Archived - Report on Operations Under the European Bank for Reconstruction and Development Agreement Act - 2006 : 1

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A Word From the Minister of Finance

I am pleased to present to Members of Parliament and to the Canadian public the Department of Finance’s 2006 Report on Operations Under the European Bank for Reconstruction and Development Agreement Act. This report responds to the requirement laid out in Article 7 of the European Bank for Reconstruction and Development Agreement Act that the Minister of Finance "shall cause to be laid before each House of Parliament by March 31 of each year or, if that House is not then sitting, on any of the thirty days next thereafter that it is sitting," a report containing a general summary of operations under this act, including their sustainable development and human rights aspects.

The format of this report differs significantly from those of past years. Given feedback from parliamentarians and civil society on this report and its companion report (Report on Operations Under the Bretton Woods and Related Agreements Act), this report has been recast with three goals in mind:

1. To improve the accountability of the Department of Finance in managing Canada’s relationship with the European Bank for Reconstruction and Development (EBRD).
2.  To make Canada’s policy objectives with respect to this institution clearer, which in turn will make it easier to measure success.
3. To have Canada continue to push the frontiers of disclosure, without violating Canada’s requirement to respect the confidentiality policies of the EBRD.

The 2006 report focuses more clearly on Canada’s policy objectives at the EBRD, which can be summarized as:

1. Promoting good governance and accountability, including respect for human rights.
2. Promoting the environmental sustainability of EBRD projects.
3. Ensuring that the EBRD shifts its operations to where transition is less advanced.
4. Advancing Canadian commercial interests.

It is my hope that this report will provide parliamentarians and all Canadians with a better understanding of the role that Canada is playing in promoting governance and accountability in the institution and in ensuring that the EBRD’s operations accord with its transition mandate.

The Honourable James M. Flaherty, P.C., M.P.
Minister of Finance

Mandate and Role of the EBRD 

Overview 

The European Bank for Reconstruction and Development (referred to in this document as the EBRD or the Bank) was established in 1991. Its aims are to foster the transition towards open, market-oriented economies in Central and Southeastern Europe, as well as in the successor states of the former Soviet Union,^[1] and to promote private and entrepreneurial initiative in those countries that are committed to the fundamental principles of multi-party democracy, pluralism and market economics.^[2] To deliver on its mandate, the Bank focuses its activities on assisting its 29 countries of operations in implementing economic reforms, taking into account the particular needs of countries at different stages in the transition process. The EBRD also places particular emphasis on the promotion of democratic institutions and human rights in its countries of operations.

The Bank’s overriding focus is the private sector, with a strong operational emphasis on enterprise restructuring, including the strengthening of financial institutions, and the development of infrastructure needed to support the private sector. The EBRD’s charter stipulates that not less than 60 per cent of its financing commitments should be directed either to private sector enterprises or to state-owned enterprises implementing a program to achieve private ownership and control. All of its financing projects have to demonstrate environmental sustainability as per the Bank’s Articles of Agreement. In promoting economic transition, the Bank acts as a catalyst for increased flows of financing to the private sector, as the capital requirements of these countries cannot be fully met by official multilateral or bilateral sources of financing, and many foreign private investors remain hesitant to invest in the region, particularly the central Asian republics. For example, in 2006, for every euro the EBRD invested, it mobilized an additional 1.7 euros from the private sector and other multilateral and bilateral agencies.

The EBRD’s operations to advance the transition to a market economy are guided by four principles: transition impact, additionality, sound banking and environmental sustainability. Financing is provided for projects that expand and improve markets, help to build the institutions necessary for underpinning a market economy, and demonstrate and promote market-oriented skills and sound business practices. EBRD financing must also mobilize additional sources of financing and not displace them. Bank projects must be sound from a banking perspective, thus demonstrating to private investors that the region offers attractive returns. Adherence to sound banking principles also helps to ensure the financial viability of the EBRD and hence its attractiveness as a co-investment partner for the private sector. Finally, the Bank assesses the environmental sustainability of all of its projects, and its project environmental safeguards are leading-edge.

The Bank’s medium-term operational priorities are premised on: the central importance of creating and strengthening institutions that ensure markets work well; the key role that small businesses can play in creating dynamic, competitive and more equitable economies; and the relevance to the transition process of the Bank’s mandate to support countries committed to and applying the principles of multi-party democracy and pluralism.

To achieve these priorities the Bank focuses on:

• Promoting transparency and accountability in public sector management.
• Developing sound financial sectors linked to the needs of enterprises and households.
• Providing leadership for the development of micro-lending and small and medium-sized enterprises (SMEs).
• Developing market-based and commercially oriented infrastructure.
• Demonstrating, through selected examples, effective approaches to restructuring viable large enterprises.
• Taking an active approach in its equity investments to improve corporate governance.
• Engaging governments in policy dialogue to strengthen institutions and improve the investment climate.
• Taking a regional approach where appropriate.
• Promoting sustainable development and environmental due diligence.

