Archived - Report on Operations Under the European Bank for Reconstruction and Development Agreement Act - 2006 : 2

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Canada’s Focus in 2006 

1. Improved governance and accountability.

2. Reinforcement of Article 1 of the Agreement establishing the European Bank for Reconstruction and Development.

3. Reassessment of the EBRD’s mission and a new operational framework.

4. Promotion of a sound investment climate through strong institutions.

5. Environmental sustainability.

1. Governance and Accountability

A key element underpinning the Bank’s ability to influence transition is the demonstration effect of its own governance policies. The EBRD, therefore, must set for itself the very highest standard of internal governance. Canada supported the Bank’s efforts to ensure that its internal policies continue to conform to best practices.

Codes of Conduct

Canada supported the introduction of new Codes of Conduct for EBRD officials and the EBRD Board of Directors. The new codes were introduced following a review in 2004 which recognized the need to update the Bank’s original Code of Conduct.

The new Codes of Conduct, approved by Governors at the 2006 Annual Meeting, have been aligned with the existing best practices of other international financial institutions (IFIs). They also provide guidance on avoiding and handling conflicts of interests; establish a transparent mechanism for examining requests for derogations; regulate the manner in which private financial affairs can be conducted and the level of disclosure required; and provide for a robust procedure for dealing with alleged breaches of the codes.

Public Information Policy

Canada was active in encouraging the Bank to enhance the transparency of its activities, in line with modern corporate governance practices. This focus is consistent with efforts at other IFIs, which Canada has also strongly supported.

Canada welcomed the Bank’s decision to broaden its public disclosure policy. In 2006, the Bank agreed (a) to disclose minutes of Board of Directors’ meetings; (b) to make more information on its internal organization available on its website (including the Bank’s organigram, as well as the terms of reference and membership of committees of the Board of Directors); (c) to make project summary documents available in relevant national languages; (d) to provide a summary of the annual staff compensation and benefits proposal; and (e) to post a list of policies and strategies scheduled for development or review in the year ahead.

Anti-Corruption Strategy

Canada was also active in pressing the Bank to strengthen its anti-corruption policy. Canada supported the Bank’s proposal to amend its practices and fight corruption in line with the harmonized approach developed by the main IFIs. Canada commended the Bank’s effort to move quickly with the adaptation of the new harmonized definitions and subsequent amendments to its existing procurement policies and rules, so that they conform with the common strategic approach developed by main IFIs.

Canada is looking forward to the first report on results, in particular to seeing how well the new anti-corruption and fraud prevention guidelines have been balanced with the Bank’s objective to support the development of the private sector.

Canada commended the Bank for publishing its first anti-corruption report,^[4] aimed at informing shareholders, other financial institutions and investors about the EBRD’s efforts to combat corruption and fraud in its own operations. The report also includes highlights of studies dealing with the prevalence of corruption in the EBRD’s countries of operations.

2. Commitment to Article 1—Engagement in Belarus

Canada took a strong stand in favour of a vigorous interpretation of the Bank’s responsibilities under Article 1 of the Agreement establishing the European Bank for Reconstruction and Development to severely restrict operations in countries where the commitment to democratic values is very weak. The EBRD has an explicit political mandate, as set out in Article 1, to foster transition in countries that are committed to and applying the principles of multi-party democracy and pluralism. In countries with poor democratic and human rights records such as Belarus, the Bank limits its scope of activities to the financing of the private sector while continuing to seek ways of improving the investment climate and supporting reform efforts.

The new EBRD Strategy for Belarus, approved in 2006, reflects the fact that the country’s progress towards implementing Article 1 continues to be slow and characterized by setbacks. The development of the new strategy had a high profile in Canada, given the Canadian government’s firm position on the need for democratic reform in Belarus. In practical terms, at IFIs, Canada has consistently opposed EBRD lending to the Belarus government, while holding open the possibility of supporting small EBRD operations with private sector entities that address basic human needs. The EBRD’s new strategy for Belarus, which continues to focus exclusively on the private sector, is consistent with this approach.

3. Reassessing the Bank’s Mission and Operations

Canada played an active role in the development and discussion of the EBRD’s third Capital Resources Review (CRR3), stressing the need for the institution to move decisively to increase its operations in the early transition economies of the former Soviet Union and Southeastern Europe. At the EBRD’s 2006 annual meeting, Governors approved the CRR3, which outlines new strategic directions that define the Bank’s transition objectives, operational activities, risk management, financial performance and resource requirements. A key feature of this strategy is the graduation, by 2010, of the eight Central European countries that joined the EU in 2004. The strategy will commence with the consolidation and closure of three resident offices in Central Europe in 2007, complemented by an expanded presence in other countries, including Russia and Ukraine.

