B Explanatory memorandum,
by Mr Gasòliba i Böhm
1 Introduction
1. Since 1992 when the Council
of Europe and the European Bank for Reconstruction and Development (EBRD)
signed an agreement of co-operation (one year after the Bank was
set up) the Parliamentary Assembly has kept a close eye on the Bank’s
work in support of democratic and market-oriented changes, essentially
in central and eastern Europe but also in Central Asia. In 15 years
of activity the EBRD has accomplished a major part of its mission
in central Europe and is now gradually shifting its focus to the
east and south-east among its 29 countries of operations. Its major
institutional partners and shareholders the European Union and the European
Investment Bank – are taking over the EBRD’s role in the new EU
member states, thus enabling the EBRD to concentrate its resources
and experience on the more needy countries.
2. The Assembly’s Committee on Economic Affairs and Development
highly values the annual exchanges of ideas on the social, political
and economic aspects of the EBRD’s work, which also gives the opportunity
for elected representatives from the Council of Europe’s 47 member
states and observer countries (that are among key donor and recipient
countries of the EBRD) to contribute their views and proposals for
the Bank’s future guidance.
3. This report seeks to provide a general overview of EBRD’s
activities to date, in particular since the Assembly’s last report
and debate in June 2006, and to examine selected areas of activity.
It will thus look more closely at the development of financial systems
in the Bank’s countries of operations, and the progress of reforms
in the Caucasus and South-Eastern Europe, as well as in the Russian
Federation, Ukraine and Moldova. The rapporteur’s work relies on
various public and media sources, EBRDs publications and discussions
with the Bank’s officials. On behalf of the committee, the rapporteur
wishes to thank the EBRD for hosting the committee’s meeting at
their headquarters in London last January and all the assistance
kindly provided throughout the preparation of this report in the
run-up to a debate in the Assembly in June 2007.
2 Background and general overview
4. We should recall that the EBRD’s
mission is to foster the transition towards open market-oriented economies
and to promote private and entrepreneurial initiative in the countries
of central and eastern Europe and the Commonwealth of Independent
States (CIS). Importantly, the EBRD is a development bank with a mandate
that includes political aims: the Bank will in principle invest
only in those countries that are committed to multiparty democracy,
the rule of law and human rights. Although the Bank’s shareholders
are all public bodies (61 member countries represented by governments
plus the European Union and the EIB), its prime attention is on
the private sector even though some investments also concern the
public sector, especially infrastructure, whether at national, regional
or municipal level. The core business is to assist in the financing
of projects that are deemed to be financially sound and to advance
reforms, while respecting the environment. The EBRD remains the
largest institutional investor in its countries of operations and
has on the whole been very successful in reconciling the requirements
of sound investment banking on the one hand and development banking
on the other.
5. The EBRD has a subscribed capital base of €20 billion (consisting
of €5 billion paid-in and €15 billion callable) and foresees no
capital increase by 2010. However the Bank does not directly use
the shareholders’ capital to finance its investments. The mainstream
of operations is financed from the funds raised on the international
financial markets currently on very favourable terms since the EBRD
enjoys a solid banking reputation reflected in its credit rating
of AAA from Standard & Poor’s and Aaa from Moody’s. This also
enables the Bank to structure its loan portfolio in a way that best
matches the needs of its clients and minimises exchange rate and
interest rate risks for its loans. Sound resource management and
investment policies combined with a favourable situation in the
Bank’s operating environment generated particularly good financial results
in 2005 and 2006 with profits soaring to record levels. In 2006,
the EBRD’s net profits for the year reached €2 389 million (compared
with €1 525.6 million for 2005 – see Table 1 in the appendix for
more details). However, the allocation of all profits for 2006 into
reserves – as decided by the EBRD’s Board of Governors in May 2007
– sparked a protest by the United States representative who argued
that at least one part of the record returns should be paid out
to shareholders in dividends.
6. The Bank thus seems well equipped to put into practice a major
strategic shift in the focus of its operation towards eastern and
south-eastern countries that would inevitably entail increased operational
costs due to higher expenditure on project preparation, a larger
number of smaller projects and very likely lower returns on investment
in the short term. The EBRD nonetheless foresees an underlying base
case annual business volume of €3.9 billion in 2007 with a high
transition impact and underlying base case disbursements of €2.8 billion.
After 11 years of budgetary austerity (zero real growth budgets),
the EBRD’s budget is also set to increase by a cumulative 7% over
2006-07 and a total of 13% over five years to 2010.
7. The EBRD’s operational priorities, adopted in 1999, include:
1. assisting in the creation of sound financial sectors linked to
the needs of local enterprises and households; 2. shaping commercial
policies and financial frameworks for infrastructure development;
3. assistance to business start-ups and small and medium-sized enterprises
(SMEs); 4. underpinning the restructuring of ailing larger enterprises;
5. building equity investments; and 6. promoting a sound investment
climate and stronger institutions in the countries of operations
through policy dialogue.
8. The EBRD is now active in 29 countries of operations.
Note The
latest newcomer, Mongolia, was accepted as a country of operations
by the EBRD in July 2006. With project financing commencing in October
2006, the EBRD, in collaboration with the Mongolian Government and
local business community, specifically seeks to assist in the development
of private enterprises, SMEs, the financial sector and microfinance,
infrastructure and the privatisation process. In the past, the EBRD
has been active in Mongolia through the Mongolian Co-operation Fund,
which was set up in March 2001 and has secured a total of €10.3
million in donor grants.
9. The countries of operations are divided into three geographical
groups: central-eastern Europe and the Baltics (CEEB),
Note South-Eastern
Europe (SEE)
Note and
the Commonwealth of Independent States plus Mongolia (CIS+M).
Note The
countries can also be grouped according to their progress with reforms.
The so-called “early transition countries” include Armenia, Azerbaijan,
Georgia, Kyrgyz Republic, Moldova, Mongolia, Tajikistan and Turkmenistan.
In 2004, the EBRD launched the Early Transition Country Initiative,
as presented in last year’s report on the EBRD (
Doc. 10950), in order to increase the impact of its activities
in these poorest of its countries of operations. The initiative
co-ordinates donor assistance and seeks to alleviate poverty by
financing primarily smaller projects in the private sector, supporting
municipal infrastructure development and improving the legal environment.
By the end of 2006, the EBRD has managed to increase the share of
operations in the early and intermediate transition countries plus
the Russian Federation to 86% (compared with a projection of about
70%).
10. This, however, does not preclude the EBRD’s continued co-operation
with EU institutions under the JASPERS, JEREMIE and JESSICA programmes
in the advanced countries of operations. These programmes foresee
targeted support for, respectively, regional development, SMEs and
microfinance, and urban revitalisation in the new EU member states.
