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Archived - Report on Operations Under the European Bank for Reconstruction and Development Agreement Act - 2005 : 2
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Financial Results for 2005
In 2005, the EBRD realized a very strong financial performance with profits after provisions of €1.5 billion, far above last year’s figure of €402 million.[6] This particularly strong performance was due to profits from major equity exits as well as unrealized gains from the movement in the fair value of the Bank’s associate share investments and high-risk equity funds, both of which are variable by nature. The EBRD continued to see a reduction in its impaired assets (non-performing loans) in 2005. At the end of 2005, the Bank had impaired loans totalling €35 million, compared to €86 million at the end of 2004.
Progress in Transition in EBRD Countries of Operations
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| Enterprises | Markets and trade |
Financial institutions |
Infra- structure |
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| Countries | Population (millions, mid-2005) | Private sector share of GDP in %, mid-2005 (EBRD estimate) | Large- scale privatization |
Small- scale privatization |
Governance and enterprise restructuring | Price liberal- ization |
Trade and foreign exchange system | Compe- tition policy |
Banking reform and interest rate liberalization | Securities markets and non-bank financial institutions | Infra- structure reform |
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| Albania | 3.2 | 75 | 3 | 4 | 2 | 4+ | 4+ | 2 | 3- | 2- | 2 |
| Armenia | 3.2 | 75 | 4-á | 4 | 2+ | 4+ | 4+ | 2+á | 3-á | 2 | 2+ |
| Azerbaijan | 8.3 | 60 | 2 | 4- | 2+ | 4 | 4› | 2 | 2+ | 2- | 2 |
| Belarus | 9.8 | 25 | 1 | 2+ | 1 | 3- | 2+ | 2 | 2- | 2 | 1+ |
| Bosnia and Herzegovina |
3.8 | 55á | 3-á | 3 | 2 | 4 | 4- | 1 | 3- | 2- | 2+ |
| Bulgaria | 7.8 | 75 | 4 | 4- | 3- | 4+ | 4+ | 3-á | 4- | 2+ | 3 |
| Croatia | 4.4 | 60 | 3+ | 4+ | 3 | 4 | 4+ | 2+ | 4 | 3- | 3 |
| Czech Republic | 10.3 | 80 | 4 | 4+ | 3+ | 4+ | 4+ | 3 | 4á | 4-á | 3+ |
| Estonia | 1.4 | 80 | 4 | 4+ | 4-á | 4+ | 4+ | 3- | 4 | 3+ | 3+ |
| FYR Macedonia | 2.0 | 65 | 3+ | 4 | 2+ | 4 | 4+ | 2 | 3- | 2 | 2 |
| Georgia | 4.6 | 65 | 4-á | 4 | 2+á | 4+ | 4+ | 2 | 3- | 2- | 2+ |
| Hungary | 10.0 | 80 | 4 | 4+ | 4-á | 4+ | 4+ | 3 | 4 | 4á | 4- |
| Kazakhstan | 15.1 | 65 | 3 | 4 | 2 | 4 | 3+ | 2 | 3 | 2+ | 2+ |
| Kyrgyz Republic | 5.1 | 75 | 4- | 4 | 2 | 4+ | 4+ | 2 | 2+ | 2 | 2- |
| Latvia | 2.3 | 70 | 4- | 4+ | 3 | 4+ | 4+ | 3- | 4- | 3 | 3 |
| Lithuania | 3.4 | 75 | 4á | 4+ | 3 | 4+ | 4+ | 3 | 4-á | 3 | 3- |
| Moldova | 3.4 | 60á | 3 | 3+ | 2á | 4- | 4+ | 2 | 3- | 2 | 2+á |
| Poland | 38.2 | 75 | 3+ | 4+ | 4-á | 4+ | 4+ | 3 | 4-á | 4- | 3+ |
| Romania | 21.7 | 70 | 4- | 4- | 2+á | 4+ | 4+ | 2+ | 3 | 2 | 3+ |
| Russia | 144.9 | 65â | 3â | 4 | 2+ | 4 | 3+ | 2+ | 2+á | 3- | 3- |
| Serbia and Montenegro |
8.3 | 55á | 3-á | 3+ | 2+á | 4 | 4-á | 1 | 3-á | 2 | 2 |
| Slovak Republic | 5.4 | 80 | 4 | 4+ | 4-á | 4+ | 4+ | 3 | 4- | 3- | 3- |
| Slovenia | 2.0 | 65 | 3 | 4+ | 3 | 4 | 4+ | 3- | 3+ | 3- | 3 |
| Tajikistan | 6.5 | 50 | 2+ | 4á | 2- | 4- | 3+ | 2- | 2 | 1 | 1+ |
| Turkmenistan | 6.5 | 25 | 1 | 2 | 1 | 3- | 1 | 1 | 1 | 1 | 1 |
| Ukraine | 47.3 | 65 | 3 | 4 | 2 | 4 | 3+á | 2+ | 3-á | 2+ | 2 |
| Uzbekistan | 26.0 | 45 | 3- | 3 | 2- | 3- | 2á | 2- | 2- | 2 | 2- |
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| Note: The classification of transition indicators uses a scale from 1 to 4, where 1 implies little or no progress with reform and 4 implies a market economy. A rating of 4+ indicates the country has achieved standards and performance typical of advanced industrial economies.áand â arrows indicate change from the previous year. One arrow indicates a movement of one point (from 4 to 4+, for example). Source: EBRD, 2005 Transition Report. |
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Financial Highlights
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The EBRD approved 151 projects in 2005, up from 129 the previous year. Along with investments under frameworks, these commitments totalled €4.3 billion, up from €4.1 billion in 2004, surpassing the base case target of €3.8 billion. Net cumulative commitments by the end of 2005 amounted to €16.8 billion. The level of disbursements, at €2.2 billion, fell off sharply from 2004, reflecting a significant decrease in average disbursement size, but the level was nevertheless in line with previous years (2004 saw an increase of 60 per cent relative to 2003). As a result of decreasing disbursements and rising reflows, the latter particularly in more advanced transition countries, operating asset growth was checked, though the Bank’s portfolio continued to grow. The geographic composition of business volume and reflows in 2005 resulted in the portfolio share of early and intermediate transition countries reaching 47 per cent by year-end. Guarantees increased to €229 million from €180 million at the end of 2004.
