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Doc. 9482
4 June 2002
The contribution of the European Bank for Reconstruction and Development (EBRD) to economic development in central and eastern Europe
Report
Committee on Economic Affairs and Development
Rapporteur: Mrs Mimi Kestelijn-Sierens, Belgium, Liberal, Democratic and Reformers’ Group
Summary
In the tenth year of its serving as a parliamentary forum for the London-based European Bank for Reconstruction and Development, the Assembly draws a generally positive picture of economic developments in the Bank’s 27 countries of operations and recognises its tangible contribution to this state of affairs.
The EBRD’s major activities in rapidly developing Russia are welcomed, as is its contribution to economic renewal in southeastern Europe under the Stability Pact. The report also supports the EBRD’s emphasis on democracy and good governance as the foundation for lasting development and welcomes its work in areas such as nuclear safety, energy efficiency, infrastructure, small businesses and greater intra-regional trade.
The Bank thus continues to have a mission in assisting especially the less advanced countries of operations in their economic transformation, including in sectors where private funds may not be readily forthcoming, such as infrastructure at regional and municipal level.
I. Draft resolution
Achievements and challenges ahead
1. The Assembly, acting as parliamentary forum of the European Bank for Reconstruction and Development, has taken note of the report prepared by its Committee on Economic Affairs and Development on the Bank’s activities. The Assembly’s annual debates on the EBRD’s contribution to economic development in central and eastern Europe – now in their tenth year – reflect an increasingly close relationship and a common concern to contribute to Europe’s economic and political integration.
2. The Assembly welcomes the progress made towards pluralist democracy, respect of human rights and the rule of law in the countries where the Bank operates but remains deeply concerned, in particular, at the slow pace of democratic change in the central Asian republics. Economic indicators are more encouraging. Thus prices and trade have been further liberalised in the region, the investment climate has improved, privatisation has proceeded apace in most countries and the share of the private sector in the economy is rising in some of the advanced transition countries to levels higher than in some countries in western Europe. The Assembly commends the Bank on its tangible contribution over a whole decade to producing this state of affairs and encourages it to do its utmost to ensure that these processes are continued.
3. However, major challenges remain, such as a widening income gap. In addition, organised crime and corruption, have in some countries reached such unacceptable levels as to hamper foreign investment and growth, apart from having overall negative consequences for the countries concerned and their populations. The Assembly urges the Bank to lay greater emphasis, where necessary, on corporate governance, transparency in public affairs, reform in the banking sector and in-depth structural reforms in the enterprise and financial markets.
4. The Assembly supports the Bank’s granting of loans also on a ‘non-sovereign’ basis to regions or local communities – that is, without the guarantee of the national government of a country – since this can make a useful contribution to regional development. The same holds for the Bank’s loans in local currencies and its large and steadily increasing lending to small and medium-sized enterprises (SMEs) via banks, especially in disadvantaged regions and rural areas and where such funding can help to improve the situation of women entrepreneurs in particular. Finally, the Bank’s efforts to diversify its services so as also to include non-bank financial institutions such as those offering insurance, pensions, leasing and mortgage are to be commended, as long as due prudence is observed, considering that such activities gain in importance along with economic development.
Countries of operations
5. The Assembly supports the Bank’s major efforts on behalf of southeastern Europe, in close cooperation with other financial institutions under the aegis of the Stability Pact. It sees such EBRD projects as the Trade Facilitation Programme, micro-financing credit lines and its ‘Turn Around Management’ as examples of a new down-to-earth strategy for the region and sees major opportunity in these fields for cooperation between the EBRD and the Council of Europe Development Bank.
6. The Assembly in this context, welcomes the recent enhanced spirit of cooperation shown by the countries in the region, and encourages them to go further, not least to facilitate future accession to the European Union. Efforts to combat organised crime and corruption and create a more positive investment climate should be given priority in this regard.
7. The EBRD’s resumption of major activities in Russia is particularly welcome, not least in view of that country’s pivotal position for stimulating economic development in the region as a whole. The Assembly hopes that the current programme of economic reform in Russia will permit an even larger EBRD funding presence in that country.