Further to the opening, in January 2007, of the JASPERS regional office
in Warsaw, similar offices will soon be inaugurated in Vienna and
Bucharest drawing on the know-how and experience of the EBRD, the
European Investment Bank and the European Commission in long-term financing,
especially for infrastructure projects. The EBRD’s involvement in
the eight central and eastern European countries that joined the
EU in 2004 will terminate by 2010.
11. The EBRD carries out
ex post evaluations
of its technical co-operation activities and investment operations
in order to take stock of results and draw lessons with a view to
improving future undertakings. A small team of evaluators, the operationally
independent Project Evaluation Department (PED), assesses accountability
(towards management, boards and the general public), transparency
and the value added of EBRD activities. Together with sound banking
practices and additionality (ability to supplement rather than substitute
for private sources of financing), transition impact
Note is
a key guiding principle. A total of 548 projects have been evaluated
to date. Between 1996 and 2006, 78% of the projects were rated as
having a positive (excellent or satisfactory) transition impact
and 58% of the projects have had a successful or higher rating with regard
to overall performance.
12. Given the difficult environment in which the EBRD operates,
these results are a token of considerable success. As the evaluation
team also carries out special studies and disseminates lessons learned,
some issues to be addressed in the coming years include coping with
more evaluations, peer reviews of evaluation functions, harmonisation
of evaluation procedures with other multilateral development banks
and maintaining a good system for follow-up on evaluation recommendations.
13. The EBRD tracks the transition progress by ranking the countries
of operations with regard to a total of nine indicators divided
into four overall categories, namely: 1. enterprises (large-scale
privatisation, small-scale privatisation, governance and enterprise
restructuring); 2. markets and trade (liberalisation of prices,
trade and foreign exchange operations and competition policy; 3.
financial institutions (banking reform, interest rate liberalisation,
securities’ markets and non-bank financial institutions); and 4.
infrastructure. The nine indicators relate to different stages of
the reform process. While small-scale privatisation, price liberalisation
and trade and foreign exchange liberalisation are part of the initial
phase of reform, the remaining indicators mark out the second phase.
14. Initial market liberalisation reforms are by and large completed
in the CEEB region, Bulgaria, Romania and Croatia, while they still
lag behind in many countries of SEE (especially the Western Balkans)
and in the CIS+M. The second stage of reform remains incomplete
in most countries in the whole transition region. Nevertheless,
significant progress has been achieved in the past year, with 16
countries being awarded a total of 24 transition indicator upgrades
in 2006.
15. From a geographical point of view, SEE, with 12 upgrades,
has moved forward considerably, with most notable reform progress
in Bulgaria, Romania and Croatia. Reforms have slowed down after
EU accession in CEEB in reaction to weaker public support for painful
restructuring measures (although Estonia has made significant advances
in a number of areas). The remaining eight upgrades were awarded
in the CIS+M countries, where reform change has been primarily concentrated
in three of the richest countries (Kazakhstan, the Russian Federation
and Ukraine) following positive responses from the markets after
institutional strengthening efforts.
16. In terms of indicators for sectors, most upgrades were allocated
to second phase reforms as very little progress was made in countries
where the initial phase of reform is yet to be completed. The financial
sector made the most progress with a total of 11 of the 24 upgrades.
The remaining upgrades were allocated to competition policy (four),
governance and enterprise restructuring (three), small-scale privatisation
(three) and infrastructure (three). Particularly noteworthy is that
while there were only three upgrades in the overall category of
infrastructure, a total of nine upgrades were given in the telecommunications
sub-category.
17. Reform progress, having peaked during the second half of the
1990s (particularly in CEEB and the CIS countries), continues at
a slower pace. In general, the transition process in recent years
is increasingly driven by markets rather than by governments, especially
with regard to telecommunications (namely mobile phones) and the
financial sector (see section below). In fact, the entire transition
region has made significant progress with regard to reform in these
two sectors.
18. With regard to macroeconomic indicators, real GDP growth has
remained strong in all these countries, amounting to an average
of 5.3% in 2005 and around 6.2% in 2006. This is a steady growth
rate, several percentage points higher than the average in the eurozone.
Growth rates tend to be higher in the CIS+M region (which has benefited
from positive terms of trade developments) than in the SEE and CEEB
countries. As the poorer countries are catching up, convergence
continues, with most economic reforms undertaken in SEE, especially
Bulgaria, Romania, Croatia, “the former Yugoslav Republic of Macedonia”
and Serbia, while reform progress has slowed down in central Europe.
While high prices and demand for oil, gas, metal and agricultural products
lie behind the strong performance of many resource-rich countries
(primarily in the CIS+M region),
Note most
of the transition region’s growth has been consumption-driven as
a result of increasing wages and expanding credit. Moreover, in
2006, the whole region benefited from a record high foreign direct
investment (FDI) influx of over €50 billion.
19. Interestingly, expert estimates show that about a third of
official GDP in most transition countries is generated by the “informal”
economy. Such informal activities are thought to persist because
of imbalances in taxation systems, social security contribution
levels, complex regulatory frameworks and a lack of employment opportunities
in the formal sector (especially in rural areas). An EBRD study
of the informal sector in Armenia, Bosnia and Herzegovina and Ukraine
reveals that agriculture is a key sector behind informal activities
which account for 53% of total employment in Armenia, 43% in Bosnia
and Herzegovina and 66% in Ukraine. Policy makers are thus confronted
with the delicate task of rebalancing business regulations, taxes,
minimum wage and social benefit levels and incentives for the creation
of high-skilled jobs. The EBRD, for its part, exercises particular
vigilance with regard to screening the integrity of its clients
and partners.
Note
20. Strong demand and high energy prices are causing inflationary
pressures in most transition countries, and the euro entry dates
for the CEEB countries have been pushed back except for Slovenia
which joined the Economic and Monetary Union in June 2006 and adopted
the euro in January 2007. Furthermore, as domestic savings are not
large enough to cover investments, many transition countries suffer
from large and continuing current account deficits. Several of the
transition region’s currencies are also under pressure. Thanks to
a favourable global environment, record levels of financing and
relatively low investors’ risk aversion, the growth outlook is positive.
However, there are some uncertainties due to the unclear international
(especially the United States) growth outlook, possible disruptions
in international financial markets and weakening commodity markets.
3 Finance
in transition and reforms
21. The EBRD’s 2006 Transition
Report provides a special focus on the financial sector, the development of
which is essential for growth which is increasingly correlated to
the expansion of the financial system and which absorbed 45% of
the EBRD’s total financing in 2006 (compared with 30% for direct
lending to the corporate sector and 17% to infrastructure projects).
