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Black Sea Energy and Economic Forum 2009


  • Werner Weihs-Raabl, Head of Infrastructure, Finance and Public Sector, Erste Bank
  • Bratislav Ceperkovic, Executive Manager, Electric Power Industry of Serbia
  • Lado Gurgenidze, Executive Chairman and CEO, People’s Bank of Georgia; Former Prime Minister, Georgia
  • Victor Ionescu, Director General, Opcom Energy Trading
  • Paula Stern, Chairwoman, The Stern Group, Inc.; Former Chair, International Trade Commission

October 1, 2009

WERNER WEIHS-RAABL:  (In progress) – will last a bit longer than initially expected.  What does this mean in our energy context and what does it mean in terms of the experience in energy-related matters in the region after several Eastern European markets, especially in the Black Sea?  What does it mean in terms of energy and financial sustainability?  Can you get the financing for the project?  Which kind of projects would be the preferred ones?  I think those are some of the issues we’d like to discuss.  I think we have quite an interesting panel here.  Excuse me if I read this out to you in order not to pronounce their names wrongly.

First of all, we’re going to start with Mrs. Paula Stern, Ph.D., chairwoman from The Stern Group, the former chair from International Trade Commission.  Ms. Stern is a quite known expert in the field of energy-related matters and gives us I guess a global perspective with a focus and a reach, but also with a focus from a U.S. point of view.

We will then have quite an interesting discussion, presentation, by Mr. Bratislav Ceperkovic, if I pronounced this correct.


MR. WEIHS-RAABL:  He is the executive manager from the Electric Power Industry of Serbia.  This will be quite a challenging discussion I’m sure, and there’s a lot of interesting remarks coming from a country like Serbia and the energy sector in Serbia and the financing of new energy initiatives in the region.  We will then talk with Mr. – no, you’re not there – (in foreign language) – and you’ll hear from the chairman from the OPCOM.

MR. (?):  Deputy representing –

MR. WEIHS-RAABL:  From the OPCOM Energy Trading Company.  

And last but not least, we will then discuss the impact in the energy and financial markets from the point of view Mr. Gurgenidze, chairman of the Georgian – People’s Bank of Georgia, and former prime minister for the Republic of Georgia.

Okay, we have introduced the panel.  Maybe just ask everyone who would like to start and –

PAULA STERN:  I’ll be happy to.

MR. WEIHS-RAABL:  I’d like to thank you for volunteering.

MS. STERN:  Thank you.  (Laughter.)  I get points for that.  Now that I’ll start to speak, we can start to subtract points.  I’m not an expert on energy so now just undermine the credibility of our chair.  But I would like to think that I have a great deal of experience in international trade and in the intersection of government and the private sector and have some observations to bring from my point of view living in Washington, D.C.  And I don’t have any specialization in finance.  I have, however, some views, based on my experience in particular, not only in the government but in the U.S. private sector.  And if I might, I’d like to make those views from the point of view of sustainability but not necessarily financial sustainability in the narrow sense of the word.

In the United States, the consumer is king and queen.  And sitting on the corporate boards that I do, which are private corporations that are trying to provide services and goods to those kings and queens, the royalty, the great consumers, the notion of environmental sustainability has become a new challenge to the American business community who have to be meeting the satisfactions of their public, their consumer.  

And the same sustainability debate, which relates very much to the discussion that we had in the hour before under the chairmanship of Gen. Wald, relates to the climate change debate.  The United States, very much in contrast to the European community has really not had a climate change policy.  It has not addressed it.  The previous administration in leadership in the White House had real problems with the science and therefore the economics and therefore the politics.  

So we in the United States are catching a – we’re in a catch-up mode, and the Copenhagen meeting in December leaves the United States in a challenged position, challenged because I believe though U.S. is certainly not the – does not have the dominance that it has had in most international leadership fora, it still is a very important leader and that would be the case of Copenhagen as well.

MR. WEIHS-RAABL:  When you say – excuse me – if I just may ask you, is climate change right now a global United States issue?  Is it more a regional focus on the – on the East Coast and on the West Coast, but is it throughout the United States the concern of climate change?

MS. STERN:  I believe right now it is hardly reaching the public’s concern.  It’s certainly always the case in American markets, be they commercial or political, that trends start in California, and then ultimately just over to the East Coast, and then finally penetrate the center of the country.

MS. WEIHS-RAABL:  So has it become a global thing?

MS. STERN:  So that is important – far more important in California than it is in the rest of the country.  So in that sense, my overarching point is the U.S., compared to the debate in other countries, we have hardly tackled this issue.  The public is not ready; the public is not pushing President Obama.  President Obama I think intellectually is ahead.  I believe that politics always lags commercial market reality.  And that’s why I say that in the business world, in our corporations, our consumers are pushing us to have products which are sustainable, to have smaller carbon footprint, et cetera, and that that’s an important risk to the reputation of corporations.

