[Documents/Docheader.htm]

Council of Europe Development Bank: a voice for solidarity

Doc. 10204
7 June 2004

Report
Committee on Economic Affairs and Development
Rapporteur: Lord Russell-Johnston, United Kingdom, Liberal, Democratic and Reformers’ Group

For debate in the Standing Committee — see Rule 15 of the Rules of Procedure

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Summary

The report reviews the activities of the Council of Europe Development Bank (CEB) over the 2001-2003 period and expresses satisfaction with its overall performance in fulfilling its mission as the “voice for solidarity” in Europe – by responding to emergency situations, such as forced population movements and natural disasters and in promoting social investment.

The report notes with regret, however, that a number of Council of Europe countries – Andorra, Armenia, Austria, Azerbaijan, Georgia, Russia, Ukraine and the United Kingdom – have not yet joined the Bank and therefore neither contribute to nor benefit from its action.

The Bank’s increasing lending to its new members in central, eastern and south-eastern Europe is welcomed. The report calls for a move towards a more balanced loan portfolio capable of better serving the needs of disadvantaged countries with lower credit ratings. This, the report suggests, could be achieved through a more extensive use of trust accounts, enhanced practical assistance to new member states and closer co-operation with the Council of Europe, as well as with other international financial institutions. Consideration should also be given to the financing of pilot projects in countries not yet part of the Bank, in preparation for their future membership and as a sign of the Bank’s pan-European vocation.

I.        Draft recommendation [Link to the adopted text]

1.       The Parliamentary Assembly has reviewed the activities of the Council of Europe Development Bank (CEB) over the 2001-2003 period. It is satisfied with the overall performance of the Bank which it finds in keeping with its mission to respond to emergency situations, such as forced population movements and natural catastrophes, and to promote social cohesion in its member states via support for social assistance and development projects. Through skilful management of its limited resources, the CEB has mobilised funds several times larger than its own and has, jointly with its member states, achieved a significant multiplier effect in its operations.

2.       Real solidarity is shown in deeds. As a token of that solidarity in favour of underprivileged people, the Bank should be able to draw on the synergy and resources of all Council of Europe member states. The Assembly notes, however, that the CEB’s membership is incomplete in that only 36 out of the Council of Europe’s 45 member states have so far joined. It welcomes the recent accession of Bosnia and Herzegovina and Serbia and Montenegro to the Bank and looks forward to Ireland joining in the near future. It deeply regrets that Andorra, Armenia, Austria, Azerbaijan, Georgia, Russia, Ukraine and the United Kingdom are not yet members of the CEB and therefore neither contribute to nor benefit from its action.

3.       The Assembly welcomes the positive dynamics of lending in favour of the sixteen countries in central, eastern and south-eastern Europe that have joined the Bank since 1994 and in which social needs are greatest. Lending in these countries can and must be further increased from the current quarter towards a fifty-fifty proportion of loans approved as between countries rated higher on international lending markets and those rated lower, in addition to the Bank’s otherwise commendable effort to preserve its top ‘AAA’ credit rating.

4.       The establishment of a Selective Trust Account in 1995 should be a useful additional tool for boosting the level of financing operations in central, eastern and south-eastern Europe. More than € 34 million from this account were used to subsidise interest rates associated with about € 500 million worth of loans over the 1995-2003 period in favour of countries in central, eastern and south-eastern Europe.

5.       The Assembly notes that the CEB maintains a relatively small staff in order to keep operating costs down, a situation which makes co-operation with other institutions, including the Council of Europe, all the more important. It believes that Council of Europe capacities and expert networks could be better exploited by the Bank in that direction through a joint undertaking.

6.       The Assembly in this connection notes the decision of the CEB Administrative Council to discontinue the joint CEB-Council of Europe programme and trusts that discussions are underway to restructure and improve co-operation.

7.       The Assembly in conclusion recommends that the Committee of Ministers:

i.       urge Council of Europe member states that are not yet members of the CEB to consider joining the Bank at their earliest opportunity;

ii.       invite the Bank’s member states to:

a.       speed up the negotiations on new inter-institutional arrangement with the CEB;

b.     explore the possibility of setting up a joint committee to serve as an advisory  instrument between the two institutions, with a view to shaping a common strategy for the promotion of Council of Europe aims and policies;

c.     consider, following the examples set by Finland and Norway, the creation of additional trust accounts to boost the Bank’s activities in central, eastern and south-eastern Europe;

d.     permit an increase in the Bank’s staff in order to allow for improved project preparation and evaluation;

iii.    invite the Bank to:

a.     further enhance lending and practical assistance to new member countries and to ensure a more even distribution of loan portfolio among countries of different wealth;

b.     make more extensive use of trust accounts, including for the preparation and realisation of pilot projects also in less wealthy Council of Europe member states that have not yet joined the CEB;

c.     intensify and enhance co-operation with other international financial institutions and international organisations, with a view to project preparation, co-financing and evaluation, especially in central, eastern and south-eastern Europe;

d.     strengthen project evaluation capacities and make impact studies public, along the lines followed by other international institutions.

II.       Explanatory memorandum by Lord Russell-Johnston, Rapporteur

Table of Contents

1.       Introduction: the CEB’s mission, resources and functioning

2.       The Bank’s activities from 2001 to 2003

3.       Membership in the CEB: the ‘ins’ and the ‘outs’

4.       A joint CEB - Council of Europe programme

5.       A proposal for the “ethical financing” of projects

6.       Follow-up to earlier Assembly texts

7.       The Bank’s relations with other institutions

8.       Conclusions and recommendations

1.       INTRODUCTION: THE CEB’s MISSION, RESOURCES AND FUNCTIONING

1.       In pursuance of its revised terms of reference, the Committee on Economic Affairs and Development is following the work of the Council of Europe Development Bank (hereafter referred to as the ‘CEB’ or the ‘Bank’). Its last report (Doc. 9114) of 2001 with Mr Lotz as Rapporteur underscored the need for the Bank to support greater economic and social cohesion in Council of Europe member states. This message has retained all its relevance.