Overall, the transition countries have seen an extraordinary transformation
of their financial sectors, driven by wide institutional improvements,
privatisations and foreign banks entering local markets. As a result,
the financial sectors have grown in both size and complexity although
progress in reform of the financial sector has been uneven. CEEB
countries advanced (with regard to both the banking and securities
markets) most significantly but even so their untapped financial development
potential remains huge given their income levels. Despite progress,
the financial sector, therefore, continues to be underdeveloped
in many countries, particularly in the CIS+M and SEE (although the latter
is more developed than the former).
22. Although banking continues to dominate the financial sector
in the transition region, there has been growth in other areas of
finance as well. Stock and bond markets have also grown and private
equity markets are emerging, providing a complement to banking.
In 2005, the stock market capitalisation ranged from just above
one-quarter of GDP in CEEB to just below one-fifth in CIS+M. The
Russian Federation is currently the transition country with the
highest stock market capitalisation. Perhaps the most striking change
(both in scale and coverage) with regard to banking is the emergence
of foreign banks as major players through the acquisition of existing
local bank assets or as new entrants, such as Austrian and Italian
banks in CEEB and SEE and Swedish (Nordic) banks in the Baltic states.
23. The credit market in most CEEB and SEE countries has grown
considerably in the past five years: it has increased by 70% in
CEEB and has almost doubled in SEE. Rapid credit growth is, however,
also associated with credit and currency risks and other potential
negative spill-overs. An increase in credit has largely contributed
to the strong GDP growth rates of many transition countries. In
2005 alone, bank lending in the transition region grew by 20% on
average. The highest growth in credit has been recorded in the less
advanced transition countries and growth has been fastest for new
foreign banks. All the same, although the ratio of domestic credit
to the private sector over GDP has gone up, it is still below 50%
in CEEB (compared to over 150% in Portugal and Spain and 86% in
Greece). Apart from Croatia (with a ratio of 56%), the SEE region’s ratio
averaged 18% in 2005. In the CIS countries, as bank financing has
in fact declined, the ratio averaged only 13% (although it is increasing
slowly in Kazakhstan and the Russian Federation).
24. Household loans account for the greater part of the growth
in credit, while credit to enterprises has generally not grown so
fast. Credit to smaller enterprises remains limited. According to
the recent EBRD/World Bank Business Environment and Enterprise Performance
Survey (BEEPS), 60% of the smaller firms surveyed throughout the
transition region do not have bank loans (and between one quarter
and one third of these declared that they are unable to acquire
a loan). Even in the EU-member CEEB countries, access to finance still
represents a major obstacle for business development. Again, the
financing environment is significantly more difficult for SMEs than
for larger enterprises. Internal finance hence accounts for the
major part (between 68% in CEEB and 77% in CIS) of enterprise finance.
25. Bank credit can have a positive impact on enterprise performance
as, according to a recent EBRD survey, access to bank credit (regardless
of size) increases firms’ revenues. The survey also shows that credit tends
to be used more effectively by larger firms than smaller companies.
Institutional factors (most notably creditor rights and credit registries)
play an important role in the development of the financial sector.
An EBRD analysis shows that institutional reform can reduce the
gap between actual and potential levels of financial development
(which is particularly large in the SEE and CIS countries). As the
progress of reform is slowing down in the financial sector (there
were fewer upgrades in 2006 than in the previous years), your rapporteur would
like to stress the importance of moving forward. Lack of reforms
with regard to creditor protection in particular would hinder further
financial development, and hence growth, in many countries. Banking supervision
and competition policy are also important. Last, but not least,
there is still scope for widening financial access and deepening
the financial system in terms of increasing credit and providing
more services (such as leasing, equity, pensions and insurance).
3.1 Banking
sector trends
26. The banking sector in the transition
region has made considerable progress and transition banks are slowly
reaching the standards of more mature financial markets. Most significant
progress has been recorded in Estonia, Hungary and Latvia. The banking
sectors in many SEE and CIS+M countries are still far behind, although
upgrades for reform in the banking sector were awarded to the Russian
Federation, Tajikistan and Ukraine in 2006. Recent years have seen
considerable diversification of services as the banking sector has become
more competitive and efficient and better regulated thanks to changes
in ownership structures and improvements in the legal and institutional
framework (such as better legal protection, more effective enforcement
of legislation and improved supervision and regulation). According
to the EBRD’s Chief Economist, banks in the region are bigger, stronger,
better regulated, more profitable and more competitive than ever.
27. The entry of foreign banks has accelerated the integration
of the banking sector in the transition region and more mature economies.
They have also helped increase the availability of credit, strengthened competition
and encouraged the adoption of improved banking technologies and
management practices. Foreign banks now dominate the banking sector
in most CEEB and SEE countries (all but Latvia, “the former Yugoslav
Republic of Macedonia”, Serbia and Slovenia), where the share of
foreign bank assets exceeded 70% in 2005. In the CIS, on the other
hand, domestic banking dominates. However, while the presence of foreign
banks has had a positive impact on the banking sector in terms of
both efficiency and stability, they should not be seen as a substitute
for institutional reform. Furthermore, there is also concern over
foreign banks lacking local knowledge and hence being less inclined
to lend to smaller businesses.
28. The above-mentioned EBRD BEEPS study reviewed a sample of
220 banks in transition countries. It points to the institutional
and legal improvements that have encouraged lending to both households
and small businesses. Lending to the former in particular (mostly
through mortgage loans) has grown quickly in the whole transition
region, although particularly so in CEEB and SEE (where household
loans accounted for around 45% and 60% respectively of total credit
to the private sector in 2005). Foreign banks in particular have
been active in household lending (as it generally requires less
information gathering, involves higher margins and is considered
less risky),
Note although
their focus is slowly moving towards providing credit also to smaller businesses.
Mortgage lending has also grown, although its share in total lending
is small (especially in the CIS countries).
29. Nevertheless, although SMEs are the most important customers
for all kinds of banks, bank credit is primarily extended to larger
enterprises. Many smaller firms, even in the more developed transition
countries, do not have access to the formal financial system. Smaller
firms in the CIS+M countries are particularly constrained. The EBRD’s
survey also shows that smaller banks tend to lend to smaller businesses
to a greater extent than larger banks.
30. The performance of banks in the transition region has improved
and returns on assets and equity are now quite high compared to
the EU average. In terms of net interest margins, performance has
been higher for smaller than for larger banks. Although bank ownership
is not correlated to bank performance, reforms with regard to ownership
structures (and institutional environment) have reduced costs. For
example, foreign ownership is generally associated with greater
cost efficiency. Bank profitability (in terms of return on assets) is
also strong, especially in CIS countries. However, the ratio of
non-performing loans over total loans is, at 15%, very high in the
CIS. In CEEB and SEE, the ratios have decreased significantly (though
they are still high) to, respectively, 3.4% and 9.5%. Larger banks
and foreign banks do generally have better loan portfolio quality than
other banks.