8. The Assembly shares the Bank’s concern over the state of the energy sector in many of the countries of operations and the need to enhance both output and efficiency of use in order to ensure overall economic growth, including in Russia and the Caspian Sea Region. It supports the Bank’s efforts to enhance nuclear safety and encourages it to shape an overall investment strategy for all its countries of operations and in close cooperation with them, on the understanding that such an undertaking presupposes a high degree of market opening in energy by the countries concerned.
9. The Assembly welcomes the Bank’s growing presence in the development of the private sector in countries in central Asia and encourages these countries to assist the Bank’s effort by opening up trade and investment with each other.
10. The Assembly notes with satisfaction the increased consultation between the Bank and the Assembly’s Committee on the Honouring of Obligations and Commitments by Member States of the Council of Europe (Monitoring Committee) on the state of democracy, human rights and the rule of law in its countries of operations. It also welcomes the Bank’s increased dialogue with non-governmental organisations. It fully supports the Bank’s decision to suspend projects in the public sector in Belarus and Turkmenistan due to the lack of preparedness of these two countries to respect the aforementioned values. It hopes that the Bank’s decision to hold its next annual meeting in Uzbekistan in 2003 will provide an opportunity to improve the situation in that country as regards democracy, human rights, the rule of law and the functioning of civil society.
11. Finally, the Assembly encourages the EBRD to start reflecting on its mission and hence its existence in the forthcoming decade, considering not only the completed transition to a market oriented economy on the part of some of its countries of operations, but also in view of the future enlargements of the European Union and the risk that the Bank may come to compete with ordinary commercial banking in the more advanced countries.
II. Explanatory Memorandum by the Rapporteur
Contents
I. INTRODUCTION: THE EBRD AND THE PARLIAMENTARY ASSEMBLY
II MOVING TRANSITION FORWARD - EBRD PERFORMANCE AND ACHIEVEMENTS
III CORE BUSINESS AND PRIORITY ACTIVITIES
IV TRANSITION REPORT 2001
Overall performance of the Bank’s countries of operations
The Energy Sector
V COUNTRIES OF OPERATIONS
Advanced Transition Countries
Early Intermediate Transition Countries
A. South-Eastern Europe and the Balkans
B. The EBRD and the Stability Pact for South-Eastern Europe
C. Central Asia
D. Russia
VI ANNUAL MEETING 2002
VII CONCLUDING REMARKS
* * * *
I. INTRODUCTION: THE EBRD AND THE PARLIAMENTARY ASSEMBLY
1. The European Bank for Reconstruction and Development (EBRD) was established in 1991. It operates in 27 countries in Central and Eastern Europe and the Commonwealth of Independent States (CIS). It is owned by 60 countries, the European Investment Bank and the European Community. Its mission is to foster the transition towards open market-oriented economies and to promote private and entrepreneurial initiative. Beneficiary countries have to abide by the principles of multiparty democracy, pluralism and market economics.
2. Through its investments it aims to strengthen financial institutions and legal systems and develop infrastructure needed to support the private sector. The Bank must apply sound banking and investment principles and promote environmentally sound and sustainable development. It seeks to structure its public and private sector projects with some specific conditionalities. These are required in order to maximise the transition impact of the Bank and the sustainability of the sectors involved. The conditionalities focus on, but are not limited to, corporate governance, privatisation or commercialisation, independent regulatory framework audited statements, or arms-length commercial and financial contractual arrangements.
3. The Bank tries to act as a catalyst for change. It encourages co-financing and foreign direct investment from the private and public sectors, helps to mobilise domestic capital, and engages in technical cooperation. It works in close cooperation with other international financial institutions and organisations such as the Council of Europe.
4. 2002 marks the 10th anniversary of our Parliamentary Assembly’s acting as the parliamentary forum of the EBRD. The partnership between the two institutions – as well as between the EBRD and the Council of Europe as such – is very close and mutually rewarding. The Assembly has provided the Bank with a tool to keep the wider public informed about its activities. The Assembly’s annual debates on EBRD activities – and the intensive work at Committee level leading up to it – provide a forum to discuss and identify priorities in our continent’s efforts to integrate economically and assist the countries of operations complete the transition process. The members of the Parliamentary Assembly are legitimate intermediaries towards, and representatives of, the citizens and taxpayers of those donor and recipient countries that belong to the Council of Europe and the debates serve as a forum where the Bank can maintain a dialogue with them.