In Washington, however, we do not yet have the public support. It lags for the climate change issue.  I think it’s a matter of time and I think it’s a matter of leadership, but I think it’s important to state this because I think ultimately the United States will have to tackle, as it did, if you will, in World War II, it will have to become internationally engaged in this international threat, the security issue.  

And that’s where we’re going to get into these financial issues, with a small F, financial issues.  That’s – you’re going to have much greater government involvement in order to bail out the global economy, U.S. government, to substitute for the consumer who has been king with – and how the U.S. government, working with the World Bank and the IFC in terms of financing will have to tie its thinking over to energy security issues and the climate change security issues together if the U.S. is going to be successful, if the leadership in place going forward, as it had been back in World War II with its allies.

MR. WEIHS-RAABL:  Okay, thank you very much for this statement.  One thing maybe from my point of view is the governments supporting this initiative by means of either techs or economic programs or maybe some other financing programs for U.S. labor.  What is the government doing actually to get this policy on the ground?

MS. STERN:  Well, as you know, the first thing that President Obama did was successfully pass the stimulus bill, which was about a $800 billion stimulus bill.  And in it, there is money that is supposed to match, is supposed to match the rhetoric about green jobs and technological revolutions and alternative energies and investments in the future, and innovation in addressing the infrastructure which has also been neglected in the United States, but an infrastructure that includes not just roads and bridges, but includes smart grids, which get into the distribution of energy, et cetera.  That is a mere down payment – a mere down payment.  But I do think it reflected President Obama’s comprehensive view of this pivotal moment in American history.  

But I don’t think that the American public yet has been, if you will, educated.  We had an absolute absence of discussion for the most part.  And Washington was completely closed to talking about climate change for the last eight years.  We have a lot to catch up on.

MR. WEIHS-RAABL:  How about banks in the United States.  Are they interested in these projects?  Are they interested in financing this?

MS. STERN:  I’m sure that, you know, at the right price, at the right investment – but I think they are so busy right now and –

MR. WEIHS-RAABL:  They can’t afford –

MS. STERN:  In Washington of dealing with the regulatory challenges which – and their compensation issues, and all of these short-term internal to the financial system things that – while there may be long-term thinkers in funds.  And finance is an enormous sector, you know, of a variety of people.  So I’m sure that there are individual organizations which are studying very carefully various opportunities.

MR. WEIHS-RAABL:  All right.  Thank you very much.

MS. STERN:  You’re welcome.

MR. WEIHS-RAABL:  Let’s move on to Serbia.  And the first question from my side would be what’s the market situation in Serbia?  We’ve heard that there’s some sort of momentum coming from basically kicking off from the West Coast in the United States, moving onto the East Coast and making its way inland to Central United States.  What is the Serbia notion about energy sustainability?  And what is the government doing to promote these new climate initiatives and energy initiatives.  And the last question from my point of view, in this context, what is the financial situation in the country and who is willing to support that?

MR. CEPERKOVIC:  Well, first of all (we left room ?) for all of our friends who are together with us on this round table.  And thank you for Russian – Serbia of course is on the opposite side of (Earth as well ?).  In the United States, we are not only opposite, we are graphically more things you are opposite politically, too.  In the last 20, 25 years of course, more things be negative reflex not only for Serbia but the whole region – ex-Yugoslavia and these countries – not only Serbia – all countries of ex-Yugoslavia, plus Albania now is a part of European Union and energy – across the energy community treaty.

I believe the people who is on this conference knows that and under that treaty, there is an observer, Georgia; there is an observer, Moldova, Ukraine and Turkey, and Norway and the fourth or this fifth country practically is under negotiated process to become a member of that.  It’s basically fully unofficial ratified European integration for the whole country region where we practically totally accept the European roles and standards and direction and whole others, completely ambient of practically energy market as well.  That’s on paper, but in real life is something of course different as well.

As a country, Serbia in this moment tries our best to be practically some kind of leadership in the region in the development and of course adoption and implementation of all rules which we take across the energy community treaty.  That’s factually – we know that on the start of open market.  And generally the gas sector is practically – they know that.  

The oil sector nearly be practically under some kind of internal monopoly until the end of 2010.  After that started, it opened the markets completely.  We have in this moment a contract which practically government finished with Gazprom with the selling of the oil industry.  But at the same time, one company, this financial group are coming from overseas from the United States and Ireland, start to build up one refinery which will be practically – if of course whole project will be realized – will be a very good sign and very good news in the same time for the whole region; it will be practically the first new refinery in the last half century, as well.