2.       The report will explore the Bank’s activities over the past three years. In so doing, it will review more recent CEB activities (especially in the transition countries of central, eastern and south-eastern Europe), the joint CEB-Council of Europe programme for promoting social cohesion and the follow-up given to earlier recommendations of the Parliamentary Assembly. It will also consider the proposal put forward by Mr Crema and other Assembly members regarding the need for more ‘ethical financing’ of projects (Doc. 9810), especially via the CEB, and will examine the Bank’s potential contribution to the 3^rd Summit of the Council of Europe to be held in 2005. The Rapporteur is confident that the Committee on Migration, Refugees and Population will for its part provide a most useful input through its opinion on the refugee-related aspects of the Bank’s work.

3.       The Rapporteur is grateful to the representatives of the Bank, especially Governor Rapha�l Alomar; Vice-Governor Krzysztof J. Ners; Richard Veneau, Director of Human Resources; Giusi Pajardi, Head of the Partial Agreement on the CEB, and Pilar Morales, Executive Secretary to the Bank’s organs, for the valuable information they provided in the course of discussions. He also recalls a much appreciated contribution made by Dr Orhan G�venen,Chairman of the Governing Board, to the seminar “Europe and EU Enlargement: Crucial Years Ahead” which the Economic Affairs Committee organised in Budapest in September 2003.

Mission

4.       The CEB can best be described as a ‘multilateral development bank with a social vocation’. Set up in 1956 by the Council of Europe’s Committee of Ministers as a Partial Agreement to ease the refugee problem in Europe, it has expanded its membership from originally 8 to currently 37 countries, all members of the Council of Europe[1] (except for the Holy See which is an observer). Among them are 16 so-called ‘transition countries’ in central, eastern and south-eastern Europe that started joining in the mid-1990s. The Bank’s headquarters are located in Strasbourg while the administration is based in Paris. Although it is attached to the Council of Europe and subject to its supreme authority, the Bank enjoys full autonomy in decision-making and management.

5.       Formerly ‘the Council of Europe Social Development Fund’, the institution since 1999 is called the Council of Europe Development Bank, which better reflects its evolving priorities and its mission of financing social development and reconstruction projects. The new name has also removed the confusion between this institution and the European Social Fund of the European Union. As previous Assembly Rapporteurs have rightly observed, the Bank needs to find a middle way between being a pure bank and a pure fund. If it were too much of the former, it would risk losing its political and social raison d’�tre and would become ‘just another bank’, of which there are many. At the same time, with too great a social orientation neglecting sound banking principles or risk management imperatives, it might lose its top credit ratings and hence its ability to provide ‘good value for money’ loans for socially oriented projects. Preserving the right balance between the two is therefore vital for the CEB.

Activities and Priorities

6.       In addition to the Bank’s traditional priority fields of action – funding refugee, displaced persons or migrant relief projects and responding to emergency situations (such as natural catastrophes) – support for social assistance and development has lately gained in importance. Thus, by boosting investment in job creation through small and medium-sized enterprises; social housing; public health and education; as well as urban and rural development, environmental protection and heritage conservation, the Bank can contribute to the improvement of living standards in the less favoured and disaster-stricken regions of Europe. Assistance towards transition and social cohesion has become a newofficialpriorityfollowingthe 2^nd Council of Europe Summit.

Resources and financial standing

7.       The Bank receives no annual contributions from its member states. Its lending activities are based on own resources - consisting of paid-up capital, reserves and profits - and capital raised on financial markets. The Bank’s own assets (equity) stand at € 4.36 billion (i.e. € 3.22 billion in subscribed capital and € 1.14 billion in reserves). Although no further capital increase is foreseen in the Bank’s medium-term development plan, the CEB’s financial basis is strengthened each year by the accumulation of reserves through the allocation from the Bank’s annual profits (this means about € 75 million per year foreseen in the Development Plan).

8.       Starting with a capital equivalent to € 5.7 million in 1956, the Bank has since issued over € 19 billion in loans. The latest capital increase of € 1.85 billion strengthened the Bank’s financial base, enhanced conformity with international prudential standards and allowed greater project financing in transition countries. The Bank’s gearing ratio (the proportion of outstanding loans and guarantees to funds owned), kept lowering in compliance with a 2.5 limit set by the Administrative Council. It stood at 2.3 for 2003, 2.21 for 2002 and 2.18 for 2001, compared to 3.41 for 2000. Moreover, the debt-equity ratio (total debt against own funds in the broadest sense) - which cannot exceed 6 - remains well below that ceiling at 2.9 in 2003, at 2.8 in 2002 and 2.9 in 2001 (compared to 4.91 in 2000). Finally, the Bank’s liquidity ratio, which stood at 104% on 31 December 2003, is high above the required minimum of 50%.

9.       If the CEB is able to grant loans on particularly attractive conditions (see paragraph 13 below), it is because of its excellent standing - rated as the top ‘AAA’ with Standard & Poor’s, Fitch Ratings and Moody’s. This enables the Bank to access financial markets on the best possible terms and thereby to minimise the cost of loans to its clients. Not surprisingly, the Bank’s profit has been generally steady, principally due to higher net banking income, moderate increases in operating expenses and relatively low releases from provisions (€ 1.9 million in 2002 as compared with € 3.8 million in 2001 and € 5.9 million in 2000). The net profit in 2001 stood at € 88.3 million, at € 95.2 million in 2002 and at € 86.9 million in 2003. Such stable performance has enabled the CEB to build up massive reserves and hasplaced it among the best performing multilateral financial institutions in terms of return on equity (even though a fall in interest rates weighed on the profitability of the investment portfolio in 2003).