5. Prior to engaging in a more detailed discussion of the Bank’s activities - and one in which she will of necessity have to concentrate on a limited number of the most salient issues - the Rapporteur wishes to thank the Bank’s President, M Lemierre, and other senior officials of the Bank, for their valuable contributions during the Committee’s plenary meeting in London in January 2002 and her own bilateral talks on this occasion. She also attended the EBRD’s Annual Meeting in Bucharest in May 2002, the results of which will be raised later on in this report.
II MOVING TRANSITION FORWARD - EBRD PERFORMANCE AND ACHIEVEMENTS
6. The Bank’s own spending catalysed co-investment from commercial banks, strategic investors and from its partners in national governments and other organisations. All together, those co-partners amplified the impact of the Bank’s own financing by investing two euros for every euro which the bank invested. The cumulative business volume since the founding of the bank in 1991 stood at 20.2 billion in 2001, for total project value of 67.8 billion. Eleven years after its creation, the EBRD has become a major investor in the region. As of the end of 2001, the Bank had authorised capital of €20 billion paid-in capital and reserves of €5.7 billion. In 2001 it signed a record €3.66 billion of new funding in 102 projects across all of the 27 counties of operations.
7. Strong operations were matched by a strong balance sheet. Profit after provisions for 2001 rose to €157.2 million. The Bank’s profitability has benefited from higher net interest income on its growing portfolio, effective cost control and lower net provisions for potential losses. The Bank continued to exert tight resource control, marking its eighth year of no real growth in the budget. The Bank intends to increase operations considerably in the early and intermediate transition countries and in Russia, while roughly maintaining its current level of operations in the advanced transition countries at around euros 800 million. Its total portfolio of disbursed financings is projected to reach €13 billion by 2005.
8. The Banks’ projects have had a significant impact in the transition countries, in particular in the corporate, financial and infrastructure sectors. It is now widely recognised for its expertise in transition financing. With the Bank’s assistance, countries of the region have made significant progress in their economic and political transition. Some have advanced more rapidly, while others are struggling to overcome various economic difficulties on the road to a market oriented economy.
9. In order to keep up with new circumstances and to increase efficiency, the EBRD is constantly reviewing its policies and priorities in the various regions. Country strategies are drawn up in cooperation with beneficiary countries. There is, for instance, a shift toward equity investment as a means to provide risk capital and promote sound business practices and corporate governance.
III CORE BUSINESS AND PRIORITY ACTIVITIES
10. The Bank’s core business remains the financing of projects, primarily in the private sector. In 2001, investments in the private sector made up 76 per cent of total investments. The main objective is to help create a sound financial sector, to serve as a catalyst for co-investment (i.e.; parallel investment by industrial or financial investors) and provide leadership for the development of business ‘start-ups’ (new companies) and small and medium sized enterprises. In co-ordination with the World Bank and other international financial institutions (IFIs), the Bank supports the restructuring of large, potentially viable, formerly state-owned enterprises.
11. Investment in the financial sector of the countries of operations now ranks first among EBRD activities, especially that which serves the needs of the business community and in particular SMEs. It is also seeking to increase the diversity of services, which financial institutions in the countries of operations can supply, and also to develop non-bank financial institutions such as those offering insurance, pensions, leasing and mortgage.
12. The Rapporteur welcomes the Bank’s efforts to increase access to financing for women engaged in business endeavours. Loans over US$ 20.000 are almost always extended to private entities, for which it is often difficult to learn about - or require - gender criteria. However, data available shed at least some light on the issue. Funding for businesses owned by women varies between 20 to 30 percent in most countries, with the figure occasionally rising to between 40 and 50 per cent in some. While there is some progress in lending to female borrowers, the numbers are still inferior compared to loans disbursed to male borrowers.
13. Infrastructure is another priority, considering its importance in accompanying investment in the private sector for lasting development. The need is enormous. The Bank focuses on municipal and environmental projects, energy (including energy efficiency) and transport, whether in the private or public sector. The aim is to promote commercially viable infrastructure projects and to reach a more decentralised structure in municipal services. The Rapporteur is particularly pleased in seeing the Bank increasingly providing financing on a ‘non-sovereign’ basis, that is, without the guarantee of the national government of the country of operations in question. This is gaining in importance as the capacity of certain governments to provide sovereign guarantee is often circumscribed by new stringent regulations.