In the sector of electricity, we started to tender in the – 20 of January this year on Financial Times, and now we have 10 partners for a thermoelectricity power plant, totally power 1,400 megawatts.  And a huge company from all over the world was practically put the self interest like EDF and others that – several of them.  And that’d be of course after 25 years and after practically bloody war in ex-Yugoslavia – first huge strategic in West in the energy sector in the whole region as well.

MR. WEIHS-RAABL:  That is in the thermal industry.

MR. CEPERKOVIC:  In the thermoelectricity, yes.

MR. WEIHS-RAABL:  How about hydro?  Hydro have been in the papers.

MR. CEPERKOVIC:  It’s Serbia who is leading production of electricity in the region of Southeastern Europe, practically, and only one country which is sufficient with the self-production, with the possibility of export, too – have around 35 percent of hydro and 60, 65 percent of thermoelectricity.

And as well as for the hydro, we have a huge plant, practically a huge project for hydropower plant, around 800 megawatts.

And of course next thing interesting is the completely unknown program of mini hydroelectricity power plants in the 800 location.  

MR. WEIHS-RAABL:  What’s the government doing in order to induce that privatization?  Is there privatization at all?

MR. CEPERKOVIC:  This is the first privatization law.  And that tariff system will be adopted I believe today on the government – the government session, that we practically have a whole renewable way of energy as well.  We open as an electricity company in Serbia.  

We think of progress with them for two weeks with a few companies from Spain, we will be seeking the memorandum of partnership about solar energy, and we try very huge to push forward. When I come back from the start of this year, I’m opening a new page as well in our trying not only to open to market but to follow completely promoting policy with all of the world, not – in the United States, which is a huge country, they start from East Coast.

MR. WEIHS-RAABL:  But is there a regulative regime?  Is there a new tariff for green energy in Serbia?

MR. CEPERKOVIC:  Sure, sure, sure, sure.  That’s something – what’s fixed and I believe today is adopted:  (solar ?) power.

MR. WEIHS-RAABL:  So there is a new regime in Serbia.  Is there one in the United States?  (Chuckles.)

MS. STERN:  If you’re talking about a regulatory – actually, just today, in terms of regulatory regime, the Environmental Protection Agency took initiative which is remarkable in announcing that it will be overseeing and penalizing corporations that are high-carbon emitting, and it is a dramatic announcement.  I think it’s something which Obama wanted to have in place to signal that the administration is doing something because he doesn’t see that the Senate and the House will be able to do it.

But I also think that ultimately, if we ever do get new legislation that deals with the overarching issues of energy and climate, that we will also get – everyone talks about a carbon cap and trade and carbon tax, but there will also be probably a provision on, if you will, countervailing tariffs on imports coming into the United States from high carbon-emitting sourced factories.  So that will be a whole other source of revenue as well as source of friction, national friction that the U.S. will be putting into place.

MR. WEIHS-RAABL:  Thank you.  One more question from us as regarding Serbia is, do you think this is the first wave of privatizations that will be happening –

MR. CEPERKOVIC:  Yes, yes, yes.

MR. WEIHS-RAABL:  – because so far Serbia was not kind of being first in the privatizations.

MR. CEPERKOVIC:  In energy sector, no.  Croatia put that with a German company and started with RWE but now we practically make this joint venture a huge project of thermoelectricity, and I believe several hundreds will be in the renewables.

MR. WEIHS-RAABL:  What’s your experience with banks interested in financing you?

MR. CEPERKOVIC:  If you of course – if you of course calculate the World Bank like a bank, not like a financial trust institution that’s – and other banks of the first category don’t come anywhere on the Balkan issue.

We assume whole projects, which is necessity under the roadmap direction – must finish in energy community treaty until 2015, as well including total budget for our realization of that project for our 8,000 megawatts.

MR. WEIHS-RAABL:  This is the roadmap for Serbia, for –

MR. CEPERKOVIC:  For completely solve the energy and sustainable climate change and environmental solutions in the energy sector as well as electricity.  And these documents, practically when we assume – I’m one of co-authors.  Two of my colleagues and I first wrote this book, exist 1.2 billion euro necessity to solve all problems in this six-and-a-half years.  Without support and long-term soft credit line, we practically are at a loss, it’s impossible to solve those problems as well.  In the same time, it’s more important than ever that we will be to take the challenge to co-finance in renewable, that’s something which we don’t think is impossible to solve as well.

And I think that’s a very huge chance – a huge opportunity for the climate sector to invite all of them as well to come and to be partner in Serbia, and of course not only Serbia, the whole region because the situation is going be always the same.  

We have a problem of course beside of – if you look at the investment climate that was the problem to.  This one, it is some kind of crisis which is under the control of the government, not only Serbia, but everywhere.  And the second problem which coming as a technical problem is congestion to practically transferring that energy because Serbia has got very good location and a million times compare with Georgia.  Last April – excellent talented and tragic country but without enough energy to be a key player.  