Functioning and management

10.     The Bank operates by granting long-term loans to its members, local or regionalauthorities and financial institutions, either public or private, but not to private persons or enterprises. Loans are issued in accordance with a set of precise criteria and all requests for project financing must be submitted via the Secretary General of the Council of Europe by the national authorities of the country concerned, along with an approval of both the project and the applicant. Applications must be backed by guarantees[2] deemed acceptable by the Bank. Although it is the applicant’s responsibility to prepare the application, the Bank increasingly assists borrowers in the preparation of their projects.

11.     The rates for the loans granted, whether fixed or variable, are based on the Bank’s cost of funds  – at present at advantageous ‘AAA’ conditions (comparable to the London Inter-Bank Offer Rate or LIBOR) – plus a modest margin which in particular cases can be further lowered through an interest rate subsidy facility (see description of the Selective Trust Account below). The duration of credit may extend to 15 years, with a possiblegrace period ofup to 5 years. At present the Bank is two to four times more competitive in terms of a margin on the cost of funds (on average0.2% - 0.25%) when compared to similar institutions – such as the World Bank and the European Bank for Reconstruction and Development – that provide loans with, respectively, 0.57% and 1% margins.

12.     After examination from the financial and technical points of view by the Bank’s staff, each application is submitted for approval to its Administrative Council, with the Secretary General of the Council of Europe giving an opinion as to the project’s admissibility from the political and social points of view. The Bank may finance up to 50% of the total eligible cost of projects and even more in specific cases. Projects selected must be subject to tenders in accordance with the relevant regulations[3].

13.     The CEB’s management is assured by the following organs: the Governing Board, currently chaired by Mr Orhan G�venen and comprising one representative per member state; the Administrative Council, at present chaired by Mr Heinrich Harries and also comprising one representative per member state; the Governor, Mr Rapha�l Alomar, assisted by three Vice-Governors; and the Auditing Board, consisting of three members chosen from among the member states in turn. Staff members of the Council of Europe provide the Secretariat of this Partial Agreement. Atthe end of 2003, the Bank had 134 permanent staff members from 20 countries.

The Selective Trust Account

14.     Although the CEB essentially issues loans and guarantees, it can, in exceptional circumstances, grant interest rate subsidies and donations. In fact, with the first transition countries joining, the Bank in 1995 set up a “soft loan window” called the Selective Trust Account for the provision of subsidieson certain loans to high priority projects or in order to respond to financing needs in situations of extreme emergency in eligible countries. The Account is essentially provisioned through allocations from the Bank’s profits and by voluntary contributions from member states (other countries, whether members of the Council of Europe or not, and international institutions can also contribute to this account). € 64.4 million had been mobilised through this Account by the year 2004 for the benefit of projects in Albania, Bulgaria, Estonia, Hungary, Poland, Slovakia, Bosnia and Herzegovina and “the former Yugoslav Republic of Macedonia”.

2.       THE BANK’S ACTIVITIES FROM 2001 TO 2003

15.     Following a major increase in its capital[4] and membership before 2001, the Bank endeavoured to re-balance its loaning activities and financial ratios (see paragraph 8 above). Due to the application of current prudential ratios, there has been a gradual decrease in the volume of projects approved since 1998, when the Bank had reached record highs with project approvals totalling 2.3 billion ecus. Thus, in 2001, loan approval operations stood at only € 1664 million and € 1605 million a year later. However a strong growth resumed in 2003 with € 2149 million approved, which represents a 34% increase on 2002. The same trend was followed in the amount of disbursements, down from a peak of € 1855 million in 2000. However, at the same time, the amount of loan approvals in transition countries rose considerably: from € 256 million in 2000 to € 432 million in 2001, € 696 million (minus € 200 million of a project cancelled) in 2002 and € 526 million in 2003 (see table 1 in the appendix). With this strategy the Bank is expecting to increase its outstanding loans from about € 8.6 billion in 2001 to almost € 11 billion by the end 2004.

16.     The structure of projects and loans activity in 2001 shows the Bank’s increasing emphasis on promoting social cohesion. Projects corresponding to the traditional priorities (aid to refugees, migrants and victims of natural disasters) represented 16 % of project approvals, while the new priorities (job creation in SMEs, social housing, health and education) made up 70% (see table 3 in the appendix). Greater selectivity has led to increased CEB funding of targeted individual projects (the share of loan approvals up from 30% in 2000 to 41% in 2001) in proportion to sector-based multi-project programmes.

17.     In 2001, the CEB loan portfolio of 57 projects allocated the biggest share to Finland (15%), Turkey (14.4%), Germany (13%), France (12%) and Poland (10%). About a quarter of that year’s financing was earmarked for transition countries, including through two sector-based multi-project programmes via German banks. In addition, interest rate subsidies – through the Selective Trust Account – were accorded to projects in Albania, Bulgaria and Hungary, representing a total of € 3.1 million; and € 2.4 million were donated to projects in “the former Yugoslav Republic of Macedonia”, Kosovo (Serbia and Montenegro), and Bosnia and Herzegovina. Although the latter beneficiaries were not member states of the CEB, assistance to them continued within the framework of a joint CEB-Council of Europe Programme.

18.     In order to further improve project preparation and evaluation, the CEB formulated a series of country and sector (for health, education, social housing and the Roma minority) strategies in 2001 in consultation with member states and decided to set up an ex-post project evaluation unit for measuring the social impact of projects on target sectors and populations. Moreover, the CEB revised its rules governing the Selective Trust Account in order to facilitate its use in favour of the most vulnerable population groups in low-income countries.