The overall financial performance for 2005 and growing reserves indicate that even as the Bank increases its emphasis on the early and intermediate transition countries—where the investment climate is particularly risky—it continues to follow sound banking principles.
Institutional Developments
Early Transition Countries Initiative
2005 marked the first full year of the EBRD’s Early Transition Countries (ETC) Initiative, and it was a successful year. The Initiative, which covers the seven ETCs (Armenia, Azerbaijan, Georgia, the Kyrgyz Republic, Moldova, Tajikistan and Uzbekistan), aims to boost the EBRD’s investment and impact in these countries by using a streamlined approach, developing new instruments to meet local needs (including smaller projects), mobilizing more investment and encouraging ongoing economic reform. Since the Initiative began, the number of new operations in ETCs has risen substantially, and the Bank’s business volume, portfolio and project pipeline development have responded similarly. The number of operations financed in 2005 almost doubled from a year earlier, reaching 61, and the corresponding level of commitments was over 2.5 times higher, at around €250 million. (These figures exclude transactions in the oil and gas sector as well as under the EBRD’s Trade Facilitation Programme.) Similar sizable increases were noted in the first, albeit incomplete, year of the Initiative.
Key to the Initiative’s success is the ETC Multi-Donor (ETCMD) Fund, which was established as a key pillar of the Initiative and to which Canada contributed €500,000. The Fund—the first EBRD fund to which bilateral donors’ contributions are classified as Official Development Assistance—supports project preparation, implementation and capacity-strengthening initiatives, enabling the Bank to make investments in these countries. Given the Bank and donors’ positive experience with the overall Initiative, efforts and pledges to replenish the Fund began in 2005.
The Bank continues to work on refining its approach in ETCs in order to increase its reach and effectiveness. Reflecting the Bank’s comparative advantages, however, the Initiative continues to emphasize private sector development, particularly in micro, small and medium-sized enterprises. It thus plays a key role in supporting activities that ensure sustainable solutions to poverty alleviation. The Initiative also promotes financing of smaller government infrastructure investments appropriate to local consumers’ ability to pay for improvements in these services (e.g. water, heating). ETCMD Fund donors’ push for greater emphasis on results-based management and gender equality in this Initiative should pave the way for a transformative impact on the Bank’s overall operations.
To parallel the successful ETC Initiative, the Bank has indicated to donors that it is considering setting up a dedicated Western Balkans Fund. The decade-long isolation from international markets due to political developments in the Western Balkans, compounded by macroeconomic instability, has caused severe difficulties for the region’s transition. Most enterprises are operating at very low levels of capacity, export business is poor and the very high unemployment rate is a key social and economic issue. Over the coming year, the Bank will assess with donors whether to proceed with this proposed Fund.
Private Sector Development
Fostering the development of strong private sectors in its countries of operations is an essential element of the EBRD’s strategy for promoting the transition to a market economy. A strong small and medium-sized enterprise (SME) sector is an important means of developing a "constituency for reform" in the transition economies that can act as a counterweight to powerful vested interests that benefit from weak state governance. The Bank’s Articles stipulate that it commit at least 60 per cent of its portfolio to private sector activities, both globally and in individual countries. The global portfolio ratio requirement was first satisfied in 1994 and was 76 per cent in 2005.
A core part of the EBRD’s work with the private sector is its support of micro, small and medium-sized enterprises (MSMEs), which are important engines for job creation and growth, and therefore poverty reduction. The Bank’s strategy for the MSME sector is founded on three pillars: financing, improving the investment climate through policy dialogue and developing business support networks for MSMEs. The strategy explicitly recognizes that the poor investment climate, and not just limited access to financing, is a major impediment to the development of the sector. The strategy emphasizes the need to identify and promote the removal of the main obstacles to MSME growth, develop proper financial instruments for MSME support and encourage the development of strong business associations.
With a view to ensuring the Bank remains at the forefront of MSME financing, the Bank drafted a new strategy in 2005 and sought public input. The draft strategy proposes that the Bank’s main delivery channel for MSME products continue to be its wide network of relationships with established financial institutions. The draft strategy envisages further expanding this network by working with non-bank financial institutions, as well as developing greenfield microfinance institutions. Looking ahead, the new strategy will be sensitive to the individual needs of each country of operations, taking into account their varying levels of transition, the strength of the private sector and existing MSME programs. The new strategy is expected to be adopted by the Board in early 2006.
In 2005, the EBRD continued its strong focus on supporting credit lines for MSMEs through financial intermediaries in its countries of operations. Since the Bank’s first small business program was established in 1994, more than 1.26 million loans worth more than €6.9 billion have been disbursed to small and micro businesses. In 2005, the EBRD disbursed 480,000 loans for small and micro enterprises, totalling roughly €2.5 billion.
Financial Sector Activities
Financial Sector Policy—The EBRD’s financial sector policy takes a country-specific approach to financial sector development, focusing on the need to promote confidence and competition in an independent financial system. The EBRD seeks to strengthen confidence in the sector primarily by helping to improve local institutions’ governance and business practices. It also tries to improve financial supervision and regulation, although its activities here are constrained by its investor role in the sector and potential concerns about conflict of interest. Nonetheless, as a reputable foreign investor in the sector, the EBRD offers important insights on supervisory and regulatory requirements, which it shares with other international financial institutions operating in the region and with governments. To address competition and independence, EBRD investments attempt to increase the diversity of institutions and services available (particularly to the private sector and SMEs), facilitate foreign direct investment and strengthen the commercial orientation of state-owned financial institutions, particularly in preparation for privatization.
In 2005, the EBRD committed €1.4 billion in financing to financial sector operations, representing 34 per cent of the EBRD’s business volume in 2005.
Banking Sector Activities
—In 2005, the EBRD signed new loans valued at €796.7 million to the banking sector, and signed bank equity transactions worth €94.6 million. In most cases where the EBRD holds an equity stake in a local financial institution, it is represented on the supervisory board of the institution, where it promotes management accountability, good corporate governance, sound banking practices, and appropriate environmental reviews and procedures. Participation in bank privatizations is a key factor behind equity investments in early and intermediate transition countries.