That’s something that we must develop together, and of course that’s one of the reasons because we take this invitation to be here and to open, to ask decision-makers to push a little bit more on the side of development because I’m being so much engaged to the development, for example, of diversification, to study it for Southeastern Europe.  The World Bank finished a study preparing for four or $5 billion.

MR. WEIHS-RAABL:  Okay, thank you very much.  Now, over to Romania and the situation with – first of all, the situation with OPCOM Energy Trading, what’s the target of the initiative, and which kind of framework do you operate, and how do you see the financing situation – financial situation?

VICTOR IONESCU:  The regional and the European issues because we are involved in are in fact differently than other power exchanges in Europe.  They are represented in the initiating for the business people, the business framework.  We were born in 2000 as a decision of the government.  And we were leverage for the government in order to liberalize the market.  

What is happening, in fact, in 2000, vertical integrated company was split in more generation units based on technologies.  I don’t know if – it’s still debate – if it was good at that time and if it’s good to keep or not to keep this structure.  First of all, the nuclear company was separated in ’98, just in the moment when the moment was to provide the vision and the first regulation in order to start the market liberalization.  It was the time when Romania started negotiations with the European Union.  In fact, negotiations regarding the accession was finalized in 2004, and it was an involvement of the World Bank as well as in Southeastern Europe this moment in Turkey also.

And the role of the World Bank was to push forward and to help all of the development by providing a loan to the transferring – to the transmission system operator.  And the so-called electricity market project in fact is this – is quite the same name that now our project is, you know, ongoing development in Turkey.  And a special condition for this loan giving was to provide the roadmap.  And this roadmap provided –

MR. WEIHS-RAABL:  So you have a similar book?  

MR. IONESCU:  Yes.  Not really.  We have – not really a book; it’s only 20, 30 pages – is a smaller one.  It’s smaller just because it’s worth – it was required by World Bank over the night, and it was prepared in two months.  It’s mainly a declaration.  We want to do – it’s an idea.  And this same document was the main pillar in negotiations with the European Commission in order to close the famous chapter 14 –

MR. WEIHS-RAABL:  So it got the blessing of the European Commission, this book?

MR. IONESCU:  It’s not really a book.  It’s not a study.

MR. WEIHS-RAABL:  The program.

MR. IONESCU:  It’s a very concise program.  We are saying we were doing the first step, this, and improvements in the project in 2005 change the mechanism in the market, including some mark-to-market concepts.  So the bilateral terms in the long term or that they have market for more trade and the balancing market to balance the system in real time.

MR. WEIHS-RAABL:  What’s the situation with the green sort of certificates in Romania?

MR. IONESCU:  Green certificates markets started in November of 2005.  It was something amazing.  We started the products in the same year, in June of 2005.  It was the new mechanism of the market in November – the green certificate market.

He’s working to produce one green certificate.  And with this green certificate is what can be done.  It can be kept by the public if he’s also a supplier – the supply plan or something.  And all may be sold through the market even if this producer don’t need to satisfy a certain quota.

MR. WEIHS-RAABL:  I mean, this is generally the issue for the bank which finances it.  What kind of price will you pay?

MR. IONESCU:  The price is –

MR. IONESCU: In fact, last year, a new law was issued and that was different previous law, the existing law.  The new law is moving material in 2020 and not so much investment because the  protection of investors was not really enough incentive.

MR. WEIHS-RAABL:  Now with all of this large green-type projects coming to Romania –  

MR. IONESCU:  – because I want to see, I want to see in place the way we –

MR. WEIHS-RAABL:  What happens with the green certificates?  Would – if those wind farms come to the grids, be connected in 2010, you must have a fixed price – calculate the financing on that?

MR. IONESCU:  What is the difference?  Until now, we are equal with one green certificate.  Now some technologies have more subsidized for these mechanisms.  For example, photovoltaic is receiving three green certificates, while windmill is receiving only one.  It’s differentiated.

MR. WEIHS-RAABL:  I understand.

MR. IONESCU:  And the enterprises.  The price is not an issue.  The price is not an issue in the market.  And what are the possibilities to negotiate for the price for an additional price to the electricity, because the electricity is sold in one market and the production is in another market.  

MR. WEIHS-RAABL:  In Serbia it’s similar?

MR. CEPERKOVIC:  They’re similar, but in Serbia, that’s a huge amount for the strange company which would like to produce renewable energy now or market then to export them.  For Italy that’s a hit now at this moment because they have a problem plus because they practically sell CO2 carbon-limited touching up as well and that’s a reason because they huge, huge develop that store; Switzerland company need to do that and several others too.

