Contribution of the European Bank for Reconstruction and Development (EBRD) to economic development in central and eastern Europe
Doc. 10198’
4 June 2004
Report
Committee on Economic Affairs and Development
Rapporteur: Ms Jane Griffiths, United Kingdom, Socialist Group
Summary
The report – drawn up by the Parliamentary Assembly in its capacity as a parliamentary forum for the European Bank for Reconstruction and Development (EBRD) – coincides with the historic enlargement of the European Union to include eight of the Bank’s twenty-seven countries of operations. It sees this remarkable evolution as proof of the Bank’s major contribution to Europe’s democratic and economic development and welcomes the institution’s increasing parallel focus on its less developed countries of operations, and in particular those which the Bank calls the “Early Transition Countries”.
Many of the countries where the Bank is active enjoy rapid growth, a situation which is aided by continuing European integration. However, the report warns, various impediments remain that may soon put a brake on development – including democratic shortcomings, a lack of transparency in public affairs, a rule of law insufficiently established and widening social inequalities. It therefore welcomes the Bank’s new “Constitutional Liberalism Index” meant to measure progress in these and other areas and singles out those countries that do particularly poorly on the Index, such as Uzbekistan, Turkmenistan and Belarus.
The report does not share the fears felt in some quarters of an excessive “outsourcing” of economic activities from more developed to less developed European countries. It instead sees the increased investment in the latter as forming part of a long-term process of continent-wide economic integration, long overdue given Europe’s past divisions. That process, it argues, must not be disrupted by any new barriers to trade or investment, such as between the enlarged European Union and third countries. The Bank’s role in fostering Europe’s continued growing together has indeed reached a milestone with EU enlargement but many more lie ahead.
I. Draft resolution [Link to the adopted text]
1. The Parliamentary Assembly - acting as parliamentary forum of the European Bank for Reconstruction and Development (EBRD) since 1992 via annual reports on its activities - welcomes the recent enlargement of the European Union from fifteen to twenty-five member states, of which eight are among the EBRD’s “countries of operations”.
2. The Assembly sees this historic event as vindication of the major contribution made by the EBRD to European democracy, economic development and integration. It looks forward to the Bank’s continued mission on behalf not only of the new central and eastern European EU member states but also – and to a growing extent as this mission nears completion – on behalf of its other countries of operations, with special emphasis being laid on the still less developed, including the “Early Transition Countries” which the Bank has singled out for special attention.
3. The Assembly notes with satisfaction the high growth rates of several countries of operations as these continue to outpace global economic development and the still hesitant growth in a number of major EU economies. It counts on the steadfast economic integration, within the EU and between it and other European countries, to help overcome these differences through mutual positive influences within the World Trade Organisation (WTO) framework of increasingly open trade and investment.
4. Various impediments continue, however, to keep economic development well below potential in a number of countries of operations. These obstacles include:
i. insufficient private investment due to inhospitable institutional conditions and democratic shortcomings,
ii. insufficiencies in terms of the rule of law, as well as corruption and economic crime;
iii. unbalanced public finances;
iv. unstable macro-economic conditions;
v. excessive dependence on natural resources such as oil and gas, delaying balanced economic development;
vi. insufficient trade and investment with neighbours which ought to be privileged partners.
5. The Assembly welcomes the Bank’s increased emphasis on these problem areas, without which its operations risk falling on barren ground, and calls on the countries of operations concerned to intensify their efforts in these sectors.
6. The EBRD is to be particularly commended on its growing emphasis on the causality that exists between democracy, human rights and the rule of law on the one hand and economic development on the other. The Assembly welcomes the introduction of a “Constitutional Liberalism Index” to measure progress in individual countries and fully supports efforts by the Bank and the governments of the countries concerned to advance constitutional liberalism and market reforms. It deplores developments in countries at the bottom of this index – such as Uzbekistan, Turkmenistan and Belarus. It calls upon the Government of Uzbekistan to comply with the benchmarks it has agreed with the Bank. As regards Belarus, the Assembly recalls its Resolution 1372 (2004) on ‘Persecution of the press in the Republic of Belarus’ adopted in April 2004, in which it states that “fundamental rights and freedoms are systematically violated in Belarus with the sole aim of keeping a non-democratic regime in power [that] bases its existence on repression intimidation and fear”.
7. The Assembly is aware of the concerns in certain more developed European countries over so-called “out-sourcing” of economic activities toward the new EU member states or other EBRD countries of operations and of parallel fears of migration of labour toward more wealthy countries. It recalls, however, the impressive economic and political development of numerous EBRD countries of operations that has been rendered possible precisely by this natural process of continental integration. Furthermore, it expresses the hope that no new trade or other type of barriers will be raised in Europe as a result of such fears. This holds also for the new external borders of the European Union where particular vigilance is called for to ensure that trade relations between new members of the European Union and countries outside it do not suffer as a result of the EU customs union.
8. The Assembly supports the Bank’s involvement in the energy sector in its countries of operations, where major improvements in energy efficiency are urgently needed. Such improvements are all the more important in view of Europe’s growing energy scarcity and the likely long-term tightening of world energy supplies, especially of oil and gas. Countries of operations concerned are encouraged to assist the Bank’s projects in this sector via appropriate policies.
9. The Assembly welcomes the Bank’s efforts to assist in the development of utilities in countries in transition, while realising that the quality and price of services do not always favour consumers. It therefore recommends that the Bank make additional efforts to assist in the raising of the quality of management in utility companies.
10. The Assembly views with concern the deepening social disparities in certain countries of operations. It asks the Bank and the governments concerned to do their utmost to reduce the latter by devoting greater resources to social protection, especially for the more vulnerable segments of the population, and to build in this context on the Council of Europe’s considerable experience via its Social Cohesion programme and its European Social Charter.
11. The Assembly welcomes the Bank’s efforts to constantly adapt its assistance to changing realities on the ground with a view to maximising the impact of its activities. The Bank is to be particularly commended on its new approach to promoting home-grown development through companies investing in their own or neighbouring countries.
II. Explanatory Memorandum by Ms Griffiths, Rapporteur
Contents
II. BACKGROUND AND GENERAL OVERVIEW OF PROGRESS TO DATE
III. A CLOSER LOOK AT SOME SPECIFIC AREAS
a. Russian Federation
b. Energy
c. Small and Medium-sized Enterprises
d. Integration and Regional Co-operation
e. Constitutional Liberalism
1. In 1992 the Council of Europe and the European Bank for Reconstruction and Development (EBRD) signed an agreement of co-operation. Since then, through the preparation of an annual report and the subsequent debate, the Parliamentary Assembly of the Council of Europe has steadfastly supported the Bank in its efforts to foster democracy and help build a socially oriented market economy in the Bank’s currently 27 countries of operations. Debates in the Assembly have provided a useful linkage between political, economic and social issues related to the Bank’s activities, and as an opportunity for parliamentary representatives from the Council of Europe’s forty-five member states - whether these are donor or recipient countries within the EBRD – to exchange views and experiences for the Bank’s further guidance.
2. The present report aims to give a general overview of the Bank’s activities current orientations, particularly since the Assembly’s last report and debate in June 2003 (Resolution 1332 (2003); Doc. 9825; Rapporteur: Mr Braun). It will take a closer look at some specific areas and make a number of recommendations.
3. The report is primarily based on presentations by and discussions with EBRD senior officials during the meeting of the Assembly’s Committee of Economic Affairs and Development at EBRD headquarters in London in January 2004. The report also relies on various EBRD publications[1] kindly placed at the Rapporteur’s disposal. On behalf of the Committee, the Rapporteur wishes to thank the EBRD for their warm welcome in London and for all the assistance provided throughout the preparation of this report.
II. BACKGROUND AND GENERAL OVERVIEW OF PROGRESS TO DATE
4. The EBRD was established in May 1991. It seeks to foster the transition towards open market-oriented economies and to promote private and entrepreneurial initiative in the countries of Central and Eastern Europe (CEE) and the Commonwealth of Independent States (CIS). The EBRD is unique among development banks in that it operates under a mandate that includes political aims. The Bank will in principle assist only those countries that are committed to democracy, the rule of law and human rights.