Non-Bank Financial Institutions
—During 2005, the EBRD continued its support of the non-bank financial sector. The EBRD is one of the largest financial investors in this sector in its countries of operations, with investments in local asset management and mutual fund companies becoming increasingly important as voluntary pension sectors in the Bank’s countries of operations develop. Through 2005, the Bank has maintained investments in the non-bank financial sector in most of the countries in the region, where necessary institutional and regulatory regimes had been or were in the process of being introduced. The EBRD also committed €196.1 million to insurance companies, leasing companies and specialist mortgage lending institutions in 2005, mainly in advanced transition countries.
Capital Market Development
—The EBRD’s mandate includes fostering transition through measures to stimulate the development of local capital markets. One of the Bank’s approaches to capital market development involves working with authorities to develop the legal framework for the issuing of long-term local currency bonds. Since 1999, the Bank has been working closely with the Russian authorities, including through the provision of extensive advice and technical assistance on the new Securities Market Law that was passed by the Duma in December 2003. This law permitted international issuers for the first time to raise funds in the domestic capital market. The EBRD also worked closely with Russia’s National Currency Association (NCA) to develop a new and transparent money market index, the Moscow Prime Offered Rate (MosPrime Rate). This cooperation with Russian authorities and the NCA led to the launch of the first bond by an international issuer in the Russian domestic market, an EBRD five-year ruble bond issue on May 18, 2005. This bond is also the first floating-rate note made possible by the creation of the transparent and credible MosPrime benchmark rate to which it is indexed. The EBRD bond is listed on the government bond section of the Moscow Interbank Currency Exchange and has been approved for use in repo transactions with the Central Bank of Russia, enhancing their use as a liquidity management tool.
This path-breaking transaction has had a significant impact on the development of the Russian capital market by introducing a new asset class and by opening the door to other international issuers. In addition to making possible the issuance of floating-rate bonds by other international and domestic issuers, the newly established MosPrime Rate will provide a benchmark for the local market for bank loans, contributing to greater pricing transparency and consistency. The bond issue will also benefit the companies and businesses in Russia that are potential clients of the EBRD. Until now, the Bank’s clients have been unable to access long-term ruble funds based on a reliable market-based rate, but rather have had to rely on hard currency borrowing to match the maturity of their funding and returns from their long-term investments. However, this has exposed some clients to foreign exchange risks to the extent that they are not hedged by revenues denominated in or linked to hard currencies such as the US dollar or euro. The proceeds from the EBRD’s ruble bond will be used to provide long-term funding for companies that produce or provide services primarily for the Russian market, including small and medium-sized enterprises and municipalities, thereby allowing them to better manage their liabilities and avoid exchange rate risk.
As demand for ruble loans is strong, the Bank will look to revisit the Russian bond market in 2006, although new regulatory changes will need to be reversed prior to re-entry. The Bank is also working with the local authorities in a number of other countries (e.g. Bulgaria, Kazakhstan, Romania and Ukraine) with a view of issuing other local currency bonds in the next year or two.
Environment
Under its Articles of Agreement, the EBRD is explicitly committed to promoting environmentally sound and sustainable development in its activities. By investing in projects that reduce waste and pollution, the EBRD plays an important role in improving environmental standards in borrowing countries. The Bank’s projects have focused on upgrading municipal wastewater plants and improving energy efficiency by upgrading power generation and distribution systems. The EBRD also assists borrowing countries to comply with EU environmental standards and works with commercial financial institutions in borrowing countries to increase the profile of environmental issues in their lending policies. The term "environment" is broadly defined in the Bank’s Environmental Policy to include occupational health and safety, public health, labour and other social issues.
Apart from the initiatives to specifically redress environmental liability issues, many EBRD projects identify environmental opportunities, including environmental targets—for example, to reduce atmospheric emissions and industrial wastewater discharges and promote waste recovery, recycling and clean technologies.
The EBRD contributes to international initiatives such as the Environment for Europe process, including the Environmental Action Plan for Central and Eastern Europe, the Danube River Basin Strategic Action Plan, the Helsinki Commission and the Global Environment Facility, for which it is an executing agency. And within the framework of its mandate, the EBRD supports relevant multilateral and regional agreements on the environment and sustainable development, including the Framework Convention on Climate Change and the measures agreed to in the Kyoto Protocol.
The Northern Dimension Environmental Partnership (NDEP)[9] provides donor funding to address severe environmental problems in northwest Russia, particularly in the areas of nuclear waste, water and wastewater treatment, and energy efficiency. Canada became an official contributor to the NDEP Support Fund at the end of 2003 and has committed €20 million to the "nuclear window." Through this window, the first series of projects under the international effort to mitigate the legacy of the operation of nuclear-powered ships and submarines of the Northern Fleet in Russia are underway. Phase one of the Strategic Master Plan (SMP), priority identification, is completed.
A Strategic Environmental Assessment of NDEP, the EBRD’s first such assessment, was carried out in 2005 and it confirmed the priorities identified by the SMP. In 2005, the NDEP Assembly approved phase two of the SMP. In phase two, the Russian authorities, local experts and international consultants will form a Programme Development Team to develop an overall decommissioning programme, complete with complementary studies. An integrated programme, expected to be completed by April 2007, will serve as a tool for the Russian authorities to plan and manage long-term decommissioning activities in the region. In the interim, projects that have been identified as urgent are proceeding—the NDEP Assembly approved five such projects in 2005. These deal with improvement of storage conditions for (alpha) reactor cores in Andreeva Bay, physical protection in Gremikha Bay and installation of a radiation monitoring system in the Murmansk region. A prerequisite to project funding was also put in place in 2005. Specifically, the EBRD and the Energy Agency of Russian Federation (Rosatom) concluded an agreement on technical assistance that brings projects in the NDEP nuclear window under the cover of the Multilateral Nuclear Environmental Programme in Russia.
The EBRD applies environmental due diligence to all its investment and technical cooperation activities. Project sponsors are required by the Bank to undertake environmental impact assessments, analyses and audits that address potential environmental, health and safety, and socio-economic impacts of projects. Environmental impact assessments and analyses are conducted when potential future impacts are significant. Environmental audits are performed to identify and assess potential past impacts and liabilities. In some cases, both an audit and an assessment/analysis are performed. The EBRD also requires local financial intermediaries, through which it channels funds to micro, small and medium-sized enterprises, to adopt appropriate environmental policies and procedures.