19.     In both 2001 and 2002 the Bank was frequently solicited for financing reconstruction projects to remedy the consequences of natural disasters and disaster prevention measures. Five projects, totalling € 269 million (16% of the approved total), were approved in 2001 to assist Hungary, Italy, Spain and Turkey. Hungary was assisted in two projects concerning the reconstruction of flood control systems and the development of protective structures; Spain benefited from CEB co-financing in the rehabilitation of country roads after storms in 2000 and 2001; Italy was able to strengthen its forest fire-fighting capacity; Turkey continued the reconstruction (in line with anti-seismic standards) of houses damaged or destroyed by the 1999 earthquakes and Poland finalised the upgrading of water level regulation structures.

20.     The year 2002 was marked by vast summer flooding in central Europe, with the CzechRepublic, Hungary, Romania, Bulgaria, Slovakia and the eastern part of Germany being particularly affected. That year CEB allocations in this field accounted for 20% of all projects approved and amounted to € 320 million in twelve projects for ten countries. Housing reconstruction works continued in Turkey and a large programme was earmarked for safeguarding Italy’s historic heritage in the city of Venice (tide protection structures; strengthening of the lagoon’s coastline; and measures to reverse environmental deterioration).

21.     Aid to refugees and migrants in 2001-2003 was essentially channelled through housing programmes. It involved mainly lending activities (in favour of Croatia and Lithuania) but also included a number of grants and interest rate subsidies (to “the former Yugoslav Republic of Macedonia”, Kosovo (Serbia and Montenegro), Bosnia and Herzegovina and Slovakia) from the Selective Trust Account. Direct financing (disbursements) to this statutory priority amounted to € 12 million (plus grants from the STA) in 2001, € 14.4 million (including € 0.665 million from the STA) in 2002 and € 18.9 million (plus € 38.6 million for projects approved) in 2003.

22.     2002 recorded a substantial growth in CEB financing to the transition countries (see figure 1 in the Appendix), which accounted for 31% of project approvals in the year (compared to 26% in 2001). About a quarter of projects in the transition countries were accorded interest rate subsidies through the STA. This represents a contribution of over € 34.5 million in a 1995-2003 period to subsidise interest rates associated with loans worth over €500 million. The overall allocations (interest rate subsidies and donations) from the STA amounted to € 2.1 million in 2001, € 3.6 million in 2002 and € 3.5 million in 2003. In addition, two trust accounts were set up at the initiative of Finish and Norwegian authorities to supply extra financing for projects in the Baltic countries (Estonia, Latvia and Lithuania) and the western Balkans.

23.     Two advanced transition countries – Hungary and Poland – were among the key beneficiaries of CEB funds in 2002, with loans to these countries totalling, respectively, 10.2% and 12.1% of projects approved during the year. Other main receivers of CEB loans were Italy (18.7%), France (15.6%) and Turkey (10.9%). Altogether, these five countries accounted for over two thirds of project approvals in 2002. However, in terms of disbursements for that year, Italy, France, Spain, Poland and Cyprus received nearly two thirds of loan funds.

24.     The so-called new priority – projects fostering social cohesion – received over half of CEB funding in 2002 (a total of € 875 million, including € 606 million for the transition countries, in projects approved and a total of € 847 million in disbursements). Allocations in favour of job creation and job preservation in SMEs amounted to € 143 million in six sector-based multi-project programmes for Croatia, Finland, Poland, Portugal, Romania, Spain, Sweden and “the former Yugoslav Republic of Macedonia”. However, the lion’s share (€ 616 million or over 38% of all projects) went to financing social housing and improving living conditions in disadvantaged urban areas.

25.     In 2003, the Bank further expanded its operations in the transition countries, with 22 new projects approved for 12 countries totalling € 526 million and loan disbursements (€ 378 million) up by 17% on the previous year. Moreover, the overall growth in project approvals represented an impressive 34% rise in relation to 2002 while the disbursement activity was comparable to that in the previous year. We should note that the funds approved by the CEB represent on the average 40% of the total effective investment, which means that the impact of CEB financing corresponds to about 2.5 times the amounts lent.

26.     The breakdown of loans approved by sector shows that, in 2003, the CEB paid special attention to projects in the fields of health and education. These two sectors alone represented nearly a half of all projects funded, totalling € 990 million. The Bank also doubled its support for activities aimed at promoting employment through SME development projects (20% of all loan approvals) in Poland, Turkey, Bulgaria, France, Portugal, Latvia and Lithuania, as well as indirectly – through German and Italian intermediary banks – in Bulgaria, Croatia, Cyprus, the Czech Republic, Slovakia, Hungary and other EU candidate countries in the framework of the EU’s SME financing facility. In the area of aid to refugees and migrants, € 38.6 million were approved in loans for housing projects in Croatia and another € 872 000 was offered “the former Yugoslav Republic of Macedonia” as grants in favour of refugee populations and Roma communities.

27.     In 2003, the CEB has proceeded to adjusting its medium-term strategic guidelines to cover three sectorial lines of action as follows: (1) the reinforcement of social integration and the fight against exclusion; (2) the development of human capital through more financing in education and health sectors; and (3) promoting a socially responsible management of the environment, with a special emphasis on the preventive aspects. A further review, in 2004, of the Bank’s Medium-term development plan is set to provide a general framework for the CEB’s activities in the 2005-2009 period, one intention being to enhance CEB’s contribution to central and south-eastern Europe.

3.       MEMBERSHIP IN THE CEB: THE ‘INS’ AND THE ‘OUTS’

28.     Out of 45 Council of Europe member states, 36 have so far joined the Bank (plus the Holy See, which enjoys observer status with the Council of Europe). Bosnia and Herzegovina and Serbia and Montenegro are the latest newcomers to the CEB. Subject to the removal of some technical obstacles, Ireland[5] will also be in a position to accede to the Bank and the Rapporteur hopes this can happen soon. He regrets, however, that CEB membership does not yet parallel that of the Council of Europe and encourages countries not yet members – Andorra, Armenia, Austria, Azerbaijan, Georgia, Russia, Ukraine and the United Kingdom – to join.