31. The banking sector in the transition region is highly concentrated.
With the exception of Montenegro, the Russian Federation and Ukraine,
the five largest banks in all the other transition countries accounted
for over half of total bank assets. While lending and deposits continue
to be the most important banking activities in the transition region,
many banks are now providing other financial services (such as corporate
finance, asset management and securities trading). The range of
products and services is, however, still too limited. Improving
access to finance is an essential challenge for the transition region.
Further improvements in banking regulation and creditor protection
need to be made in order for lending activities to increase, especially
with regard to SMEs. Greater lending needs, however, to be balanced
with greater risk taking. Finally, the banks in the transition region
should further develop the range of financial products and services
they offer.
3.2 Private
equity
32. Private equity markets in the
transition region have grown significantly in the past few years.
The total volume of financing committed to (new) private equity
funds
Note in
transition countries peaked at over US$1.6 billion in 2005. In CEEB,
the harmonisation and integration measures taken with a view to
EU accession have clearly aided the development of these countries’
private equity industry. The Russian private equity markets have
also been growing as the country’s relative stability and strong
growth have attracted foreign investors. In general, return performance
has increased rapidly in recent years (and returns are now comparable
to those in western Europe) thanks to easier exit opportunities
Note and
better investment prospects. Yet, most private equity markets in
the transition region are still small and often lack liquidity.
33. The EBRD’s assessment of data relating to 44 private equity
funds (with a total capital volume of US$4.6 billion) that have
committed around US$2.7 billion to 450 investments in 399 companies
between 1992 and 2005 shows that, in general, larger, older and
more diversified funds have tended to perform better and yield higher
returns. Funds that have operated longer have normally had more
time to exit and return money to their investors. While earlier
funds tended to invest in manufacturing and retail, younger ones
(established between 1995 and 1999) have concentrated on telecommunications
and IT. The most profitable industries have been financial services,
telecommunications and high technology. Regardless of the sector,
however, funds targeting several sectors have, on average, yielded
higher returns than those focusing on only one sector.
34. Transition funds have most commonly been invested in company
expansion and start-ups (and less in privatisations and buy-outs).
However, returns on start-up investments have generally been lower
than returns on privatisation ventures. Although projects with co-investors
have tended to have higher returns, most companies have received
finance from a single fund (70% of the assessed private equity investments
had no co-investors). Furthermore, most private equity funding is
coming from abroad as domestic sources for private equity funding
are still limited. While it is not clear how (if at all) performance
is influenced by the country in which funds are invested, returns
have in general been relatively good in the Czech Republic, the
Slovak Republic and SEE as a whole.
35. Although private equity provides a complement to bank lending,
it is generally a more expensive way of financing an investment
than a bank loan. However, the expansion of the private equity industry
has had positive and significant effects on the economic development
in most transition countries not only as an additional source of
finance for enterprises, but also as support for the development
of know-how and expertise. Thanks to their active involvement in
the companies they finance, private equity funds are playing an
increasingly important role in enterprise restructuring and the
promotion of entrepreneurial and managerial skills. Further development
in this area will rely on improvements to the legal and regulatory
framework and on increasing funding from domestic sources. To this
end, pension funds and insurance companies could become involved
in private equity investments. There is also an increasing interest
in investing on the part of rich individuals and companies. Improvements
in the general business environment and the development of the banking
sector would also assist in the development of the industry.
3.3 Remittances
as a source of finance for small enterprise creation and micro-investment
36. Migrants’ remittances are attracting
growing attention worldwide because of the growth in volume and importance
of flows as well as because of their potential to reduce poverty
and support development efforts in the destination countries. In
2005, the total value of official remittances worldwide was estimated
at US$230 billion.
Note Remittance inflows have
become increasingly important to many transition countries’ economies, amounting
to a substantial part of their GDP. For example, in 2004, official
remittances amounted to as much as 27.1% of GDP in Moldova, placing
it second among the top remittance-receiving countries in the world
in relative terms.
Note The greater part of remittance
funds is most commonly used for direct consumption purposes in the
destination countries, while smaller amounts are saved or invested
in real estate (namely purchase and/or construction of housing).
Finally, a small, but very important part often finances small business
creation and investment.
37. In January 2006, the EBRD undertook a survey of 639 micro
and small enterprises with regard to the use of remittances in the
creation, operation and expansion of business in five transition
countries with high remittance to GDP ratios (namely Albania, Bosnia
and Herzegovina, Georgia, Moldova and Serbia). The results of the
survey were presented in the Transition Report Update of May 2006
and show that quite a significant share of remittance transfers
are used by business owners to finance investment (especially with regard
to start-ups). Overall, 27% of the respondent business owners claimed
to receive remittances from abroad and 43% of these in turn used
remittance transfers to cover establishment costs, investments and working
capital needs. Remittance transfers have been very important for
business creation: 93% of the enterprise owners used remittances
for starting up their businesses, with around 40% of the start-up
costs having been financed by remittance transfers from abroad.
Note
38. Lack of access to finance is one of the main obstacles to
the setting-up, operation and expansion of businesses in the transition
region. It is generally the smaller businesses (which dominate the
enterprise sector in most transition countries) that face the greatest
challenge in obtaining financing. Hence many rely on “informal”
or non-bank funding. In fact, transition country enterprises finance
three quarters of new investments with internal funds or loans from
family and friends. Remittance transfers can thus compensate for
an underdeveloped financial sector and for the lack of credit availability.
They are not a substitute for bank loans, but rather strengthen
the possibilities for entrepreneurs of obtaining formal financing.
39. The survey also concludes that banks play an important role
in the transfer of remittances. Although the use of banks as a remittance
transfer channel varies widely between countries, more than half
of all the respondent remittance-receiving enterprises obtained
their transfers through the banking system. An important step in
seeking to maximise the impact of remittances for the benefit of
local development in the destination countries is to attract the
remittance flows into formal transfer channels. To this end, concurring
with the call for better management of remittance inflows by our
colleague, Mr Schreiner, in last year’s report on the EBRD (
Doc. 10950), your rapporteur particularly argues for a reduction
of remittance transfer costs and a greater availability of bank
loans (and other financial products). Furthermore, in order to make
remittances really work for the local economy, there needs to be
a good overall business and investment environment, the creation
of which depends on many other factors, including fiscal and monetary
policies and structural reform.
3.4 Corporate
responsibility and sustainable development
40. Your rapporteur would like
to address the concepts of sustainable development and corporate responsibility,
two important aspects of good business practices. The latter concept
refers to transparency, accountability and sound economic management
but also entails environmental and social impacts of business activities,
products and services. With regard to the financial sector, there
are two major international initiatives seeking to promote social
and environmental standards, namely: 1. the Equator Principles –
a set of principles agreed upon by a number of leading commercial
banks in 2003 laying out a framework of socially and environmentally
responsible lending practices for project finance activities above
US$10 million (recently reduced from a US$450 million threshold);
and 2. the UNEP Finance Initiative – a more general public-private partnership
agreement offering training and advice on best practices on sustainable
development to its members. Another initiative, the UN Global Compact,
launched in 1999, invites UN agencies, companies (including banks
and other financial sector enterprises), NGOs and such to support
a set of 10 universal environmental and social principles.
