Activities of the European Bank for Reconstruction and Development in 1995

Activities of the European Bank for Reconstruction and Development in 1995

Doc. 7564

24 May 1996

REPORT^[1]
Rapporteur: Mr BOG�R, Hungary, European Democratic Group)

Summary
    The European Bank for Reconstruction and Development was established in 1991 to foster the transition towards open market-oriented economies, and to promote private and entrepreneurial initiative in the central and east European countries. It now has 60 members. The reform of the Bank's internal structure, working methods and operations begun in 1994 under the presidency of Mr de Larosi�re has continued, permitting it to fulfil a useful role in assisting the transition in its 26 countries of operations.
    The Assembly, which acts as the Bank's parliamentary forum, welcomes the recent doubling of the Bank's capital from 10 to 20 billion ECUs, since this will permit it to expand operations. The report makes a number of proposals for further increasing the Bank's efficiency and for reducing costs, such as focusing on the less developed countries of operations and making its board of directors smaller and non-resident.
I. Draft resolution [link to adopted text]
1.    The Assembly, taking note of the report of its Committee on Economic Affairs and Development on the activities of the European Bank for Reconstruction and Development (EBRD) in 1995-1996, welcomes the continuous efforts made by the Bank to streamline its internal organisation and activities, and to contain administrative expenses.
2.    It believes, however, that administrative expenses may be further reduced by making the Bank's so far resident board of directors non-resident as well as smaller in size, thereby liberating resources for operational activities.
.    The Assembly, while aware of the greater commercial risks this may entail, encourages the Bank to pursue its policy of expanding its presence and lending activities in the least developed countries of operations.
4.    The Assembly welcomes the Bank's fulfilment of its statutory target of having 60% of its loans directed to the private sector. It nevertheless recalls the useful role which the Bank can play in also assisting public sector projects, for example in transport infrastructure, energy and environment protection, all of which can be important in promoting economic and social development.
5.    It supports the Bank's increasing role in the co-financing of projects together with other international institutions, and believes more specifically that there is scope for greater project co-financing with the Social Development Fund of the Council of Europe.
6.    The Assembly welcomes the Bank's increasing reliance on equity financing and co-operation with local credit institutions, especially in the less developed countries of operations - a policy which, under careful risk management, may reduce handling costs, encourage the development of a local banking culture and enhance the multiplier effect of resources directed toward the essential target of small and medium sized enterprises.
7.    The Assembly believes that the Bank has found a useful role among international financial institutions in assisting transition economies in their reform efforts. It therefore welcomes the doubling of the Bank's capital from 10 to 20 billion ECUs, decided at its annual meeting in Sofia in April 1996, which will permit the Bank to expand operations rather than being gradually reduced to being dependant on the repayments of existing loans.
8.    The Assembly asks the Bank to enhance operations aimed at promoting trade among the countries of operations, as well as with the rest of the world.
9.    It encourages the Bank to continue to pay due heed to its statutory obligation to promote democracy and human rights alongside economic and social development in its countries of operations, and to pursue its close co-operation with the Council of Europe towards this aim.
10.    The Assembly notes that the Bank intends to develop a "graduation policy" which will include the criteria for a cessation of the activities of the Bank in a country of operations when it has reached a certain stage of development, and hopes that there will be an opportunity for public discussion of the proposed criteria before they are adopted by the Bank.
11.    Finally, the Assembly calls on those of its member states or on those countries whose parliament has special guest status which are countries of operations of the Bank, to do everything in their power to facilitate the Bank's work and aims.
II. Explanatory Memorandum

by Mr BOG�R
Contents

I.     INTRODUCTION
II.     DEVELOPMENTS SINCE THE ASSEMBLY'S LAST DEBATE
    ON EBRD ACTIVITIES IN JUNE 1995
    i.     Reorganisation of the Bank
    ii.     Objectives of the Bank
    iii.    The Bank's Annual meeting in Sofia, April 1996. 'Graduation Policy'
    iv.     Macroeconomic indicators in Central and Eastern Europe
    v.     Investment and enterprise development
    vi.     Municipal and Environmental Infrastructure and Natural Resources
    vii.     Transport
    viii.     Agribusiness
III.     CONCLUDING REMARKS
    APPENDIX: Member States of the EBRD
I. Introduction
     The European Bank for Reconstruction and Development (EBRD) was set up in 1991. According to Article 1 of the agreement establishing the EBRD, its aim is to foster the transition towards open, market-oriented economies in central and eastern Europe as well as in the successor republics of the former Soviet Union, and to promote, via tailored investment strategies, private and entrepreneurial initiatives in countries committed to and applying fundamental principles of democracy and the market economy.