29.     In a practical sense there could hardly be a better token of solidarity among the Council of Europe member states in favour of underprivileged people than membership in the CEB. Because needy and vulnerable population groups exist in all our member states, the Bank should be able to draw on the synergy and resources of all Council of Europe member states in its mission of helping its members to help themselves. Acting first and foremost as a bank with a social vocation, the CEB enables its members not only to pool and share resources but also to raise additional ‘good value for money’ capital on international markets for socially worthwhile but commercially not so attractive projects. The initial membership contribution to the Bank’s capital thus represents not money spent or ‘frozen’, but rather a targeted investment in development projects.

30.     The accession of countries such as the United Kingdom, Austria and Russia would not only boost the Bank’s resources and lending capacity but would also allow it to increase the share of loans in favour of the transition countries. The political will to commit the necessary resources seems, however, to be lacking in some countries not part of the CEB. Nothing, for instance, prevents them from making voluntary contributions in support of CEB projects in transition countries. The arguably poorest country in Europe – Moldova – has managed to join the Bank and to honour its membership dues. Against this fact the argument of high accession costs for CEB membership put forward by the British Government in its correspondence with the Rapporteur (in his capacity as former President of the Parliamentary Assembly in 1999-2001) sounds hollow or even irresponsible. If all the better-off countries took the same reserved view as the UK has done so far, the Bank could not exist and the valuable work it does would not be assured.

4.       A JOINT CEB - COUNCIL OF EUROPE PROGRAMME

31.     The enlargement of the European Union to 25 countries in 2004 and the likely accession of several more countries in the years to come will not only represent a major test to the EU itself but will also mean a new challenge and an opportunity for the CEB, since with enlargement the social and economic disparities across Europe will become more obvious. As this Assembly’s Resolution 1365 on the economic aspects of European Union enlargement, adopted in January 2004, stated, “given its pan European membership, the Council of Europe has a unique role to play in ensuring that no two-tier Europe results from the [EU enlargement] … but that all countries remain committed to the development of one Europe”. In this context, the partnership between the Council of Europe Development Bank on the one hand, and the European Commission, the European Investment Bank and the European Bank for Reconstruction and Development, on the other hand, will be important for boosting investment volumes for development projects throughout Europe, especially in disadvantaged regions and in favour of vulnerable populations. At the same time, closer Council of Europe-CEB working ties should be sought.

32.     The Joint CEB - Council of Europe Programme for Social Cohesion was set up following the Second Summit of Heads of State and Government of the Council of Europe which called for more active collaboration between the two institutions in favour of social cohesion. In September 1998, the Bank set aside € 1.5 million from the Selective Trust Account to be used for the joint activities over a period of two years. The joint programme was subsequently prolonged for another two years and its scope widened so as to include the identification of small-sized projects for possible financing by the Bank; feasibility and needs assessment studies; support measures for ongoing projects of the Bank; and project impact studies. Regrettably, however, the programme was discontinued in January 2004 following a decision of the CEB Administrative Council. A new framework of co-operation is being worked out.

33.     The programme had certain teething problems in the 1999-2001 period, as the two administrative structures involved had to learn to work together. However, in the 2002-2003 period, 14 projects worth € 700 000 were launched. This amounts to about a half of the total budget of the joint programme, with € 500 000 having actually been spent. If at a first sight these amounts appear tiny compared with the funds the Bank allocates for loans every year, one should also consider the value added of the joint programme. The money used went exclusively to covering contracts and field missions of expert consultants hired at very competitive rates – often below market costs[6], while the Council of Europe provided its own financial resources on all costs related to staff missions and work[7] in the framework of the joint programme.

34.     Three important feasibility studies, carried out at the request of the CEB and member countries, in social housing (Hungary), health (blood transfusion, Moldova) and child protection (Romania) were followed by loan requests for a total amount of over € 150 million: € 143 million for social housing in Hungary; € 3.3 million for care facilities for street children in Romania; and € 6 million for Moldova’s blood transfusion system. In addition, regional training seminars on blood transfusion were held in Croatia, Romania and Moldova for specialists from countries in south-eastern Europe, serving also the needs of research and development in the region.

35.     Moreover, project accompanying measures to CEB loans were implemented in Croatia (creation of a curriculum for a Master’s degree in public health) and Bulgaria (social assistance and vocational training for Roma populations). Several pre-feasibility studies were conducted in Slovenia on local development and in Bulgaria on small and medium-sized cultural enterprises. Regional reports on housing issues were prepared for presentation at the CEB-World Bank Ministerial Conference for South Eastern Europe held in Paris in 2003. More studies are underway in Albania (local development and coastal tourism), Romania (social development for Roma people), Bulgaria (mental health) and Slovenia (universal access for people with disabilities). As the reader will note, the programme concentrated essentially on projects in south-eastern Europe, thus responding to an institutional commitment by the CEB and the Council of Europe to contribute to social investment in this region under the Stability Pact.

36.     However imperfect, the joint programme – the first of this kind between the Council of Europe and the Bank – managed to establish an important practical link of high political and symbolical value, strengthening the external visibility of both institutions. Its constant concern to involve key representatives of various ministries along with those managing the financial resources well served the objective of investigating the potential for new loan requests from participating countries. As negotiations now look into ways of building a new co-operation format between the two institutions, consideration could be given to pilot project studies in those needy member states of the Council of Europe that do not yet belong to the CEB. This would be a good way to demonstrate the value and relevance of CEB and Council of Europe projects, leading to a speedier accession by these countries to the CEB. It would also serve as a practical contribution to the Third Council of Europe Summit foreseen for 2005.