Note
41. The transition region is clearly under-represented with regard
to these three initiatives. Transition country signatories to the
UN Global Compact represent only around 8% of all participants (with
regard to members from the financial sector, this figure is a bit
higher at around 10%). Only four banks from transition countries
have signed onto the UNEP Finance Initiative. However, although
there are no transition country banks among the signatories of the
Equator Principles, most project finance transactions in the region
are covered as they are commonly implemented by international banks
or international financial institutions.
42. With regard to reporting on social and environmental issues,
transition country banks (particularly those in the CIS) lag behind.
According to a recent EBRD survey of the three largest banks in
20 transition countries, only around one sixth take account of environmental
impacts in their lending activities. Even fewer banks consider social
implications. Internal social and environmental policies are also
uncommon. Only with regard to local community sponsorship and charity
programmes can transition country banks be considered at a more or
less equal level with banks from the benchmark countries of Greece,
Portugal and Spain.
43. Unfortunately, sustainable development does not seem to be
high on the agenda for banks and companies in the transition region.
However, as the transition process moves forward and as more economic actors
recognise that a good reputation is important for business, a higher
degree of integration of environmental and social considerations
into business practices is to be expected in the not so distant
future.
44. With regard to the EBRD, its commitment to corporate responsibility
in its investment activities and internal operations is part of
its overall dedication to sustainability. Each year, the EBRD addresses
matters related to corporate responsibility not only for its own
operations but also for all its investment activities in its sustainability
report, which, together with the annual report and the transition
report, cover many of the reporting aspects of the Global Reporting
Initiative (GRI).
Note In addition, the EBRD plays a leading
part in the UNEP Finance Initiative and is the current chair of
the regional co-ordinating committee. Furthermore, two EBRD initiatives
seek to promote sound corporate culture in the transition region:
the TurnAround Management (TAM) and Business Advisory Services (BAS)
programmes. These donor-funded, non-financial enterprise support
programmes aim to assist and further management skills in small,
medium and large enterprises with a view to improving their business
performance and increasing job opportunities. These two programmes
are important elements of the EBRD strategy for micro, small and
medium-sized enterprises and primarily target the countries of the
Early Transition Country Initiative (as presented in section II
above) and the Western Balkans Initiative (see section V below).
They also play a significant role in EBRD activities throughout
the less-developed regions and rural areas of the Russian Federation
and Ukraine.
45. Since its start in 1993, the TAM programme has carried out
over 1 350 projects in 27 countries of operations. It assists enterprises
with 100 to 2 000 employees working at the senior management level.
It maintains a database with over 3 000 business advisors who provide
specific industry expertise with a view to restructuring and introducing
a new management culture in the target countries. The BAS programme commenced
in 1995 and has implemented over 6 000 projects in 17 countries
of operations. It uses and develops local consultancy services (with
a total of 1 700 accredited consultants) and provides business advice and
services to smaller enterprises with 10 to 250 employees. Together,
these two programmes have raised about €146 million in donor funding
for the support of enterprises with an aggregate annual turnover
of €25 billion and a total workforce of 1.1 million employees. While
enterprises participating in the TAM programme have maintained employment
at 90%, the BAS programme has increased employment by 20%. Activities
with both programmes have had high success rates – 82% (TAM) and
92% (BAS). New and upcoming TAM/BAS initiatives will seek to increase
the presence of these programmes in the rural areas of all target
countries, particularly seeking to support environmental and energy
efficiency, women in business, cross-border co-operation, business
incubators and tourism. Finally, the programmes also provide a pipeline
for EBRD’s investment projects, particularly in the Early Transition
Countries (ETCs).
46. One of the most pertinent development challenges in central
and eastern Europe is the need to enhance the efficiency of energy
use
Note so
as to ensure greater competitiveness of local enterprises, reduce
greenhouse gas emissions as economies expand and improve energy
security. The EBRD’s special role in promoting energy efficiency
in the region has been widely recognised by other international
financial institutions. We should point out the importance of the
EBRD’s Sustainable Energy Initiative, launched in May 2006, whereby the
Bank intends to more than double its investments in energy efficiency
and cleaner technologies over the next three years. Accordingly,
the Bank will invest about €1.5 billion over the 2006-08 period
while supplementary donor support could reach around €100 million.
This is in addition to 35 industrial energy efficiency projects,
as well as a series of energy efficiency credit lines, a renewable
energy portfolio, district heating projects and urban transport
systems modernisation programmes, worth a total of €673 million,
that the Bank has financed since 2001.
4 The
reform process in the South Caucasus
47. The South Caucasus region,
especially Azerbaijan, has enjoyed very high growth rates in recent
years (see Table 2 in the appendix). With the opening of the Baku-Tbilisi-Ceyhan
oil pipeline and a rapid increase in oil production, Azerbaijan
is now the fastest growing economy in the world. Export revenue
is booming and its strategic importance is increasing. Although
the Armenian economy has been doing better in recent years, its growth
is hindered by the complex political situation in the region and
economic non-co-operation imposed by Azerbaijan and Turkey. Although
at a slower rate, Georgia’s economy has also grown substantially
in recent years. An increase in private consumption lies behind
much of the growth in Armenia and Georgia following employment and
wage increases and as a result of a growth in credit and remittance
inflows. Both Armenia and Azerbaijan reached and surpassed their
pre-transition levels of real GDP in 2005-06 (and are at around the
average level of the transition countries), while Georgia is still
only at around half of its “initial” real GDP (and ranks well below
the average for the transition countries).
48. Although the inflation rate has been brought down in Armenia
in recent years, it is moving up again primarily following the increase
in energy prices. In Azerbaijan, inflationary pressures result from
an increase in domestic spending boosted by energy incomes. The
government deficit is relatively low in the three Caucasian countries
(although less so in Armenia), even if it has deteriorated slightly
in the past couple of years. The current account deficit has remained
more or less the same in Georgia in recent years and has improved
somewhat in Armenia, while Azerbaijan has moved from a fairly large
deficit (up to a quarter of GDP in 2003 and 2004) to a surplus (0.5%
of GDP) in 2006. FDI inflows (both in absolute and relative terms) decreased
significantly in Azerbaijan in 2005 and 2006 in comparison to the
high levels of recent years. While FDI inflows in Georgia increased
in both 2005 and 2006, Armenia’s level was relatively low, but stable.