     The EBRD has sixty members, that is, 58 member countries and 2 institutions (the European Union and the European Investment Bank) (see Appendix). Its main areas of action are the promotion of the private sector, the restructuring of financial institutions, the strengthening of the legal system and the development of infrastructure necessary to support countries at different stages of their transition process.
     Transition also involves institutional changes, comprising not only the development of the private sector but also an evolution of the role of the state, in particular as concerns the economic, financial and legal institutions underpinning the market economy. Even though they require time and effort, a wise government is one which does not hinder or delay the transition process. Indeed, available data indicate that those governments which embarked on the process early and with determination have experienced more rapid growth sooner and at lower social and economic costs.
     At the initiative of the Committee on Economic Affairs and Development, a cooperation arrangement was concluded in September 1992 between the Parliamentary Assembly and the EBRD. The arrangement in particular foresees annual visits by the committee (together with representatives of certain other Assembly committees) to the Bank's headquarters, the participation of the Bank's President in an annual debate in the Assembly on EBRD activities and the exchange of information between the Assembly and the EBRD.
     Since the conclusion of this cooperation arrangement, the Assembly has given its support to the EBRD in the effort to assist the transition economies of central and eastern Europe, as part of its own role of stimulating a wide-ranging parliamentary exchange regarding European economic issues as well as an appropriate institutional and legislative framework.
     At its meeting in London at EBRD headquarters of 26 February 1996, the Committee on Economic Affairs and Development took up issues of general importance to the transition economies, such as the role of financial institutions, in very rewarding exchanges of views with the Bank's President, Mr Jacques de Larosi�re, and senior officials of the Bank. The Rapporteur also had the opportunity to conduct separate interviews with numerous officials of the Bank surrounding the meeting. He also participated, together with the Committee's Chairman, in the Bank's Annual meeting in Sofia in April 1996. This report reviews developments in the Bank since June 1995, and is in large part based on the knowledge gained at the London and Sofia meetings and in committee deliberations.
II. Development since the Assembly's last debate on EBRD activities in June 1995
    i.     Reorganisation of the Bank
    It will be recalled that, in its Resolution 1002 (1993), the Assembly called for a "more streamlined organisation structure of the Bank, more adapted to the diversity among its countries of operations, and better focused on their individual characteristics and needs". At the third annual meeting of the Bank, in April 1994 in St. Petersburg, Mr de Larosi�re described the reorganisation he was implementing as newly appointed President as "a very important moment for the EBRD". Already in June 1995 in its Resolution 1064 (1995), the Assembly felt in a position to "welcome the successful reorganisation of the bank, its increased focus on the private sector development and the improved geographical scope of its activities". It went on to express its appreciation of the "efforts undertaken ... to achieve greater efficiency through new expenditure policies and controls introduced to ensure good use and careful management of public funds."
    At the February 1996 meeting, Mr de Larosi�re informed the Committee that the reorganisation of the Bank was virtually complete. At operational level, and with the aim of enhancing the 'country focus' contained in the EBRD mandate, the staff units had been divided according to a "matrix-based" structure, which allows the EBRD's private sector activities to be reinforced and targeted to all the twenty-six countries of operations.
     This structure, which resembles that of private commercial banks, relies on "country teams" for each country of operation with responsibility for all activities, be it private banking, transport, telecommunications, energy or the environment. Each country team provides the EBRD's Board of Directors with an annual "strategic paper" containing all projects deemed viable in a given country. (The Board of Directors consists of 23 resident Directors, many of whom represent "constituencies", or groups of members. They are assisted by an Alternate Director and an Assistant to the Director.)
     An increasing number of staff are now recruited in the countries of operations and undergo temporary training at the London headquarters. This training programme, apart from its educational merits, permits the Bank to restrain operating costs and consolidate its local presence. At present, the EBRD has 151 staff in 17 resident offices, with two regional offices in Russia, thereby confirming its trend toward geographical diversification. Moreover, due to the overall high educational level in central and eastern Europe, this approach has not compromised either the quality of projects or their monitoring.