5. The Bank’s primary focus is the private sector, even though a number of investments also concern the public sector, especially infrastructure, whether at national, regional or municipal level. Its core business is to assist in the financing of projects that are deemed to be financially sound and advance the transition process, while respecting the environment. It is not always easy to reconcile the requirements of sound investment banking on the one hand and development banking on the other hand, but the EBRD has on the whole been quite successful in trying to do so.
6. 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) Pursuing commercial approaches and financial frameworks for infrastructure development; 3) Help in the development of business start-ups and small and medium-sized enterprises (SMEs); 4) Demonstrating effective approaches to the restructuring of ailing larger enterprises; 5) Helping in equity investments; and 6) Promoting sound a investment climate and stronger institutions in the countries of operations.
7. In line with the above priorities, funding for financial institutions in 2003 accounted for 33% of the Bank’s activities. Similarly, support for infrastructure represented 19%, and for other sectors (agribusiness, property and tourism, and telecommunications projects) 18 % of total commitments. Loans toward the manufacturing sector totalled 14% of the business volume. In total, two thirds of investment was devoted to infrastructure, energy, manufacturing and other sectors such as agribusiness, property/tourism and telecoms.
8. With 60 member countries and two member intergovernmental institutions[2], the EBRD is active in 27 countries of operations[3]. As the largest single investor in the region of central and eastern Europe (CEE) and the Community of Independent States (CIS), the EBRD in 2003 disbursed € 2.1 billion (out of a committed € 3.7 billion) toward 119 projects signed in that year. 79% of these projects are in the private sector (up from 71% in 2002). (Both these sums are about € 200 million below those of 2002, largely depending on changing exchange rates, especially the weakened dollar.)
9. The Bank’s net profit on the sale of share investments rose to €156, while the income from dividends from the equity portfolio rose to € 52 million. The Bank’s administrative expenses were reduced from €159 to €142 million, resulting in a rise in operational income from € 295 to € 400 million. Since provisions came down from €187 million in 2002 to only €22 million in 2003, net profits came to €378 million (compared to € 108 million in 2002). They have been added to the Bank’s reserves and will be used in particular to assist early transition countries. At a press conference in London in March 2004, the Bank’s President Jean Lemierre said that the Bank was now in a much stronger position than before and would thereby be better able to shoulder the higher risks involved in such countries.
10. 2003 was a successful year for EBRD in terms of attracting commercial co-financing. Financial institutions invested € 20.7 billion alongside funds provided by the EBRD. The net cumulative business volume rose to € 22.7 billion. Combined with funds from other investors, EBRD was instrumental in mobilising financing commitments totalling € 69 billion.
11. Much EBRD financing in 2003 (39%) went to early or intermediate transition countries[4] (the regions of the Caucasus, Central Asia, Eastern Europe and South-eastern Europe). (An ‘early’ transitions country is one which has not come far along the road of transition from a centrally planned to a market economy, while an ‘intermediate’ one has come somewhat further.) In line with its objectives, the EBRD in 2003 increased funding of projects in early and intermediate transition countries by 8% compared to the previous year. Investment in the region amounted to €1.45 billion. The largest of the countries of operation, Russian Federation[5], remains the largest recipient of EBRD financing. In 2003, the country absorbed 30 % of total EBRD financing, or €1.10 billion. 31% of the funding or €1.17 billion went to countries in advanced stages of transition[6] (Central Europe and the Baltic states).
12. The EBRD Transition Report 2003 shows that economic growth in its countries of operations continued to outpace that of the world economy, growing 4.7 %. However, the general picture behind the macroeconomic indicators is not all rosy. Growth often occurs on a rather fragile basis lacking the ingredients necessary to ensure long term sustainability.
13. The economies of advanced transition countries – Central Eastern Europe and the Baltic States[7] (CEB) grew by an average 3.7% in 2003. The best performers in this group were Latvia and Lithuania which grew by 7.0% and 8.9% respectively[8]. However, it is worth noting that in these countries – in particular the eight that joined the European Union in May 2004 – much of the growth is the result of expansive fiscal policies reflected in high government spending, sometimes large budget deficits and robust private and public consumption. Growth in private investment, which could assist in their smooth integration into and convergence with the wealthier present members of the EU, is still insufficient.
14. Although growthin South-eastern Europe[9] (SEE) stands at a decent average of 4.2%, it remains to be seen if it is sustainable, since the level of reform in many of the countries in this region is comparatively low, and political instability frequent. State institutions work in precarious conditions, their efficiency frequently undermined by constant political transformations and transfers of powers. Public administrations often lack the capacity and means to sustain reforms. Serbia, for example, failed in its efforts to elect a president in three successive elections.
15. Fiscal adjustments present real challenges for many SEE countries, whose government deficits remain large. Albania had a budget deficit of 6.3% of GDP in 2003, the largest in the SEE region. Many countries in this region also have high current account deficits – the average reaching 9.7% of GDP in 2002 and all of 20% in Bosnia and Herzegovina. Real growth is probably even lower when one considers that most of these countries rely heavily on foreign aid and remittances from emigrants, sources of income that are likely to diminish in coming years.
16. In the CIS countries[10], growth stood at an impressive average of 7.6% in 2003. However, it is fragile considering these countries’ continuing strong dependence on the sale of natural resources. This holds in particular for countries rich in oil and gas, such as Russia, Kazakhstan, Azerbaijan and Turkmenistan.
17. Among the CIS countries, those still in the early stages of transition – Armenia, Azerbaijan, Georgia, the KyrgyzRepublic, Moldova, Tajikistan and Uzbekistan, are lagging behind. The economies of two - Moldova and Uzbekistan – have even receded. In the case of Moldova this is due to a number of domestic and international circumstances (a stagnation in reforms, heavy governmental interference in the running of the economy, and tense relations with neighbours, resulting in limited trade). The opposite holds for Uzbekistan. As EBRD Chief Economist Willem Buiter put it, “Uzbekistan never made much progress to begin with, so it is currently regressing from a reform level that is already low[11]”
18. Generally speaking, while there has been some progress in CIS countries, the transition agenda is far from completed. Half their populations continue to live in extreme poverty. Their external debt is growing, as is their dependence on external sources of financing, mainly in the form of grants. As global growth continues to be weak, it is not certain that foreign aid will continue at present levels, jeopardising their economic growth. To prevent the situation from deteriorating further, the EBRD will launch a new strategy in 2004 for the benefit of this group of countries.
19. Since 1993, the operationally independent EBRD Project Evaluation Department (PED) has assessed project performance.Evaluations are carried out ex post (generally one or two years after the final disbursement for a given project). They seek first to measure results of projects, second to draw any lessons from them for use in the future. Projects are assessed and rated on the basis of: transition impact[12]; financial performance[13]; environmental performance; ‘additionality’, by which is meant the EBRD’s ability to supplement rather than substitute private sources of financing; fulfilment of objectives; and investment performance.
20. To date, the PED has reviewed 425 projects or 76% of those deemed ready for evaluation. 83% of projects have been judged to have had a “good” or “excellent” transition impact, while 52% have been judged to have had a successful or highly successfuloverall performance rating.
21. Overall, the EBRD can be considered to have been relatively successful in operating according to its mandate of fostering transition towards open market-oriented economies and promoting private and entrepreneurial initiative in the countries of CEE and the CIS, especially considering the difficult environment in which it operates. The Bank has closely observed and strictly abided by the political aspects of its mandate. It has lent its assistance to countries “committed to and applying the principles of multi-party democracy [and] pluralism”. Countries that still show clear democratic shortcomings, notably Belarus and Turkmenistan, receive little EBRD financing.[14]
22. The Bank is also closely following developments in Uzbekistan. At last year’s Annual Meeting in that country, intended to serve as an incentive for reform, the Bank reached agreement on seven benchmarks - four economical and three political - for the Uzbek government to meet. It appears, however, that the Uzbek government has if anything since then adopted an even more isolationist, oppressive and protectionist approach than before. A worrying development indeed is the mining of its borders with Tajikistan and Kyrgyzstan. The Bank continues its efforts to maintain a political dialogue with all three countries and to promote wherever possible the development of private business initiatives that can serve the reform process.
