MOSTAR, Bosnia (Reuters) – The aluminium smelter in the Bosnian town of Mostar has fallen eerily silent since its electricity was cut in July. The only visitors to what was once a model factory in former Yugoslavia are staff filling in redundancy papers.

The closure of debt-laden Aluminij Mostar is symptomatic of the challenges facing countries across the Balkans as they try to keep loss-making state-owned businesses inherited from the communist era afloat in market economies.

The demise of the aluminium exporter also shows how 25 years after the end of the Bosnian war, everything from ethnic rifts to weak corporate governance to corruption are hindering growth, just as the world economy is slowing and European Union membership looks ever more remote.

While closure may be the only option for many Balkan firms propped up by state subsidies, local leaders are keen to salvage something from businesses that are big employers in a region where just 44 percent of the working-age population have jobs.

Besides its 900 staff, Aluminij provided work for some 10,000 people in its supply chain and was a mainstay for the local railway, power company and even the Croatian port of Ploce 60 km (40 miles) to the south.

“You can’t just shut down the largest plant in the country,” said Emil Coric, 34, a chief engineer at Aluminij, which also employed his father before he retired seven years ago. “Somebody must take responsibility.”

Aluminij’s management declined to comment for this story.

In Bosnia, the value of assets held by state-backed firms is worth a year’s gross domestic product (GDP). In Croatia and Serbia, it’s 90% and 70% percent respectively, according to the International Monetary Fund (IMF).

That’s in stark contrast to the EU where the value of big state-owned firms accounts for less than 30% of GDP in most states and is under 10% in Germany, the Netherlands and the United Kingdom, according to a 2016 EU study.

‘NOT SUSTAINABLE’

The World Bank, IMF and potential investors see many of the state-owned firms in the Balkans as economic burdens, sucking up taxpayers’ money, putting start-ups at a competitive disadvantage and often acting as hotbeds of political cronyism.

“This situation is not sustainable and seriously impedes private sector and general economic development,” said Zsuzsanna Hargitai, Western Balkans director at the European Bank for Reconstruction and Development.

She estimated that propping up inefficient state companies costs Serbia, the biggest economy in the region, two percentage points of national output a year.

While Belgrade has sold a steel plant and a copper mine to Chinese companies, it is still subsidising nine businesses which together employ 15,000 people. The Resavica coalmine group alone gets about $42 million a year.

In Croatia, loss-making metals producer Djuro Djakovic, in which the state holds a 38% stake, is seeking help with wage arrears. The government finally stumped up a guarantee of 300 million kuna ($44 million) to help the company and avoid protests in its impoverished eastern Slavonia region.

In Bosnia and Herzegovina, which split after the war into a mainly Serb region and a federation of Bosniaks and Croats – itself largely divided geographically between the two groups – there are a host of struggling state-owned firms.

The IMF said last year that most were in poor financial shape and a fundamental reform of them could boost Bosnia’s GDP by three percentage points a year.

COMPANY VINEYARDS

Yet the story of Aluminij shows how difficult the process of making such companies viable can be.

Founded next to a bauxite mine in 1981 under Yugoslavia’s planned economy, Aluminij’s alumina plant and smelter established itself supplying the local auto and airline sector.

It was destroyed during the 1992-95 war as Mostar was on the frontline, first as Bosniaks and Bosnian Croats defeated the Bosnian Serbs, and again when the victors turned on each other in struggle that left the city divided upon ethnic lines.

Like virtually all Bosnian entities, it was rebuilt after the war along ethnic lines. It was located in territory held by the Croats, so when it reopened in 1997 only Croat workers were allowed to return to their jobs, according to organisations deployed to Bosnia after the war, such as Amnesty International.

Smelting aluminium is hugely electricity-intensive but the generous power subsidies it received from Croatia and Mostar’s predominantly Croat energy company Elektroprivreda HZHB made it look like a viable producer.

Aluminij was also known for paying the highest salaries in Bosnia. According to local reports, its average salary was about 900 euros at the time the average for Bosnia was 440 euros while some managers got 10,000 euros a month.

It also boasted its own brand of wines, fruit liquors and olive oil from the sunny southern region of Herzegovina.

But even with subsidies, Aluminij was racking up losses, squeezed by a rise in the cost of the raw material alumina and a decline in global aluminium prices from 2014.

Between 2014-2017, its liabilities more than doubled to $208 million, or 2% of national output. About three-quarters of its debt is unpaid power bills to Elektroprivreda HZHB, which is itself trying to stay afloat.

PARTY FIRST

Damir Novotny, managing partner at consultancy T&MC, put some of the blame at the door of Aluminij’s management, saying it was chosen for Croat ethnic and political allegiance – rather than competence.

“Even electricity cheaper than market prices could not secure the successful operation and survival of this outdated company,” he said.

Aluminij’s managers were often close to the Bosnian Croat HDZ party, a pattern replicated by other groups across Bosnia but also in other Balkan countries, where party affiliation can sometimes be more important than competence for top managers.

With the group insolvent, Bosnia looked for a partner. Global mining giant Glencore (GLEN.L) and an Israeli-Chinese consortium led by Tel Aviv’s M.T. Abraham Group have shown interest but a deal remains elusive.

“All interested investors want the same: subsided electricity prices and government guarantees for all future loans,” said Energy and Industry Minister Nermin Dzindic.

“Had we done that, we would have been helping this management at the expense of someone else. That model is not possible,” he told Reuters.

Glencore declined to comment on its reasons for pulling out of talks in July. M.T. Abraham confirmed its first offer for Aluminij had been rejected but said in a Jan. 20 statement to Reuters it was awaiting a government response to a new offer to lease the factory, with an option to buy.

Whatever the fate of Aluminij, governments across the region face hard choices on dozens of other such businesses: continue to suffer budget hits from their losses, or move ahead with painful steps such job cuts or scaling back their activities.

The World Bank and others acknowledge that the prospect of EU membership is an incentive for politicians to enact difficult reforms but such hopes have been extinguished for now.

In July, French President Emmanuel Macron said applications from North Macedonia, Albania and other Balkan states were on hold until the EU revamped its structures. Officials are now awaiting a May summit for more promising signals from Brussels.

Ela Halilhodzic, 38, who used to work in Aluminij’s finance department, said she wasn’t going to hang around and was likely to join the brain drain which is adding to the region’s woes.

“I will probably go to Germany,” she said.