     Proposed projects must meet three criteria: they must reflect sound banking principles; they must have an impact on transition as measured by their effect on a country's progress to a market economy; and they must include "additionality", i.e. providing facilities not available on reasonable terms elsewhere, such as when it provides financing for a longer term than the private commercial market is ready to accept. Moreover, the programmes so far approved have taken into careful consideration both structural and macroeconomic effects, as well as the impact on labour markets.
     The EBRD has strengthened its financial position by reducing costs and increasing project and staff productivity. Administrative expenses have not grown in real terms since 1993, while the Bank's portfolio has more than doubled. Over 35% of the EBRD's income is now generated from its banking activities, a figure which is expected to increase in the coming years. This successful outcome was also favoured by a prudent and conservative provisioning policy designed to reflect the risks of operating in central and eastern Europe. In 1995 the Bank's operating profit reached 82.9 million ECUs, while net profits after provisions surged to 7.5 million ECUs, up from 1 million in 1994. Reflecting a cautious policy as it makes increasingly risky investments in the less developed among the transition economies, the Bank in 1995 raised its provision for loan losses to 75.4 million ECUs, from 23.9 million in 1994.
     In order to permit the EBRD to extend its range of projects also to the social sector, Mr de Larosi�re in reply to a question by the Committee said he would favour cooperation and cofinancing with the Social Development Fund of the Council of Europe, which has recently become active in central and eastern Europe, including through the approval of a loan for Bulgaria in November 1995.
     The Rapporteur is impressed with the rapid pace of the Bank's reorganisation, which no doubt will help further improve the quality and effectiveness of its operations.
ii.     Objectives of the Bank
     The EBRD's goals and strategic priorities, adopted in early 1994, can be summed up as:
    - a greater focus on private sector development, especially at local level;
    - greater presence in the field;
    - greater reliance on local financial intermediaries;
    - more emphasis on equity investment
    - efforts to maximise transition impact in countries of operations.
    The Rapporteur would welcome it if the Bank could have as an additional objective that of minimising transition "side-effects" in countries of operations.
     Since the creation of the Bank, 300 projects have been signed - worth some 6 billion ECUs, of which 2 billion in 1995 alone. The Board of Directors has already approved projects worth 8 billion ECUs, or 80% of the Bank' 10 billion ECU capital. This last figure, by charter, determines the maximum lending volume available to the Bank. The EBRD has also experienced a steady rise in commitments within the private sector, as well as in equity investments (which now account for 24% of the Bank's portfolio as against 12% in 1992).
     A further achievement is in the field of private capital mobilisation. The Bank has consolidated its role as a partner and a catalyst for other investors. In arranging project co-financing, the Bank helps the countries of operations increase their direct access to international capital markets. Thus, for every ECU the Bank committed in 1995, it mobilised an additional 2,6 ECU. In 1995, joint financing of US300 million was arranged by the EBRD, the International Finance Corporation (the private sector arm of the World Bank) and the Deutsche Bank. This was the largest non-sovereign borrowing ever in Hungary, and the first financing of this magnitude to be fully underwritten by the market.
     According to the Bank's statutes, at least 60% of its total lending should be directed to the development of the private sector. This requirement is known as the "portfolio ratio". In 1991 and 1992, this objective was not met, in large part because the private sectors of the economies in transition were still too small. However, since 1993, the Bank has met this ratio and in 1995 the Bank's lending to the private sector reached 63%.
     Creating a financial infrastructure is another important part of the Bank's mandate. The financial sector is central to the success of the transition because it ties the economy together: one firm with another firm, the present with the future. It enforces financial discipline, which is particularly critical in countries where the former command economy r�gimes more used local banks as "automatic cash dispensers".
     This sector also permits the Bank to foster the growth of the industrial tissue. By lending directly to local banks, the EBRD is able to encourage the consolidation and expansion of their operations, instill sound banking practices at management level and enforce indispensable auditing and accounting requirements. The local banks will in turn lend to small and medium-sized enterprises in urgent need of fresh working capital.
     The protection of the environment has been at the heart of the EBRD mandate. Since February 1995 the Board of Directors has approved a number of new projects in the field of municipal and environmental infrastructure, e.g. the Baku Water Rehabilitation (Azerbaijan), the Kaunas Environmental Improvement (Lithuania) and the Estonian Small Municipalities Environment.
