European Bank for Reconstruction and Development - achievements, activities and priorities

11 June 1993

Doc. 6861

1403-3/6/93-2-E

REPORT

on the European Bank for Reconstruction and Development:

achievements, activities and priorities

(Rapporteur: Mr SCHWIMMER,

Austria, Group of the European People's Party)

Summary

The Assembly reports on the activities of the European Bank for Reconstruction and Development (EBRD). It welcomes the complementary missions of the Council of Europe and the Bank in fostering democracy and development. The Agreement of Co-operation between the two organisations concluded in April 1992 is an expression of this, as is the arrangement between the Assembly and the Bank, giving the Assembly a significant role in carrying out its supervisory parliamentary function.

The Bank must now resolutely embark on its main task — that of fostering the development of the private sector in the transition economies in a responsible way — thus ensuring good use of the public funds with which it is entrusted. The Assembly urges the Bank to observe strict standards of cost-effectiveness in its internal administration, to abstain from conspicuous forms of representation, and to establish tighter budget controls and auditing over all its operations.

I. Draft resolution

1. The Assembly welcomes the creation of the European Bank for Reconstruction and Development (EBRD), which has as its purpose to foster the democratic and economic transition process in the countries of central and eastern Europe, and to promote private and entrepreneurial initiative.

2. The Assembly welcomes the complementary functions of the Council of Europe and in particular the Bank's statutory commitment to promoting democracy and human rights on the one hand, and balanced social and economic development on the other, and calls on both institutions to cooperate closely, wherever appropriate, notably through joint projects.

3. In this connection, the Assembly welcomes the Agreement of Co-operation between the Council of Europe and the EBRD, signed on 14 April 1992, and in particular the arrangement between the Assembly and the Bank providing, inter alia, for annual Assembly debates on the activities of the Bank, with the participation of its President, and giving the Assembly a significant role in carrying out its parliamentary supervisory function.

4. The Bank's statutory commitment to private sector development in central and eastern Europe should be respected. While projects directed toward the public sector,for instance in infrastructure improvement, can play an important role in building the foundation for market economy development, the Bank should focus increasingly on direct support for the private sector.

5. The Bank is still in the process of developing its activities and of gaining experience from its two years of activity (1991-93). It has committed more than 2 thousand million ecus for projects totalling approximately 8 thousand million ecus.

6. The Bank must now resolutely embark on its main task — that of fostering the development of the private sector in the transition economies in a responsible way — thus ensuring good use of the public funds with which it is entrusted.

7. Aware of the difficulties of promoting private enterprise and investment in a still fragile economic and political environment in most of the countries of operation, the Assembly encourages the Bank:

i. to try to shorten the often long lead-time between the planning and implementation of projects it helps finance and to increase disbursements in the countries of operation, while nevertheless observing due financial prudence;

ii. to combine strictly the lending and investment operations of the Bank with technical assistance programmes for the recipients (both the public and the private sector), with a view to ensuring the sound management of the public funds entrusted to it;

iii. to help establish, or strengthen, the financial infrastructure in the countries of operation, as well as the agreements or financial instruments foreseen for the restoration of trade in central and eastern Europe;

iv. to help the growth of private banking institutions in central and eastern Europe capable of lending to emerging small- and medium-sized enterprises in particular;

v. to assume a larger role in assisting the restructuring and privatisation of enterprises, thus providing a "demonstration effect" for other lenders, through various types of restructuring programmes, focussing on business entities of key importance for employment and economic recovery — and on a larger number of medium-sized enterprises which have the potential to survive if given proper assistance, and which have demonstrated an ability and will to change;

vi. to stimulate a more efficient use of energy by modernising the sectors concerned towards more sustainable production, to promote toward this end access by its countries of operation to environmentally-friendly technologies and to repair environmental dmage already incurred;

vii. to devise a more streamlined organisational structure of the Bank, more adapted to the diversity among its countries of operation, and better focused on their individual characteristics and needs.

8. The Assembly welcomes the setting up within the Bank of a Multilateral Nuclear Safety Fund, through which it would be possible to reduce the risks posed by unsafe nuclear plants, or, where necessary, to close them, and encourages all Council of Europe and EBRD member states to support this fund.

9. The Assembly calls on the governments of Council of Europe member states, and on the European Community, to do their utmost to enhance access to their markets for the exports of the new democracies in central and eastern Europe, also for their agricultural products. In this respect, the Assembly welcomes the Bank's proposal to establish a European multilateral trading framework that could eventually lead to a "continental common market" favouring stable economic development.