The Bank’s overarching Environmental Policy is scheduled to be reviewed in 2006. The Evaluation Department (EvD) is planning the review and subsequent revision process. While the EvD has focused on evaluation criteria, the Environmental Department (ED) has developed a system for monitoring the environmental performance of Bank projects. Implementation of an improved environmental monitoring and evaluation system is expected to take place through the course of 2006. Further, in 2005, the EvD undertook a special study that focused specifically on how the Bank achieves its environmental mandate through financial institutions. This study and other EvD findings will contribute to the ED’s development of an updated Environmental Policy review. This broad approach is required to assess the Bank’s and its clients’ overall environmental performance, while examining the environmental change realized by individual projects.
Municipal and Environmental Infrastructure
EBRD investments in this sector focus on upgrading local utility services, such as water supply and wastewater treatment, urban transport, solid waste disposal and heating services. Modernizing service provision and its reliability stimulates the development of commercial and industrial enterprises, and provides a direct contribution to the global efforts to reduce harmful emissions. At the same time, better local services provide an immediate and tangible improvement to people’s lives and also increase public confidence in the transition process and reform efforts.
The EBRD’s approach in this sector supports: transition towards decentralization of service responsibilities to local or regional levels; commercialization of the operating companies providing local services, with local private sector participation where feasible/appropriate; and environmental improvement as a consequence of investments that conserve environmental resources and reduce pollution. In countries where a suitable overall legislative framework is evolving, the EBRD applies decentralized financing solutions with local (non-sovereign) government guarantees to promote adequate implementation legislation and a borrowing track record. In other countries, the Bank promotes structures that clarify ownership and corporate governance of local municipal services and support governments and donors in their efforts to establish effective, fair and transparent regulatory regimes that can attract long-term capital investment. In doing so, the Bank helps local governments introduce cost recovery and "user pay" concepts within the limits of affordability constraints and promotes transparency regarding transfers and subsidy payments.
In 2005, more than 90 per cent of EBRD local utility investments were committed without any recourse to financial guarantees by central governments, reinforcing the Bank’s mandate in support of decentralization and local fiscal responsibility. Among these investments was the first non-sovereign utility transaction in an early transition country (Georgia), where the Bank is providing loan financing to Tbilisi’s municipal transport company for the purchase of buses. The use of quality second-hand buses reduced the overall project costs significantly, making the service improvements affordable to the population.
The Bank’s heightened interest in reducing emission levels of harmful greenhouse gases saw the extension of numerous district heating improvement loans to Romanian and Russian cities. These investments led to a 20-per-cent reduction of energy use on average, while at the same time ensuring continued heat supply to the affected population.
Investments to support improved water supply and wastewater treatment are continuing apace, with a number of major pollution hot spots removed. For example, in St. Petersburg the Bank’s investment helped cut the outflow of untreated sewage by half following the October 2005 commissioning of a new treatment plant.
Energy Sector
Most of the EBRD’s countries of operations suffer from severe economic and environmental problems caused by polluting energy systems and inefficient energy pricing. Thus, a key objective of the Bank’s energy sector investments is to improve environmental performance, including meeting climate change objectives and supporting renewable forms of energy. The Bank is working on strengthening its impact in this area, and this push is supported by the call from G8 leaders at the 2005 Gleneagles Summit for international financial institutions (IFIs) to develop a framework to accelerate the shift to cleaner, more efficient energy production and use. The Bank is working with other IFIs to develop this framework, and in November it hosted a workshop to share its energy efficiency financing experience with other IFIs. The Bank is in the process of hiring a consultant who will review its activities in the field of climate change and make recommendations to broaden and improve its impact, thereby contributing to the formulation of the investment framework.
In addition to the Netherlands Emission Reduction Cooperation Fund, which was established in 2003, the Bank is currently developing a Multilateral Carbon Credit Fund (MCCF). The MCCF, which is expected to be launched in 2006, will be open to EBRD shareholders and private companies (though not to financial investors and traders). The MCCF will purchase project-based carbon credits as well as facilitate Green Investment Schemes (sovereign-to-sovereign sale of Assigned Amount Units). The Bank is currently discussing a possible partnership on this initiative with the European Investment Bank. The EBRD is also exploring the idea of a Sustainable Energy Cooperation Fund, which could fund energy audits and provide incentive payments in support of energy efficiency and renewable energy credit lines.
The Bank aims to promote best practices in other aspects of its energy investments as well, such as through the required adherence to the best international transparency and revenue management standards in extractive industry (e.g. oil, gas, coal) investments. In policy dialogue, the Bank encourages the adoption of the Extractive Industries Transparency Initiative (EITI)[10] in countries of operations that have not yet done so.
The Bank began consultations in 2004 on a new Energy Operations Policy to update and consolidate its existing Energy Operations and Natural Resources Operations Policies. The requisite public consultations took place in 2005, and the new Policy is expected to go to the Board for approval in 2006. The new Policy is expected to put more emphasis on social and environmental issues, including energy efficiency and climate change. For example, it is expected to target increases in the financing of energy efficiency and renewable energy projects as well as require project sponsors to enhance environmental sustainability and adopt measures designed to benefit local stakeholders where practicable. The new Policy is also expected to introduce mandatory screening of all EBRD projects for energy efficiency potential, regardless of the sector the investment is in, and to enhance monitoring and reporting systems to track its energy efficiency investments.
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The EBRD and Nuclear Safety Through the Nuclear Safety Account (NSA), 15 donors, including Canada and other G7 countries, have continued to work closely with the EBRD to improve nuclear safety in countries of Central and Southeastern Europe and in the former Soviet Union. The NSA is used primarily for making essential safety improvements to older-generation, Soviet-built reactors and to help Ukraine cope with the aftermath of Chernobyl. In 2005, the NSA fell short of the amount needed to complete its work. The shortfall is estimated at US$150 million. To date, Canada has contributed approximately US$13 million to the NSA. The Bank has continued to administer the Chernobyl Shelter Fund for securing the sarcophagus around the Unit IV reactor in Ukraine (which was destroyed by a nuclear accident). In 2004, the conceptual design for the new shelter was completed and the overall cost estimated at approximately US$1.1 billion. The G8 nations, the EU and other countries have so far contributed €645 million and pledged another €180 million in May 2005. Canada contributed US$33 million and pledged another US$7 million in 2005. The construction work on the stabilization of the sarcophagus started in 2004, and the proposals for the detailed design and construction of the new shelter are under evaluation, with the contract award planned for the first half of 2006. The project is expected to be completed by 2009. |
Capital Resources Review
According to the Agreement establishing the Bank, the Board of Governors must review the Bank’s capital adequacy at intervals of no more than five years. The exercise also sets out the medium-term strategy of the Bank, by defining how and where the Bank expects to operate in a manner that is consistent with its principles of transition impact, additionality and sound banking. Work on the third Capital Resources Review (CRR) began in 2005. Governors will consider the recommendations of management and the Board of Directors regarding the CRR and formally adopt it at the Bank’s Annual Meeting in May 2006. More concretely, the third CRR will focus on the challenges of exiting from the eight borrowing countries that joined the EU in 2004 (EU8) as transition opportunities and the need for the Bank’s financing recede, as well as renewing the Bank’s business model to ensure it remains a key partner in countries where significant transition challenges remain.