     The EBRD has established an Energy Efficiency Unit, whose role is to identify and develop energy efficiency projects in central and eastern Europe and the former Soviet Union area. Typical programmes concern energy-saving investments in private companies as well as the establishment of energy service companies (ESCOs), providing energy-saving services for hospitals, schools and other public buildings. They also include district heating rehabilitation and end-user improvements, such as pipelines and boiler house retro-fitting, metering and consumption monitoring and control, as well as renewable energy projects.
     As regards the construction of nuclear plants, the Bank's involvement is dependent on a number of immutable requirements. They include the best safety standards available; the highest cost-efficiency; consistency with sound banking principles; co-financing by other donors; and the concomitant closure of existing plants.
     Apart from economic considerations, the Bank also relates its overall assessment of progress in countries of operations to that towards pluralist democracy, human rights and a market-oriented economy, as stated in Article 1 of the Bank's charter. The rapid growth in the number of countries where the Bank is present and the sweeping political changes across the region make this aspect at the same time more important, far-reaching and complicated.
     Remarkably enough, the EBRD has so far been able to adapt its work to the large differences prevailing in the twenty-six countries of operations, for instance as concerns the organisation and regulation of markets, the legal systems, the diverse environmental challenges and the diversity of financial institutions.
iii.    The Bank's Annual Meeting in Sofia, April 1996; "Graduation Policy"
    The Rapporteur participated, together with the Committee's Chairman, in the Annual Meeting of the EBRD held in Sofia, Bulgaria, in April 1996. Around 4,000 participants gathered, coming from the Bank's 60 members and beyond. The Bank's
requested capital increase, from 10 to 20 billion ECUs, was approved, 22.5% of which must be paid in by members over the next twelve years. The increase had become necessary due to the fact that around 80% of the previous capital base of 10 billion ECUs had been committed. Since lending could not go beyond that figure, the Bank would have reached the limit of its lending capacity by next year.
    Numerous country representatives said at the meeting that they were in favour of the capital increase considering the successful work of the Bank. Not only did the EBRD grant more projects than ever in 1995, but in addition the operational costs were reduced and profits increased. This success coincides with the economic recovery in the more advanced countries of operations, above all in central Europe, and with a certain recovery also in a number of the other countries of operations.
    However, the latest capital increase is likely to be the last one. In future the Bank will be obliged to finance any expansion through its own profits and repayment of capital.
    A keyword during the Sofia proceedings was 'graduation policy'. Since the Bank was set up to assist the transition of countries in central and eastern Europe it will become superfluous once that process has been completed. True, transition is not yet truly finished in any of the countries of operations although it is coming close in a few. The fact is, however, that the most advanced countries today have more and more access to private sources of financing. Since the EBRD follows a strict 'additionality' policy - that is, it is not to compete with private financial institutions but rather supplement them - it will ultimately leave the scene. In other words, the finality of the Bank is to be finite in time.
    The Agreement in Sofia was that the Bank should develop a 'graduation policy' which will include the criteria for a cessation of the activities of the Bank in a country of operations when it has reached a certain stage of development. The Rapporteur hopes, and so does the Committee on Economic Affairs and Development, that there will be an opportunity for public discussion of the proposed criteria before they are adopted by the Bank.
    Bosnia-Herzegovina was accepted as the 58th member country of the EBRD, bringing the number of members to 60 (ie including the European Union and the European Investment Bank). The number of countries of operations similarly rose from 25 to 26 through the Bosnian-Herzegovian accession.
    All in all, the Sofia meeting was a very rewarding experience, both for the Bank and its members and for the Rapporteur and the Committee Chairman, who were able through the proceedings and in numerous contacts to gain a clearer understanding of the Bank's situation.
iv.     Macroeconomic indicators in Central and Eastern Europe
     The east-central European states are all still to varying degrees undergoing transformation from communism to capitalism. Whether the end result will in all cases be democratic government and a market economy can still not be ascertained with certainty, but what is clear is that substantial progress has been made by many countries and that medium-term prospects are on the whole encouraging. Although the transformation process is incomplete, the 1995 EBRD Transition Report provides a good basis for judging what has been accomplished and what remains to be done.
     After a demanding adjustment process, the countries that were the first to undertake market reform are beginning to reap the benefits. Meanwhile, countries that initiated reform and stabilisation only in the past year or two, such as Ukraine, Belarus and Moldova, are still waiting for positive growth to help generate broad public support for continued reform. In these countries patience, perseverance and external support will be required for the full potential of market reforms to be realised.