10. Bearing in mind that the integration of the Russian Federation into Europe is of vital importance for the long-term stability of the continent, the Assembly:

i. welcomes the creation within the Bank of an Enterprise Fund to provide capital for small- and medium-sized companies in that country, and hopes that similar funds can be established for all countries of operation;

ii. invites the Bank to go beyond investments in the energy and minerals sector, and foster investment also for the conversion from military to civilian production and for the agro-industrial sector;

iii. encourages the Bank to focus increasingly on regional development in the Russian Federation, and to concentrate on those regions where local authorities have shown the strongest commitment to market reform. The Bank should therefore contribute to the diversification of the industrial structure of selected cities or regions depending on only a few enterprises or industries.

11. The Assembly questions the need for the Bank to have such an expensive and prestigious headquarters. In order to ensure proper use of taxpayers' money and to avoid the creation of a negative public image prejudicial to the Bank's work and the very cause for which it was established, the Assembly urges the Bank to observe strict standards of cost-effectiveness in its internal administration, to abstain from conspicuous forms of representation, and to establish tighter budget controls and auditing of all its operations. The Assembly asks that the auditors' report following their investigation into allegedly extravagant expenditure by the Bank be made available to its Committee on Economic Affairs and Development.

II. Explanatory memorandum

by Mr SCHWIMMER

A. Introduction

1. The European Bank for Reconstruction and Development was created in May 1990 by thirty-nine countries and the European Community. All Council of Europe member states are members with the exception of San Marino. Council of Europe members Bulgaria, Hungary and Poland belong to the Bank. They, together with other central and east European countries, have been designated as "countries of operation". The present membership stands at fifty-four member countries, plus the European Community and the European Investment Bank (see Appendix I).

2. The Bank, which was originally proposed by France at the European Council of the European Community held in Strasbourg in December 1989, has as its broad aim to "... foster the transition towards open market-oriented economies and to promote private and entrepreneurial initiative in the central and east European countries committed to and applying the principles of multi-party democracy, pluralism and market economics" (Article 1 of the Agreement establishing the EBRD).

3. In September 1992 a special co-operation arrangement was concluded between the EBRD and the Parliamentary Assembly, within the framework of a more general agreement reached earlier between the Bank and the Council of Europe. More specifically, in a letter to the President of the Parliamentary Assembly of 7 September 1992, Mr Jacques Attali, President of EBRD, offered the following areas of co-operation:

—in vitations to the President of the Parliamentary Assembly and to the chairmen of its committees to attend the European Bank's annual assembly, starting in 1993, together with their participation in working seminars and meetings taking place at the same time;—

—pa rticipation of the European Bank's President in the special annual debate which the Parliamentary Assembly proposes to hold at the end of June or in early July on the Bank's activities, in the course of which the Bank's President will report on its activities and answer parliamentarians' questions;—

—th e hosting each year, at the European Bank's headquarters, of a session of the Parliamentary Assembly's Committee on Economic Affairs and Development, starting in 1993. In view of the need to prepare for the Parliamentary Assembly's special annual debate on the European Bank's activities, the date of this session will have to be decided later;—

—ex changes of information, particularly regarding the monitoring and assessment of the development of democracy in central and eastern Europe;—

—co -operation, including the participation of a European Bank representative as an associate member of delegations charged with observing elections in central and eastern Europe, starting with the Estonian elections on 20 September 1992.4.

4. In accordance with this agreement, the Committee on Economic Affairs and Development held a meeting in London at EBRD headquarters in early March 1993. Your Rapporteur was able to present a report outline at the committee's meeting in Malta in late March 1993, and to receive numerous suggestions from his colleagues.

B. The role of EBRD as regards economic assistance to the transition economies

1. The political mandate of the Bank

5. Although the EBRD shares many characteristics of other multilateral development banks, it also has certain unique features. One of them is a more explicit policy conditionality than in the case of the Bretton Woods institutions (the World Bank and the International Monetary Fund).

6. The Bank's expressly stated link between lending and investment operations on the one hand, and civil and political rights in the countries of operation on the other, reflects the objective that the long-term success of efforts to transform the former communist states into successful market economies to a significant degree hinges on their willingness and ability — both real and as perceived by potential investors — to safeguard civil and political rights in accordance with international standards. As the chief economist of the Bank, Mr John Flemming put it, the EBRD is very much "a creature of its time", in that its inception reflected the euphoria that greeted the downfall of the totalitarian regimes in Europe.