Countries of Operations 

The EBRD has 63 members: 61 countries, the European Community and the European Investment Bank.

How the EBRD Works 

The highest authority in the Bank is the Board of Governors. It meets annually and approves the institution’s annual report, budget, financial statements and independent auditor’s report, the election of the Chair and Vice Chair for the next Annual Meeting, as well as other items requiring Governors’ approval. A Governor and an Alternate Governor represent each member country. The Board of Directors, which is responsible for the general operations of the Bank, is composed of 23 members, of which four are non-Europeans.

The EBRD’s share capital is provided by member countries, with proportional voting rights. The EBRD’s authorized capital is €20 billion—Canada’s capital share is 3.4 per cent.

Project Finance

The EBRD offers a full array of financial products and services, including:

• Longer-term loans.
• Equity investments.
• Quasi-equity instruments (subordinated loans, preferred stock, income notes).
• Guarantees and standby financing.
• Risk management (intermediation of currency and interest rate swaps, provision of hedging facilities).

Eligibility

Eligible projects must be supported by a strong business case, benefit the economy of the host country and comply with the EBRD’s environmental guidelines. Projects in all industries are eligible for EBRD financing except those producing military equipment, tobacco and distilled alcohol. Although it primarily finances private sector projects, the Bank may provide financing to state-owned companies provided they are operating competitively, particularly if the financing attracts private and/or foreign capital. The EBRD may finance both locally and foreign-owned private companies, as well as joint ventures between foreign and local shareholders.

In order to ensure the participation of private sector investors and lenders, the EBRD limits the total amount of debt and equity financing for any single project to 25 per cent of total estimated project costs. However, in certain circumstances, it may provide up to 35 per cent of the equity capital for a project, provided it is never the largest shareholder.

EBRD investments range from €5 million to €230 million. Smaller projects are financed both directly by the EBRD and through local financial intermediaries. By supporting local commercial banks, micro-finance banks, equity funds and leasing facilities, the EBRD has helped finance over 1 million smaller projects.

Fees

The EBRD charges market rates for its private sector financing and provides uniform loan pricing for sovereigns of LIBOR (London Inter-Bank Offered Rate) +100 basis points. In addition, fees vary according to the nature of the project and the amount and complexity of the work required of the EBRD.

Funding of EBRD Activities

The EBRD’s equity and quasi-equity investments are funded out of its net worth—the total of paid-in capital and retained earnings. Of the funding required for its lending operations, 100 per cent is borrowed in international financial markets through public bond issues or private placements. The EBRD’s bond issues have been given triple-A ratings by Moody’s Investors Service and Standard & Poor’s.

Advice and Technical Assistance

The Bank uses its close relationship with governments in the region of operations to promote policies that bolster the business environment. The EBRD advises governments on how to promote a sound investment climate and a stronger institutional framework, which helps to ensure a well-functioning private sector. The EBRD provides advisory services in the following areas: effective legal and regulatory framework, business integrity and sound corporate governance, anti-corruption practices, fair and predictable taxation, and transparent accounting.

Canada’s EBRD Priorities 

Canadian Policy Priorities 

Canada’s participation in the EBRD supports our international development and foreign policy priorities. Canada is committed to sustainable development that promotes democracy, peace and security, human rights and equality and contributes to a more secure, equitable and prosperous world. By fostering transition towards open, market-oriented economies in its countries of operations, the Bank advances Canada’s international priorities, strategic interests and values. Through sound investments that support economic growth and contribute to the transition region’s integration into the world economy, the EBRD promotes prosperity and stability, which are important to Canada as a trading nation.

The Government of Canada has four priorities in relations with the EBRD:

1. Promoting good governance and accountability (at the national and corporate level), including respect for human rights.
2. Promoting the environmental sustainability of EBRD projects.
3. Ensuring that the EBRD maintains a strong transition focus and shifts its operations to countries where transition is less advanced.
4. Advancing Canadian commercial interests.

1. Governance and Accountability

Canada’s involvement with the EBRD provides the opportunity to promote the Canadian values of democracy, rule of law, accountability and respect for human rights. Canada is a strong proponent of the Bank’s ongoing efforts to improve and strengthen governance and accountability in its countries of operations (through technical assistance programs and dialogue with national and local authorities) so as to ensure increased transparency, optimal use of investment funds, promotion of the rule of law, respect for human rights, safety and equality. Canada also supports the Bank’s efforts to encourage mechanisms of multilateral cooperation on democratic issues.

Improved Corporate Governance

Canada has maintained that the Bank’s fundamental priority for private sector development is to create an enabling environment for investment and sound regulatory frameworks for the private sector to develop in a sustainable fashion. Good governance helps ensure that corporations integrate into the international financial system and strengthens their international competitiveness. Strong, transparent governing institutions improve their effectiveness and accountability towards their people. To this end, through technical cooperation funds, the EBRD advises national and local governments on ways to improve and strengthen their institutional frameworks in order to ensure a well-functioning private sector.