     While the region-wide recession that began prior to the collapse of communism has not yet ended, there are numerous promising signs. Poland, the Czech Republic, Hungary, Slovenia, Romania, Slovakia and the Baltic countries are pursuing reform and improving their economic situation. In 1995, these countries achieved a second consecutive year of growth as measured in real GDP. (Poland, Estonia and Slovenia grew by 6%.)
     All countries in eastern and central Europe, as well as the Baltic states, have experienced a sharp decline in inflation. As shown in 1995 EBRD Transition Report, the Czech Republic, Hungary, Poland, Slovakia and Slovenia in 1993 and 1994 managed a marked reduction in inflation. The Czech Republic, for instance, brought inflation down from 18% to 10%; Slovakia from 25% to 12%. These encouraging results reflect the fact that reform strategies based on the development of market forces and private markets favour more rapid growth and employment.
     The region as a whole offers strong potential for medium-term growth. It has an overall educated labour force which is gradually learning the ways of the market. It is open to foreign trade, has competitive wage levels and increasing macro-economic stability. For the past twenty years or so these factors have underpinned high growth in South-East Asia. They can do the same in central and eastern Europe.
     Gradually improving fiscal and monetary control and advancing market reform will help ensure that available savings are channelled into productive areas. The ratio of investment to GDP is about 20% in much of the central and eastern Europe and the Commonwealth of Independent States. This is close to the level in developed economies, though substantially less than in South-East Asia.
     However, central and eastern Europe and the Commonwealth of Independent States may well need to invest less than the Asian countries to attain similar growth. This is because they have a vast supply of highly-skilled labour and an under-utilised production capacity which can be employed with increasing efficiency in the years ahead even without a major increase in investment.
     At the same time, there is a good chance that the ratio of investment to GDP will rise in the years to come. Strong fixed investment growth has been recorded in 1995, for instance in Poland and the Czech Republic. It is worth noting that investment in some of the most successful East Asian economies remained below or close to 20% of GDP during the initial part of their high-growth era. The famous Asian investment ratios of 35-40% were seen only several years later. A similar pattern may be expected in eastern Europe.
     The 1995 EBRD Report sees one key to economic success as lying in greater economic and regulatory stability. Further macro-economic stability in particular will permit governments as well as private entities in the region to entice foreign investors. Although there is scope for foreign direct investment to grow, experience shows that the bulk of investment must be financed from domestic savings in order to ensure sustainable growth.
v.     Investment and enterprise development
     The EBRD provides foreign capital, helps transfer necessary skills to a region, and stimulates domestic saving by raising the average return on investment. Both industrial and infrastructure projects contribute to this state of affairs. The provision of infrastructure services is a prerequisite for dynamic private sector development. Services like water, power, transport and telecommunications are critical inputs for almost any production activity, and removing infrastructure bottlenecks can stimulate enterprise development. Major infrastructure investments such as the Hungarian Telecommunications project promote more balanced regional development by upgrading the quality of the service and permitting linkages to foreign business partners.
     As regards transport, the Belarus Highway Improvement project, aimed at repairing the Belarus portion of the M1/E30 highway connecting Moscow, Minsk, Warsaw with western Europe has reduced vehicle operating costs and introduced better safety standards. It has also improved domestic transport systems, essential for small and medium-sized enterprises operating countrywide.
     Investment projects that contribute particularly to the transition process usually are not given priority by the private sector. Private investors normally do not incorporate the contribution a given investment project may make to the advancement of transition in their profit calculations. They will only invest if sufficient financial returns are likely to be received through the opportunities created by the new market environment.
     The EBRD also aims, through its financial sector projects, to improve the efficiency with which domestic savings are allocated to productive areas. Financial markets play a key role in creating a competitive private sector, strengthening the overall efficiency of the economy and serving as a catalyst for the market system as a whole.
     At first, financial sector reforms seek to establish a constructive and continuous bank-enterprise relationship, essential for facilitating the growth of the fledging private sector. Then, enhanced banking skills will improve the capacity of banks to monitor loans effectively and the access to credit by emerging enterprises.
     The EBRD is better equipped to meet these objectives as local governments move forward with the transition. There can be little doubt that rapid development of the untapped potential in central and eastern Europe and the CIS countries will continue for years to come. Central European countries are already well advanced in the transition process, whereas some CIS countries have further to go.
vi.     Municipal and Environmental Infrastructure and Natural Resources
     In August 1995, the EBRD created a new sector team within its Banking Department dealing with municipal and environmental infrastructure. It is responsible for preparing and implementing investments in environmental infrastructure and services, mainly for municipal authorities which are emerging as an important client group for the Bank. Moreover, this team aims to develop the creditworthiness of municipal entities, thus reducing the need for sovereign guarantees.