7. Because of this critical relation between the economic and the political aspects of the Bank's mission, a correct assessment of the progress in countries of operation towards pluralist democracy and a market-oriented economy becomes vital to the Bank's fulfilment of its mandate. This task has become both more important and more complicated by the rapid growth in the number of countries where the Bank is active. The question then arises how the latter's progress towards the above goals is to be adequately assessed by the Bank. In this connection, some members of the Committee on Economic Affairs and Development pointed to the virtual contradiction that the Bank's mandate contained provisions on democracy and human rights for its countries of operation, while some of its member states, for example Morocco, did not have a good record in this respect. This question might usefully be raised in the Assembly's debate on the Bank's activities.

8. The Bank's "country strategy papers" provide an annual assessment of political and economic progress in the countries of operation. In shaping its assessment of a country's progress in the above regards, the Bank co-operates with other institutions and intergovernmental organisations, in particular the Council of Europe. Admission to the Council of Europe and ratification of the European Convention on the Protection of Human Rights and Fundamental Freedoms are positive indications of a country's commitment to the Bank's aims.

2. Some basic characteristics

9. The EBRD offers a unique combination of merchant and development banking services to central and eastern Europe, including the former Soviet Union. Since the Bank's creation, the geopolitical landscape of the continent has changed completely: one member country, the German Democratic Republic, became part of another, the Federal Republic of Germany; two others, the Soviet Union and Czechoslovakia have ceased to exist and been replaced by successor republics; a third, Yugoslavia, has seen the break-up of its federal system and the recognition by many countries of several of its former constituent republics. And Albania has rejoined the ranks of European democracies. Overall, the number of countries of operation of the Bank is in rapid expansion, from eight originally to more than twenty today.

10. The capital base of the EBRD is comparatively small. It has an initial subscribed capital of 10 thousand million ecus provided by fifty-three countries, the European Community and the European Investment Bank (30% of the capital is to be paid progressively over the first four years of operation). The United States is the single largest shareholder, with 10% of total votes. The twelve members of the European Community (plus the European Community as such), hold a 51% vote majority, while central and east European members have slightly over 12%. (The European Community's weight within the Bank is reflected by the provision that no issue of capital shall have the effect of reducing the EC portion of the subscribed capital.)

11. Another particular feature is the requirement in the Bank's statute that at least 60% of loans and investments must be directed to the private sector, with the remaining 40% allowed to finance infrastructure or other public sector projects. (The 40% limit on lending to the public sector was imposed in particular by countries like the United States, the United Kingdom and Japan.) However, the Bank's first two years of experience have shown that the scarcity of private interlocutors in the transition economies sometimes makes it difficult to respect the 60/40 rule, so that the actual ratio now is something more similar to 50/50. (This ratio is at the board approval stage, which the board chose to interpret the statutory commitment of the Bank. At the disbursement stage, where 200 million ecus has been drawn, the private share is over 80%.)

12. In this regard, the experience of the EBRD may come to parallel that of the International Bank for Reconstruction and Development (IBRD). The IBRD started operations in 1946 with purposes that included the promotion of foreign investment, the growth of foreign trade and the adaptation of productive capacity in recipient countries. In practice, however, the activity of the IBRD has been directed towards infrastructure, as well as agricultural and capital intensive projects. It could be that the EBRD will face a similar development.

13. However, what sets the Bank apart from other lenders to central and eastern Europe is its statutory commitment to private sector development, and it should so remain. While projects directed toward the public sector can play an important role in building the foundation for market economy development, the Bank should focus increasingly on direct support for the private sector.

14. At any rate, as its President has insisted on various occasions, the EBRD is not "just another development bank" but also a "merchant bank" — and this description is justified at least in part, because unlike other multilateral development banks, much of the impact of the EBRD is likely to be through the mobilisation of resources other than its own.

15. Interest rates charged by the EBRD are only marginally under those of the market. Although its AAA-rating (the same as the World Bank and similar institutions) permits it to mobilise funds at preferential terms, the fact that 60% of its lending are supposed to go to the private sector (with a correspondingly increased risk of default) tends to stiffen lending conditions. Grace and repayment periods are normally three to five years and fifteen to twenty years, respectively. This has led some observers to ask whether a bank that is so "market-like" is needed at all, that is, in addition to already existing ordinary, commercial banks. The answer to that would be, however, that the EBRD will guaranteedly lend to central and eastern Europe, whereas nobody can ensure that ordinary banks would. And to the extent that the EBRD encourages other banks to cooperate in certain useful projects, it may set in motion a "virtuous circle" of development.