The EBRD has already begun to grapple with the challenges posed by the EU8’s transition success. Reflecting the region’s transition progress, as well as the increased availability of commercial financing, new EBRD lending to the region continues to decline and reflows (such as early repayments) are increasing. As a result, the Bank’s portfolio in the EU8 continues to shrink and has been reduced in terms of the Bank’s overall portfolio. As long as the Bank’s financing remains additional to address the limited transition challenges remaining—notably financing for private sector SMEs and small and medium-sized municipalities—and projects meet the sound banking criteria, the Bank will continue to operate in the EU8. However, in the context of the third CRR and future business planning, the Bank must consider the implications of a natural withdrawal of EBRD programming in these countries.
The Bank’s future lies to the south and east of the EU8. The third CRR exercise will set out how the Bank intends to continue to shift its operations towards the early and intermediate transition countries and Russia—where its impact on transition will be the greatest. This shift will concentrate the Bank’s focus where the transition challenges remain the greatest and, correspondingly, where the transition and financial risks are the highest. The EBRD will continue to refine its business model to best address these challenges. The Bank’s partnership with donors will continue to be an essential component of its success in fostering transition. Early in the third CRR period, the Bank should also be in a position, thanks to its strengthening reserves, to use some of its own resources to complement donor funds.
The Bank is gearing up to admit a new country of operations during the third CRR period. In January 2005, in the interest of reinforcing the Bank’s transition activities, the EBRD’s Board of Governors unanimously adopted a resolution aimed at admitting Mongolia as a country of operations. While Mongolia is neither a part of Central or Eastern Europe nor a former Soviet republic, it faces transition challenges similar to a number of former Soviet republics. For Mongolia to become a country of operations, all 62 of the EBRD’s shareholders must accept the change in the Bank’s Articles. At the end of December 2005, most shareholders had formally ratified Mongolia’s admittance while the others, including Canada, expect to complete the process of acceptance by May 2006.
Another important aspect of the CRR is the Bank’s Human Resources Strategy, which must ensure that the Bank is adequately staffed and has the appropriate skill mix to carry out its medium-term strategy. Given the geographical shift in the Bank’s activities, this also requires adjustments to be made within the headquarter Resident Office (RO) staff allocation as well as RO consolidation. In the view of a number of member countries, including Canada, the process of RO consolidation should begin in 2007. The continued shift south and east will lead to projects that are on average smaller and more challenging due to the state of local business conditions. This implies that additional resources will be required to monitor projects to keep transition and financial performance on track. For these reasons, along with the expected increase in the number of overall projects, more resources will also be required for the Bank’s internal control functions—internal audit, compliance, evaluation and risk management.
Addressing Corruption and Poor Governance
The transition countries, like most emerging economies, face significant challenges in improving transparency and governance. As required by its statutes, the Bank reviews annually each country’s progress towards multi-party democracy, pluralism and a market economy. These principles—which Canada fully supports and encourages—contribute to transparency in public policy making and act as a check on corruption.
From this standpoint, the domestic policies of Belarus, Turkmenistan and Uzbekistan continue to raise concerns as they are difficult to reconcile with the political and economic conditions set out in Article 1 of the Bank’s Articles of Agreement. Lack of political and economic reform has already led the Bank to reduce its operations in Belarus and Turkmenistan. In 2005, the EBRD’s new two-year strategy for Uzbekistan concluded that, despite limited economic progress, no political liberalization had taken place. As a result, the Bank decided to limit its investments in Uzbekistan to the private sector, provided the investment has no direct or indirect link to the government or government officials. The Bank will focus on providing support to micro, small and medium-sized enterprises, and will continue to support international trade through its Trade Facilitation Programme. The strategies for Belarus and Turkmenistan will be renewed in 2006, but unless the countries make political and economic progress, the Bank’s investments will continue to exclude public sector investments.
To a large degree, the EBRD seeks to enhance good governance and transparency in its countries of operations through the projects it undertakes. Equity investments have been an important tool in this regard. The Bank’s participation on the boards of directors of companies in which it invests has been instrumental in improving the transparency of their accounting and business practices and their respect for minority shareholder rights. It is hoped that the success of these companies will demonstrate the importance of applying similar practices more broadly in the region. In addition, all Bank business partners are examined to ensure they meet the highest standards of business practice. The Bank routinely seeks the services of forensic accountants and specialized firms to perform integrity checks on companies in which it might invest and on their management and shareholders. For those doing business with the EBRD, the Bank’s procurement policies and rules set the standards of ethics and conduct required during the procurement and execution of EBRD-financed projects.
The Bank’s work in the area of legal transition also supports these goals. The EBRD’s Legal Transition Programme helps create an investor-friendly, transparent and predictable legal environment to improve the investment climate in the Bank’s countries of operations. The programme focuses on developing legal rules and establishing legal institutions as well as nurturing a culture that is essential for a vibrant market-oriented economy. Under this programme, the Bank has worked to improve the legal environment in its countries of operations by advancing reform in six areas: bankruptcy, company law/corporate governance, concessions, financial market regulation, secured transactions and telecommunications. To promote transparency the EBRD publishes an annual survey of the extensiveness and effectiveness of various commercial laws in the region in its legal journal, Law in Transition. In 2005, this publication focused on "Banking Law in Transition."
