Riccardo Puliti, head of energy and natural resources at the EBRD (European Bank for Reconstruction and Development), speaks with Ben Naylor about the bank’s energy strategy and how it promotes the development of strong legal frameworks and energy markets through its investments

The EBRD launched a new energy strategy in 2014. Can you outline its main objectives?

The strategy is based on three main pillars which I think are fundamental to creating a strong energy market: climate change, competitiveness and affordability, and security of supply.

For a sustainable and transparent energy framework at a national, regional or international level, one needs a very balanced approach to each of these factors.

In regards to climate change, we do everything we can to support the reduction of CO2 emissions by investing in renewables and upgrading of old plants to make them more environmentally friendly.

What we try to avoid is being locked into investments that are not conducive to an improvement in climate change. We believe that coal as a fuel is going to become technologically obsolete in our countries of operations, so in general it does not make sense to invest in a project for the next 40 years when technology has already advanced beyond this.

We believe our investments must be conducive to improving the security of supply, the lack of which we see as a cause for political instability, difficulties in production and holding back economic growth.

Since the new policy was approved in December 2013, how successful do you feel the bank has been in achieving its targets? 

From the viewpoint of climate change and energy efficiency, we have kept our word. The EBRD has not made any further investments in coal-fired power plants or thermal coal, while our investments in renewables have increased enormously. When you analyse our overall financings or investments, in 2014, for the first time, investments in renewables overtook those for thermal power generation. 

In the area of energy security, we have been involved in key projects. For example, improving a gas pipeline through Ukraine to enable operators to reverse the flow so that Ukraine could receive gas from Europe as well as supplying it. In addition, we have provided a $300 million loan to Ukraine in September 2015 to buy natural gas on the European market to fill storages for the winter heating period.

In terms of competiveness and affordability, we have been very attentive - we have not made investments that need subsidies to be viable so placing additional financial burdens on a country.

Have you found it necessary to amend or adapt the strategy in the light of geopolitical developments in the last two years?

I am very proud to say that the strategy has proven resilient and well-designed.

The strategy will last five years and we had thought there could be a possibility following COP21 that we may have to address something, but it has shown to be a robust document.

How does the bank approach energy regulation in its countries of operation?

Either directly through technical expertise or indirectly through certain conditions in our financial interventions. We consider a good legal framework crucial, and play an active role in the creation of these regimes.

The EBRD can provide grant funding for the development of legal frameworks, and there are a few examples of this of which we are very proud. We provided funding for Ukraine’s and Kazakhstan’s laws on renewables and for the development of a law in Russia. In Egypt we provided legal and technical support for the development of regulation for PPAs that were bankable. In the area of mining we have done a lot of work to support the Extractive Industries Transparency Initiative. In oil and gas we have provided substantial funding for health and safety and gender equality with our investments.

What do you consider to be the most important national or regional energy initiatives in your member countries at present?

The efforts made by the current European Commission towards the creation of an energy union are very important. We strongly support enhanced cooperation between EU countries. To have one European Commissioner in charge of both energy and climate change – for me two sides of the same coin – has been helpful.

Projects which improve the infrastructure between EU member states are also very important. For the energy union to function, it needs more than just a well-drafted set of rules - it is also about having the interconnectors, the storage, the power transmission lines, because without these the system will not work.

You mention the importance of improving infrastructure for the European energy union to function effectively. Have you encountered any challenges in your investments in cross-border energy infrastructure projects?

We have encountered legal challenges. Some of the regions where we work, such as SEE [South-East Europe], include countries that were at one stage in their history parts of one unified state and are now independent entities. In regions like this you will find, for instance, there are no good long-distance high-voltage transmission lines. Or that there are two power plants in two countries but only 300 km apart and working at 30% capacity, which is illogical. In general there is a lot of duplication, but making these systems more efficient through regional solutions has for a long time been met with reluctance. As much as this is understandable in newly independent states, the idea of complete self-sufficiency is outdated.

Going back to regulation, how difficult is the process of achieving reform through your investments? For example, when the bank loaned Naftogaz $300 million last year on the condition it would become more transparent, how challenging was that deal to negotiate?

Very difficult. In a country where there is a history in the gas sector of rent-seeking and corruption it is very difficult to ask for changes that improve transparency or corporate governance. It is never a linear function that you are going to have, you are going to have successes and you are going to have a few setbacks. But if you look at the Naftofgaz loan, we have achieved all the objectives we wanted to under this contract.

In a deal like this, how does the bank enforce the conditions of a loan if they were are met by a borrower?

We always disburse our loans in steps and subject to the fulfilment of clearly defined conditions. This gives us significant leverage. In cases where the money has been disbursed, there are other ways to achieve our goals. What is important is a continuous dialogue. We do not tell people what to do, we work together.

Do you have a preference for the models used to develop energy projects?

Our countries are very different, you can go from very developed members of the EU to countries at an earlier stage of development. I think you have to look what suits a country best, then you can look how a model can be developed.

In energy projects you have to be like an artisan with a toolbox and consider what the best tool is for a country. For example, at the end of July 2015 we provided $100 million for a mega project - a high-voltage power line to connect the huge hydro potential of Tajikistan and the Kyrgyz Republic with a power line going through Afghanistan delivering electricity to Pakistan. In a case like this you can only complete the project with a sovereign guarantee because of the political risk involved.

In other instances you can use PPP (public-private partnership) structures. At the moment there is a lot of interest of foreign investors into renewables in Egypt. But to translate this into concrete projects they need to be made bankable.

What are your thoughts on developing energy projects using the PPP model?

In order to have a PPP you have to have a solid legal and regulatory framework and you need a supportive political environment which creates a long-time stable environment for PPPs.

I think PPPs foster efficiency, but you need a lot of technical capability and a change in culture to apply PPPs because what you are looking for is sustainability. This means a certain level of financial, legal and political maturity.

What are the key criteria for an energy project to be bankable?

An open, transparent and predictable – I cannot stress enough the importance of this last word – legal and regulatory framework is essential for project finance or equity investments. Of course there are other factors – the geography, you have to have a market to sell the energy to – but predictability really is everything. As an investor you need to know what will happen in all possible scenarios. We have seen the impact of unpredictability on FDI into country when there have been retroactive changes to some countries regulatory frameworks. When this has happened it has immediately affected foreign direct investment.

Can we finish by talking a little about the bank’s use of outside counsel? How often do instruct outside counsel on energy projects?

Apart from sovereign lending, it is 100% when we are involved in a project financing or equity investment.

How do you select your external legal counsel?

We have a list of legal counsel we use in our countries of operations. This list is regularly updated on the basis of our experiences.

What attributes do you look for in outside counsel?

I look for in-depth knowledge of the jurisdiction. You can have the best legal mind in the world but you must know the jurisdiction’s laws. Experience in energy is obviously useful too. The best combination is knowledge of the law in the jurisdiction where the investment is being made and knowledge of the sector. From a legal viewpoint there are clauses, terms and conditions that tend to repeat themselves so experience is of course helpful.


Riccardo Puliti 

Managing director for power, energy and natural resources


Riccardo Puliti joined the European Bank for Reconstruction and Development (EBRD) in the power and energy utilities department in 1996, moving to the natural resources team in 1998. In 2000, he was appointed deputy director of municipal and environmental infrastructure and in 2002 he became director of transport infrastructure.ukria

Puliti began his career at Istituto Mobiliare Italiano Group in 1987, moving to Banque Indosuez (Paris), then NM Rothschild and Sons (London) before joining the EBRD.