Canada welcomed the CRR3 and supported the EBRD’s shift in operations to Southeastern Europe and the former Soviet Union, where more significant transition challenges remain. This strategic framework will ensure that the EBRD’s resources are allocated to where they can yield the greatest transition impact.

4. Promotion of a Sound Investment Climate

A Well-Functioning Financial Sector

Canada strongly supports the EBRD’s activities in the financial sector as vital to integrating transition countries into the global economy. The EBRD seeks to strengthen confidence in the financial 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 Bank offers important insights on supervisory and regulatory requirements, which it shares with other IFIs 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 micro, small and medium-sized enterprises, to facilitate foreign direct investment and to strengthen the commercial orientation of state-owned financial institutions, particularly in preparation for privatization.

The Bank also contributes to a well-functioning financial sector through its efforts to stimulate the development of local capital markets. One approach involves the EBRD working with authorities to help develop the legal framework for the issuing of local currency bonds. The EBRD’s three domestic ruble floating-rate note issues (one in 2005 and two 2006) highlight both the transition potential of developing local capital markets and the extensive regulatory dialogue required. In preparing these issues, the Bank has worked closely with the Russian authorities since 1999 and has provided technical and legal expertise to develop the framework for the issuance of long-term local currency bonds. The bonds represent an important step in the development of the Russian capital market, as they introduce a new asset class to Russia and open the door to other international issuers. The EBRD is working with other governments, including in Ukraine and Kazakhstan, with the same objective in mind.

Micro, Small and Medium-Sized Enterprises

Canada supports the Bank’s strategy to promote micro, small and medium-sized enterprise (MSME) growth, develop proper financial instruments for MSME support and encourage the development of strong business associations. Canada is a strong proponent of fostering the development of local management expertise, skills and innovation. It is a strong supporter of the Bank’s strategy for the MSME sector, which 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.

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 MSME sector is the backbone of a country’s sustained economic growth and is crucial to help countries become internationally competitive and self-sufficient. A dynamic local workforce undertaking a full spectrum of business activities, coupled with well-established local financing arrangements, ensures that countries are less vulnerable to global capital movements.

5. Environmental Sustainability

Sustainable Energy Initiative

Canada welcomes an expanded role for the EBRD on the issues of climate change and increased energy security. Canada has already contributed some funds to the Sustainable Energy Initiative through its €20-million commitment to the "nuclear window" of the Northern Dimension Environmental Partnership Support Fund.

As one of the fastest-growing parts of the world, the transition region has a growing demand for energy. One of the major challenges facing the region is inefficient use of energy, a legacy of the former command economy that undermines the competitiveness of enterprises and economies, threatens energy security and contributes disproportionately to carbon emissions.

The EBRD presented its Sustainable Energy Initiative at the 2006 Annual Meeting, and the initiative was broadly supported by the Bank’s shareholders. Under the new initiative, the Bank would more than double its energy efficiency and cleaner energy investments over the next three years by mainstreaming sustainable energy investments across all sectors, strengthening the Bank’s capacity to deliver; ramping up its policy dialogue in cooperation with other international institutions; and establishing a new partnership with donors to support the initiative.^[5]

Canada’s Participation in the EBRD 

Benefits of Participation 

Canada’s membership in the EBRD and its active participation in the discussion of policy and operational issues enable it to project Canadian values and to help shape regional norms and rules. By supporting continued political and economic reform in Central and Southeastern Europe and the former Soviet Union, Canada is contributing to the region’s stability and integration into the world economy.

Canada and the Bank share the overriding objective of developing a strong private sector in the Bank’s countries of operations by mobilizing financing for projects with a high transition impact and by providing advice and technical assistance to businesses and governments. Through its participation in the EBRD’s Board of Directors’ policy discussions, Canada has been able to reinforce this mandate and press for greater attention to governance issues in the Bank’s operations. Moreover, Canada has been able to help shape environmental and social safeguard policies that govern EBRD lending. The EBRD also provides Canada with a vehicle through which it can reach poor transition countries that are not normally reached through our bilateral development assistance programs.

As detailed earlier, Canada is also interested in securing important commercial benefits. In order to implement transition projects, the Bank often relies on goods and services from its members through procurements. This allows Canadian firms to have access to different markets and to enjoy commercial opportunities they may not otherwise have. An area where Canada has a comparative advantage and where Canadians have been successful in winning EBRD-financed contracts is consulting services. In 2006, however, interest by Canadian companies in bidding on EBRD-financed public tenders was weak, and no Canadian firm was awarded a tender. However, the EBRD offers Canadian companies considerable opportunities to finance investments in its countries of operations as well as access to public sector tenders.