23. While much of the project and evaluation information remains confidential for natural reasons, the EBRD is committed to a maximum of transparency and accountability as part of its Public Information Policy Review. In 2001 the Bank carried out its First Review of Implementation, as a result of which its Board requested a full Public Information Policy Review. This was carried out in 2002 and a Public Information Policy was approved by the Board on 29 April 2003. The policy has increased the amount of information available to the public and has enhanced transparency. For instance, the Bank’s Annual Report includes an evaluation section, while summaries of special studies are published on the Internet.
24. The PED also works with other international financial institutions, notably the World Bank (WB) and the International Monetary Fund (IMF). Since 1996 the three institutions run a joint Evaluation and Coordination Group (ECG) that seeks to harmonise evaluation procedures and processes, compare experiences and develop best practices.
III. A CLOSER LOOK AT SOME SPECIFIC AREAS
25. Following this general overview, the Rapporteur now wishes to focus on four specific areas.
a. Russian Federation
26. As illustrated in Section II above, the Russian Federation is the principal recipient of EBRD financing and will remain so in its capacity as the largest of the countries of operations. Since 1991, the EBRD has committed € 5.2 billion in Russia (23% of the Bank’s total), financing over 170 projects with a total value of €14.3 billion (21% of the Bank’s total). For every euro invested by EBRD, 1.8 € could be mobilised from other resources. At the end of 2003, the Bank’s portfolio stock in Russia stood at € 3.34 billion (23% of the Bank’s total portfolio). Operating assets are at € 1.88 billion (21%)
27. In 2003, EBRD annual business volume in Russia stood at €1.1 billion. In terms of investment portfolio by sector, 25% of the EBRD’s financing went to financial institutions (mainly bank lending). Energy (mainly natural resources) and specialised industries each received one-fifth of total commitments, while general industry and infrastructure each received one-sixth. The Bank continued its support for micro and small enterprises (MSEs), channelling its funding through the Russia Small Business Fund (RSBF), which by the end of 2003 had provided over 168,000 loans to MSEs totalling €1.5 billion.
28. Foreign investment more than doubled in Russia in 2003, reaching 5.2 billion dollars. The EBRD’s growing activity in the country primarily reflects the country’s reform progress and renewed interest on the part of strategic investors. Indeed, the EBRD Transition Report 2003 ranks Russia among the best performers not only in the CIS region but throughout its operational area.
29. The EBRD’s key objectives with regard to its operations in the Russian Federation are: 1) development and practical implementation of the Corporate Governance Code; 2) Attracting major international strategic investors; and 3) restructuring natural monopolies.
30. The latest country strategy for the Russian Federation was approved by the EBRD in October 2002. In the years leading up to the drafting of the strategy, the country made important reform progress. Key to this progress has been the political will and commitment to simultaneously push for political, economic, institutional and legal reforms.
31. As shown in Table 1 below, the Russian Federation has made significant reform progress across a range of areas. Recently, the country has made encouraging achievements with regard to advancing electricity sector reform and trade and currency liberalisation as well as in developing an institutional framework for pension reform. Nevertheless, progress seems to have slowed down in other areas, most notably with regard to the banking and gas sectors.
Table 1. Russian Federation Transition Indicators: 2003
Note 1: Infrastructure includes telecommunications, electric power, railways, roads, and water and waste water.
Note 2: The rating/classification scale ranges from 1 to 4+, where 1 represents little or no change from a rigid centrally planned economy and 4+ represents the standards of an industrialised market economy.
Note 3: Shaded numbers indicate upgrades (improvements) from previous year.
32. With regard to macroeconomic performance, as illustrated in Table 2 below, the Russian Federation has fared fairly well in recent years. Real GDP continues to grow. This growth, coupled with relative macroeconomic stability (primarily due to the consolidation of public finances), has considerably improved the country’s creditworthiness and overall attractiveness. The Russian Federation has also benefited from relatively stable exchange rates. While inflation has been brought down considerably since the early and mid-1990s, it could yet resurface.
Table 2. Russian Federation Macroeconomic Indicators: 1999 – 2003
* = Preliminary actuals; ** = Projections.
Note: Inflation is measured as the change in annual average retail/consumer price level.
33. This being said, investment growth has slowed more recently. Furthermore, investment, particularly of foreign origin, has primarily been concentrated in the natural resources sub-sector (oil and gas production and processing). Furthermore, recent developments in the Yukos case, involving the arrest of its top executive on grounds not entirely transparent to the outside world, have, together with tighter governmental reins on the media, unsettled some foreign investors.
34. Although the Russian Federation has made significant overall progress, its economy has also benefited from high international oil prices and a competitive real exchange rate. For lasting growth to be achieved, the EBRD country strategy for Russia stresses the need to focus on increasing productivity and closing the technology gap vis-�-vis the outside world. To this end, further reform progress and restructuring as well as increased investments (particularly in infrastructure) and diversification of the economy are needed. The development of a sound financial system is also important. In line with the EBRD’s key operational objectives for the Russian Federation (as outlined in paragraph 29 above), the main priorities set out in the 2002 country strategy are to: 1) promote restructuring in infrastructure; 2) encourage restructuring and attract strategic investors to the corporate sector; 3) strengthen small business development and expand regional coverage; and 4) enhance competition and support financial sector reform.
35. The European Union is a key partner to the EBRD in Russia. The two institutions have cooperated in a number of different areas, notably institution building, environment protection and nuclear safety. EU funding, in particular grants given in the form of technical assistance, has prepared the ground for EBRD financing and investment. They are used for training local staff in areas such as banking and small businesses, thus facilitating for EBRD projects to take off and be successfully implemented.
36. Environment protection is another area of cooperation between the two institutions. The Northern Dimension Environmental Partnership[15] (NDEP), established in 2001 to tackle the severe problems in the area of environmental and nuclear safety in north-west Russia, has received € 50 million in support from the EU. The two institutions are also partners in their efforts to promote nuclear safety elsewhere in Russia. Thus, the EU has contributed a total of € 20 million to the EBRD-managed Nuclear Safety Account (NSA).
b. Energy
37. The energy sector has received almost 16% of total EBRD commitments in the 1991-2003 period. While the relative allocation has decreased somewhat over the past years (to 14% in 2002 and 16 % in 2003), it remains an important sector in EBRD’s activities and has always played an important role for the economies of CEE and the CIS regions.
38. The EBRD’s Energy Operations Policy, approved in March 2001, covers energy conversion, transportation, distribution and consumption. In particular, it targets operations related to power generation, transmission, and distribution; heat generation and distribution; and gas distribution and power utilisation (including energy consumptions and utilities).[16]
39. This EBRD policy is guided by a recognition that the energy sector in both CEE and CIS countries suffers from a number of important shortcomings such as: 1) excessive energy consumption;[17] 2) excessive wastage on the part of end-users;[18] 3) low operational efficiency and plant availability with regard to power and heat generation;[19] 4) high losses in the transmission and distribution of electricity, heating and gas;[20] 5) inadequate tariffs;[21] 6) low revenue collection;[22] 7) ineffective subsidy mechanisms
as regards heating;[23] 8) poor environmental, health and safety management;[24] and 9) high-risk and ageing nuclear power plants.[25] In addition, countries which have just joined or are set to join the EU face the challenge of investing in environment protection to meet that institution’s high criteria in this domain.