16. The Bank's principal objective is, then, to serve as a catalyst for capital flows to central and eastern Europe through co-financing, and to attract international banks to the region. The Bank usually finances up to 35% of the capitalisation (equity plus long-term debt) of a company or greenfield project; the remainder of the financing is to be provided by industrial investors and other financial institutions.

3. EBRD's fields of activity in countries of operation

a. Financing of projects

17. Since its start the EBRD Board has approved investment of more than 2 thousand million ecus of the Bank's own funds, and has raised an additional 7.9 thousand million ecus from third-party lenders and investors for eighty-eight projects. However, of this sum only about 207 million ecus have been disbursed. The projects supported in 1991-92 are given in Appendix II. (By comparison, the Social Development Fund of the Council of Europe, employing only about 70 people (as opposed to the EBRD's 700) actually disbursed, in 1991 and 1992, 1,825 thousand million ecus. It must, however, be recognised that the Social Development Fund has not yet started to disburse loans to central and eastern Europe.)

18. In 1991 the board of directors of the Bank adopted policies concerning its operations, finances and administration. These have defined the basic approach of the Bank towards fulfilling its mandate in the countries of operation — which is that the political effectiveness of the Bank will hinge on its ability to take prudent business risks, while maintaining the highest financial standing. It was agreed that the Bank would place emphasis on activities that support the creation of infrastructure necessary for private sector development. The Bank will also assume a central role in areas such as privatisation and restructuring, reform of the financial sector, encouraging foreign direct investment and environmental rehabilitation, and promoting the development of small and medium-sized enterprises.

i. Protection of the environment:

19. The Bank is directed by its statute to "promote in the full range of its activities environmentally sound and sustainable development". Even though the World Bank and other multilateral development institutions have become increasingly sensitised to the need to include environmental concerns in their project selections, they are not statutorily bound to do so. This is thus the first time that an international financial institution has been given, in its founding charter, a clear and forward-looking mandate on environmental protection and restoration.

20. In addition to certain regional projects (such as the Baltic Sea and the Danube Delta Environment Programme) the Bank has contributed to identifying, and managing, continent-wide projects of urgency such as a programme to eliminate the risks caused by unsafe nuclear plants in central and eastern Europe. This "energy safety" initiative has led to the creation of a Nuclear Safety Fund for Central and Eastern Europe, on the proposal of the Group of Seven industrialised nations.

21. The purpose of the Nuclear Safety Account, or Multilateral Fund for Nuclear Safety, is to finance, through grants, projects designed to implement immediate operational safety and technical safety improvement measures for nuclear reactors in central and eastern Europe, including the former Soviet Union. Specifically, the fund would provide grants for fire-protection equipment, safety valves, pumps for emergency core cooling systems, emergency display systems for operators, back-up diesel engines, and so forth. A strong emphasis will be put on provision of equipment.

22. In financing projects under the fund, priority will be given to those reactors that present a high level of risk which can be significantly reduced by short-term and cost-effective safety improvements, and which are necessary to ensure the continuing national electricity supply in the region, until the plants can eventually be shut down.

23. To date over 100 million ecus have been contributed by eleven countries and the Commission of the European Community to the fund. The first project, for improving safety conditions at the Kozloduy nuclear complex in Bulgaria, will be submitted by the Bank to the committee of donors in May 1993.

24. The Bank also intends to focus on promoting a more efficient use of energy (energy savings) by modernising the sectors concerned. It is encouraging energy price reform in of all its countries of operation, and is helping them achieve a diversified portfolio of primary energy supplies. Other plans under consideration are: projects to improve the efficiency of energy transfer within the electricity grid and natural gas networks (which at present suffer from large energy losses); promoting access by central and east European countries to western environment-friendly technologies for the energy sector, in particular clean-coal technology; and the linking of their power and gas networks with the west European systems. The Assembly is particularly well placed to provide political support for all these initiatives. Indeed, the Assembly's Recommendation 1209 (1993) on nuclear power plants in central and eastern Europe makes explicit mention of the role of the EBRD in this regard.

ii. Privatisation:

25. The nature of the Bank's involvement depends on how far the country concerned has proceeded along the path of privatisation. In countries where the process is well under way, the Bank is involved as a financier and core owner of newly privatised companies. (While the Bank cannot take a majority interest in a company, it seeks in certain situations a seat on the company's board to help guide the latter's development.) In countries just beginning to create a privatisation framework, the Bank is acting as an advisor to the government on the design and implementation of its plans. (The Bank and the World Bank Group are, for instance, jointly organising a large-scale privatisation advisory project for the Russian Federation. In December 1992 the Bank conducted its first major "model transaction" in Russia: the voucher auction of the Bolshevik Biscuit Factory.)