14. Reliable and efficient telecommunication systems have a major impact on the overall economic development in the Bank’s countries of operations. In response to the pressing needs of the telecommunication sector, the Bank has designed investment programmes tailored to match the specific needs of each country. By investing in the sector, the Bank assumes risks that commercial banks are often not willing to enter into. It also supports the development of new services such as Internet and satellite communications and assists the countries in gradually liberalising their telecommunications services.
15. Media, agribusiness, property, tourism, shipping and natural resources are other sectors gaining ground in the Bank’s work. Agriculture accounts for as much as over a quarter of total GDP of some of the Bank’s countries of operations, and while the Bank’s assistance strategy is shifting towards more rural and peripheral areas, there is a need to look more closely at investments in the agribusiness sector. As for the power and energy sector, a more detailed analysis will be made in the chapter to follow.
16. Many transition economies still face major challenges as they overhaul their political, legal and economic systems. In particular, they are confronted with calls from local and foreign investors to develop rules for the conduct of business. Consequently, the Bank now views the promotion of sound business practices as a core dimension of its work.
17. Strengthening small and medium-sized enterprises remains central, especially since SMEs are a major source of job creation and reduce the social tensions that often characterise the early and intermediate stages of transition. Here it offers credit lines, financing for ‘micro-lending’, equity and venture funds, and technical assistance and know-how.
18. The Bank recognises that sustainable development is a fundamental aspect of sound business management. In complying strictly with its mandate, it has introduced firm guidelines with regard to environmental safeguarding and protection. Environmental impact assessment forms an integral part of its business practises.
19. When in London in January 2002, the Committee received detailed briefings about the situation in the EBRD’s countries of operations against the background of its 2001 Transition Report. The central messages were: an overall strong performance by the Bank in all its 27 countries of operations; continued, albeit lower, growth for most of the countries in 2001 from the year before, mainly due to the general slowdown of the world economy; and a still largely untapped potential in the region, in particular as regards people and their skills.
20. The Transition Report is on the whole optimistic as regards the economic future in the countries concerned. This includes their capacity to overcome the present weakness in the global economic situation. The region’s economic resilience is seen as being due largely to the determination with which market-oriented reforms are carried out especially in EU candidate countries in Central Europe, the Baltics and South-Eastern Europe. Russia’s recovery - aided by high prices for oil and gas and a comparatively weak and therefore competitive currency - has also reduced the impact of the global slow-down on both Russia and its neighbours. Trade will be encouraged as a result of certain countries’ joining the World Trade Organisation. Legal reform, especially in commerce, accelerated across the region in 2001. The Bank predicts that growth in the countries of operations will be sustained at about 3 per cent in the year under way, down from 4.3 per cent in 2001 and 5.5 per cent in 2000.
21. However, the EBRD warns that the region may not be lastingly immune against continued economic weakness at global level. Risks include weakening demand for exports and lower and more volatile prices for oil and other exported raw materials. The Report strongly recommends a sustained reform pace, also in the relatively advanced countries in Central Europe, which will face increasing fiscal pressures before and after accession. The Report calls for greater fiscal consolidation and enhanced domestic savings to face potential risks ahead. Governments in the region must, the EBRD argues, encourage more investment – both domestic and foreign – to continue making real progress in transition.
22. Each year, the Bank’s Transition Report tackles a particular theme. The 2001 Report deals at length with the energy situation, and especially the management problems in the sector. On the one hand it acknowledges that oil and gas have been sources of wealth in recent years for Russia and the countries in the Caspian Sea region. However, it contends, too little has been done to turn this wealth into a source for long-term growth. Thus, Russia and the Caspian Sea region countries need to strengthen corporate governance and create the market conditions and the regulatory institutions necessary to achieve greater competition also in the transport of gas and oil. In addition, poorly targeted consumer subsidies and the frequent granting of privileges to favoured producers have drained much revenue. These should be eliminated, the report says, and revenues used instead for laying the foundation for sustained economic development, not least by developing skills and ensuring new investment in plants and equipment.