40. At the onset of transition, most energy suppliers in the CEE and CIS countries were national or local monopolies, under the direct supervision of the central government or a municipality. In the light of the various problems facing the sector as just outlined, and tight public finances, most countries are reforming their energy sectors. According to the Energy Operations Policy, the primary drivers of energy reform include the need to reverse the declining quality of services and to mobilise private capital for the modernisation and development of energy supplies, as well as to raise revenue to finance government spending on this industry.
41. With regard to electricity, traditionally a national monopoly, there is a strong correlation between general transition progress and progress of reform in this sector reform, such as through restructuring, deregulation and privatisation.[26]
42. However, while regulatory reform in the power sector has advanced in most transition economies, regulatory independence is still rather limited due to direct, i.e. statutory, or indirect political influence.[27]
43. District heating in the CEE and CIS countries accounts for a much higher share of energy production and use than is the case elsewhere. District heating has traditionally been established on a local basis under municipal ownership and control. Also here, progress differs widely between countries.[28]
44. With regard to gas (also traditionally under national monopoly), reform has been slow in most CEE and CIS countries, as governments retain control over this sector.[29]
45. While energy reform priorities depend on the development of the sector (in terms of structure, ownership and regulation) and hence vary between countries, the Energy Operations Policy supports an energy reform process that, in general, includes: 1) corporatisation and commercialisation of public sector entities, including tariffs that cover long-term supply costs and cash collection of energy bills; 2) de-monopolisation, including restructuring that separates natural monopoly functions from potentially competitive elements, sound economic regulation, and a supporting trade structure; and 3) privatisation to promote competition and operational efficiency.[30]
46. The way in which power sector reform is carried out also matters. For example, the sector should be restructured before private sector participation is introduced, as restructuring is difficult once assets are sold and vested interests created.[31]
47. While a gradual approach to reform may have been appropriate during the first years of transition, there is today little reason to delay market-oriented power sector reforms any longer.[32]
48. One of the EBRD’s four key objectives for the energy sector is to improve efficiency in the conversion, transportation, distribution and consumption of energy (as well as to improve the quality of energy services) in its countries of operations.[33] Energy prices, especially those that are kept above the cost-recovery level, and progress in enterprise restructuring appear to be the two most important factors behind efforts to reach a more efficient use of energy. Comprehensive power sector reform (including tariff adjustments, unbundling and commercialisation) is an important part of change.[34]
49. EBRD’s operations in the energy sector are divided into three sub-sectors: power and energy; natural resources; and energy efficiency. By 2003, the Bank had invested € 1.8 billion in a total of 48 projects in the power and energy sector. Due to the prevalence of state ownership in this sector, most allocations (77%) had gone to state projects.
50. The power and energy sub-sector includes power generation, transmission and distribution as well as power sector reconstruction, restructuring, and modernisation.
51. While most of the countries of operations rely on fossil and nuclear fuel for their energy needs, there are opportunities to develop renewable energy sources, such as hydropower, geothermal and biomass power, and solar and wind power). In line with the Bank’s Energy Operations Policy, its Strategic Renewable Energy Assessment[35] is a recently launched initiative that focuses on green energy potential and seeks to identify investment opportunities in renewables in the countries of operations. The first stage of this assessment has consisted in a technical identification and evaluation of potential renewable energy projects that might be eligible for EBRD funding. The second stage focuses on advancing promising projects through feasibility studies, resources assessments and the like.
52. By 2003 the EBRD had invested € 1.6 billion in a total of 46 projects in the natural resources sub-sector. Four-fifths of the cumulative commitments in the natural resources sub-sector have gone to private sector projects.
53. The EBRD’s Natural Resources Operations Policy was adopted in 1999 and covers oil (in all stages of production), gas, coal, as well as precious and non-precious metals. Such natural resources are important endowments to - and hence one of the most significant sectors and foreign exchange earners for - many of EBRD’s countries of operation, especially in the CIS region. For example, in 2000, in Azerbaijan, Kazakhstan, the Russian Federation, and Turkmenistan, oil and gas exports accounted for between 47% and 85% of the total, and for between 22% and 69% of GDP. Production of natural gas in Ukraine and Uzbekistan is also quite significant, although most is consumed domestically. In the CEE region, Romania produces large amounts of crude oil, while a number of other countries have important refining capacities. Furthermore, mining of precious metals is an important economic activity (and foreign exchange earner) in several CIS countries.
54. The prospects for the development of natural resources are, on the whole, favourable. In terms of endowment, the Russian Federation and Turkmenistan, respectively, possess the world’s largest and third largest natural gas reserves. Furthermore, the Russian Federation is one of the world’s five largest oil producers, while the countries in the Caspian Sea region[36] also have significant oil reserves.
55. However, the economic potential of the natural resources sub-sector is determined by more than actual endowment. One also needs to consider production costs, the state of the technology, transportation facilities, and general market conditions, in particular prices. For example, production costs for oil in the Russian Federation are comparatively due to the geological location of its reserves and also due to the industry’s relatively obsolete technology (and organisation). Production costs are lower in the Caspian Sea region due to a more favourable geology and more foreign investments. However, the oil industry in the Caspian Sea countries suffers from various transportation difficulties. Finally, while prices of oil and precious metals generally fluctuate widely on international markets, those for natural gas are somewhat more stable.
56. In addition to many of the common problems for the energy sector as a whole (as outlined in paragraph 38 above), the Natural Resources Operations Policy also points to three additional circumstances that have complicated the efforts to reform the natural resources sector. First, for strategic reasons, state involvement in natural resources activities has been (and continues to be in many countries) much more persistent than in other sectors. Second, foreign investment has often been discouraged by insufficient standards of corporate governance.[37] The resulting lack of investment has delayed a much needed technological and organisational modernisation of the sector. Third, in a legacy of the ‘geographical planning’ prevalent during Soviet times, production and processing facilities are often distant from each other and now indeed often located in different countries following the break-up of the Soviet Union. Regional co-operation and investment in transportation infrastructure are therefore particularly important for the natural resources sector.
57. Although the countries of operation face their own unique challenges, the EBRD’s general operational objectives with regard to natural resources include: 1) increasing private participation and promoting direct foreign investment; 2) reducing transport bottlenecks and ensuring competitive market access; 3) improving regulatory and institutional frameworks; and 4) setting high standards of business conduct, transparency, corporate governance and environmental protection.
58. In the CEE region the primary focus of the EBRD is on assisting in the restructuring and privatisation process as well as to prepare the EU accession countries for increased competition.[38] EBRD activities in the Russian Federation are in particular seeking to address issues of corporate governance and transparency. In the Caspian Sea countries, EBRD operations are targeted at attracting commercial lending and financing transportation routes. The latter is a priority also in the Black Sea and Baltic Sea regions.
59. As with almost every large infrastructure investment, the EBRD-funded Azerbaijan-Georgia-Turkey pipeline system has been criticised over a lack of information provided, insufficient transparency and consultation during the land acquisition and compensation process and over its alleged consequences for local communities[39]. However, the Committee and the Rapporteur during their meeting with EBRD senior representatives in January 2004 gained the impression that the EBRD had done its homework with regard to meeting the three main goals it had set for itself in launching this major project. These were a) to guarantee the project’s safety to the public and the environment; b) to ensure it would generate benefits for the population of the countries concerned and; c) to ensure its sustainability. After two years of project preparation, the Bank representatives were confident they were meeting all three objectives. The project, it is hoped, will attract foreign investors and promote regional stability for the region.
60. In conclusion, it should be noted that, while natural resource endowments can contribute significantly to economic growth and development in many countries, they are not infinite. The EBRD hence stresses that the exploitation of natural resources should seek to build other assets (both physical and human) at least the same pace as natural assets are being depleted.
61. By 2003 the EBRD had invested € 181 million in a total of 10 projects in the energy efficiency sub-sector. In cumulative terms, the allocations to the energy efficiency sub-sector have been distributed between private sector and state projects (91% and 9%, respectively). Furthermore, most of the energy efficiency commitments have gone to projects in the EU accession countries in the CEE region.