Strong Internal Governance

Canada is pleased with the Bank’s commitment to enhance the transparency of its activities, in line with modern corporate governance practices. This focus is consistent with efforts at other international financial institutions (IFIs), which Canada has also strongly supported. Canada welcomes the Bank’s efforts to benchmark its practices against those of other IFIs. The EBRD has developed and implemented a series of policies and strategies—most notably Codes of Conduct and an Anti-Corruption Strategy—to ensure that it follows best practices. These are described in detail in the section "Canada’s Focus in 2006."

Strong Democratic Institutions

In keeping with its mandate to promote economic and democratic reform, the Bank regularly reviews political and economic progress in transition in its countries of operations. The EBRD has limited its operations in Belarus, Turkmenistan and Uzbekistan, where the commitment to core democratic principles is particularly weak. The country strategies for Belarus and Turkmenistan were renewed in 2006 and, given the lack of progress in economic and political reform in both countries, the Bank’s approach of severely restricting its operations was reconfirmed. As the geographical focus of the Bank’s operations continues to shift to more challenging environments, the EBRD’s commitment to the political requirements of Article 1 remains imperative. EBRD analysis shows a strong, positive relationship between progress in transition and political liberalism, i.e. the establishment of strong, democratic institutions.

2. Environmental Sustainability

Environmental and social issues are increasingly regarded as fundamentally connected with long-term sustainability of economic performance, political stability and the quality of life of a region’s inhabitants. Canada has an interest in promoting environmental sustainability in the transition region as a means of fostering a strong global economy. Canada is therefore a strong proponent of sustainable best practices with respect to EBRD investments in both the public and private sector. EBRD priorities include:

• Fully integrating environmental and social (e.g. health and safety, labour and community issues) considerations into the project cycle and ensuring that each project considered for financing undergoes environmental and social appraisal.
• Promoting environmental investments across a variety of sectors to achieve resource efficiency, cleaner production processes, biodiversity and best practice in environmental management.
• Financing projects with clear environmental objectives, such as better water and wastewater management, energy efficiency and renewable energy, and working in partnership with other institutions to address regional and global environmental issues.^[3]

3. Transition Impact

Canada has a strong interest in ensuring that nascent democratic regimes have access to the financing and advice they need in order to deliver on their political and economic efforts towards transition to market-oriented democracies. The EBRD has an important role to play in this process. The entry of eight EBRD borrowers into the European Union in May 2004 marked a milestone in the transition process and its success. The EBRD played no small part in this process, helping these countries create the right conditions to attract private sector financing without the Bank’s participation. Going forward, the Bank must shift its operations to borrowing countries in the former Soviet Union and Southeastern Europe that have the greatest need for the EBRD’s support.

4. Advancing Canadian Commercial Interests

The EBRD offers a number of investment opportunities for Canadian businesses, including 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 and other Canadian financial institutions. Together with the Department of Foreign Affairs and International Trade and Industry Canada, the office also identifies EBRD procurement opportunities and, with the Canadian International Development Agency (CIDA), promotes Canadian technical cooperation activities and official co-financing with the EBRD.

In 2006, the Board of Directors approved two investments with Canadian involvement. The first involved a loan to support the modernization and expansion of Chelopech Mining EAD, a Bulgarian company which is fully owned by Dundee Precious Metals Inc. of Toronto. The second was a multi-vendor leasing framework in Russia, which was jointly developed by Export Development Canada and the EBRD.

In 2006, 14 contracts totalling €4.6 million were awarded to Canadian consultants for project preparation, project implementation and investment climate reform support. The assignments were funded by CIDA technical cooperation funds at the EBRD (eight assignments), by the EBRD directly (four assignments), and through other untied technical cooperation funds at the EBRD (two assignments).

Canada’s Voting Record in 2006 

On January 30, 2004, the Minister of Finance, as Governor for Canada at the EBRD, voted to amend the Agreement establishing the European Bank for Reconstruction and Development to authorize the Bank to undertake operations in Mongolia. This proposal had the unanimous support of EBRD members, given Mongolia’s close economic linkages to the former Soviet bloc countries and its long history with central planning. Canada ratified the amendment to the EBRD’s Articles of Agreement in the Budget Implementation Act, 2006.

On June 3, 2006, after declaring its independence from the State Union of Serbia and Montenegro and being recognized as an independent country by the international community and the Government of Serbia, the Republic of Montenegro was formally admitted as a member of the EBRD. In September 2006, following a Governors’ vote, which Canada supported, the Republic of Montenegro became a borrowing member of the EBRD.

On November 6, 2006, Governors voted to adjust the formula for calculating the remuneration of Directors, Alternate Directors and the President of the EBRD. Canada supported proposed changes.

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