investors in renewable energy are present in Croatia and Slovenia but not in the rest of the Adriatic region. Germany has introduced facilitations to obtain state guarantees for investments in the Western Balkans.

Two years ago, during the opening of a factory in Valjevo, Western Serbia, the CEO of the German company Hansgrohe addressed the employees, stating that they were “part of their global production strategy to shorten and secure supply chains and transportation routes.” Some local observers initially thought these were just words meant to impress those present. However, when, after only a year and a half, Hans Juergen Kalmbach opened another factory in the same city with the same statement, no one doubted that the company’s CEO truly meant what he said. On the contrary, it became evident that there’s a growing number of German companies that see investing in Serbia, North Macedonia, and other countries in the Adriatic region as a way to avoid disruptions in production and supply chains.

With the escalating political-economic tensions between the West and China, German companies are compelled to change their production and market supply strategies.

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Using Hansgrohe as an example, it’s apparent that medium-sized German companies are redirecting their operations in China to cater to the needs of the Chinese and Asia-Pacific markets. Meanwhile, they’re establishing new production capacities in the Balkans for the European market. For instance, Hansgrohe nearly simultaneously opened two new innovation development centers in June this year: one in Shanghai and the other in Valjevo, a city where nearly 20 percent of all Hansgrohe employees worldwide will work.

So far, countries in the Adriatic region, especially Serbia and North Macedonia, have been attractive to German investors not only due to geographic proximity but also because of generous state subsidies. Certain German media specialized in trade and investments report that German companies through the Serbian Development Agency can obtain state subsidies covering up to 70 percent of their investments in Serbia. However, this type of German investment will now also receive financial support from the German state. The German government has decided to financially support German industry investments in 34 countries, including the “Western Balkans six” (Serbia, Montenegro, Bosnia and Herzegovina, North Macedonia, Albania, and Kosovo*). Specifically, German companies will have a simpler and significantly cheaper bureaucratic process to obtain German state guarantees for their investments in the Adriatic region, reducing their financial risk in the event of investment failure due to extraordinary circumstances.

Coupled with incentives for those investing in green energy, specifically projects contributing to the climate goals of the German government, the Adriatic region has all the conditions to attract significant investments in renewable energy projects.

Reduced Costs, Greater Risk Coverage

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This strategy aims to reduce dependency on China and consolidate supplier and production chains in so-called friendly countries, established in October this year, where the German government simplifies and reduces the cost of obtaining state guarantees for domestic firms. Among the privileged countries within this diversification strategy of German economic relations are India, most South American countries, several African and Asian countries, and in Europe, Turkey and the Western Balkans.

According to the measures that have immediately taken effect, German investors in these countries will be exempt from paying fees when applying for state guarantees, the annual guarantee fee will be reduced by 10 percent, and in case the guarantee is activated, their mandatory share in financial losses will be halved.

This means that in the event a company needs to write off an investment in a particular country due to reasons like outbreak of war, asset expropriation, or law violation by the government of that country, the German government will reimburse a larger portion of the loss. Typically, companies must bear five percent of the losses themselves, but for the mentioned 34 countries, this share will be reduced to 2.5 percent.

“With these new positive incentives, we strongly support the German economy in important diversification for greater crisis resilience,” said Franciska Brantner, the State Secretary in the German Ministry for Economic Affairs and Climate, for German media. She added that improved conditions should encourage companies to make new investments in markets where they are currently less active. “We have selected countries that are reliable foreign trade partners and politically stable.”

As of June this year, the German government currently covers over 30 billion euros of investments made by German companies through state guarantees, whereas in previous years, around 2.5 billion euros were requested annually for new investments.

According to the government’s annual report on investment guarantees in 2022, Serbia is among the five countries with the highest number of newly registered applications for state guarantees, standing alongside China, Taiwan, Ukraine, and Turkey. However, in terms of the size of newly registered applications for guarantees, Serbia doesn’t rank among the top five markets. Instead, countries like Uzbekistan, Turkey, Malaysia, Argentina, and Algeria hold those positions.

The new measures by the German government aim to significantly reduce the costs of obtaining guarantees for investors, which, for substantial investments, often involve sums in the millions. However, for German investors, the risk of investing in the Adriatic region is practically minimal because they are already protected by investment encouragement and mutual protection agreements signed by West Germany with communist Albania and Yugoslavia, later complemented by newly signed agreements with the countries emerging after the breakup of Yugoslavia. In essence, German investments are already secured even without obtaining specific German state guarantees.

As explained by the head of the German-Serbian Chamber of Commerce, Alexander Markus, the German government’s guarantee is an “additional protection, meaning that in case of damage, the company will definitely receive money in the end, either from the state in which it invested or from the German government.”

Incentives for Climate Projects

Germany’s diversification strategy aligns with the country’s climate strategy. It’s possible to reduce the guarantee fee to as low as 0.4 percent annually for investments in renewable energy, green transition technologies, and significant projects contributing to green transformation in the country of investment. This sector presents a potential opportunity for the Adriatic region due to the untapped potential in renewable energy. Austria doesn’t have much space for investments in hydro, wind, and solar energy, while there are ample opportunities in the Balkans.

While there are no major German investors in this sector in a significant part of the Adriatic region, Germany is present financially through German commercial banks, insurance companies, the KfW development bank, and technologically through German companies whose technology is integrated into energy facilities. The Serbian engineering company Owners Engineers Clarion.Energy confirms significant foreign interest in green energy investments, as well as the development of carbon offset and carbon trading projects for industrial clients. There’s an increasing trend of German industrial companies relying on new concepts like near-sourcing/outsourcing in Serbia, particularly for steel and metal fabrication, as well as process and industrial equipment.

In Serbia, there are currently no German investments in power plant ownership. Still, companies operating there would like to see German investments in energy production rather than just in banking support and technology suppliers. Conversely, in EU member states of the Adriatic region like Croatia, there have been numerous German investments announced in renewable energy recently. For example, the German company VSB announced plans for a wind farm in Dalmatia with a capacity of 329 megawatts (MW), and German Enercon, along with Dutch Green Trust, are building the “Licki medvjed” wind farm with a capacity of 425 MW.

However, in both Croatia and the rest of the region, German investors and technology face stiff competition from China. The largest wind farm in Croatia was built by the Chinese company Norinco, investing 230 million euros. Nonetheless, regional experts suggest that there are still significant potentials for these investments in Croatia, Slovenia, and other parts of the region. Yet, it remains uncertain how much German investment will stimulate solar parks and wind farms in the Adriatic region.

German energy giants RWE and EON could be the driving force behind renewable energy in the region. This possibility is supported not only by generous subsidies and German ease of state guarantees in the region but also by the most recent news.

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