62. Although most of the energy efficiency projects are relatively small in terms of overall funding, the lack of financing on the part of local banks is common throughout the CEE countries. As a result, the EBRD and other non-local sponsors have established so-called Energy Service Companies, or ESCOs. These companies allow customers to upgrade facilities and reduce energy costs by using projected cash flows from future energy savings for investment at the present time.[40] Most ESCO development strategies are supported by Multi-Project Facilities (MPFs) signed by the EBRD and private western sponsors. By 2001 the EBRD had sponsored a total of 11 private ESCOs in seven countries,[41] representing an aggregate commitment of € 88.5 million.[42] However, most ESCOs have under-performed with regard to their business plans, and few international private sponsors have so far entered the market.[43]
63. Worth noting are the Bank’s efforts to promote nuclear safety. The EBRD is responsible for the administration of funds for nuclear safety, for which € 1.5 billion has been pledged to date. The funding is grouped under the Nuclear Safety Account, the International Decommissioning Support Funds for Bulgaria, Lithuania and the Slovak Republic and the Chernobyl Shelter Fund. The EBRD provides the technical, financial and legal services and is responsible for monitoring the project management. The Bank works closely with the European Union, which has contributed €194 million to the multilateral Chernobyl Shelter Fund (more than 25% of the contributions so far) aimed at the conversion of Chernobyl into an environmentally safe system. The EU is also a major contributor to the three decommissioning funds for Bulgaria, Lithuania and Slovak Republic with over €500 million to date. The two institutions work closely together to promote environmental and nuclear safety.
c. Small and Medium-sized Enterprises
64. As mentioned in Section II above, the third of the EBRD’s operational priorities lies in the provision of leadership for the development of business start-ups and small and medium-sized enterprises (SMEs). The promotion of SMEs has long been a focus of the EBRD’s activities, as such enterprises make a vital contribution to EBRD’s mandate of promoting the spread of the market economy and democracy.
65. The EBRD primarily supports SMEs indirectly by providing credit through financial intermediaries.[44] That is, the Bank makes credit available to local financial intermediaries (mostly banks), which in turn lend funds to small businesses.Between 1991 and 2002, the EBRD committed more than € 3.9 billion to financing SMEs and has helped to fund around 200,000 projects.
66. Particularly worth praising are EBRD efforts to develop microfinancing, or the provision of financial support to sometimes very small, ‘micro’ enterprises or MSEs. This practice has led to the establishment of Micro Financing Institutions (MFIs). Over the recent years the EBRD has invested in 12 MFIs in south-eastern Europe, Russia, Ukraine and the Caucasus. The EBRD is itself at the centre of a core group of international financial institutions that work to further develop MFIs[45].
67. Furthermore, in 2003, the Bank introduced so-called ‘express’ micro loans which are typically disbursed within 24 hours, with no need to provide collateral. Amounts range from €550 to €2,400. The MSE programme set up “mobile branches” to provide access to financing for communities living in remote areas. It is hoped that the success of pilot projects in Georgia will permit the Bank to provide similar funding in other remote areas.
68. The prevailing thought among formal financial channels or institutions is that microfinance entails significant risks, and that it is very demanding in terms of time and human resources. Consequently, it is perceived as unattractive for major financial institutions to engage in this service. Against this background the EBRD’s activities in this domain appear all the more important.
69. In a recent article in the EBRD LiT on Line[46] (a supplement to the Bank’s Law in Transition periodical) EBRD economists and specialists argue that providing financial support to micro, small and medium enterprises can yield considerable benefits to the wider society in terms of economic growth, job creation, and the development of entrepreneurship. In line with their thinking, the Rapporteur believes it is very important to invest in microfinance banks and make credits available to SMEs and MSEs.
70. The EBRD works closely with the European Union in providing support for SMEs in advanced transition countries that are about to join the EU. In April 1999, the EBRD and the EU launched the SME Finance Facility for micro, small and medium-sized enterprises. A fund of € 846 million (with € 716 million provided by the EBRD and € 130 million by the EU) is used to support SMEs by channeling loans to local banks, leasing companies, and investments in private equity funds.
71. The EU/EBRD Municipal Finance Facility (MFF) is another initiative aimed to encourage commercial bank lending to small and medium-sized municipalities in EU accession countries. In addition to financial support, SMEs also benefit from technical support from the EBRD and its partners.
72. In addition, the Bank has established close cooperation with the United States in promoting private sector growth in south-eastern Europe, in particular in the countries in the early or intermediate stages of transition. The US/EBRD SME Finance Facility has provided almost 200,000 loans totaling €950 million to SMEs in 12 countries. The Facility seeks to reduce the legal and regulatory barriers to finance small businesses. It provides loans which on average amount to some € 5000, thereby meeting the needs of very small businesses that find it difficult to obtain financing from other sources.
73. Worth noting in the context of SME development is cooperation between the EBRD and the Council of Europe Development Bank. The two institutions are working together to develop SMEs in Hungary by lending €30 million to finance investment in infrastructure and equipment undertaken by Hungarian SMEs and to expand leasing activities.
74. In addition, two multi-project sectoral programmes were approved for the Bank Iniciatiyw Spoleczno-Ekonomicznych SA (Bise) in Poland. The first, worth € 20 million was approved in September 2003 and concerns local infrastructure projects in health, education, environmental protection, rural modernisation and the improvement of living conditions in disadvantaged urban areas. The second, of € 10 million, aims to create jobs in small and medium-sized firms and to permit investment in health, education and environmental protection.
d. Integration and Regional Co-operation
75. The EBRD’s 2003 Transition Report focuses on an important and timely theme, namely integration and regional co-operation.
76. The transition process has gone hand in hand with that of increasing integration between the economies of the countries concerned. While the degree of such integration is influenced by a number of country aspects, such as size, location, level of income, and pace of reform, integration has in general been more rapid and deeper in the EU accession countries[47] than in the other CEE/CIS countries.
77. The extent of integration can be measured by comparing trade (exports plus imports) with GDP, as presented in Table 3 below.
Table 3. Average Share of Trade in 2002 as a % age of GDP (by region)
78. Countries in South-eastern Europe and the CIS (excepting the Central Asian countries) do significantly less trading with the world economy than with the EU accession countries. With regard to the CIS countries, this difference can primarily be explained by the lesser reliability of the economic framework, leading to higher risks for trade. The fact that many CIS countries are landlocked also contributes to less integration with the world economy. In South-eastern Europe, limited integration is most likely in the first place a legacy of the region’s unstable past.[48]
79. In addition to an increase in the volume of trade with respect to GDP, most countries have also experienced a shift of trade away from other transition countries towards non-transition countries. In other words, the openness to the rest of the world has increased as the transition process has proceeded. As illustrated in Table 4 below, almost three-quarters of the trade in the countries in central Europe and the Baltic States, South-eastern Europe, the Caucasus, and the Russian Federation were carried out with non-transition countries in 2002.
Table 4. Average Share of Trade with Non-transition Countries in 2002
(as a % age of total trade)
80. Nevertheless, the integration of several countries into the world economy is still only partial. The transition countries as a group still trade less than might be expected from their level of income and location, particularly with regard to the countries in South-eastern Europe and the CIS. In order to overcome the limited international integration in these countries, the 2003 Transition Report (Integration and Regional-Co-operation) calls for changes in three areas, namely: 1) improved market access (for transition countries to markets in non-transition countries); 2) structural and institutional reforms;[49] and 3) increased regional co-operation, which would act as a catalyst for more global integration.
81. Integration can also be measured in terms of capital flows and labour movements. Since the beginning of the transition process, the CEE/CIS countries have become increasingly integrated into international capital markets. Between 1989 and 2002, total net private capital inflows increased from USD 6.2 billion to USD 23 billion. Some countries have, however, clearly benefited more than others.