5.       A PROPOSAL FOR THE “ETHICAL FINANCING” OF PROJECTS

37.     In May 2003 Mr Crema and others submitted a motion for a resolution entitled “Ethical financing of projects, especially via the Council of Europe Development Bank” (Doc. 9810). The motion argues that “ethical financing and socially responsible investment are now increasingly perceived to bring development on a human scale, enabling economic objectives to be reconciled with a strengthening of social cohesion through targeted investment”. It goes on to commend the CEB’s combined financial and social purpose and its successful experience in financing projects with a significant social dimension, in line with the values of the Council of Europe. Finally, the motion proposes that the Assembly study the possibility of setting up “through the Council of Europe’s Directorate General of Social Cohesion, in co-operation with the Council of Europe Development Bank, a European group of ethical finance institutions which will step up investments fostering social cohesion”.

38.     Your Rapporteur has carefully reflected on the proposal put forward by Mr Crema. Although it seems to him feasible, it is not necessarily practical. There is first the difficulty of convincing all member states of the Council of Europe become party to its Development Bank. Besides, an attempt to label some of the financing institutions – or some specific sub-group of financing projects by a given institution - as being ‘ethical’ could lead the public to assume that those not receiving this appellation were not. However, all institutions or projects are supposed to observe sound corporate behaviour, or ethics. What could, on the other hand, be suggested is for Council of Europe member states to provide fiscal incentives for financial institutions to finance more socially oriented projects even if these look less profitable from the purely financial point of view.

6.       FOLLOW-UP TO EARLIER ASSEMBLY TEXTS

39.     The Assembly has on many occasions over the 2001-2004 period referred to the CEB. Its texts in particular called for greater member state involvement in identifying, in co-operation with the Bank, projects to support vulnerable or marginalised groups and solidarity mechanisms.  

40.     Thus, the Assembly welcomed the co-operation between the EBRD and the CEB in funding reconstruction efforts in south-eastern Europe under the aegis of the Stability Pact (Resolutions 1287 (2002) and 1332 (2003)). It also encouraged its member states to make better use of the CEB with a view to:

• improving conditions for the return and integration of refugees and displaced persons in south-eastern Europe (Recommendations 1537 (2001), 1561 (2002), 1563 (2002), 1608 (2003) and 1588 (2003));

• assisting project development and implementation in favour of Roma communities (Recommendation 1557 (2002));

• enhancing care facilities for abandoned children (Recommendation 1601 (2003));

• insisting on full social inclusion of persons with disabilities (Recommendation 1592 (2003));

• devising strategies to foster the participation of women in micro-financing schemes (Resolution 1328 (2003));

• supporting aid and integration projects for young migrants, in particular victims of human trafficking (Recommendations 1526 (2001), 1596 (2003) and 1625 (2003)); and

• installing reception facilities for asylum seekers at European seaports and coastal areas (Recommendation 1645 (2004));

• strengthening co-operation with the International Organisation for Migration (Recommendation 1607 (2003)).

41.     We should recall that the Bank’s statute does not provide for the financing of projects in countries not belonging to it, unless CEB member states involve themselves directly in a project. Regrettably therefore Armenia, Azerbaijan and Georgia have not yet been in a position to take advantage of CEB support as the Assembly wished in its Recommendation 1570 (2002). Serbia and Montenegro, however, has just joined the CEB and will be able to seek financing (Recommendations 1569 (2002) and 1633 (2003)).

42.     In its last report on the activities of the Council of Europe Development Bank in favour of greater social cohesion in Europe (Doc. 9114; Recommendation 1524 (2001)), as well as in its Recommendation 1605 (2003), the Assembly pointed to the specific case of Moldova. This country, despite joining the CEB in 1998, had not been able to benefit from the Bank’s funding due to its outstanding contribution to the capital and reserves of the Bank. Your Rapporteur is pleased to report that Moldova has since settled its payment of dues, following which the CEB has approved its first loan for Moldova’s healthcare sector in the area of upgrades to blood transfusion system. A speedy preparation of this project was a result of close tripartite consultations involving the Moldovan authorities, the CEB and the Directorate General of Social Cohesion of the Council of Europe through the CEB-Council of Europe joint programme.

43.     We should also note that Moldova is deemed eligible to benefit from the Bank’s Selective Trust Account and would be well advised to submit additional project applications. According to the Committee of Ministers (Doc. 10036), Council of Europe technical assistance aimed at promoting social security instruments has enabled Moldova to signthe European convention on Social Security in May 2002 and the European Code of Social Security in September 2003.

44.     The Assembly has furthermore supported CEB co-financing for employment creation and preservation, especially through the development of SMEs, the conservation and rehabilitation of historical heritage (Resolution 1285 (2002)) and partnerships for development projects (Resolution 1365 (2004)).

7.       THE BANK’S RELATIONS WITH OTHER INSTITUTIONS

45.     Given the Bank’s limited size (in terms of financial and human resources) and the rule restricting its participation in funding to a maximum of 50% of the total cost of eligible projects, co-operation with other international organisations, especially IFIs (international financial institutions), allows the CEB to broaden its scope of action. At the same time, co-financing lowers the investment risk for each of the parties involved and capitalises on each participant’s comparative advantage.

46.     The Bank has indeed established close working links with the World Bank, the EBRD (European Bank for Reconstruction and Development), the EIB (European Investment Bank) and the NIB (Nordic Investment Bank). Since 1999 it has concluded bilateral and multilateral memoranda of understanding[8] with all these partners, covering both financial and non-financial aspects of practical co-operation. Under these agreements,

• two CEB-EBRD co-financed projects were approved in Poland (2000) and Croatia (2002) and two more (with regard to Hungary and Poland) identified for financing in 2004;

• the CEB’s partnership with the World Bank has since May 2000 led to the co-funding of nine projects (mostly in Romania, for a total of € 471 million, and in Turkey, worth € 424.8 million); one additional project is now being considered; moreover, in April 2003 the CEB and the World Bank jointly organised a Ministerial Conference on housing policies in the Balkans, under the auspices of the Stability Pact for South-Eastern Europe;

• the CEB and the Nordic Investment Bank co-financed, since January 2002,  four projects in Estonia, Latvia and Lithuania totalling over € 20 million;

• also, the CEB-EIB partnership has since 1995 produced joint funding for 14 projects in seven countries, essentially in environmental protection, reconstruction after natural disasters and urban infrastructure.