23. The region as a whole remains sub-efficient in its energy consumption, using between four (central Europe and the Baltics) and 13 (CIS) times as much energy relative to GDP as does Western Europe. Part of the solution, says the Report, lies in raising energy prices for households and industrial consumers, while building an institutional framework that supports private investment in the power sector and subsidises those unable to afford higher energy prices
24. The Report concludes that the region’s potential as an energy producer and exporter is far from fully developed and that serious impediments to investment remain. Moreover, the countries of the region can do much more to promote the efficient use of energy.
25. In addition, the Bank plays an important role in the nuclear sector. On behalf of the international community, the Bank administers funds for nuclear safety. To date, more than € 1.5 billion have been pledged to the Chernobyl Shelter Fund, the Nuclear Safety Account, and the International Decommissioning Support Fund for old reactors situated in Bulgaria, Lithuania and the Slovak Republic. Bank funding for the completion and safety update of two other nuclear power plants in Ukraine was made contingent on the closing down of the Chernobyl nuclear power plant.
26. Most of the EU candidate countries notably the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia have made significant progress in the reform process. They are well on their way to meeting the political and economic criteria for EU membership. Although all are in need of further political and economic reform, they could finish accession talks by the end of next year and join the EU in 20041. Others may not be in the first wave of accessions.
27. A good share of the successes registered may be attributed to the work of the EBRD. As the countries evolve and their needs change, so does the Bank’s strategy. It continues to prepare them to face the stiffer competition and other challenges that will follow from EU membership. As domestic investment will not be sufficient to continue making real progress in transition, the Bank is committed to continuing mobilising investment abroad for as long as there is an investment requirement and the markets need particular help and encouragement to fill it. The looming need ahead in those countries is for equity participation to encourage the growth of mid-sized firms, both new start up and restructuring existing enterprises. The Bank will continue to help cities to commercialise their local services, bringing market-driven investment to urban transportation, water and waste. The Bank will incorporate a shift from the main cities to peripheral and rural areas and small towns.
A. South-Eastern Europe and the Balkans
28. In South-Eastern Europe and the Balkans the Bank focuses on improving economic and institutional stability. Overall results have been positive and assistance has targeted micro-credit lending institutions and the development and strengthening of small and medium sized enterprises. The region altogether has experienced a modest upward trend in the size of the private sector - from 56 per cent in 1998 to more than 60 per cent in 2001. The rise is mainly attributed to the privatisation process. In most countries small-scale privatisation is largely complete, the exceptions being Bosnia and Herzegovina and Serbia and Montenegro. However, large-scale privatisation and the sale of strategic enterprises and public utilities proceed only slowly.
29. Foreign investors are playing a significant role in the sustainable development of the SEE region. Since 1998, Foreign Direct Investment FDI has accounted for well over half the capital flow. However, compared with the Central European and Baltic states the countries of SEE seen as group (and there are exceptions) have been less successful in attracting FDI, mainly due to political unrest, the slow pace of reforms, delays in the privatisation of strategic sectors and public utilities, and lower market confidence as to rapid EU membership. The Bank intends to maintain a strong presence in the region, one primary objective being to promote confidence among foreign investors. The Bank has more recently registered increasing investor interest, which suggests that increased stability and business confidence, government commitment to reform and the successful mobilisation of EBRD and other resources under the Stability Pact for South-Eastern Europe are having an effect.
B. The EBRD and the Stability Pact for South-Eastern Europe
30. The Stability Pact is now widely recognised as forming an effective framework for enhancing co-operation in the region of South-Eastern Europe. The Bank considers private sector development key for building a viable market economy and prosperity. Among the financial institutions involved under the Pact, the EBRD has taken a leading role in coordinating the international community’s efforts to promote economic development and regional integration in SEE through private sector development.
31. By September 2001, the EBRD’s Trade Facilitation Programme amounted to €78 million in signed commitments.
32. The development and strengthening of small and medium sized enterprises in the region awarded €34 million in loans (commitments) to local banks from the EU/EBRD SME Facility for SME financing .
33. The Bank and the US have also established a joint US$ 150 million fund for Small and Micro-Enterprise Finance and Technical Co-operation. The Bank and the Fund have already jointly committed US$25.5 million under the programme towards micro-enterprise banks in the region.