MR. IONESCU:  To finalize the issue of green certificates and to summarize this framework for climate change, at this moment is we are totally covered by an existing law.   CO2 is very difficult because of the framework.  For example, nobody knows if a black certificate is a financial instrument or is a commodity.


MR. IONESCU:  Nobody can indicate at this moment (what will happen later ?).

MR. WEIHS-RAABL:  Okay.  So there needs to be some better regulation in order to make it – work.

MR. IONESCU:  The national security commissions are having the intention to regulate.  The electricity regulator does nothing because it’s not government.  There are other – more other industry issuing the greenhouse crisis.

Even if something strange to consider this black certificate as being a financial instrument, they are not a commodity.  It’s a not a free market but a commodity market.  It’s not a financial instrument.  And so it’s more difficult to not mention why certificates is totally different because if we’ll have some frameworks, some legal frameworks, Romania, the three months for white certificate are not easy. There are other subsidies for inefficiency – energy efficiency improvement, but not market-based institutes, hence is the certification.

MR. WEIS-RABBI:  Okay.  Thank you.  Now to Georgia.  And Mr. Gurgenidze, a banker in our panel, and what is the experience from the bank’s perspective in the energy sector?

LADO GURGENIDZE:  Thank you.  Well, actually, I’ll try to stick to the topic of our panel for the declared topic, which is the risks and the risks and financing energy and infrastructure projects.  I do think this is particularly topical today when the investment inflows into emerging markets are so dramatically reduced, right, reduced by about 70 percent.  Two years ago there was almost a trillion dollars that flew into the emerging markets globally.  This year, the forecast is 165 billion.  Guess what, the most CapEx-heavy sectors, that is energy and infrastructures have obviously taken it on the chin in a particularly badly ride because much of that has been taken away from that.

Secondly, as very aptly pointed by Barbara Judge, the last plenary session, in terms of the energy financing and the risks thereof, and what is particularly helpful is that most of the hydrocarbons tend to be in the countries with a very profound and I’m afraid, in many cases, irreparable deficit of democracy or liberty deficit as they refer to call it.  And that’s the inevitable high level of corruption because these two things go hand in hand throughout the planet and throughout the history of mankind and that’s an important point to make.  Now, political risk –

MR. WEIHS-RAABL:  So you were saying there is a kind of similarity – all technology and –

MR. GURGENIDZE:  No, I’m just saying life is ever unfair and, you know, it basically is reflected in the global allocation of hydrocarbons – profound unfair but se la vie.  Now, when one talks about political risks in general, that’s a much over-used term, abused term, and an overbroad term, and as such not particularly helpful unless one desegregates it, right.  So first, just to underscore the new reality, right, a very big subset and the one we can do the least about unfortunately, from the financing point of view or in general, is this subset related to geopolitical risks, and that is a very real reality and a very, very closely linked issue of the access to supply routes for hydrocarbons.

Why is that a new reality?  Well, anyone who has been following the rather unfortunate actions of Russia against Ukraine, Belarus, and my own country in the past two years pretty much will see that the access to supply routes has become a dramatic source of risk, and unfortunately it’s not the one the bankers or the project sponsors can do very much about.  Now, an aside point here:  given the dramatic escalation of those types of risks, to me it is puzzling and disappointing and frankly inconceivable that we all in the free world are moving at such a glacial pace in terms of the progress on the diversification of the routes, et cetera, right.

Actually, I would like to differ from the point raised yesterday by Ambassador Morningstar, 10, 15, 20 billion euros for something that denies those who are very much enamored by the zero-sum games in this field, right.  That is not a high price to pay for denying those who want to drag us back into the 20th or the 19th century.  Look, I’m a libertarian, so any fiscal dollars spent on anything is profoundly offensive to me, but I’m also sadly a realist who over a generation that just barely escaped the iron curtain.  So that is probably the one type of expenditure I would like to see more of regionally and globally, right, on Nabucco and other alternatives to those routes that have been monopolized by those who view energy as the continuation of aggressive geopolitics.  

And frankly the 10 to 20 billion euro or dollar range of costs for these alternative routes compared to the trillions that have been wasted by the governments globally and in particular in G-7 in the what will be known I’m sure in the moment of madness of the past year, year and half post Lehman, that’s really not a high price to pay.

Now, another interesting point is that sadly the behavior of the project sponsors and emerging markets, be it in Eastern Europe, CIS certainly, certainly in Africa or in particular, really just very often promote and perpetuate the bad habits that those governments have acquired, especially when it comes to infrastructure and energy financing.  And obviously I’m talking about the seeking of preferred treatment, which is very wide spread, as well as the, you know, rather unfortunate practice of deals based on non-monetary deliverables.  It’s particularly popular in Africa these days, a lot of the Chinese companies prospecting for resources there do that in particular – you know, give us the license or what have you; we’ll build the road or a hospital or what-not, and guess what, it obfuscates the pricing, the benefits become very un-transparent, the goalposts keep moving, et cetera, so it would be to everyone’s interests for the project sponsors to stop being naïve and really think whether or not that really achieves anything for them.  