47.     Of special importance is a tripartite agreement of December 2000 with the European Commission and the Kreditanstalt fur Wiederaufbau (KfW). It has enabled these institutions to approve joint financing (worth € 207.5 million) for a number of projects in central and south-eastern Europe regarding SME development and municipal authorities. The agreement has been particularly useful for carrying out financing operations in countries set to join the European Union. A similar goal was pursued through a multilateral agreement of March 2000 involving the World Bank, the EBRD, the European Commission, the NIB and the Nordic Environment Finance Corporation (NEFCO).

48.     In June 2001 the CEB became a full partner in the Stability Pact for South-Eastern Europe. In that framework, the CEB has approved 36 projects totalling € 585 million and has paid out over € 5.3 million in humanitarian grants in favour of countries covered by the Pact. It allocated another € 22 million from the Selective Trust Account in the form of interest rate subsidies and financially supported Albania’s accession to the Bank in 1999 (€ 1.9 million).

49.     The CEB is also working with non-financial international organisations such as the United Nations High Commissioner for Refugees (UNHCR), the International Organisation for Migration (IOM), the United Nations Development Programme (UNDP) and the United Nations Children’s Fund (UNICEF). Memoranda of understanding with these institutions are being negotiated and may be signed in the near future.

• With the assistance from the UNHCR, the CEB approved two projects in Croatia (in 2000 and 2003 totalling € 69 million) aimed at facilitating the implementation of the state programmes for the return of refugees and displaced persons and related housing problems. Moreover, two donations (€ 2.3 million) were offered to the UNHCR in 1999 and 2001 to assist refugees in Kosovo and “the former Yugoslav Republic of Macedonia”.

• In 2002 the UNDP received a € 1 million donation from the CEB for emergency food aid and the reconstruction of damaged infrastructure and housing in “the former Yugoslav Republic of Macedonia”.

• In 2003, the CEB allocated a donation of € 450 000 for a project implemented by the UNICEF aimed at facilitating access to education for Roma children and young women. Other projects in the health sector, especially those concerning mother-and-child medical facilities, long-term care institutions for abandoned and/or disabled children and programmes for preventing child trafficking, will be jointly considered and hopefully funded through national and regional programmes.

• In line with Assembly Recommendation 1607 (2003), ongoing contacts with the IOM centre on the identification of joint pilot co-operation projects with regard to Poland, Slovakia, Czech Republic, Romania and Slovenia. The IOM is to provide expertise for setting up and monitoring projects locally, while the CEB would provide financing.

50.     The Rapporteur welcomes the CEB’s strengthening collaboration with international organisations not least since it may lead to an expanding project portfolio in the less advanced transition countries. The Rapporteur in this context recalls the various Assembly Resolutions and Recommendations evoked in the previous chapter and urges the countries concerned to activate projects that could benefit from CEB funding.

8.       CONCLUSIONS AND RECOMMENDATIONS

51.     With own assets of € 4.4 billion, the CEB is a relatively small institution on the European scene. Other European development banks, such as the EIB and EBRD, have a much larger capital base. However, the currently nearly € 10 billion in outstanding loans issued by the CEB in reality correspond to about € 25 billion in social investment, which indicates a significant multiplier effect of the Bank’s activities. True, some observers may be more impressed by hundred kilometres of highway in central or eastern Europe than by ten social housing units, but its social vocation has compelled the CEB to follow a course which commendably sets it apart from many other financial institutions.

52.          The CEB is now close to the ceiling of €11 billion in funds it can allocate without compromising its so far exemplary compliance with sound banking principles. Any further increase in financing volume would require more own capital. The accession to the Bank of additional countries – especially Austria, Russian Federation and the United Kingdom – would be highly important and would empower the CEB to do even more in the countries of central, eastern and south-eastern Europe where social needs are the most pronounced.

53.     At the same time, a more extensive employment of the Selective Trust Account would permit the generation of more projects in central, eastern and south-easternEurope. This would also allow for a further redistribution of the CEB’s investment portfolio toward a fifty-fifty proportion of loans approved as between countries rated higher on international lending markets, essentially the wealthier countries, toward those rated lower, in practice the poorer countries. This, the Rapporteur is convinced, could be achieved without jeopardising the Bank’s otherwise commendable effort to preserve its top ‘AAA’ credit rating. (Indeed, at present two thirds of loans outstanding are in regard of only five countries - Spain, Germany, France, Italy and Greece.) Consideration should also be given to the possible financing of pilot projects in non-member countries, as a sign of the Bank’s planning for its and for Europe’s future.

54.     Because the Bank has a relatively small staff in order to keep the operating costs down, its co-operation with other institutions, including the Council of Europe, is particularly important in the area of project preparation. The Rapporteur believes that the Bank should have more staff working for project preparation and evaluation, while also making better use of Council of Europe capabilities and expert networks through a joint undertaking whose exact nature remains to be determined.