Enhancing Institutional Transparency, Accountability and Governance
The EBRD’s Public Information Policy is based on the presumption that information about Bank activities should be made public in the absence of a compelling reason for confidentiality. The following documents are available to the public, with commercially sensitive information deleted as required: draft sectoral policies (for public comment); final sectoral policies; Board-approved country strategies following consultation with the country concerned; summaries of medium- and long-term operational strategies; executive summaries of environmental impact assessments for public and private sector projects; and reports on public sector projects (on a request basis). The Bank’s policy requires management to report annually to the Board on the implementation of the Public Information Policy. These findings are made available on the Bank’s website (www.ebrd.com). Further, to ensure that the Public Information Policy serves the Bank and the public well, the Policy includes a three-year review cycle. As the current Policy was approved in 2003, it will be reviewed and renewed in 2006.
To be accountable to its shareholders and stakeholders, the EBRD assesses its contribution to the process of transition in its countries of operations. The Bank contributes to the transition process through two channels: its portfolio of projects and policy dialogue and intellectual leadership on transition and related activities, which are often but not always linked to projects. When projects are developed, the Bank assesses their potential contribution to transition. In 2005, 85 per cent of the Bank’s approved projects received a transition impact potential rating of "good" or "excellent." It also assesses the projects’ expected transition impact, that is, the risk-adjusted transition impact. Once a project begins, the Bank monitors the project with its Transition Impact Monitoring System; this measure helps keep bankers focused on, and working towards, the project’s transition objectives. In addition, the EBRD’s independent Evaluation Department evaluates the Bank’s projects, usually within two years after full disbursement, to assess the extent to which the projects have met their objectives. In the context of country and sector strategies, the Evaluation Department also assesses the extent to which both transition channels have contributed towards transition.
In 2005, the Bank’s Board of Directors initiated and engaged in several substantial institutional reforms to strengthen the Bank’s internal governance. First, following on the renewal of the Audit Committee’s terms of reference in 2004, a working group undertook a similar process of review and renewal of the terms of reference for the remaining two Board committees: the Budget and Administrative Affairs Committee and the Financial and Operations Policies Committee. The changes reflect recent developments in corporate governance and evolving practices in other international financial institutions (IFIs). As well, the working procedures of the Board Steering Group and Board committees were updated, notably improving the transparency of the nomination process for Chairs and Vice-Chairs. 2005 also marked the first full year of the Audit Committee’s new terms of reference. In discharging its new responsibilities, it reviewed the resources and work plans of the Bank’s control functions—compliance, evaluation, internal audit and risk management—with a view to ensuring their effectiveness. Based on the Committee’s assessment, additional funding for risk management was included in the Bank’s 2006 budget. Finally, the Bank’s evaluation function was given a new status, independent of management. The Evaluation Department now exclusively and directly responds to the Board of Directors, thus guaranteeing the independence of the function from operations and enhancing the Board’s collective duty of accountability to the Bank’s members and other stakeholders.
Canada has played a strong role in advancing these initiatives on internal governance. This is consistent with Canada’s positions at other IFIs, where it has been a leader in efforts to increase transparency and accountability.
Encouraging Partnerships
The EBRD is required by its Articles of Agreement to involve outside sources of financing in its operations. The Bank plays a key role in attracting co-financiers that might not otherwise be willing to invest in the region. Co-financing with the EBRD increases a country’s access to international capital markets and promotes foreign direct investment. The EBRD’s main co-financing partners are commercial banks, government agencies, export credit agencies and other IFIs. In 2005, the EBRD worked in partnership with commercial banks and other private lenders to achieve a total commercial co-financing amount of a1.9 billion.
The EBRD also works with donor countries to provide financing for institution-building and technical cooperation. Such funding has played a significant role in promoting transition. In 2005, total donor funding received was €78 million and is used to support project implementation as well as enhancements to the investment climate in the region. In 2005, €4.8 million of Canadian technical cooperation funding was used for EBRD commitments (projects identified and initiated). The only donors that committed more were the Early Transition Countries Multi-Donor (ETCMD) Fund, the European Commission and the European Agency for Reconstruction. Where possible, the EBRD also works with other IFIs in order to enhance the impact of the Bank’s financing and to benefit from complementarities with the other institutions. In 2005, the EBRD worked with other IFIs on projects involving €326 million in co-financing. Key partners included the International Finance Corporation and the European Investment Bank. In addition, the EBRD mobilized €338 million from official co-financing and €42 million from export credit agencies. Total co-financing from all partners was €2.6 billion in 2005.
Canada has encouraged this cooperation and coordination among multilateral development banks and is pleased with the efforts of the EBRD to work more closely with its sister institutions. Significant improvements in donor harmonization and coordination have been achieved through the recently established ETCMD Fund.
Human Resources
At end of December 2005, the EBRD had regular staff of 969 at its headquarters, largely unchanged from 2004. Locally hired staff in the Bank’s Resident Offices totalled 234, again similar to 2004. There are approximately twice as many male professional staff as female professional staff at headquarters, while it is evenly split among professionals in the Bank’s Resident Offices.
Managing Canada's Interests
Role of Governors
—The highest authority in the Bank is the Board of Governors. A Governor and an Alternate Governor represent each member country. The Honourable James Michael Flaherty, Minister of Finance, is the Canadian Governor and Mr. Peter Harder, Deputy Minister of Foreign Affairs, is the Alternate Governor.
Role of the Board of Directors
—The Board of Directors, which is responsible for the general operations of the Bank, is composed of 23 members, of which four are non-European members. Canada is the third largest non-European shareholder, after the United States and Japan, and by virtue of its share has the right to elect its own Director. Canada also represents Morocco at the Bank. The Canadian Director is Mr. Scott Clark. The Minister (Economic/Commercial) at the Canadian High Commission in London, Mr. David Plunkett, is the non-resident Alternate Director and represents Canada in the absence of the Canadian Director.
Role of Canadian Government Departments
—Within the Canadian Government, responsibility for oversight of the EBRD’s activities resides with the International Policy and Institutions Division of the Department of Finance Canada. In consultation with Foreign Affairs Canada, International Trade Canada and the Canadian International Development Agency (CIDA), the Department of Finance Canada regularly reviews the Bank’s policy papers and proposed country strategies and provides advice to the Canadian Director.
Functions of the Canadian Director
—In addition to participating in regular Board meetings, the Canadian Director is currently the Chairman of the Board of Directors’ Audit Committee, which oversees the integrity of the Bank’s financial statements, the soundness of the Bank’s system of internal controls, the ability of the control functions to perform their duties independently, and the independence, qualifications and performance of the external auditor. The Canadian Director was actively involved as a member of the Budget and Administrative Affairs Committee in 2005, until the Board Committees’ memberships were renewed. The Canadian Director continues to participate actively in Budget and Administrative Affairs Committee meetings as well as those of the Financial and Operations Policies Committee.