Looking forward, the EBRD hopes to increase the number of high-quality Canadian project sponsors with which 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 Export Development Canada and other Canadian commercial co-financiers.

Governmental and Professional Involvement 

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. In consultation with the Department of Foreign Affairs and International Trade and the Canadian International Development Agency (CIDA), the Department of Finance 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 a member of the Board of Directors’ Budget and Administrative Affairs Committee, which monitors efficiency, cost control and budgetary prudence, oversees the Bank’s human resources policies (including those relating to governance and ethics), and ensures that the Bank’s resources are directed towards its priorities.

Canadian Staff at the EBRD—Canadians are well represented on EBRD staff. At the end of 2006, there were 23 Canadian professionals on the staff of the EBRD, representing 3.4 per cent of total professional positions, equal to 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. Members of the Canadian Director’s office made a number of visits to Canada and the EBRD’s countries of operations in 2006 to meet with business people, conduct seminars, speak at conferences and consult with government officials.

The following events in 2006 were supported by the Canadian Director’s office and promoted Canada’s interests:

• The Canadian Director and Business Advisor participated in the Canada Trade Days in Kiev, Ukraine, which was sponsored by the Canadian Embassy in Kiev.

• The Canadian Director went to Moscow to participate in the Adam Smith Conference and meet with Canadian and Russian business and government officials.

• On the Canadian outreach side, the Canadian Director and the Business Advisor organized the visit of EBRD President Jean Lemierre to the Conférence de Montréal and arranged a business program, including additional meetings with Canadian corporates interested in investing in the Bank’s region of operations.

• The Business Advisor and an EBRD Russia team senior banker participated in the Canada Eurasia Russia Business Association (CERBA) Canada-Russia forestry business seminar. The Advisor also participated in the Globe Environmental Industries Effective Bidding Workshop in Vancouver to identify opportunities for Canadian companies in environment-related procurement at the EBRD, as well as the annual CIDA/CME (Canadian Manufacturers & Exporters) International Development Days (IDD) held in Winnipeg. The Canadian office arranged for the EBRD Director of the Consulting Services Unit to participate in the CIDA/CME IDD, as well as business outreach programs with the Ontario and Alberta governments and industry association representatives in Toronto and Calgary.

• The EBRD’s Deputy Chief Economist and Director, Strategy and Analysis and the Canadian Policy Advisor travelled to Toronto and Ottawa to present to business, academics and government officials key findings of the Bank’s 2006 Transition Report on developments in the business and economic environments of the Bank’s countries of operations.

Contribution to Ordinary Capital Resources 

At the end of 2006, the total authorized capital of the Bank was €20 billion. Canada’s share is 3.4 per cent, or a680 million (C$968 million), of which 25.3 per cent, or C$245.2 million, is paid-in. The remainder is callable and would be provided only in the unlikely event that the EBRD faces severe financial difficulty. Canada’s paid-in contribution is treated as a non-budgetary expenditure as shares in the Bank are considered an asset. Our callable capital represents a contingent liability.

Canada’s paid-in capital is being provided in a series of instalments of cash and non-interest-bearing demand notes, which are then encashed over a five-year period. Payments are made in eight equal annual instalments (40 per cent in cash and 60 per cent in non-interest-bearing demand notes). Canada’s last note encashment will be made in 2009.

Canadian Payments to the EBRD

Year	Total cash payments in US$ (includes note encashment and cash payments)	Total cash payments in C$1 (includes note encashment and cash payments)
1991	23,807,004	27,278,065
1992	15,871,336	19,177,335
1993	19,839,170	25,588,561
1994	23,807,004	32,517,987
1995	23,807,004	32,677,494
1996	7,935,668	10,821,077
1997	3,967,334	5,492,325
1998	6,315,572	9,366,645
1999	7,773,010	11,549,451
2000	9,230,449	13,709,085
2001	10,687,891	16,549,305
2002	12,145,331	19,072,539
2003	12,145,331	17,021,217
2004	12,145,331	15,807,394
2005	12,145,331	14,715,677
2006	5,829,759	6,611,492
2007	4,372,320	4,958,6202
2008	2,914,880	3,305,7472
2009	1,457,440	1,652,8732
Notes: 1 Exchange rates are based on Bank of Canada annual noon exchange rate averages. 2 2006 exchange rate used as an estimate.

EBRD Transactions in Canada or in Canadian Currency 

The EBRD did not undertake any transactions in Canada in 2006.