Appendix

Table 1: Key figures on CEB activities, in million euros

	2000	2001	2002	2003
Loans disbursed during the year	1855	1749	1537	1589
Projects approved during the year of them in transition countries	1888 256	1664 432	1605 696(-200*)	2149 526
Loans disbursed since inception	15 428	17 177	18 714	20 303
Loans outstanding	8442	8630	9350	9903
Own assets (after allocation of results)	2466	3962	4254	4358
Subscribed capital (as at 31 December)	1401	3004	3231	3249
Paid-in capital (as at 31 December)	157	337	362	363
General reserve (as at 31 December)	829	728	789	877
Profit	95	88.3	95.2	86.9
Selective Trust Account	55	58.3	63.5	64.4

*due to a project cancelled

Table 2: CEB projects approved by country (2000-2003), in thousand euros

Country	2000, amount and %		2001, amount and %		2002, amount and %		2003, amount and %
Albania	-	-	6 000	0.4	-	-	-	-
Belgium	120 000	6.4	-	-	-	-	-	-
Bulgaria	4 000	0.2	5 000	0.3	15 000	0.9	20 000	0.9
Croatia	67 000	3.5	9 000	0.6	2 876	0.2	38 632	1.8
Cyprus	-	-	73 000	4.4	100 985	6.3	200 000	9.3
Czech Rep.	1 000	0.05	-	-	-	-	-	-
Denmark	-	-	-	-	100 000	6.2	-	-
Estonia	10 000	0.5	-	-	1 000	0.1	150*	…
Finland	150 000	8	250 000	15	-	-	50 000	2.3
France	222 000	11.8	200 000	12	250 000	15.6	50 000	2.3
Germany	660 000	35	215 000	12.9	75 000	4.7	145 000�	6.7
Greece	4 000	0.2	-	-	-	-	-	-
Hungary	50 000	2.7	60 000	3.6	163 413	10.2	-	-
Iceland	-	-	-	-	26 600	1.7	-	-
Italy	20 000	1.1	109 000	6.6	300 000	18.7	600 000�	27.9
Latvia	-	-	19 000	1.1	-	-	2 000	0.1
Lithuania	-	-	3 000	0.2	1 500	0.1	6 292	0.3
Malta	-	-	-	-	-	-	152 182	7.1
Moldova	-	-	-	-	-	-	6 000	0.3
Norway	-	-	123 000	7.4	-	-	-	-
Poland	45 000	2.4	166 000	10	194 515	12.1	110 000	5.1
Portugal	6 000	0.3	50 000	3	100 000	6.2	100 000	4.8
Romania	10 000	0.5	71 000	4.3	40 775	2.5	140 450	6.6
San Marino	-	-	-	-	-	-	-	-
Slovakia	8 000	0.4	3 000	0.2	1 534	0.1	4 859	0.2
Slovenia	2 000	0.1	14 000	0.9	-	-	-	-
Spain	329 000	17.4	48 000	2.9	56 420	3.5	214 852	10.0
Sweden	58 000	3.1	-	-	-	-	108 257	5.0
“the former Yugoslav Republic of Macedonia”	-	-	-	-	-	-	US$872*	…
Turkey	122 000	6.5	240 000	14.4	175 400	10.9	200 000	9.3
Total	1 888 000	100	1 664 000	100	1 605 017	100	2 148 524	100

* Grants

� including € 77.5 million for the final benefit of transition countries

� including € 120 million for the final benefit of transition countries

Table 3: CEB projects approved by sector (2000-2003), in million euros

Sector	2001, amount and %		2002, amount and %		2003, amount and %
Traditional priorities
- aid to refugees and migrants	-	-	-	-	38.6	1.8
- aid to regions affected by natural disasters	269	16.2	320	19.9	260	12.1
Sub-total	269	16.2	320	19.9	298.6	13.9
New priority
- Job creation in SMEs and vocational training	42	2.5	142.5	8.9	422.5	19.7
- Social housing	781	47	563.7	35.1	55.4	2.6
- Health	128	7.7	42.9	2.7	483.6	22.5
- Education	187	11.3	73.1	4.6	507	23.6
- Aid to disadvantaged urban areas	9	0.5	52.5	3.3	147*	6.8
Sub-total	1 147	69	874.7	54.6	1 615.5	75.2
Other activities
- Protection of the environment	97	5.8	208.5	13	66.4	3.1
- Rural modernisation	133	8	186.8	11.6	n/a	n/a
- Protection of historic heritage	16	0.9	15	0.9	168	7.8
Sub-total	246	14.7	410.3	25.5	234.4	10.9
Total	1 664	100	1 605	100	2 149	100

* including funds allocated for rural modernisation

Figure 1: CEB loan operations in the transition countries, in million euros

Source: The CEB

 

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Reporting committee: Committee on Economic Affairs and Development.

Reference to committee: Standing Mandate

Draft recommendation 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

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[1] Albania, Belgium, Bosnia and Herzegovina,Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Holy See, Hungary, Iceland, Italy, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Moldova, Netherlands, Norway, Poland, Portugal, Romania, San Marino, Slovenia, Slovak Republic, Spain, Sweden, Switzerland, Serbia and Montenegro, “the former Yugoslav Republic of Macedonia” and Turkey.

[2] The CEB normally accepts guarantees provided by the member state government, local authority or a first class financial institution.

[3] For a complete set of eligibility criteria, the processing of loan applications and the monitoring of project implementation see the CEB Resolution 1424 (1997) Revised 4.

[4] The capital increase, approved by the member states in 1999, came into effect in March 2001 and was completed in April 2002, bringing CEB’s own funds from 2.5 to 4.25 billion euros. In the 1998-2000 period eight countries from central and eastern Europe joined the Bank.

[5]The Irish Government decided to join the CEB in April 2002.

[6] The average cost for each activity was in the range of €20 000-40 000 and the average project cycle was 3-5 months from the moment of hiring an expert to the delivery of final report.

[7] On average, ten administrators in different fields of expertise were involved in co-ordination and ad hoc technical support for the activities under the joint programme.

[8] Except for the EIB with which co-operation is based on an operational, non-formal footing.