Positions Taken in 2005
—The Canadian Director has frequently spoken to the Board on the importance of the Bank’s charter requirement that member countries be committed to market reform and multi-party democracy. In 2005, Canada’s Director spoke on the need to address issues related to the disregard for human rights and democratic principles, and actively supported the decision to restrict the Bank’s operations in Uzbekistan. Canada’s Director also spoke strongly on the need to rigorously apply the additionality test for projects in the new EU countries and stressed the importance of the Bank’s goal of shifting operations to the south and east to early and intermediate transition economies.
To ensure EBRD operations are additional (i.e. do not displace financing available from the private sector on reasonable terms) and contribute to the transition process, Canada continued to advocate increased Bank efforts to find sound projects in countries that are in the early and intermediate stages of transition, respect the principles of multi-party democracy and are making efforts at reform. Only by focusing on quality projects will the Bank contribute to advancing transition in these countries. Canada has urged the Bank to be increasingly focused and strategic in the transition countries, where private sector financial and capital markets are increasingly active. The Canadian Director abstained from supporting several projects in 2005 due to a lack of additionality.
Canada has also been a strong proponent of greater EBRD transparency, accountability to shareholders and improved internal governance, believing that the Bank should be a model of behaviour for the region.
Canadian Staff at the EBRD
—Canadians are well represented on EBRD staff. At the end of 2005, there were 24 Canadian professionals on the staff of the EBRD, representing 3.7 per cent of total professional positions at headquarters, in line with Canada’s 3.4-per-cent share of the institution’s capital. It is noteworthy that Canadians fill the following positions: Director of Communications, Director of the Procurement Department and Director of the Early Transition Countries Initiative.
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Canada's Voting Record Canada and other shareholders typically raise concerns and questions about specific Bank operations before they get to the Board. As a result, decisions at the Board are generally taken by consensus. Directors may, however, abstain or vote against projects in consultation with their constituencies. The Canadian Director abstained or voted against the following policies and projects in 2005:
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Canadian Commercial Interests
The EBRD offers a number of investment opportunities for Canadian businesses and financial institutions. The objectives of the Canadian Office are to increase Canadian awareness of these investment opportunities, explain how the Bank’s financing mechanisms work, and ensure that EBRD policies and procedures are followed in a transparent and fair manner.
To achieve these objectives, the Canadian Office provides EBRD market information and intelligence to Canadian firms and advises Canadian project sponsors on EBRD financing options. In addition, the office develops commercial co-financing opportunities with Export Development Canada (EDC) and other Canadian financial institutions. Together with Foreign Affairs Canada, International Trade Canada and Industry Canada, the office also identifies EBRD procurement opportunities and, with CIDA, promotes Canadian technical cooperation activities and official co-financing with the EBRD.
In 2005, there was one new investment in the region with Canadian involvement. The Bank is providing a €63-million loan to Elektrownia Patnow II, a power plant in Poland, to help finance the completion of a single 464 megawatt generating unit of replacement capacity, to replace obsolete technology with energy-efficient technology. The Bank’s financing is complemented by commercial co-financing totalling €227 million, including a €42-million parallel loan from EDC. SNC Lavalin is the Canadian Engineering, Procurement and Construction contractor.
In 2005, 13 contracts totalling €3.45 million were awarded to Canadian consultants for project preparation, project implementation and investment climate reform support in the transportation, financial institutions, environment, natural resources and legal reform sectors. Eleven of these assignments were funded through five Canadian technical cooperation (TC) funds contributed by CIDA and two from Bank-funded budgets.
Under Canada’s Phase IV EBRD Trust Fund, a one-year extension to the two year Insolvency Specialist Position resident in the Legal Transition Team at EBRD headquarters was approved and is expected to be contracted in early 2006. Under Canada’s Phase V EBRD Trust Fund, one project was contracted for telecommunications regulatory support in the Kyrgyz Republic worth €199,845. Three new EBRD TC assignments were approved by CIDA and the Bank in 2005 covering state pension reform in Kazakhstan, investment and legal assistance for transit operations in Astana, Kazakhstan, and an EBRD gender mainstreaming study cost-shared with the UK Department for International Development. These contracts are expected to be tendered or finalized in early 2006.
In 2005, under the Canada South East Europe Fund Phase II, nine TC assignments worth €2.55 million were awarded to Canadian consultants. CIDA has identified its priorities in regional infrastructure, financial institutions, municipal and environmental industries, and environment and energy efficiency, and the assignments reflected these priorities. Three assignments were regional, covering several countries in Southeastern Europe, two were in Serbia and Montenegro, and there was one each in Albania, Bulgaria, FYR Macedonia and Romania.
In addition, Canada has a $2.5-million fund commitment for the TurnAround Management (TAM) Programme, which provides funding for Canadian retired and semi-retired business executives to act as advisors to small and medium-sized enterprises in the region. In 2005, five assignments worth $742,300 were awarded to Canadian advisors through the Canadian TAM fund, covering Armenia, Bosnia and Herzegovina and the Kyrgyz Republic. Five additional Canadian advisors were funded through other untied donor funds for TAM assignments.
Finally, the CIDA Ukraine SME Cooperation Fund expanded to include technical cooperation assistance to Ukrainian banks to expand their mortgage-lending activities.
On the commercial co-financing side, Canadians participated in nine transactions in 2005 for a total of €75 million. Cordiant Capital of Montréal has co-financed 22 transactions with the EBRD since 2002, ranking as the EBRD’s ninth largest co-financing partner. In 2005, Cordiant participated in seven EBRD transactions: one in Georgia, one in Romania, three in Russia, one in Serbia and Montenegro and one with the Regional Trade Facilitation Program. In addition, EDC provided a €42-million parallel loan to the Elektrownia Patnow II power project, and Alconsult International provided €4.2 million for the Quadriga Private Equity Fund in Russia.
There are significant opportunities for suppliers in EBRD-financed public sector goods, works, supply and installation contracts. In 2005, a total of 122 public sector contracts were recorded for a value of €617 million, of which the EBRD financed €487 million. In 2005, two Canadian tenders were received though neither won a contract.