26. The Bank is also considering a method of developing its activities in industrial restructuring by running a pilot special restructuring programme, in association with local intermediaries, bilateral and multilateral aid programmes, and other international agencies. This programme is to focus on a large number of enterprises, in particular those of medium-size, that are currently in danger of deterioration and collapse but have the potential to survive given the proper assistance.

iii. Development of small and medium-sized enterprises:

27. The development of private initiative and entrepreneurial skills is critical to the success of transition economies. Building entrepreneurial capacity in these countries has been one of the main priorities of the Bank. Yet to date it has provided only limited loans in this domain. It is not feasible for the Bank to help a large number of small enterprises directly — as was pointed out at the committee's March 1993 meeting in London — but rather by assisting in the creation of an "enabling environment", for example through the establishment of appropriate financial institutions, training, business advisory services etc.

28. A paramount obstacle to investment in the small business sector is the lack of an effective network for distributing smaller amounts of capital, due to an antiquated or non-existent banking system in most of the transition economies. Moreover, investing in small business often carries greater risks than EBRD's national shareholders are willing to take. They maintain that an institution which was conceived as a gesture of support for the new democracies must avoid becoming a financial embarrassment. In this field the Bank faces difficult trade-offs between the need to promote private enterprise in a highly unstable economic and political environment, and the need to protect its capital.

29. As far as the Bank's lending policy is concerned, lessons ought to be drawn also from past experience with north-south development co-operation. One such lesson is that money should not be lent to hastily. There is, notably, a danger of excessive indebtedness as well as corruption and abuse on the part of recipient countries. Recipient governments must show "good governance", and loans should only be given in connection with technical assistance (short courses of financing and enterprise) for the recipient entrepreneurs, bank managers, public officials and decision-makers, and to countries which abide by the principles of the rule of law, the protection of human rights and responsible government. In addition, investment would not be effective if the right framework conditions were not established. Another problem is insufficient coordination among different aid programmes in favour of the central and east European countries.

30. Moreover, given the Bank's cost structure and organisation, it is not able to make loans of less than 5 million ecus (although this limit has in practice been interpreted flexibly). Significantly however, two of the latest EBRD initiatives are directed at helping the growth of private banking institutions in central and eastern Europe equipped to lend to emerging small- and medium-sized enterprises. (In April 1993 the Bank subscribed to 20% of the shares of the Ion Tiriac Bank, the leading privately-owned bank in Romania, and to a 28% stake in Poland's Wielkpolski Bank Kreditowy.)

31. To solve this dilemma in Russia, the Bank has recently proposed the creation of a small- and medium-sized enterprise fund, with a capitalisation of 300 million United States dollars, to provide venture capital for new companies. Moreover, the Bank has made an equity investment in the Russian Project Finance Bank, which provides assistance in consultancy services to Russian and foreign companies. The Project Finance Bank's principal aim is to become a model for business finance in Russia, and to establish appropriate financial services, especially for medium and small-sized enterprises. It is expected to be fully operational in about two years, with a capitalisation of about 100 million United States dollars. As some members of the Committee on Economic Affairs and Development emphasised, similar funds should also be established for other countries of operation with a similar need.

32. In April 1993 the Board approved the establishment of two special funds at the Bank, as part of the Baltic Investment Programme adopted on 4 March 1992 by the Nordic Ministers of Economy and Finance (Denmark, Finland, Iceland, Norway and Sweden). The primary objective of the programme is to promote private sector development through the support of small and medium-sized enterprises in Estonia, Latvia and Lithuania. The Bank administers two funds: one for technical cooperation which will be used for identification and preparation of investments and privatisation projects; and another for equity investment, loans and guarantees for investment projects. Other countries and multilateral institutions are invited to contribute to these funds.

iv. Infrastructure:

33. Recognising that improved transport industries and telecommunication services are essential for economic growth, the Bank supports the development of these sectors in the transition economies. Priority is given to projects which contribute to the integration of these countries into Europe and the world community, and to the protection of the environment. (Loans have already been given for telecommunication systems in Russia, Poland, Hungary and Romania. Discussions are under way on similar projects in Belarus, the Czech Republic, the Baltic states, and on technical assistance to Albania.)