49. With regard to the transition indicators (see Table 3 in the
appendix), all three countries are near to completing the first
phase of reform (although Azerbaijan is slightly behind the other
two). Armenia and Georgia have also made significant progress with
regard to large-scale privatisation and some improvements with regard
to banking reform and interest rate liberalisation. In terms of
the remaining indicators, the South Caucasus is substantially behind,
with no transition indicator upgrades awarded in 2006.
50. In terms of future prospects, the 2006 Transition Report (as
reflected in Table 4 in the appendix), calls for further improvements
in the business environment in all three countries. Azerbaijan and
Georgia are faced with a major effort to contain inflation, while
a further appreciation of the Armenian currency could threaten the country’s
competitiveness. Georgia has to address its infrastructural deficiencies
and Azerbaijan its overreliance on the energy sector. Finally, all
three countries (although perhaps Georgia to a lesser extent) suffer
from weaknesses in democratic institutions and the rule of law,
and corruption allegations are cause for concern throughout the
region.
51. While prospects for EU accession for the South Caucasian countries
are slim, they are included in the European Neighbourhood Policy
(ENP), which seeks to encourage deeper economic, political, cultural
and security co-operation between the enlarged EU and its new neighbours.
Individually, the South Caucasian countries’ markets are clearly
too small to attract significant investments.
Note This
fact, coupled with the diversity of their resources and their difficult
geo-political situation, makes regional co-operation (with a view
to integration in the longer term) essential for the further economic,
political and social development of the South Caucasus. While unresolved
conflicts (including those over Nagorno-Karabakh, Abkhazia and South
Ossetia) clearly hinder regional co-operation in the first place,
such co-operation would also help create the conditions necessary
for settling those conflicts as well as for avoiding new conflicts
arising in the future.
52. Your rapporteur recalls the Assembly’s initiative (see
Doc. 11082,
Resolution
1525 (2006) and
Recommendation
1771 (2006)) for the establishment of a stability pact for the South
Caucasus. Such a stability pact could draw from the positive experience
of the one in South-Eastern Europe, while taking significant differences
into account. As a first step, the recommendation suggests the organisation
of an international conference for security and co-operation in
the South Caucasus with a view to assessing the specific needs and
establishing the practical conditions for the potential launch of
such a stability pact in agreement with all stakeholders. It invites
the authorities of Armenia, Azerbaijan and Georgia to commence a
political debate on the possibility of creating such a stability
pact and, regardless of its status, encourages them to co-operate regionally.
Finally, it also calls for consultation with and support from other
member states and international players. The political and financial
support of the EU, the EBRD, the Russian Federation, Turkey and
the United States are particularly important.
53. Under the Early Transition Country Initiative, launched in
2004 and aimed at stimulating private sector activity in the lowest-income
countries, the EBRD is intensifying its work in the three Caucasian
countries. In 2006, 11 projects per country were approved in favour
of Armenia and Azerbaijan (representing, respectively, €40.4 million
and €134.4 million in EBRD financing) and 22 projects were signed
with Georgia (worth €114 million in EBRD funds). In September 2006,
the EBRD opened a regional office for the Caucasus (as well as for
Belarus and Moldova) in Tbilisi (Georgia). The EBRD’s work in the
region focuses on the reform and strengthening of the financial
sector, development of leasing practice, support for microand small
enterprises (Armenia and Azerbaijan), infrastructure rehabilitation
and development (Azerbaijan and Georgia), restructuring of the energy
sector (Armenia), and introducing sound corporate governance measures (Georgia).
54. Together with other international organisations, the Council
of Europe and the EBRD are also involved in the Kyiv Initiative
Regional Programme. The initiative, launched in December 2006, aims
to promote a democratic and participative society by contributing
to sustainable cultural, social and economic development in the
three Caucasus countries as well as in Moldova and Ukraine. It seeks
to do this through multilateral cooperation and trans-sectoral management
of culture and cultural heritage. Moreover, at the end of 2006 the EBRD,
the EIB (European Investment Bank) and the European Commission signed
a memorandum of understanding meant to further facilitate joint
projects in eastern Europe, the Southern Caucasus, the Russian Federation
and Central Asia, especially with regard to infrastructure development,
under the EU’s European Neighbourhood Policy.
5 Prospects
for regional integration and development in South-Eastern Europe
55. All countries of South-Eastern
Europe have made significant progress with reform in recent years.
As Table 5 in the appendix shows, in 2006, the SEE region was awarded
a total of 12 (out of 24) upgrades on transition indicators for
small-scale privatisation, governance and enterprise restructuring,
competition policy and financial institutions. On the whole, the
region has almost completed the initial phase of reform. Some headway
has also been made with regard to large-scale privatisation, banking
reform and interest rate liberalisation, although most countries
still lag behind in the areas of governance, enterprise restructuring, competition
policy, securities markets, non-bank financial institutions and
infrastructure. Much reform effort was seen in Bulgaria and Romania
in 2006 as they sought to join the EU. Macedonia and Serbia have
also made significant progress last year, although the latter still
lags behind in many areas of reform. In development terms, the SEE
region is now ahead of the CIS+M countries and is slowly catching
up with the CEEB area. Prospects for potential EU membership in
the future are expected to encourage continued reforms in the Western
Balkans.
56. The state of macroeconomic indicators (as presented in Table
6 in the appendix) shows a contradictory picture. Most of the SEE
countries have grown strongly in the past two years. 2006 saw a
particular boost in real GDP growth for Bulgaria and Romania in
anticipation of their EU accession, as well as Montenegro, now for
the first year as an independent country.
Note The inflationary
pressures are increasing in most SEE countries, especially in Serbia,
due to higher energy prices, but also because of rapid growth of
credit and wages. As a result, several SEE countries have adopted
some form of fixed exchange rate regimes. Current accounts are in
deficit across the whole region.
Note These deficits are large
and troubling in the light of the fixed exchange rate regimes. The
entire SEE region has seen record inflows of FDI, especially those
related to privatisation and acquisitions in the banking sector.
Most notable is Montenegro, where FDI inflows accounted for nearly
20% of GDP in 2005 and grew further in 2006, mainly due to privatisations,
the expansion of the banking sector and greenfield investment in
tourism. Nevertheless, unemployment rates remain high throughout
the region, hitting 33% in Serbia, nearly 36% in “the former Yugoslav
Republic of Macedonia” and 41% in Bosnia and Herzegovina.
57. The 2006 Investment Reform Index Report prepared by the OECD-led
Investment Compact of the Stability Pact found that SEE has made
significant improvements in the investment climate and business environment
by implementing effective investment policies, liberalising trade
regimes and introducing lower corporate tax rates. Prospects for
the future are mostly favourable. Growth is expected to continue
following export expansion and strong domestic demand. Investment
and FDI inflows are also expected to remain strong and the region’s
image is improving. The countries’ primary macroeconomic challenge
is to maintain fiscal discipline and vigilance in the financial
sector. Unresolved political riddles (especially Kosovo) could threaten the
stability of the region.