Looking forward, the EBRD hopes to increase the number of high-quality Canadian project sponsors with whom it invests to better align its official co-financing and technical cooperation needs with Canadian interests in the region, and to strengthen its partnership with EDC and other Canadian commercial co-financiers.
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Promoting Canada's Interests Members of the Canadian Office made a number of visits to Canada and the EBRD’s countries of operations in 2005 to meet with business people, conduct seminars, speak at conferences and consult with government officials. The following events in 2005 were supported by the Canadian Director’s Office to promote Canada’s interests:
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Challenges Ahead
There were many transition advancements across the region of Bank operations through 2005, particularly in the advanced transition economies of Central Europe as well as in Southeastern Europe. In addition, advanced transition economies obtained high levels of commercial financing, which resulted in another year of negative EBRD net loan disbursements to these countries, as well as a substantial drop in their share of the EBRD’s financing. It is clear that the Bank’s portfolio and activities will increasingly shift towards the early and intermediate transition countries and Russia, where transition challenges remain the greatest and the Bank’s financing is required. The Bank’s future is to the south and the east of the new EU member countries.
With this in mind, in 2005, Bank shareholders considered the institution’s strategic direction in the context of its third Capital Resources Review. Work on the review will continue in 2006, and Bank Governors are expected to discuss and formally adopt it at the Bank’s Annual Meeting in May 2006. The review will set out how the Bank will adapt its core banking business model to remain effective in addressing transition challenges in the increasingly complex business environment it faces. As well, it will set out how the Bank will reallocate resources efficiently and effectively to support the operational shift south and east. From a Canadian perspective, this should include consolidation of the Resident Offices in the new EU member countries, consistent with their expected market-driven graduation within the short to medium term.
The Bank’s shift to early and intermediate transition countries in Southeastern Europe and the former Soviet Union is intensifying the Bank’s exposure to more difficult business environments. The early and intermediate transition countries have weak institutional capacity (economic, financial and legal), which the Bank must continue to help improve through policy dialogue and the provision of technical assistance in cooperation with other stakeholders, including donor countries and other IFIs. Expanded cooperation with other IFIs will also be necessary to develop high-transition-impact projects in order to strengthen the willingness of governments in some of the least advanced transition economies to move forward with politically difficult but essential reforms, particularly the restructuring or closure of large state-owned enterprises. The Bank will also need to develop a strategy for handling increased financial risks in the medium term. The challenge going forward will be ensuring that the Bank remains focused on its core transition mandate and its operating principles of transition impact, additionality and sound banking.
An excellent example of how the Bank is meeting these challenges is its new Early Transition Countries Initiative. This Initiative provides a platform for increasing both the Bank’s effectiveness and volume of activities in higher-risk markets, and enjoys the support of a multi-donor fund. It does so by streamlining its operations in early transition countries, creating new instruments to meet financing gaps and accepting more risk. The Bank will need to continue to innovate in the future while working in close partnership with other IFIs in order to address the transition gaps in these more challenging environments.
As the Bank shifts south and east, the importance of its policy dialogue role will increase. The need for strong corporate governance in all recipient countries will continue to figure as a key issue in the period ahead, and the EBRD will need to promote sound institutions, anti-corruption efforts, more efficient tax collection and improved legal and regulatory frameworks. It must ensure not only that appropriate legislation is developed, but also that it is properly implemented and enforced.
The need for the EBRD to observe its Article 1 requirement to operate only in countries committed to multi-party democracy and pluralism continues to be a challenge. While EBRD Governors have not declared any member to be in violation of the Article 1 requirement, the Board of Directors has limited operations in countries whose commitment is weak. This authority has been used in the cases of Belarus, Turkmenistan and Uzbekistan, where investments are restricted to private sector operations that can be insulated from government interference. The inclusion of Uzbekistan in this group as of July 2005 demonstrates that Article 1 principles are taken seriously by the Bank. The decision reflects the tragic events in Andijan, where hundreds of unarmed demonstrators were killed in an anti-government protest, as well as the fact that the Uzbek authorities have taken little initiative to reduce strong state control over the economy and media or to ease restrictions on opposition political parties and non-governmental organizations. Canada will continue to vigorously support Bank efforts to address issues related to the rule of law, human rights and democratic principles in all of the Bank’s countries of operations.
Finally, good governance within the EBRD itself is also important. The EBRD, as a multilateral institution, is not regulated. Thus, the Bank must ensure that it adopts and maintains the highest industry standards. To this end, a number of improvements were made in 2005. The Bank introduced formal certification of internal financial controls, new terms of reference were established for the Board’s committees, and the Audit Committee undertook a full review of the resource adequacy of the Bank’s control functions (internal audit, compliance, evaluation and risk management). Further, evaluation at the Bank was improved as the Evaluation Department began to report directly to the Board, becoming independent from Bank management. This type of independence is considered increasingly essential to the effective operation of evaluation departments. Still, additional measures can be taken to strengthen the Bank’s internal governance, ensuring that the institution’s standards meet best corporate practice. In particular, the Bank needs to adopt a new Code of Conduct to replace its current one, and the role of internal audit and its organizational relationships need to be updated to reflect best practices. Work on both issues is currently underway with Board approvals to be made in 2006. Canada has played, and will continue to play, an active role in improving the Bank’s internal governance.
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Contacting the Office of the Director for Canada |
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The Canadian Director’s office at the EBRD may be reached at:
Office of the Director for Canada and Morocco |
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| Mr. C. Scott Clark, Director | Tel: +44 20 7338 6457 |
| Mr. David Plunkett, Alternate Director1 | Tel: +44 20 7338 6507 |
| Ms. Michelle Kaminski, Advisor2 | Tel: +44 20 7338 6458 E-mail: kaminskm@ebrd.com |
| Ms. Sandy Ferguson, Advisor3 | Tel: +44 20 7338 6509 E-mail: fergusos@ebrd.com |
| Ms. Alicja Krivicky, Executive Secretary | Tel: +44 20 7338 6507 E-mail: krivicka@ebrd.com Fax: +44 20 7338 6062 |
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1 Resident at the Canadian High Commission in London. |
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For More Information on the EBRD The Bank releases considerable information on its various activities. Bank publications include information guides (such as Financing With the EBRD), special reports (such as the Annual Report and Transition Report), country strategies and assorted fact sheets. Information can also be obtained on the Bank’s Web site: Requests for information can be addressed to:
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