     It promotes decentralisation of the provision of services, involvement of the private sector in the supply of public services, corporatisation of municipal utilities, cost recovery through user-charges and economic efficiency in resource allocation. The team uses an
array of instruments, including municipal credit facilities, environment funds and private multi-project financing.
     Most projects developed by the EBRD to date have dealt with water supply, sewerage and waste-water treatment, sanitation, solid-waste management and district heating. Such provision of basic public infrastructure and services is essential for the economic transition process in the countries of eastern Europe, the Baltic states and the CIS countries.
     Poor quality and under-supply of municipal services limit the productivity of industries and hinder the emergence of viable small and medium-sized enterprises. Improved services will help foster much-needed public support for economic reform, as citizens will measure the benefits of the transition to a market economy partly in terms of improvement in the conditions of daily life.
     The EBRD sees private investment opportunities in the municipal services sector mainly in countries where the economic transition process is most advanced, where affordability constraints and resistance to economic pricing are the lowest, and where the political and legal framework is conducive to private sector involvement. Lower cost of capital development, productivity and efficiency gains, and improved investment appraisal and selection are other significant features of private sector participation.
     The EBRD sometimes engages in private sector operations to demonstrate their use to others. Initially, as municipal authorities are still unfamiliar with private financing, the Bank will play the role of adviser on appropriate projects for private sector involvement, prepare tender documentation, conduct the tender and subsequent concession awarding process and secure necessary government approvals and permits. In July 1995, the EBRD signed a 90 million dollar equity and loan facility with Lyonnaise des Eaux, a leading international municipal services company, to support its 300 million dollar investment in eastern Europe.
     The energy and natural resources sectors are critical to economic development, since they strengthen the fiscal base, generate foreign exchange and improve a country's creditworthiness.
     The EBRD's Natural Resources Group deals with oil, gas, mining and petrochemical projects. Its financing and investment portfolio currently amounts to over 800 million dollar and involves projects such as the West Siberian oil and gas fields rehabilitation and the Komi oil spill and pipeline rehabilitation (both co-financed with the World Bank), the Kubaka gold deposit with the financial assistance of a private company and, in Uzbekistan, the processing of mineralised mass from lower grade stockpiled ore by applying advanced technology in cooperation with 13 commercial banks .
vii.     Transport
     The transport sector accounts for approximately 20% of the Bank's portfolio. The Bank has committed over 1 billion ECU in total, making it one of the largest investors in the region's transport systems. Some 42% of the financial resources have been allocated to the private sector. Within the transport sector, 38% of resources have gone to roads, including motorways, with 17% each to railways and the automotive sector.
     Transport projects are underway in 16 of the Bank's 26 countries of operations, ranging from Armenia to Ukraine. The largest beneficiary is Hungary, with 20% of overall transport sector commitments.
     The Bank has financed three transport projects in Hungary: the "MO Motorway Project", a sovereign project co-financed with the World Bank; the Budapest Public Transport project; and the M1/M15 motorway concession, the first "Build-Operate-Transfer" concession in the region. The Bank undertakes this type of project financing to encourage some 'bankable', privately financed operations with the aim of reducing political risk during the early project development phase, thus helping governments appreciate fully the implications of private sector involvement. Moreover, its role can be especially important in ensuring that the agreed arrangements will support financial viability as well as reasonably balance the interests of political authorities, consumers and private sector parties.
     Possible future transport projects in Hungary will include motorway concessions, a railway restructuring project in cooperation with the World Bank, the European Investment Bank and the European Union, and an intermodal logistics terminal.
     In the short term, the EBRD has a substantial pipeline of aviation, railway, road, urban transport and maritime projects. In the medium term, it will be seeking to increase further its financing of private sector transport projects, in line with its statutory mandate.
     However, the EBRD will continue sovereign lending for transport projects where there is clear 'additionality', for instance, transport infrastructure in countries at an early stage of transition, complex restructuring projects concerning railways and state contributions to private-public joint ventures.