82. In absolute terms, the countries in Central Europe and the Baltic states are estimated to have received around three-quarters of all net FDI inflows into the CEE and CIS region in 2002. FDI inflows per capita amounted to an average of $ 358 in Central Europe and the Baltic States in 2002 (compared to $54 for South-eastern Europe and $ 38 in the CIS countries). As percentage of GDP, FDI inflows in 2002 averaged 6.1 % in Central Europe and the Baltic states compared with 3.1% in south-eastern Europe and 4.4% in the CIS countries.
83. Furthermore, FDI inflows have not only been fairly concentrated in terms of location, but also, although less, according to sectors. Most FDI inflows into the CEE/CIS region have gone to manufacturing and general industry.
84. While some CEE and CIS countries have been able to attract substantial amounts of capital, labour flows have been rather restricted despite large differences in unemployment. Even with the upcoming EU accession, labour mobility is expected to remain low due to immigration barriers and shortcomings in the functioning of domestic labour markets.
e. Constitutional Liberalism
85. In line with the ‘political’ clause of its mandate - in which it is mandated to “support transition in countries committed to multiparty democracy” - the EBRD in its 2003 Transition Report deals with the relationship between political liberalism on the one hand, and the transition process on the other. Political liberalism emphasises the rule of law, respect of human rights, including property rights, and freedom of the media.
86. For the first time the EBRD has introduced a ‘Constitutional Liberalism Index’ based on the World Bank’s ‘Rule of Law and Corruption Index’, the ‘Property Rights Index’ of the Heritage Economic Freedom Index, and the ‘Media Index’ from the Freedom House. It has used this index to measure progress in its countries of operations in the above-mentioned respects.
87. While there are exceptions to the rule, all evidence suggests that, in the long term, there is a strong correlation between what is called constitutional liberalism[50] and economic reform, particularly with regard to institutional aspects of transition.
88. The advanced transition countries have so far reached the highest degree of constitutional liberalism among the EBRD countries of operations, using the Bank’s index. By contrast, countries that lag behind with their transition agendas suffer from weak constitutional systems. In some cases, political repression has returned and thus further hampered the transition progress.
89. The EBRD justly takes pride in having contributed to progress reached by the countries joining the EU in 2004. Developments in these countries demonstrate how closely tied are constitutional liberalism and progress on economic reform. Those countries have opted for fully democratic elections, undertaken deep institutional reforms and strengthened corporate governance. The rule of law and control of corruption are high on their agenda. So are freedom of media and expression. While there are differences as to the degree of success of such reforms in the various countries, the overall assessment is that they have performed well so far. However, they will face further challenges when integration into the EU Internal Market takes place. They will therefore need to intensify reforms, in particular in the financial sector, the public administration and the business environment. Their ability to do so will be key to their future success.
90. Other EBRD countries of operations, in particular those in the early and intermediate stages of transition, are slowly catching up with their more advanced neighbours in terms of constitutional liberalism. Countries in South-eastern Europe had a difficult start, whether through the break-up of countries or through war, but also here there is promising progress. However, to be successful, they will urgently have to tackle rampant corruption and organised crime. A serious challenge will be the practical enforcement of the rule of law and all the other institutional and democratic reforms they have embraced so far. There also has to be a true separation of powers between the legislature, the executive and the judiciary. Independent and free media need to be allowed to investigate and report to the public.
91. The CIS region presents a varied picture. Russia has lately achieved significant progress in advancing constitutional liberalism. It has, among other things, strengthened legislation to make the business environment safer, adopted a new governance code and introduced new regulations to improve public administration. However, in areas such as the judiciary and law enforcement, progress is still sparse.
92. The Annual Meeting of the Bank was held in London in April 2004. Representatives of the various member countries and member institutions hailed the success achieved by the Bank. Despite a continuing global economic slowdown in 2003, the EBRD spent €3.7 billion on 119 new projects. It attracted more co-financing on projects than ever before, with €2.7 billion coming from private banks and other partners. The private share of the business volume stood at 79 per cent.
93. It should also be mentioned that the Meeting re-elected its current President, Mr Jean Lemierre, to a second mandate, a move which this Rapporteur, and, she is sure, the Parliamentary Assembly with her, will warmly welcome. We find in Mr Lemierre a firm supporter of Council of Europe ideals and a highly efficient and humane manager.
94. The Annual Meeting noted the Bank’s key role in supporting economic and political transformation of its member countries. It highlighted the Bank’s particularly important contribution to the enlargement process. The Annual meeting again stressed the Bank’s economic and political mandate and its role in promoting democracy. It encouraged the Bank to seek new ways to engage constructively in countries where problems exist over political reform.
95. The Annual Meeting endorsed the Bank’s strategy for the new European Union member states. There was a general understanding that, as the Bank scales down its operations in the new EU member states, its continued presence there would nevertheless be important in helping them to achieve convergence with the EU and to allay the social consequences of that convergence. Hence, the Bank will focus on continued reform of financial markets, investments in the private sector, the restructuring of key industries and support for municipal projects.
96. Participants strongly supported the Bank’s new strategy for seven “Early Transition Countries” (ETCs)[51], in which the Bank foresees to increase its funding from the present €90 million to €150 million per year. This is seen as all the more necessary as more than half of the population of these countries live below the poverty line. The strategy aims at stimulating market activities, mobilising investment and encouraging economic reform through investment in small businesses, the provision of microfinance, the facilitation of cross-border trade and investment in small-scale infrastructure. Due to high government debt, these countries face particular difficulties in securing new funds for economic and social development programmes. In addition, poor infrastructure, obstacles to cross-border trade and the small size of their domestic markets discourage foreign investors. The Meeting recalled that availability of funds would be crucial to the successful implementation of the strategy and called on donors and the international community to provide the Bank with resources that would permit the required funding.
97. Participants at the meeting argued that much of the EBRD region is rich in natural resources, which in principle should allow them to build strong and diversified economies. The reality however, is different. While views differed on how to best to spend income derived from oil and gas, all agreed on the need for more transparency in this regard. They pointed to the need to strengthen the rule of law, ensure judicial independence, and build a legal framework that would allow fair competition, prevent monopolies and create an investment climate protecting small businesses.
98. The Meeting noted and supported the considerable increase in the Bank’s business in Russia. It also stressed the opportunities in South-eastern Europe. The region has been through much political and economic havoc but recent developments have been rather encouraging. Reforms are proceeding steadily and economies, continue to grow, albeit relatively slowly. The prospect of EU membership by 2007 for Bulgaria and Romania, and the progress in concluding Stabilisation and Association Agreements with several other countries continue to provide incentives for reform. The Bank will continue to develop the private sector and try to stimulate foreign investment.
99. The Meeting endorsed the application of Mongolia to become a country of operations and expressed the hope that the ratification process could soon be finalised.
100. As the Bank’s various countries of operations continue to make progress, the institution is engaged in an active process or trying to evolve accordingly, especially by constantly shifting its efforts towards areas where it believes it can make the greatest difference. The Meeting fully endorsed the Bank’s new approach to promote home-grown growth through companies investing in their own or neighbouring countries. The President of the Bank, Mr Lemierre, considered the move as “a natural evolution of the Bank’s mandate to finance the development of the real economy”.
101. Participants strongly supported the Bank’s efforts to take investment also to smaller cities and rural areas, in order to reduce national income disparities between regions.
102. The Meeting welcomed the Bank’s efforts to promote cross-border trade and investments as a means to foster prosperity and stability.
103. Finally, the Meeting welcomed the Bank’s efforts to increase its own transparency vis-�-vis its shareholders, donors, NGOs and the general public, not least via its new Independent Resource Mechanism. The Bank’s first public meetings in Georgia, Azerbaijan and Turkey[52] were seen as steps in the right direction.
104. Generally speaking, the economies of EBRD region have performed better than the world economy as a whole. Macroeconomic indicators promise stable developments for 2004. However, prospects for long term sustainability are rendered more uncertain due to the continuing sluggish growth of the global economy.
105. In Central Europe and the Baltic countries, the ability of governments to carry out public administration and fiscal policy reform will significantly affect the gains to be had from their entry into the European Union.