58. The Stability Pact for South Eastern Europe, adopted in 1999,
has been instrumental in the revival of the region’s economies in
recent years. It has nurtured stability, regional co-operation and
common approaches to many challenges (such as organised crime and
corruption) as well as assisted in the creation of a regional electricity
market and free trade area. The Stability Pact is now transforming
itself into a Regional Co-operation Council (RCC) to be in place
by 2008. The RCC will concentrate its efforts on areas in which
regional co-operation has been deemed by the countries in the region
to be most beneficial, namely: economic and social development;
infrastructure; justice and home affairs; security co-operation;
human capital development; and parliamentary co-operation.
59. The international community will stay engaged, but the ownership
of regional co-operation will lie with the countries of the region.
A sustainable and successful regional co-operation framework relies
on the complete political commitment of the countries in the region
as well as the continued involvement of both EU and non-EU donors.
A number of decisions are yet to be made with regard to the location
of the RCC secretariat, financing scheme and donor contributions,
the relationship with the Stability Pact, and a thorough mandate
and legal basis for the RCC.
Note The Investment Compact has
proposed the creation of a South-East European investment committee
to act as the investment arm of the RCC. Expected to be launched
in spring 2007, this committee could work towards establishing a
high-level regional platform for monitoring progress and for designing,
implementing and assessing policies related to foreign and domestic
investment in the regional context. It could also monitor and implement
the Regional Framework for Investment and the investment clauses
of the regional free trade agreement for South-East Europe.
60. The EBRD, for its part, launched the Western Balkans Initiative
in May 2006 to boost private business investment, financial institutions
and infrastructure development in the five countries of the subregion.
This multi-donor fund builds on the Early Transition Country Initiative
and seeks to provide an integrated effort for private sector development
with an emphasis on job creation. A total of €10 million from 11
donor countries were committed initially.
6 An
update on EBRD’s work in the Russian Federation, Ukraine and Moldova
6.1 Russian
Federation
61. The Russian Federation has
continued its integration into the European and global economy,
with business climate improving against the background of general
political stability and sound macroeconomic management. Investment
– domestic and foreign – grew vigorously and will very likely be
sustained according to the Foreign Investment Advisory Council in
which the EBRD actively participates. This is in spite of restrictions
on foreign investment in 39 sectors of the Russian economy seen
as strategic. Reform progress in the country’s financial sector
(which received two transition indicator upgrades in 2006) has been
particularly strong last year and notable advances have been recorded
in the initial phase reform indicators (with regard to governance
and enterprise restructuring, competition policy and infrastructure).
62. The Russian Federation is enjoying a period of strong growth,
primarily as a result of an increase in domestic demand and a strengthening
of its terms of trade (the real GDP growth rate stood at 6.7% in
2006). The internal balance for 2006 is estimated at a surplus of
7.5% following measures of fiscal tightening and inflation keeps
falling (estimated at 9.7% in 2006 from 12.7% in 2005). An important
initiative encouraging price stability is the Oil Stabilisation
Fund (OSF), estimated to have reached US$84 billion in 2006. The
Russian Federation’s current account is also in surplus, projected
at a record 10% in 2006, primarily due to the increase in prices
of key export commodities even though oil prices lowered in the
second half of 2006. In 2006, the EBRD invested €1.9 billion in
Russian enterprises, which represents 38% of its total portfolio
for the year (up from 26% in 2005). This investment mainly supported
agribusiness, manufacturing, property/tourism and telecoms outside
the major urban centres, with a growing proportion (about one third
of the total) of small range loans (€5 million or less per loan).
63. Although prospects for growth remain strong, the Russian economy
appears to be encountering capacity constraints and the population
is increasingly worried about corruption and a decline in social
services. The EBRD’s 2006 Transition Report identifies a series
of challenges for the Russian Federation in moving towards self-sustaining,
investment and innovation-led economic growth: improving the investment
climate by furthering reform of public institutions, combating corruption,
reducing administrative and bureaucratic barriers, and clarifying
the role of foreign investment in strategic sectors; balancing industry
consolidation and the role of state-owned bodies against the need
to maintain an open and rules-based regime for trade and foreign investment
and to ensure competitive domestic markets; and continued efforts
to lower inflation by containing fiscal expansion and allowing for
greater exchange rate flexibility.
64. The Russian Federation remains one of the main target countries
for the EBRD’s investments. In line with its new country strategy
for the Russian Federation, approved in July 2006, EBRD activities
seek to reduce the country’s dependence on natural resources, improve
and strengthen corporate governance standards, help the development
of SMEs, modernise its infrastructure and promote financial intermediation,
especially in the regions. In addition to its existing regional
offices in Moscow, St Petersburg, Yekaterinburg and Vladivostok, the
EBRD is opening new offices in Rostok, Samara and Krasnoyarsk. During
the EBRD Annual Meeting and the Business Forum held in Kazan on
20 and 21 May 2007, the Russian authorities announced a major decision
to set up a Russian development bank which would be endowed with
about US$2 billion from the Investment Fund (which itself is fed
with resources from the Priority Solidarity Fund – OSF) and should
in principle become operational within two years. The rapporteur
hopes that this new institution will work in complementarity with
other institutional investors, such as the EBRD, especially with
regard to the financing of costly infrastructure projects with lengthy
payback periods through public-private partnerships.
6.2 Ukraine
65. Like the Russian Federation,
Ukraine has moved closer towards membership in the World Trade Organization
(WTO) and made major reform efforts in the financial sector. It
was awarded upgrades in indicators on banking reform and interest
rate liberalisation (as well as in infrastructure) in 2006 but many
other indicators clearly remain behind. Privatisation targets were
missed and many cross-subsidies in the economy still need to be
eliminated so as to avoid market distortions and fiscal losses.
Unfortunately, Ukraine remains one of the most energy intensive
and inefficient countries in the region. The EBRD is currently implementing several
energy sector projects in Ukraine, including three projects in co-operation
with the EIB.
66. In 2006, real GDP growth attained 7.1% (compared with 2.6%
in 2005) as a result of increased prices for export metal, stronger
domestic demand and a rise in investments. The country’s inflation
rate is declining (estimated at 9.1% for 2006), partly owing to
budgetary discipline and lower food prices. Ukraine ran a current account
deficit in 2006 (1.6% of GDP) for the first time since 1998 due
to the boom in imports, escalation of energy prices and less rapid
expansion of exports. Nevertheless, FDI inflows remain relatively
significant even as the country’s political situation, policy priorities
and hence decision making suffer from a lack of consensus among
key political actors.
67. For Ukraine, the EBRD has recommended prioritising good governance
and transparency (including improvements to company law, measures
against corruption, a push forward with judicial reform, and ensuring equal
competition for private enterprises); promoting investment in energy-saving
technologies and increasing private sector participation in the
energy sector to offset the impact of rising prices for gas imports;
keeping fiscal discipline and allowing for a more flexible exchange
rate policy to better withstand adverse external circumstances.