     Harmonisation of transport policies will be a gradual process, as central European countries move towards full membership of the European Union. The EBRD will contribute to this process through its project-related activities, in particular in the areas of technical standards, financial and economic viability, environmental assessment and procurement.
viii.     Agribusiness
     Agriculture and related industries form an important part of the economies of eastern Europe and the former Soviet Union area. The share of agriculture in GDP ranges from 6% in the Czech Republic to 56% in Albania, with the average in EBRD countries of operations standing at some 20%. Agricultural productivity levels in the region are generally lower than in the industrial sector, and agriculture's share of total employment hovers around 25%.
     Traditionally, the agricultural sector was dominated by monolithic state concerns controlling input supply, extension services, processing and distribution. The dismantling of the command economy has resulted in the virtual collapse of this whole, leaving a vacuum as regards input supply, distribution and sales. This has contributed to a "liquidity squeeze" among farmers further which undermine their ability to afford inputs and extension services.
     The EBRD's agribusiness operations started in this context. At present, Board-approved projects amount to 300 million ECUs, and commitments to 200 million ECUs.
Activities in this sector are structured around an inventory of products, each targeting specific food and drink sub-sectors and countries at different stages of transition.
     Agribusiness is particularly suitable for multi-project facilities, a new form of financial cooperation rendered necessary by the relatively small size of individual projects and the increasing involvement of larger local groups. The EBRD's first such facility, for up to 100 million dollars in equity financing, was with Group Danone to support their investment programme in the food and beverage industry in eastern Europe and the former Soviet Union area.
     Started in March 1995, this equity facility's aim was to finance, for a period of three years, small and medium-sized projects involving the acquisition and modernisation of existing facilities, and the construction of new ones in different sub-sectors of the food and beverage industry, such as dairy and biscuit businesses. The EBRD will provide up to 35% of total project costs alongside Danone and local partners.
     The "multi-project" facility approach enables the EBRD to benefit from Danone's track record in identifying, appraising and operating successful food and beverage projects worldwide. In return for the Bank's relatively prompt supply of equity capital, Danone provides its assessment of individual project viability, comprehensive due diligence and strong project operational support. The countries of operations also benefit from this type of arrangement, through shorter project preparation and approval procedures. In addition, it allows the Bank to expand significantly its support for the food sector in a cost-effective manner, while maintaining high credit quality.
     The impact of this sort of investment programmes on countries' transition can be significant. It can foster the development of privatised food and beverage facilities and act as a catalyst for the restructuring and modernisation of essential parts of the food chain, such as primary production, packaging and distribution. It can have a high demonstration effect, with the production of high quality food and beverages for the domestic market and the development of locally sourced raw materials.
III. Concluding remarks
     The EBRD President has implemented thorough reform in the way the EBRD is organised and operates. A more streamlined organisation and clearer objectives have successfully replaced financial laxity, not to say irregularities observed under his predecessor. This reorganisation process, which began to yield tangible and noteworthy results already in 1994, is likely to consolidate further the Bank's overall usefulness and effectiveness in assisting central and eastern countries. Over 35% of the Bank's income is now generated from its banking activities and this figure is set to increase in the coming years.
     Although the Bank's administrative expenses have not grown in real terms since 1993, its operational costs could be further reduced by introducing additional cost-saving measures as regards the budget of the Board. Provided that broad political support for the Bank can be maintained, the Rapporteur favours the ideas of a non-resident, as opposed to the present resident, Board and of a reduction in the number of its members. This would liberate financial resources for the Bank's operational activities.
     This proposal is in line with Mr de Larosi�re's request for a capital increase that would enable the Bank to meet the growing demand for its assistance. As has been mentioned, the Bank's Board of Directors has already approved projects equal to 80% of
the EBRD's capital of 10 billion ECUs which represents, by charter, its limit in terms of lending volume.
     During Mr de Larosi�re's tenure, the geographical scope of EBRD operations has expanded considerably, so that it is now present in all its countries of operations. The Bank is also reinforcing its presence in the region by recruiting personnel at local level and opening regional offices. This will improve further its ability to appraise and monitor the overall success of projects.
    The increase of the Bank's capital from 10 to 20 billion ECUs decided at its Annual Meeting in Sofia in April 1996 is most welcome, since it will allow it to expand operations in the less advanced countries of operations and since it avoids it being gradually reduced to being dependent on the repayment of existing loans.
    The 'graduation policy' also decided at Sofia is something which the Assembly must follow in the future. It signifies that activities of the Bank are to cease when a country of operations has reached a certain stage of development. The Rapporteur hopes there will be an opportunity for public discussion of the criteria of such a 'graduation policy' before they are adopted by the Bank.