106. Most EU funds will be allocated at local and regional level, which at present is administratively weak in most of the countries in central and eastern Europe and the Baltic States. If the governments concerned fail to undertake swift and efficient reforms to tackle the problem of poor absorbing capacity at sub-national level, not only would they miss the advantages those funds would offer them, but money from Brussels would not be used in the most efficient way.
107. Most CEB (central and eastern Europe and the Baltics) countries still incur high budget deficits. They need to undertake wide-ranging fiscal reform. This holds not least for the biggest among the new EU members: the Czech Republic, Hungary, Poland and the SlovakRepublic.
108. In Southeast Europe, greater political stability and ongoing regional integration have resulted in higher growth. However, as financing in the form of grants decreases, growth sustainability over time is less certain. SEE countries also have large budget deficits and persistent current account deficits. The region also enjoys the lowest level of incoming FDI. Capital flows in SEE are mainly in the form of official aid or from remittances from people having emigrated back to their own country. An important challenge for the countries of SEE will be to fill the gap resulting from the expected reduction in official aid. An increase in private investment would be the answer, but it will only come about in an environment of strong institutions and a favourable business climate.
109. The CIS countries have experienced robust growth whose durability is, however, jeopardised by an excessive dependence on natural resources, widespread poverty in some and a high external debt. Careful management of their natural resources, diversification and development of other economic sectors are challenges ahead. This holds also for non-resource-rich countries, which will also have to increase the efficiency in their use of energy, much of it imported.
110. EBRD countries of operations have made progress in terms of integration into the world economy. The western Balkans in particular have fared better in terms of integration among themselves, not least thanks to trade agreements forming part of the Stability Pact for Southeast Europe.
111. Still, the integration of transition economies into the world economy remains incomplete. Although trade has significantly been reoriented towards the EU and other western countries, the transition economies as a group still trade less at a level below their potential. Their efforts to further integrate and converge can only bear fruit if the industrialised countries – the EU, the US and Japan – reduce their protectionist policies in many fields.
112. With specific regard to the Russian Federation, the 2003 Transition Report (Integration and Regional Co-operation) identifies the following three key reform challenges: 1) Increased impetus and consistency in structural and institutional reform (particularly with regard to natural monopolies and the rule of law); 2) Reform of the state bureaucracy and civil service in order to address weak policy implementation and improve public sector management; and 3) Acceleration of financial sector reform and economic diversification. Important economic challenges also lie in reducing the country’s dependence on oil and gas as well as in increasing domestic and foreign investment.
113. The energy sector offers great economic potential for many of the EBRD’s countries of operation, especially the CIS countries. The 2001 Transition Report (Energy in Transition) points to the following four key challenges for the energy sector: 1) Promoting investment in order to meet the large maintenance, upgrade and development needs; 2) Redefining the role of the state in order to increase efficiency and attract investment; 3) Increasing competition; and 4) Improving the management of resource rents. With regard to the power sector, further regulatory reform is needed to secure tariff increases and greater private sector participation.[53]
114. The encouragement of SMEs must continue. Further establishment and consolidation of MFIs, provision of credit and technical assistance from the EBRD-SME funding are particularly needed as funding in the form of grants is going down.
115. Integration into the world economy and regional co-operation would be helped by improved market access to western markets combined with efforts to reduce trade and transit barriers (particularly within south-eastern Europe and the CIS).[54]
116. Most of the 27 countries of operations are on the right track in their efforts to build functioning market economies.Still, serious social inequalities and discrepancies will have to be tackled. Over time, institutional change and reform, economic growth and increased competition should ensure better social cohesion by making more resources available for social protection, especially of the most vulnerable segments of the populations.
117. Reform of the public administration is of particular importance. Governments need to build administrations that are efficient and evenhanded in establishing and enforcing the principles of a functioning market economy based on the rule of law, human rights and politic and civic liberties. This will help to attract foreign direct investment and ensure sustainable development.
Reporting committee: Committee on Economic Affairs and Development.
Reference to committee: Standing Mandate.
Draft resolution adopted by the Committee on 28 May 2004.
Members of the Committee: Mr Kirilov (Chairman),Mrs Burbiene, Mrs Pericleous Papadopoulos, Mr Figel (Vice-Chairpersons), MM. A�ikg�z, Adam, Agramunt, Anacoreta Correia, Andov, Arnau, Assis Miranda, Ates, van Baalen, Berceanu, Bilalov, Braun, Brunhart, Budin, �avusoglu, Cosarciuc, Crema (Alternate: Rigoni), Djupedal,Ms Griffiths, MMGrignon, Gunnarsson, Gusenbauer, Ms Hakl, MM. Haupert, H�gmark, Jonas, Kacin, Kalanovic, Karapetyan, Klympush, Korobeynikov (Alternate: Petrov),Kraus, Kristovskis, Lachnit, Le Guen, Leibrecht, Makhachev (Alternate: Mrs Piroshnikova), MM Masseret, Melcak, Mikkelsen, Ms Milicevic, MM. Mimica, Nikolopoulos, �hman, O’Keeffe, Opmann, Mrs Patarkalishvili, Mrs Pintat Rossell, MM. Podgorski, Popa, Puche, Pullicino Orlando, Ramoudt, Ramponi, Rattini, Reimann, Rivolta,Lord Russell-Johnston, MM. Rybak, Sasi, Schreiner, Severin, Seyidov, Slutsky, Ms Smith, MM. Sofiyeva, Stefanov, Tepshi, Timmermans, Todorovic,Mrs Vadai, MM. Versnick, Vrettos, Walter, Wielowieyski, Wikinski, Mrs Zapfl-Helbling, Mr Zhevago.
N.B. The names of the members who took part in the meeting appear in bold.
Head of Secretariat: Mr Torbi�rn
Secretary to the committee: Mr Bertozzi
Co-Secretaries to the committee: Ms Ramanauskaite, Ms Kopa�i-Di Michele
[1] Including: Annual Report 2003; Annual Report 2002; Transition Report 2003 – Integration and Regional Co-operation; Transition Report 2002 – Agriculture and Rural Transition; Transition Report 2001 – Energy in Transition; Transition Report 1998 – Financial Sector in Transition; as well as policy documents, investment brochures, fact sheets, country strategies, and working papers.
[2] The European Union and the European Investment Bank.
[3] Albania, Armenia, Azerbaijan, Belarus, Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Georgia, Hungary, Kazakhstan, Kyrgyzstan, Latvia, Lithuania, “the former Yugoslav Republic of Macedonia”, Moldova, Poland, Romania, Russian Federation, Serbia and Montenegro (formerly the Federal Republic of Yugoslavia), Slovak Republic, Slovenia, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan.
[4] Early/Intermediate: Albania, Armenia, Azerbaijan, Belarus, Bosnia and Herzegovina, Bulgaria, Serbia and Montenegro, “the former Yugoslav Republic of Macedonia”, Georgia, Kazakhstan, Kyrgyz Republic, Moldova, Romania, Tajikistan, Turkmenistan, Ukraine, Uzbekistan.
[5] Russia is treated separately from the two EBRD country groups of ‘early/intermediate’ and ‘advanced’.
[6] Advanced: Croatia, CzechRepublic, Estonia, Hungary, Latvia, Lithuania, Poland, SlovakRepublic, and Slovenia
[7] Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovak Republic and Slovenia, EBRD Transition Report 2003, Country Groupings.
[8] EBRD Transition Report 2003.
[9] Albania, Bosnia and Herzegovina, Bulgaria, “the former Yugoslav Republic of Macedonia”, Romania, and Serbia and Montenegro – EBRD Transition Report 2003, Country Groupings.
[10]Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, KyrgyzRepublic, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine and Uzbekistan, EBRD Transition Report 2003, Country Groupings.
[11] EBRD, Transcript of the launch of the Transition Report 2003, 18 November 2003.