b. Technical assistance programmes

34. In selected cases the Bank can offer financial advice, training and technical assistance based on funds provided for this purpose by certain governments and international institutions. Indeed, the first two years' experience of the Bank have highlighted the importance of its mandate for technical co-operation. It has become evident that technical co-operation is much needed for both the public and private sectors in the countries of operation. Generally speaking, these activities form the basis for future investments and sectoral reform programmes. Among the priorities for technical co-operation are: privatisation, enterprise restructuring, financial sector infrastructure, energy, environment, agriculture, legal reform and social sector development. In 1991-92 the Bank approved 260 projects with a total value of 79,3 million ecus, in more than twenty countries. (The geographical and sectoral distribution of the projects, as well as the Co-operation Fund Agreements, are listed in Appendix III.)

35. In the field of technical assistance programmes on legal co-operation and training in central and eastern Europe, the Agreement of Co-operation between the Council of Europe and the EBRD, signed on 14 April 1992, makes specific reference to the possibility of joint projects. The first tangible example of such cooperation is the Council of Europe's programme with the Russian Federation on the theme "Examination and promotion of the compatibility of Russian legislation with European standards". Officials of the Bank have reiterated the latter's interest in being associated with that programme and giving it financial support.

C. Issues of convergence between the Bank and the Assembly

36. As was pointed out at the committee's March 1993 meeting in London, the Assembly has an important supervisory function at parliamentary level with regard to the Bank (because it is funded with taxpayers' money), as it has in respect of other international organisations, such as OECD. In addition, the Bank relies on the Council of Europe, in particular in matters relating to human rights, democracy, social affairs and the rule of law.

37. In order to support the Bank in its task to help reconstruct and develop the transition economies, the committee sees the Assembly's role as one of stimulating a comprehensive, wide-ranging debate on pan-European economic issues, international trade and agriculture, environmental issues, education, as well as the institutional and legislative conditions for economic and social development, especially as far as they relate to democracy, human rights and social protection standards.

38. Moreover, the Parliamentary Assembly can serve as a useful forum to discuss questions of general importance to transition economies, such as privatisation, technology, entrepreneurship and development of small- and medium-sized enterprises, fiscal reform, and the creation of a "civil society".

39. The Council of Europe can be of assistance to the Bank in creating the right "framework conditions" for privatisation in particular, and economic transition in general. It is becoming increasingly clear that neither privatisation nor the sheer injection of capital will help unless the right "framework conditions" for reform have been established. These include laws governing business and the like, proper constitutions, and a functioning administration working according to clear rules and capable of ensuring some form of social security. The Council of Europe is already very active in this kind of assistance, and proper co-ordination with the Bank must be assured.

40. In the light of the committee's London meeting, your Rapporteur wishes to present some conclusions which could serve as a political input to the Assembly's debate on EBRD activities. He believes that the debate should help enunciate appropriate political guidelines for the Bank's work — particularly in view of its unique role a financial institution with a clear political vocation.

41. One conclusion was that what is missing today is that urgent sense of historical purpose that existed in Europe after the second world war. A long-term and coherent vision of the continent's future is urgently needed. The sense of drift has to be stopped. The transformation of central and eastern Europe which started in 1989 with such popular enthusiasm and optimism has lost much of its momentum over the last two years.

42. The "transformational recession" in these countries has worsened far beyond previous expectations and risks undermining both popular and political support for change. For instance, Hungary, one of the "reform model economies", has experienced, since 1989, a decline in output steeper than the industrial contraction during the 1929-32 great depression. Hungary is not alone — or even the most disadvantaged — as it tries to weather this storm. Economic decline, unemployment and high inflation are the unwelcome companions to practically all new democracies of Europe and Asia.

43. As several committee members stressed during the London meeting, persistent economic depression in the post-communist world could have repercussions of global proportions. Popular discontent could even endanger the newly acquired liberties in these countries. Although the transformation process cannot avoid destroying old structures, policy-makers in post-communist nations have to rise to the occasion, save their economies from economic underachievement and prevent a surge of political extremism.

44. Your Rapporteur believes it is still possible to steer a clear course for the future and ensure that the market economy and democracy will survive in the region. This does, however, mean that European integration can no longer ignore post-communist central and eastern Europe. Instead, it must move up to the top of the political agenda. We must address this problem on a multilateral basis, as time is running short. A framework must be put in place to stop the very real threat of a "new tribalism" and of a collapse of the market economy. A coherent strategy must be devised to arrest, and if possible reverse, the economic decline in the transition economies.