34. The Bank has also been the lead agency for three out of 25 “Quick start” projects in infrastructure financing. In addition, it is co-financing other projects led by the World Bank and the European Investment Bank. Selection of infrastructure projects within given regions has provided an opportunity to blend EBRD financing with the donor and other multilateral funding for the benefit of the region in question as a whole. Taking a regional approach, might also help the Bank to release funding for other projects such as schools and bridges, where lenders are less forthcoming.
35. The Bank’s “Turn Around Management” (TAM) programme serves to transform small and medium enterprises into competitive businesses. It delivers managerial, operational and marketing advice to local businesses in the region and addresses various management weaknesses.
36. Drawing upon the lessons of the 1998 financial crisis in Russia, the Bank attaches great importance to strengthening commercial banks and other financial institutions such as leasing companies, pension funds, insurance companies and other financial intermediaries serving private business. Assistance includes improved credit policies and procedures, treasury management, accounting standards, internal audits and staff training.
37. The EBRD is leading the implementation of a regional approach in trade, in mobilising grant funds for the private sector, in leading some specific regional infrastructure projects in transport and power and in a water strategy for South-Eastern Europe.
38. Central Asia represents an interesting and highly diverse region for the Bank, all the more so in view of its growing strategic importance. Outside the oil sector, the Bank is today the largest investor in the region’s private sector, also in terms of the number of projects. Investments total around €1.6 billion. Much effort is devoted to opening the region to foreign investment. Special attention is given to institution building, developing SMEs, infrastructure, trade financing, environment protection and social cohesion.
39. The events of 11 September 2001 have had a major impact on the region and have placed it in the global spotlight. Countries are slowly opening up to reform and restructuring. However, considerable obstacles – not least in the trade systems – stand in the way of the profound market and societal reforms needed, and the creation of an attractive investment climate.
40. Despite some success in the region as a whole, the Bank continues to be concerned over insufficient positive developments in Belarus and Turkmenistan In his letter accompanying the review of the Bank’s policy towards Turkmenistan, which took place in July 2001, EBRD President Jean Lemierre informed President Niyazov that, in the course of the lengthy discussion, the Directors had expressed grave concerns about the state of democracy and the lagging pace of political and economic transition in Turkmenistan. In view of the government’s inadequate commitment to a market economy, the Bank would only pursue operations in the private sector. As regards Belarus, President Lemierre noted in his introduction to the Bank’s Strategy for the country adopted in May 2002 that the Autumn 2001 presidential election had failed to meet the OSCE commitments for democratic elections, and Council of Europe standards; and that the economic transition process continued to be undermined by the perpetuation of a rigid and centralised system of management. Consequently, as President Lemierre wrote to President Lukashenka, also in May 2002, the Bank could only justify very limited private sector engagement. Even so, to the Bank’s and the Rapporteur’s profound disappointment, government authorities are often found trying to hinder projects supported by the Bank.
41. The Rapporteur is greatly impressed by the steady growth of the Russian economy. It reached over 5 % in 2001. Growth is mainly attributed to oil prices but other factors have also played a role, in particular the revival of the domestic economy in such areas as construction, machinery and computer software. Growth has also been encouraged by a number of important reforms such as new tax laws, an on-going judicial reform, and a new land code.
42. Russia has also made significant progress in its debt repayment. Her decision to repay $2.7 billion of outstanding debt to the International Monetary Fund2 ahead of schedule and its plans to proceed to early repayment of debt of $48 billion to the Paris Club of creditors has no doubt impressed foreign investors. Foreign direct investment, however, remains below the level in some Central European countries. However, the Rapporteur would caution that overall Russian economic growth is due to a not inconsiderable extent to relatively high oil prices ($30/barrel before 11 September and at or above $20 for much the time since). Any drop in the price of oil, on which Russia still depends heavily, could have unwelcome consequences.
43. Russia plays a large role in the EBRD’s work, with a continuing increase in focus and investment, in projects that benefit from more rouble lending. The Bank will finance more projects beyond the major cities such as Moscow and St Petersburg in the Russian regions. The basic focus is as well as on the energy sector, on an improved regulatory framework, enhancing competition, the promotion of minority shareholder rights and strengthening the agricultural sector. The problems in the energy sector result from a dramatic decline in investment over the last decade. The Bank’s objectives in the energy sector include: promoting private-sector participation; assisting in attracting foreign investment, strengthening competition and promoting energy efficiency.