Having been an investor or an advisor for the last 15 years, and having done business in about 30 emerging markets in this region and elsewhere, frankly, from my point of view, if there’s a government receptive to a dialogue about a preferred treatment or special treatment, I just tend to run away from that country as fast as I can.  And the best view of such markets is the rearview mirror – or the rear-mirror view.  That’s just a point I firmly, firmly believe in.

Lastly on that subject, sadly also our colleagues, the financers, the project funders very often suffer from the herd mentality.  Just because a lot of projects have been funded in, you know – those CIS countries would be particular richness in hydrocarbons doesn’t mean that the debacles of Sakhalin or Karachaganak were any less painful for those who have been, well, on the receiving end of the treatment of those two, right.  So just because a lot of funding flows in a particular direction doesn’t mean participating in those types of projects is a smart or intelligent thing to do.

So how does one do it then, right?  And here’s maybe where I’ll bring some of the Georgian examples here as well.  The old-fashioned homework is very important, right.  Just do your homework on a country.  And do your homework by being very specific about the types of risks you look at, right.  If one disassembles the host country risk, which is a better term than political risk, you really are looking at what?  You’re looking at the nonpayment and the currency inconvertibility.  You’re looking at the risk of expropriation and nationalization.  You’re looking at the risk of the breach of contract by the sovereign.  And its ability to pay the penalties on paper are incurred once a contract is breached.  And you’re looking at the regulatory regime change or erratic behavior and you’re looking at tax really.  I mean, these are the basic categories here, right.

So how does the – what does one look at?  Well, first, look at the track record of the country, right.  Look at the very basic policies, right.  Start with what is the level of government expenditure to GDP, and has it been creeping up as sadly, sadly has been the case for, I don’t know, 95 percent of the countries worldwide for the past century or so, right.  Is it high because if that is the case, then chances are, you will always be seen as yet another source of fiscal revenue as opposed to an economic agent laboring for the better of all of the stakeholders in the market, right.

Look at the state ownership, right.  Sadly in emerging markets, the governments are particularly enamored of owning infrastructure assets.  And, by the way, just to provide an alternative view her, right, on the fiscal expenditure to GDP, Georgia is about 30 percent right now, and frankly we consider that too high.  And there’s a law being put in place limiting the size of the government to that 30 percent forever because it’s going to be done at the constitutional level.  

Those are the types of measure for countries who need to shout very loudly to attract any attention that work and make sense.  But, frankly, given again the madness that’s been going on post-Lehman globally and in G-7 in particular, a constitutional measure of their kind would have been very helpful or would be very helpful for just about any country in the world, right.  The fiscal madness that is going on is simply unsustainable.  A very closely related point is the point of the power to attacks, who exactly has it, right.  Since when has it become an accepted reality that it is the legislature that has the power to tax?  That didn’t used to be the case a couple of hundred years ago.

Unfortunately so far – but we’ll change it next month – so far there is not a country in the world which has had the courage or the vision to return the power to tax where it belongs, to the citizens themselves.  There’s not only the state of Colorado that for the past 18 years had something called the taxpayers bill of rights.  That bans any new taxation or any increases in the tax rates other than through the statewide referendum.  We intend to follow that route in the next couple of weeks by introducing those constitutional changes.

Look at the scope of the bureaucratic discretion, right.  How erratically has the regulator behaved in the past, well, years, decades, quarters, what have you.  How many changes of the regulatory regime have been announced or introduced?  And frankly, I don’t care what the cause or the endgame or the big picture is, right.  The more erratic behavior, the more risk there is, quite frankly.  And also there’s really fundamentally no good reason, especially in emerging markets, to not fully liberalize any of the energy markets.  In Georgia, the electricity market has been liberalized fuller for the end-user point of view for many years.  Last year we finished off the gas market liberalization, so and so forth.

A couple of more points and I’ll just –

MR. WEIHS-RAABL:  Just a very few please because we have also question and answers hopefully.

MR. GURGENIDZE:  Well, fair enough.  Just let me just wrap up.  Now, just sort of listening to the earlier very interesting debate, we don’t have – in terms of the environmental sustainability we don’t have roadmaps in Georgia, we don’t have green certificates or certificates of any other rainbow colors.  What we do have, however, is a market where 88 percent of the electricity produced and consumed, since we’re not an exporter, comes from green sources.  And we have an economy that is most efficient among the former Soviet Union economies in terms of the units of energy consumed per unit of GDP as opposed to per capita, right.

So fortunately, and we take no credit for that.  Policies we’ll take credit for.  That thing and the abundance of hydro resources that’s really up to God having put us where we are.  So I’ll just stop at this point of the program.