Contribution to Special Funds 

In addition to its financing activities through loans and equity investments, the EBRD advises businesses on a variety of issues, including: physical and financial restructuring; the formulation of business plans; identification of markets, products, technologies, and financial and technical partners; and mobilization of project finance. These advisory services are provided through special funds set up in partnership with donor countries and/or donor institutions. As the Bank continues to shift its operations towards the south and the east of the transition region, these funds and the technical capacity-building assistance they offer will grow in importance. Canada has contributed to the following special funds:

Early Transition Countries Multi-Donor Fund—CIDA is one of the 11 donors to this multi-donor fund, which was launched in 2004 and targets Bank programming in the seven poorest countries of the EBRD’s region of operations (Armenia, Azerbaijan, Georgia, the Kyrgyz Republic, Moldova, Tajikistan and Uzbekistan). This fund is the first EBRD funding mechanism to be classified as Official Development Assistance by the Development Assistance Committee of the Organisation for Economic Co-operation and Development (OECD/DAC). Canada has contributed C$1.7 million to this untied fund.

Canadian Technical Cooperation Fund—The main purpose of this fund is to provide financing to hire Canadian consultants for EBRD projects across a wide range of sectors and EBRD countries of operations. Canada has transferred C$17 million to the EBRD for technical cooperation since 1992. Canada’s contribution, which was renewed in 2006 for an additional three years until 2009, includes technical cooperation in Armenia, Georgia, Russia and Ukraine, and focuses on the environment, private sector development and municipal governance.

Chernobyl Shelter Fund—The main purpose of this fund is to secure the sarcophagus around the destroyed Unit IV nuclear reactor in Ukraine. The total estimated cost of this 10-year project is roughly US$1.1 billion, of which US$716 million has been pledged so far. Canada has pledged US$33 million, including US$0.8 million of bilateral assistance for ventilation stack repair.

Nuclear Safety Account (NSA)—This facility was established in 1993 to help finance the closure of the Chernobyl nuclear power plant and to improve safety conditions at nuclear power plants in countries of operations until the plants can be closed. The NSA complements other bilateral and multilateral nuclear safety technical assistance and functions in parallel with multilateral efforts to achieve broader energy sector reform in the region. Canada has contributed C$19.5 million to the total fund of €280 million. Canada’s contribution has been completely disbursed.

CIDA-EBRD Cooperation Fund for Southeastern Europe (CFSEE)—By 2002, Canada had contributed $10 million in support of the EBRD’s South Eastern Europe Action Plan, to be used for technical cooperation and co-financing activities. These funds, tied to Canadian consultants, were used in Albania, Bosnia and Herzegovina, Bulgaria, Croatia, FYR Macedonia, Romania, Serbia and Montenegro. In 2003, an additional $6 million was added to the CFSEE to support work on CIDA priority sectors and countries of focus. CIDA is participating, through the CFSEE, in a newly created Western Balkans Initiative, which includes within its scope a multi-donor technical cooperation fund and is intended to improve donor coordination arrangements in the Western Balkans.

TurnAround Management Programme—The TurnAround Management Programme was established in 1993 to match senior industrial advisors from market-driven economies with chief executives of selected firms in the region that are in financial difficulty. The objective is to provide industrial management know-how and develop business skills so that these companies can become competitive and profitable. Canada has contributed C$2.55 million to this fund.

Technical Assistance in Support of the Ukraine Micro, Small and Medium-Sized Enterprises Line of Credit II—Canada agreed to provide C$3 million for technical assistance services by qualified Canadian organizations to Ukrainian commercial banks receiving loans under the EBRD’s Ukraine Micro, Small and Medium-Sized Enterprises Line of Credit II for on-lending to micro, small and medium-sized enterprises. To date, C$2.12 million has been transferred to the Bank for technical assistance that includes risk- and loan-evaluation training. The Fund is now being used in support of the Mortgage Lending Framework, focusing on local banks’ capacity building.

Northern Dimension Environmental Partnership—Canada is the sole non-European contributor to this fund, which 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 has committed €20 million, which is earmarked for the facility’s "nuclear window" and counts towards Canada’s commitment to the G8 Global Partnership Program.

CIDA-EBRD Cooperation Fund for Central Asia and the South Caucasus—This C$2-million fund was created in 2004 for work on project preparation and implementation activities in Central Asia and the South Caucasus. The fund targets the following sectors: agribusiness, natural resources, infrastructure financing (e.g. transport, telecommunications, municipal finance), and capacity development of local institutions working in private sector development and micro-lending institutions. Given CIDA’s program focus, priority will be given to projects in Georgia and Tajikistan. This is the first Canadian bilateral fund at the EBRD that is untied (i.e. procurements are not limited to Canadians).

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