68. The EBRD remains the largest investor in Ukraine where it
focuses on policy dialogue to improve the business environment and
the competitiveness of the private sector; strengthening the institutional
capacity of the financial sector and increasing the level of finance
for micro-enterprises and SMEs; as well as supporting the restructuring
and modernisation of the country’s infrastructure network (including
the energy sector, with particular attention to nuclear safety).
The EBRD’s investment in Ukraine was a record high in 2006 (€797 million)
and totalled, as at 1 January 2007, nearly €2.9 billion in 132 operations,
which helped attract an additional €5.6 billion from other investors.
We should also note the EBRD’s continued efforts to expand its direct
lending to municipalities.
6.3 Moldova
69. Although Moldova has nearly
completed the initial phase of reforms, the privatisation process
and structural reforms have stalled recently. The country has moved
forward somewhat with the banking reform and interest rate liberalisation
but major improvements in the legal framework and supervision of
the banking sector, as well as in corporate governance and transparency,
are still pending. Moldova was not awarded any transition indicator
upgrades in 2006 (except in the telecommunications sub-category).
Its growth rate slowed down (estimated at 4% – down from 7.5% in
2005) and inflation was high (close to 13%) in 2006 following the Russian
Federation’s ban on Moldovan wine and agricultural products, and
a sharp increase in energy prices, mainly for gas imports.
Note Private consumption is growing, essentially
as a result of increasing remittance inflows from Moldovan migrants
working abroad (estimated to account for at least 11% of the country’s
labour force). With rising (energy) imports and falling exports,
the trade deficit reached nearly 50% of GDP in 2006. Investment
levels, however, kept growing, with FDI inflows peaking in 2006
at US$225 million. Government interference with the economy, a weak
judiciary, the underdeveloped banking sector, opaque financial system and
limited access to finance remain, according to the EBRD, major obstacles
to business.
70. Key challenges for the Moldovan economy include: 1. maintaining
the reform momentum to improve the business environment, attract
investments and enhance competitiveness; 2. enhancing corporate
governance and transparency in the banking sector to attract investments
and promote competition; and 3. ensuring prudent fiscal and monetary
policies (and exchange rate flexibility) to address a growing external
account imbalance and inflationary pressures. The EBRD’s country
strategy for Moldova, approved in July 2005, identifies operational
objectives in support of financial institutions, private enterprise
and infrastructure. EBRD’s activities in Moldova, which is part
of the Early Transition Country Initiative, primarily aim to stimulate
private enterprises by direct investments (particularly in agribusiness
and small enterprises) and intermediary finance through local banks
as well as by supporting the development of local business skills.
They also include several joint projects with the EIB in favour
of the transport sector. By December 2006, the EBRD had approved
48 projects in Moldova representing a total of €205 million (including
€13.7 million in 2006), to be added to €125 million mobilised by
its partners.
7 Prospects
and challenges
71. The assessment of EBRD work
over the past five years shows that the Bank is a highly successful international
financial institution which performed in line with its mandate as
a development bank with a political dimension and made a significant
contribution to promoting market-oriented economies, good corporate governance
and entrepreneurial spirit in its countries of operations, especially
in central and eastern Europe. The Bank’s authority among foreign
and local investors in the region has grown considerably as has
its expertise and involvement. Although the Bank is now gradually
disengaging from central Europe, its steady policy dialogue with
partner governments and market players continues to play the role
of a catalyst for continued reforms throughout all countries of
operations.
72. The rapporteur welcomes the EBRD’s enhanced attention to the
energy sector, especially the challenge of increasing energy efficiency
and the security of energy supply in the region. He hopes that the
target countries will make the latter issues a lasting policy priority
and will accordingly take advantage of the EBRD’s financing. The
deeper the EBRD gets involved in the east and the south of the region,
the more relevant its contribution in this area will be.
73. Further to the decisions of its 2006 annual meeting, the Bank
is set to operate increasingly in the needier countries with a more
complex and risky business environment. It is important to note
that the EBRD’s pioneering investment and development effort has
so far been sustained while preserving a healthy risk–commitment–result
balance and frequently exceeding the Bank’s strategic objectives
(such as in terms of transition impact, business volume, profitability
and stimulatory effects on private sector finance). The Bank maximised
its business volume at about €4.9 billion to 301 projects in 2006
Note (with a 48%
share for the early-to-intermediate transition countries and 38%
for the Russian Federation alone) and reaped impressive profits, especially
over 2005 and 2006, enabling it to build up general reserves of
over 10% of authorised capital in 2006. This financial “cushion”
allows the Bank to proceed more swiftly with expanding its risk-taking
capacity and support for activities where investments are lacking.
74. According to the EBRD’s own estimates, the gap between early
transition countries and more mature economies is growing, which
is indicative of a slowdown in reforms across most of the former
group of countries. This calls for enhanced EBRDs field presence
and local reach, more diversified financing offers (including loans
in local currency), closer co-operation with other international
financial institutions (especially the World Bank, the International
Finance Corporation, the EIB and the Asian Development Bank), project associates
(including the Investment Centre of the Food and Agriculture Organization
of the United Nations, the Central European Initiative, etc.) and
local partners, as well as increased vigilance regarding the integrity of
clients.
75. The Bank’s new business model foresees more specific annual
business plans, starting with 2007, in order to better gauge the
opportunities, benefits, costs and resource allocation relating
to the Bank’s development and performance. The core banking activity
will be adapted with a view to expanding the product range meant
to address large differentiation of country priorities, market conditions,
risks and client profiles whilst paying special attention to a proactive
policy dialogue conducive to improvements in business environment.
The weak capital base of enterprises and financial institutions,
underdeveloped infrastructure and energy sector problems are seen
as the main constraints in the target countries but they also constitute
new challenges for the EBRD’s action. Risk control measures, internal
audit and project evaluation functions will have to be gradually
strengthened.
76. The most recent strategic capital resources review proposes
no capital increase in the near future and sets a number of operational
priorities, such as the stabilisation of an annual business volume
in the range of €3.3 to €3.9 billion, step-by-step increase in the
share of financing for the Russian Federation and the volume of
operations in the early/intermediate transition countries combined
with a steady withdrawal from the advanced countries, and a trend
towards smaller average project size to enable the channelling of
more resources to SMEs and micro-enterprises. Despite continued
productivity gains, it will be necessary to reinforce some of the
existing country offices, to open new ones and to close some in
the advanced countries already in 2007. It is reassuring to know
that the EBRD is estimated to be able to withstand, as from the
end of 2008, major shocks equivalent to about 3.5 times the magnitude
of the 1998 financial crisis.