MR. WEIHS-RAABL:  Thank you very much.  It was an excellent overview.  Now, let’s go right into questions please, because we really – I believe that these presentations here should provoke a number of questions.

Q:  I have –

MR. WEIHS-RAABL:  And then also please short questions.

Q:  Yeah, this is short.  I don’t really think it’s true that the banking systems in the Balkans are incapable of these kinds of investments.  They are actually quite well developed.  And in fact, the participation of global banks in the capital of banks in this region is very high.


Q:  In Romania, in Bulgaria.

MR. CEPERKOVIC:  It is not OPEC (?) it is European Union.

Q:  There are global banks.

MR. WEIHS-RAABL:  I think that the point was that there are no – they are also foreign.

Q:  My point is that there are banks here.  The question is whether banks are commercial banks, local commercial banks are the proper agents for infrastructure investment.  And on that score I agree with you.  It will be a long time before you have local banks financing big infrastructure projects because they just don’t have the resources.  But getting back to the more global point, is it – what kind of science will we have to see in the sort of come-back of financial markets and the banking systems in the region to determine whether it’s the right time for outsiders to begin to consider looking at infrastructure investments?

MR. WEIHS-RAABL:  Maybe, let’s go through our panel with the answer to that.

MR. IONESCU:  My opinion is that not only the banking system is in trouble at this moment, but financial investment, but even the investors – if I’m an investment, I’m in a very difficult position, and for sure if the investor is 10 percent sure that he will be covered, mainly the bank supporting him will be 70 percent sure that it would be able to recover.  The most certain decision is of investor.

And even the investor at this moment is in very big difficulty.  For example, what is happening now in this region?  We will discuss about harmonization, about the integration of the market.  We discover that it’s impossible to discuss about market integration and to cover the markets.  Just because visiting the regulator in Belgrade, I discovered that it’s not fair to ask him to discuss about market copying when he’s concerned and is thinking day and night how to open the market.  It’s difficult in this region to harmonize because each country is having their own agenda.  And what we understand differently than other power exchanges in Europe is that they’re making very aggressive declaration.  They want to build empires.  

We want only to cooperate because even the European Union legislation – and Romania is not really included in the European Union legislation because if you look at the seven regions, mansion for cross-border trading, Romania is nowhere.  Romania is only in the Southeastern Europe, in the eighth region, and we have spatial indication about this region not similar with other regions in Europe.  And in this case, how to build an integrated market.  It would be very difficult.  And the first declaration that we always were giving to our partners is really speak your agenda when your agenda and my agenda will meet – okay.  We may cooperate; otherwise we cannot push for cooperation.  

And in this case, what was not possible to be done by regulation, by the treaty, by other aspect – top-down aspect, shamefully only the crisis was doing.  Now the prices in the region are the same, which is very difficult, for example, for Romania because if in Romania the price was 10, in Albania it was 20 – very easy to export.  Now it’s very similar the price in the region.  How can it be done one export in this case?  On the other hand, in Romania, the consumption decreased with 10 percent, which means this 10 percent – and in Romania it’s half-part regulated and half-part free.  The regulated part is protected by the tariff.  So this 10 percent means in fact decrease of 20 percent of the free market.  And in the case, how to invest in a new power plant if the consumption decrease with 10 percent and nobody knows what will happen next month.

MR. GURGENIDZE:  Maybe it’s a not a good idea to invest if the consumption is down 20 percent, right.  Maybe the market is telling you something.

MR. CEPERKOVIC:  This is not a moment for –

MR. WEIHS-RAABL:  Yeah, don’t –

MR. CEPERKOVIC:  The documents of European Commission are proudly mentioning the capture and storage of the carbon – very nice but very costly.  It’s an investment; it’s not only theory and the silence.  It’s investment.  If the price in the carbon market is lower than 35 percent, the investment in capture and storage technologies is wrong.  Who knows.

MR. WEIHS-RAABL:  If I may just interrupt?  There is another question.  From you, sir, please.

Q:  One of the things we are trying to – sorry, one of the things we’re trying to accomplish with this conference is to identify the interest of private-sector companies and to link up with governments in the region, to identify policies that will help this region become more energy independent.  One of the things that you look at is to try to – as a deterrent to investment is oil price volatility.  

You look what happened in 2008, over a six-month period, the price of oil went from 147 down to 32.  And that sort of environment it’s very difficult to allocate resources and capital to determine which of these – you know, whether it’s traditional energy sources you continue to plow money into, the CapEx requires all the long-term investment process.  It’s very difficult to run a business model to calculate reliably for governments and businesses to decide together.