     The EBRD also discharges a crucial function as a partner and a catalyst for domestic and foreign investors. By arranging the co-financing of projects, it may reach three results. Firstly, it helps the countries concerned increase their access to international capital markets. Secondly, the Bank reduces the political risk associated with many projects in the early stages of the transition process. Thirdly, it raises the likelihood that a project is financially viable and at the same time meets the interests of political authorities, consumers and private sector parties.
      Moreover, the Bank has increased its cooperation with private sponsors to prepare and appraise investment projects, obtain concession and management contracts, secure the necessary government approvals and permits, and establish the corporate and organisational arrangements for project implementation.
     While maintaining a prudent and conservative provisioning policy, the EBRD in 1995 registered a net profit of 7.5 million ECUs after provisions, increased net project disbursements by 72% and increased its portfolio of signed loans and equity investments by 2 billion ECUs. Furthermore, its co-financing operations, now amounting to 1.86 billion ECUs, rose by almost 50%, while its general administrative expenses of 136.8 million ECUs were significantly below the approved budget and only marginally above those of 1994 (134.8 million ECUs). Major cost-saving initiatives, such as the sub-letting of a floor of the London headquarters, are likely to continue under Mr de Larosi�re's stewardship.
     All in all, the Rapporteur believes that the Bank's strong financial management has helped it find a useful niche in the overall mission of rebuilding central and eastern Europe, and establish a relatively high-quality (although also high-risk) portfolio characterised by strict cost control. After five years of investment in eastern and central Europe and the CIS countries, the EBRD has achieved tangible results which can be seen and appreciated by all. It is with this general conclusion that the Rapporteur submits his report for the Assembly's consideration.

APPENDIX
Membership
Albania
Armenia
Australia
Austria
Azerbaijan
Belarus
Belgium
Bosnia-Herzegovina
Bulgaria
Canada
Croatia
Cyprus
Czech Republic
Denmark
Egypt
Estonia
Finland
Former Yugoslav Republic of Macedonia
France
Georgia
Germany
Greece
Hungary
Iceland
Ireland
Israel
Italy
Japan
Kazakhstan
Republic of Korea
Kyrgyzstan
Latvia
Liechtenstein
Lithuania
Luxembourg
Malta
Mexico
Moldova
Morocco
Netherlands
New Zealand
Norway
Poland
Portugal
Romania
Russian Federation
Slovak Republic
Slovenia
Spain
Sweden
Switzerland
Tajikistan
Turkey
Turkmenistan
Ukraine
United Kingdom
USA
Uzbekistan
European Union
European Investment Bank

Reporting committee: Committee on Economic Affairs and Development
Budget implications for the Assembly: none.
Reference to committee: Standing mandate
Draft resolution unanimously adopted by the committee on 26 April 1996.
Members of the committee: MM. Davis (Chairman), Pavlidis, Mrs Degn (Vice-Chairpersons), MM. Aloglu, Andreoli, B�rsony, Behrendt, Belyaev (Alternate: Oorzhak), Benetatos, Bilinski, Billing, Mrs Blattmann, MM. Bloetzer, Bog�r, Mrs Burbien�, MM. Buzatu, Caballero (Alternate: Ms Guirado), Mrs Calner, MM. Cerqueda Gispert, Coviello, Dokle, Mrs Durrieu, MM. Elo, Eyskens, Fenech, Dame Peggy Fenner, MM. Figel, Frey, Galv�o Lucas, Goop, Grimsson, Gusenbauer, Kamhi, Kirilov, Kirsteins (Alternate: Pantel�jevs), Kol�r, La Loggia, Latronico, Le Grand, Leers, Liapis, Malinowski, Masliukov (Alternate: Shuba), Mautner-Markhof, Merkushov, Minkov, Muravschi (Alternate: Jeleapov), Nov�k, Pahor, Pereira Coelho, Poppe, Puche, Radulescu Botica, Rippinger, Siebert, Telgmaa, Townend, Tribunovski, Tumanov, Valleix, Van der Maelen, Mrs Verspaget, MM. Wallace, Yaroshynsky.
N.B. The names of those members present at the meeting are printed in italics.
Secretaries to the committee: MM. Torbi�rn and Bertozzi.

[1] By the Committee on Economic Affairs and Development