44. The Rapporteur commends the Bank’s policies in support of SMEs. In 2001 it advanced an additional $30 million loan to the Russian Small Business Credit Bank, the main institution through which it has lent money to Russian SMEs. In 2001 alone, almost 27,000 Russian Small Business Fund loans worth $234.2 million were made in some 100 different cities.
VI ANNUAL MEETING 2002
45. The Rapporteur attended the Annual Meeting of the Bank held in Bucharest in May 2002. It conveyed the message of a fruitful year for the Bank and its entire region of operations. The President of the Bank, Mr Jean Lemierre, saw the first decade of transition as having been one of recovery, while the second one had all the potential of becoming one of sustained growth.
46. Development of the private sector, mainly through support for SMEs, formed a central theme of the deliberations. The US Secretary of the Treasury, Mr Paul O’Neill, emphasised that the task of developing the small business sector in southeastern Europe was a priority not only of the Bank but also of the United States. SMEs were the lifeblood of developed economies, he said, and if international financial institutions wanted to achieve tangible results at a quicker rate in transition countries, then the EBRD’s approach to SMEs could well be taken as a model.
47. The meeting also emphasised the need to strengthen social security systems in order to alleviate the effects of reform, to promote environmentally sustainable projects and businesses, and to tailor projects according to the diverse needs of each region. The Bank was further urged to retain maximum flexibility and actively explore new business opportunities. There was also strong support for the Bank’s shift towards more equity financing, its increasing focus on agriculture and energy efficiency and its encouragement of trade among countries of operations, not least in Central Asia. Finally, the meeting concluded that good corporate governance - underpinned by good laws, dedicated civil servants and a strong judiciary system - require more action to curb corruption. In brief, success rests on the three pillars of democracy, transparency and good governance.
VII CONCLUDING REMARKS
48. When measured in terms of progress reached in their transition towards a market economy, the Bank’s countries of operations now fall into two distinct groups: the ‘early/intermediate transition countries’3 and the ‘advanced transition countries’4 . Russia is treated separately by the Bank. The overall share of the EBRD commitments in the advanced transition and the early/intermediate transition countries represents 39% for each of the two groups. The remaining 22% of its funds are committed to Russia. The former centrally planned economies, comprising some 400 million people, continue to undergo dramatic changes that are driven by technology, globalisation and the extension of the marketplace. Indeed, the EBRD countries of operations have all the ingredients necessary to make them among the most dynamic markets in the world.
49. Central and Eastern Europe and the Commonwealth of Independent States have shown remarkable resilience in the wake of recent economic shocks. Advanced transition countries are seen by investors as stable places of investment. Russia’s fortunate position in the oil markets combined with a reform to bring about structural changes and a turnaround in the investment climate in the country have borne fruit, and private initiative and market principles are gaining ground.
50. All the Bank’s countries of operations – with the exception of Belarus and Turkmenistan - have achieved much through their efforts to respect human rights, pluralist democracy and the rule of law. There has been substantial progress in price and trade liberalisation, as well as in the privatisation of both small and larger enterprises. The private sector is being consolidated and its share of GDP is increasing – in some of the advanced transition countries it is close to or equal to those in Western Europe. The Rapporteur commends the Bank on its efforts over a whole decade to produce this state of affairs and to create an improved investment climate.
51. This notwithstanding, major challenges lie ahead. Better financial discipline and corporate governance, greater transparency and more fundamental reforms in the banking sector are among them. Significant obstacles to attracting foreign investment remain, in particular in the early/intermediate group of countries. Structural reforms in the enterprise and financial markets should be intensified. The Bank must increase its presence further and provide essential value added as regards confidence in projects, risk sharing and financing.
52. The Rapporteur and the Assembly are aware that the Bank’s main challenge lies in the duality of its mission: on the one hand fostering economic development and assisting its countries of operations in establishing market economies that respect human rights, the rule of law and pluralist democracies; and, on the other, to do business as a profitable lending institution. The Bank’s mission demands the application of sound banking principles, and at the same time the financing of potentially risky projects. In order for the Bank to be able to achieve this complex mandate, good co-operation and co-financing with other international institutions and other private banks is of the utmost importance.