45. The transition process presents new issues every day: these include the need for legal and institutional benchmarks, against which to measure the progress and efficiency of reforms; the adaptation of state-run monopolies to the challenges of the competitive sector; and the phasing out of subsidies to uncompetitive sectors. These and other questions are germane to the wider problem of the integration of the economies concerned into one continental (or indeed world) market.

46. While public and private sector financial transfers from west to east have an important part to play in rebuilding post-communist Europe, they risk proving relatively futile unless accompanied by functioning trade. Only through trade can hard currency be earned to service debts, and prosperous economies have a chance of emerging in central and eastern Europe.

47. The potential for a reorientation of trade towards western Europe is there. A number of central and east European countries in the region have seen the share of their exports to the European Community rise from 20% to 25% in 1989 to over 50% today. (A study by the Centre for Economic Policy Research in September 1992 put the long-term potential for trade growth between the European Community and central and eastern Europe at around four times pre-1989 levels — to the clear advantage of both sides. To quote from the study: "The opening of the east could provide export opportunities to western economies of a scale and a speed unprecedented in modern history.")

48. As Mr Attali pointed out to the committee, there is an urgent need for a "Global European initiative" to arrest and reverse economic decline in central and eastern Europe. Two areas for action may be identified. The first is trade. Priority has to be given to the creation of markets for the exports of the new democracies, including agricultural products, by ensuring favourable trade access for them through such bodies as the EC, EFTA, and GATT. In particular, there is a need for a draft treaty eventually leading to a "continental common market". A framework should be negotiated for the progressive and asymmetrical (that is disproportionately favourable to central and eastern Europe) removal of all trade barriers between the EC and EFTA countries on the one hand, and those of central and eastern Europe on the other.

49. The difficulty in achieving this should not be underestimated, for it may in the short term lead to increased unemployment in a western Europe already "assailed" in the trade field by low-wage (and low-social protection) countries in East Asia, with the ensuing risks to political stability. And yet, as Mr Attali emphasised, the long-term prospect is a geographically close-knit market of up to 700 million people.

50. It is only through a comprehensive approach that it is possible to consider the overall effects of measures related to European trade. For instance, liberation of trade in agriculture is one of the main aims in post-communist central and eastern Europe. However, that risks aggravating overall European surplus production. Another example is steel, an essential source of income for a country like the Czech Republic, but which meets with considerable access difficulties in western Europe.

51. On the other hand, the solution to the problem of unemployment in western Europe could well be found in the long-term economic development of central and eastern Europe. A long-term growth programme could provide the west with markets and hence jobs, but for this to come about political vision is required. A continental common market would also have to include trade in all economic sectors and would most certainly make necessary a major reform of the Common Agricultural Policy of the European Community (not to speak of the national agricultural policies of many EFTA countries). Needless to say, increased agricultural output in central and eastern Europe will also require substantial land reform and privatisation of the farming sector in that region.

52. The second area could be the launching of a pan-European public works programme, intended to stimulate private sector development. It could concentrate on major transport infrastructure projects linking eastern and central Europe with western Europe, or the development of new trans-European oil pipelines, and other infrastructure projects facilitating growth in post-communist Europe. The latter point is obviously linked to the previously mentioned "60/40" dilemma. The Assembly, which is also the parliamentary forum of the European Conference of Ministers of Transport (ECMT), could lend support to EBRD initiatives in this field.

53. Private business and markets are still weak in most central and east European countries, and they are likely to suffer from low economic activity and high unemployment for some considerable time to come. Governments must therefore provide carefully designed recovery packages. These must not generate further inflation by injecting undue amounts of new money into the economy. Rather, they should focus on stimulating private investment, either directly or via previously referred to investments in vital infrastructure projects.

54. Specifically, the governments should: (a) accelerate privatisation of state-owned companies by providing attractive credits to investors; (b) ensure early settlement of property rights, including those pertaining to agricultural land and state-owned real estate; (c) develop state-owned credit guarantee institutions, thereby encouraging commercial banks to assume greater risks while providing long-term investment credit to entrepreneurs. All these issues relate to the wider problem of creating effective financial institutions in the countries of operation. As was pointed out during the committee's London meeting, technical expertise provided by the Bank — and a greater visibility in some central and east European countries — would be useful.