As people looked and tried to determine what was the cause of that price volatility, many first blamed it on the hedge fund and commodities speculators.  You know, I think if you took a step back and looked at it a little bit more broadly, I think it was a real misallocation of capital.  I think there was a real lost opportunity by the global financial system by channeling surplus of largely Asian funds from China into these sophisticated collateralized debt obligations that were basically secured by real estate, by American home owners that just by a signature without verifying their income, could get a loan, and the person holding the ultimate paper was governments around the world.  It seems to me if that can be sold by Wall Street, we should be able to come up with something a little more sophisticated where this money in the liquidity markets could be directed directly to where it can really do something in the context of energy security.  I don’t have the answer for that, but that’s something that I hope that this forum will take on and address over the coming months as we have follow-up with this conference.

MR. GURGENIDZE:  That’s a very important point, actually.  I mean, those of us doing business in this region, broadly speaking, now there’s no need to chase the yield because the yield is all around us.  So it’s just –

MR. WEIHS-RAABL:  So are you saying back to basic financial – I think more – not-so-complex structures and pointing their fancy to –

Q:  I think the complex structures are fine as long as it’s directed to – where the underlying asset is in the energy industry, and basically you’re never going to address the price unless you have put investment into infrastructure and improve capacity to be able to take on, you know –

MR. WEIHS-RAABL:  From my own observation, what I always experience when doing infrastructure finance, it’s always the same behavior pattern.  When you go to a country and say, okay, we are to finance your energy or your airport or your road, first of all, the concession period must be as short as possible because they don’t want to give it away to a foreigner, the first observation.  The second observation, well, the foreigner has deep pockets; he must take all of the risks.  The third observation, the foreigner doesn’t really take the risk away from us so we can do it wholesales.  Why don’t we need this all together, and then we spend three, four, five years retendering it all over again and nothing happens.

So I mean, that’s, from my experience, the biggest challenge in Eastern and Central Europe, that you get the governments to first of all not just believe that some are coming from outside, takes all the risks away, is happy with the shortest concession period, and expects – and is happy with the situation that the tender of what he prepares for half a year or maybe a year will be retendered, retendered, retendered and retendered, and he doesn’t have any clue of understanding under which scenarios finally they award to the winning tenderer.

I mean, this kind of uncertainty is, to my understanding – I’m sorry, I’m the moderator; I’m not the panel speaker – but I would just like to bring that on the table this way.

MR. CEPERKOVIC:  That’s a good conclusion.  In Serbia we had the sample with the road.

MR. WEIHS-RAABL:  We had similar experiences.

MR. CEPERKOVIC:  Very similar with the highway which – three times crushing down and on arbitrage now to the parties and delays of five years.

MR. WEIHS-RAABL:  Delays of five years.  No one would like to –

MR. CEPERKOVIC:  And the cost is around 5 million to preparing documentation or consulters, coming from where we are.

MR. WEIHS-RAABL:  I think regardless, whether it’s infrastructure, energy, roads, or whatever, it’s always the same.  But anyway.

MS. STERN:  I just want to add the comments of China’s financial crisis and projecting what may go forward.  And he basically pointed out that banks want to invest; financial services want to invest in those areas where they know the legal system to be established and therefore the amount of Asian-held dollars got reinvested, if you will, in the United States, its housing market and in the U.K.  And the question – you know, if this is the way global flows – and what we’re talking about here are regional flows, I think that the fundamentals still remain, is are you concerned about corruption?  Are you concerned about transparency?  If you’re concerned about a variety of things like this, then you’re tending to the have those first dollars get reinvested in a legal system:  A, that you’re familiar with and, B, that at least are transparent.

MR. GURGENIDZE:  Well, isn’t it ironic that over the past year given the regulatory retribution of the politicians in the United States and the United Kingdom are now shoving upon the financial services sector, that predictability has been tossed out the window; it doesn’t exist anymore.  Isn’t that ironic?

MS. STERN:  I didn’t – I talked about transparency in the legal system.  You’re saying – you’re saying what is unpredictable now, the legal system?

MR. GURGENIDZE:  Well, yeah.

MS. STERN:  Transparency?

MR. GURGENIDZE:  Well, transparency might still be there, but what I’m saying is the behavior of the U.S. and U.K. governments over the past year has been not just sad but it has tossed out the window all of the predictability, stability, et cetera, the behavior toward the financial services sector.

MS. STERN:  Well, I think that they at least, you know, are saying that they’re trying to give the regulatory system must more transparent.  Now, if that means that that’s less predictable than in the past –

MR. GURGENIDZE:  It’s just the case of politicians being politicians basically.

MR. WEIHS-RAABL:  Let me just ask you the last question, and then we have to finish it.  We have to – looking at the organizers – I’m sorry we can do the questions outside.  Thank you very much.  (Applause.)

Transcript by Federal News Service, Washington, D.C.

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