53. In this context, the Rapporteur welcomes increased cooperation between the EBRD and the Council of Europe Development Bank. In 1999 the two Banks signed a Memorandum of Understanding, in which they express their intention to intensify their cooperation, in particular for the joint financing of projects in transition countries. Thus, for example, in 2000 the CEB and EBRD approved parallel financing projects in favour of the Polish State Railway, while in 2001 the CEB approved a project in favour of Hrvatska Banka za Obnovu I Razvitak (Croatia), co-financed with the EBRD.
54. The Rapporteur has taken note of the Bank’s efforts to increase transparency and accountability and considers the Public Information Policy adopted in 2000 an important step forward in this respect. She welcomes the publishing on the Bank’s website of sector strategies and evaluations of past projects. The Bank also pursues a much needed dialogue with NGOs and other parties interested in EBRD country strategies. However, despite the Bank’s efforts to improve communication with the public and increasing pressure from shareholders and NGOs in this direction, it has not yet proven possible to make public all information related to project evaluation. Finally, the Rapporteur welcomes the Bank’s efforts to work closely with other international financial institutions to harmonise procedures and prepare “best practice” standards. This will no doubt also serve to increase transparency and accountability.
Reporting committee: Committee on Economic Affairs and Development.
Reference to committee: Standing mandate
Draft resolution unanimously adopted by the committee on 30 May 2002.
Members of the committee: Mrs Zapfl-Helbling (Chairperson), Mrs Stepova (Vice-chairperson), Mr Kirilov, Mr Blaauw (Vice-chairmen), Mr Adam, Mr Agius, Mr Agramunt, Mrs Akgönenç, Mr I. Aliyev, Ms Anderson, Mr Arnau, Mr Aylward, Mr Berceanu, Mr Billing, Mr Braun, Mr Brunhart, Mr Budin, Mr Budisa, Mrs Burbiené, Mrs Calner, Mr Cerrahoglu, Mr Cosarciuc, Mr Crema, Mr Djupedal, Mr Elo, Mr Eyskens, Mr Felici, Mr Galoyan, Mr Grachev (Alternate: Ms Yarygina), Mr Gülek, Mr Gusenbauer, Mr Haupert, Mrs Hoffmann, Mr Hrebenciuc, Mr Jung (Alternate: Mrs Durrieu), Mr Kacin, Mrs Kestelijn-Sierens, Mr Kosakivsky, Mr Leers, Mr Liapis, Mr Lotz, Mr Makhachev, Mr Mateju, Mr Mikkelsen, Mr Mitterrand, Mr Naumov, Mr Palis, Mrs Patarkalishvili, Mr Pavlidis, Mr Pereira Coelho, Mrs Pericleous-Papadopoulos, Mrs Pintat Rossell, Mr Pleshakov (Alternate: Mr Tulaev), Mr Podgorski, Mr Popa, Mr Popescu, Mr Popovski, Mr Prokes, Mr Puche, Mrs Ragnarsdottir, Mr Ramponi, Mr Reimann (Alternate: Mr Marty), Mr Rivolta, Lord Russell-Johnston, Mr Schmitz, Mrs Schoettel-Delacher, Mr Schreiner (Alternate: Mr Le Grand), Mr Seyidov (Alternate: Mr Mollazade), Ms Smith, Mr Stefanov, Mr Suslov, Mr Texeira de Melo, Mr Valleix, Mr Voog, Mr Walter (Alternate: Baroness Hooper), Mr Wielowieyski, Mr Wikinski
N.B. The names of those members present at the meeting are printed in italics.
Head of Secretariat: Mr Torbiörn
Secretaries to the committee: M. Bertozzi, Ms Ramanauskaite and Ms Kopaçi-Di Michele
1 Report of the European Commission on candidate countries' progress toward European Union membership (released 13 November 2001).
2 Financial Times, 24 October 2001
3 Albania, Armenia, Azerbaijan, Belarus, Bosnia and Herzegovina, Bulgaria, FYR Macedonia, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Romania, Serbia and Montenegro, Tajikistan, Turkmenistan, Ukraine and Uzbekistan
4 Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovak Republic, Slovenia.