[12] Key indicators are: Promotion of privatisation; Development of skills; Encouragement of competition; and Support for market expansion. Other relevant aspects include: Institution-building to improve the functioning of markets; Contribution to government policy formation and commitment; Contribution to laws; Positive demonstration effects (i.e., potential to provide a model); and Setting new standards in business conduct and governance.
[13] Both with regard to the general performance of the project and the performance of the company responsible for executing the project.
[14] Its activities in these two countries are limited to monitoring existing projects.
[15] Contributors: The EU, Denmark, Finland, France, Norway, Russian Federation, Sweden, United Kingdom, Netherlands, Germany and Canada
[16] It is to be noted that oil and gas production is covered in a separate policy document (see Natural Resources Operations Policy in paragraph 53 below).
[17] Although the CEE and CIS countries have historically been very intensive in their use of energy compared to other countries, energy intensity (i.e., energy use per GDP) has generally decreased since the beginning of the transition process. Between 1989 and 1999, total primary energy consumption feel from 1 925 to 1 250 million tonnes of oil equivalent. Similarly, overall, the CEE and CIS regions’ energy intensity decreased by 11 % between 1992 and 1998. Transition Report 2001 – Energy in Transition. Progress has, however, varied between countries and even the least energy-intensive CEE and CIS countries still use more energy per GDP than other countries. Cornillie, J., and Fankhauser, S. “The Energy Intensity of Transition Countries”, EBRD Working Paper No. 72, June 2002. Energy intensity is also negatively related to energy prices, i.e., the lower the energy price, the higher the energy intensity. Ligot, Jacquelin. “EBRD and ESCO / Third Party Financing”, Climate Technology Initiative (CTI) Conference, Budapest, Hungary, 29 November 2001.
[18] Primarily due to inadequate regulatory frameworks for investments in loss reduction, the absence of effective public awareness campaigns, and low energy costs, (which limit incentives to invest in loss reduction).
[19] As demonstrated by a relatively high fuel use per unit of energy output and low capacity of most plants as a result of, for example, obsolete technology and insufficient maintenance.
[20] Primarily due to technical problems and inadequate maintenance.
[21] Tariffs in most countries are generally not sufficient to cover operating costs or to generate funds for investment or debt service following the legacy of subsidies and market distortions dating from the Soviet era.
[22] Primarily in the early and intermediate transition countries.
[23] Except in some CEE countries.
[24] Especially in those countries that use indigenous lignite and/or brown coal as well as low-grade heavy fuel oil (such as Bulgaria, the Czech Republic, Hungary, Kazakhstan, Poland, Romania, and Ukraine).
[25] In several countries, such as Bulgaria, Lithuania and Ukraine, the proportion of nuclear power in overall energy generation is fairly substantial (between 40 and 70 %).
[26] For example, Hungary has made the most progress in general transition at the same time as it is rated highest in power sector reform progress. On the other hand, Belarus and Turkmenistan score low both in terms of general and power sector reform progress. The most notable exception is Kazakhstan, where power sector reform has moved faster than general economic reform. Conversely, power sector reform progress lags behind general progress in the Czech and SlovakRepublics. Power Sector Transition Indicators in Transition Report 1998 – Financial Sector in Transition.
[27] Kennedy, David. “Power Sector Regulatory Reform in Transition Economies: Progress and Lessons Learned”, EBRD Working Paper No. 78, February 2003.
[28] Some of the more advanced transition countries, such as the Czech Republic, Hungary, Lithuania, and Poland, have reformed their district heating operations more than others.
[29] Except Hungary (which has de-monopolised and privatised its gas sector) and Kazakhstan (which has privatised gas transport). In addition, gas sector restructuring is under active consideration in the Baltic countries, Poland and Romania.
[30] For example, while smaller energy utilities and certain operations such as billing and collection could be put out to concession at an early stage, electricity transmission and gas transportation could remain as service companies under public ownership until later stages of regulation and competition consolidation.
[31] Kennedy, David. “Competition in the Power Sector of Transition Economies”, EBRD Working Paper No. 41, August 1999.
[32] Von Hirschhausen, C. and Opitz, P. “Power Utility Re-regulation in East European and CIS Transformation Countries (1990-1999): An Institutional Interpretation”, Harvard Electricity Policy Group Discussion Paper, September 2001.
[33] The other three key objectives for the energy sector include: Improving the investment climate and allowing the development of energy systems based on market principles; Improving environmental performance (including supporting actions to address the climate change issue); and improving the safety of nuclear power production.
[34] Cornillie, J., and Fankhauser, S. “The Energy Intensity of Transition Countries”, EBRD Working Paper No. 72, June 2002.
[35] This is co-sponsored by the EBRD Technical Co-operation Fund and the US Trade and Development Agency Evergreen Fund.
[36] Azerbaijan, Kazakhstan, Turkmenistan, and Uzbekistan.
[37] This can in turn be attributed to the lack of modern company law and a related legal framework.
[38] Several countries (such as Hungary and Poland) have already successfully restructured and privatised their natural resources operations.
[39] By www.bankwatch.org among others
[40] In practice this requires an ESCO to: identify savings opportunities in a municipal, commercial or industrial energy facility; implement energy conservation measures at no initial cost to the customer; maintain energy savings investments for the duration of the contract and; guarantee energy savings (which are then used to pay back the initial investment).
[41] i.e., Czech Republic, Hungary, Lithuania, Poland, Romania, Slovak Republic, and Ukraine.
[42] Ligot, Jacquelin. “EBRD and ESCO / Third Party Financing”, Climate Technology Initiative (CTI) Conference, Budapest, Hungary, 29 November 2001.
[43] Ligot, Jacquelin. “EBRD and ESCO / Third Party Financing”, Climate Technology Initiative (CTI) Conference, Budapest, Hungary, 29 November 2001.
[44] As well as through leasing finance, equity funds, and the EBRD’s Direct Investment Facility. See also the Assembly’s report on EBRD activities of 6 June 2003 (Doc. 9825).
[45] MFIs have benefited from financial support and technical expertise provided by the International Finance Company (IFC), the German Development Bank and the German Investment and Development Company (KfW/DEG), Commerzbank AG and Internationale Micro Investitionen AG..
[46] Sustainability of microfinance banks: the ultimate goal/ EBRD LiT on line, Autumn 2003 - http://www.ebrd.org/pubs/index.htm
[47] That is, all countries except Croatia in Central Europe and the Baltic States, as well as Bulgaria and Romania in south-eastern Europe.
[48] Babetskii, I., Babetskaia-Kukharchuk, O., and Raiser, M. “Transition and International Integration in Eastern Europe and the Former Soviet Union”, EBRD Working Paper No. 83, November 2003.
[49] While the South-eastern European and CIS countries (with the exception of Belarus, Turkmenistan and Uzbekistan) already have relatively open trade policies, most of them suffer from weak trade-related institutions (such as customs, law enforcement and trade finance). In this regard, the EU and the World Trade Organization (WT) could act as “external anchors” towards the promotion of institutional reform.
[50] Constitutional Liberalism: “Constitutionalism” refers to limitations on the power of the state. “Liberalism” means the protection of basic individual and group rights. EBRD: Transition Report 2003
[51] These are the Bank’s seven poorest countries of operations: Armenia, Azerbaijan, Georgia, Kyrgyz Republic, Moldova, Tajikistan and Uzbekistan. EBRD Press release, April 2004
[52] The Bank organised public meetings which aimed to inform about the Bank’s activities and to hear the concerns of local people regarding the Bank’s involvement in the financing of a pipeline across the Caucasus.
[53] Kennedy, David. “Power Sector Regulatory Reform in Transition Economies: Progress and Lessons Learned”, EBRD Working Paper No. 78, February 2003; and Cornillie, J., and Fankhauser, S. “The Energy Intensity of Transition Countries”, EBRD Working Paper No. 72, June 2002.
[54] Babetskii, I., Babetskaia-Kukharchuk, O., and Raiser, M. “Transition and International Integration in Eastern Europe and the Former Soviet Union”, EBRD Working Paper No. 83, November 2003.