55. Another important conclusion of the London meeting was that the integration of Russia into the rest of Europe is of the utmost importance for the long-term stability of the continent. The Bank's President said that as regards that country he was optimistic and pessimistic at the same time. Russia has enormous natural and other resources, but it suffers, inter alia, from a breakdown in its political structure, a collapse of its administration, careless budgeting, and an over-sized army. The biggest short-term problem is probably the low value of the ruble: the country is on the brink of hyper- inflation. Whereas 1 United States dollar equalled 180 rubles at the beginning of 1992, it buys nearly 800 rubles today. The problem is illustrated by the fact that at the rate mentioned, the value of Russian economic output is only slightly higher than that of Singapore!)

56. A European-wide common market, institution-building, and a pan-European infrastructure project would not solve all the problems of post-communist Europe. Nevertheless, they would create economic momentum, a mechanism by which solutions to some of the most pressing problems can be found, and a vision for policy-makers. It could prove an antidote to new trade barriers, the further fragmentation of countries, and xenophobia. It would be of economic benefit to both "halves" of Europe. By promoting growth in the transition economies, it would reduce the prospects of large-scale migration from there (and a resulting "brain drain"), as well as capital flight (already occurring on a major scale in Russia). In a comparatively short period, it could double the size of the European market, and provide a strong economic stimulus to Europe as a whole. The EBRD and the Parliamentary Assembly must work together for the realisation of this goal.

D. Concluding remarks

57. Recent times have seen serious criticism in the media, and from certain EBRD members, against wasteful management practices of the Bank. The Bank, critics say, has spent over £200 million since its launch two years ago on decorating its London offices and meeting overhead costs, including the use of a private jet for its President. The President's travels in 1992 cost £800 000, or more than 8% of the Bank's total travel budget. This, critics continue, is double the amount it has so far dispersed in loans and investments in central and eastern Europe. Furthermore, £750 000 have been spent on replacing cheaper marble in the Bank's head office with Carrara marble. The Committee on Economic Affairs and Development has persistently criticised, during the adoption of the present report, what it perceives as wasteful management practices of the Bank. It will continue to call for strict standards of cost-effectiveness in the Bank's internal administration. It asked that the auditors' report following their investigation into allegedly extravagent expenditure by the Bank be made available to the committee.

58. The Bank informed the committee in London about the many projects still "in the pipeline", about the long "lead time" between identification of a potentially worthy project (itself a tricky business in central and eastern Europe) and the forwarding of loans that one can be reasonably sure of having repaid. Locating private sector investments in countries which often are politically unstable and have little in the way of accounting standards, robust legal frameworks or systems of property rights, is an immensely difficult task. However, preaching moderation for the countries of operation and doing the opposite as regards the Bank's internal administration is bound to be extremely damaging to its public image. Moreover, it is prejudicial to the Bank's work and the very cause for which it was established.

59. Your Rapporteur is convinced that it is the Assembly's duty as a parliamentary advisory forum for the EBRD to point to any shortcomings, especially those that involve the tax money of citizens, with a view to ensuring the best possible use of the public funds with which it is entrusted.

Membership in the Bank

April 1993

APPENDIX I

APPENDIX II

APPENDIX III

Reporting committee: Committee on Economic Affairs and Development.

Budgetary implications for the Assembly: none.

Reference to committee: standing mandate.

Draft resolution unanimously adopted by the committee on 1 June 1993.

Members of the committee: Mr Holtz (Chairman), Dame Peggy Fenner, Mr Lotz (Vice-Chairmen), MM. Aarts, Becker, Gudmundur Bjarnason, Bloetzer, Bonnici, Brach, Brennan, Colombo (Alternate: Ferrari,), Davis, Demiralp, Mrs Durrieu, MM. Efraimoglou, Fabra, Flückiger, Garcia Sanchez, Gasperoni, Gassner, Goerens, Mrs Haglund, MM. Hellström, Kempinaire, Kiliç, Kittelmann, Konecny, Koritzinsky (Alternate: Gundersen), Le Grand, Lewandowski, Mesoraca (Alternate: Covi), Paire, Pinto, Pirinski, Rehn (Alternate: Särkijärvi), Rodrigues, Rokofyllos, Schwimmer, Mrs von Teichman, MM. Thoft (Alternate: Gjellerod), Townend, Valleix, Mrs Verspaget, Mr Wingtens.

N.B. The names of those members present at the meeting are printed in italics.

Secretaries to the committee: MM. Torbiorn and Mezei.