Archived - Canada at the European Bank for Reconstruction and Development 2007: 1

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Letter From the Minister

I am pleased to present to Members of Parliament and to the Canadian public the Department of Finance’s 2007 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 Parliament, on or before March 31 next following the end of each calendar year" a report containing a general summary of operations under this Act, including their sustainable development and human rights aspects. More importantly, it reflects our government’s strong commitment to transparency and accountability, and our desire to promote effective and efficient international financial institutions.

Last year’s report focused more clearly on Canada’s policy objectives at the European Bank For Reconstrcution and Development (EBRD), which can be summarized as:

1. Promoting good governance and accountability.

2. Ensuring institutional effectiveness.

3. Promoting the environmental sustainability of EBRD projects.

4. Advancing Canadian commercial interests.

In the 2007 report, we describe Canada’s achievements in meeting these priorities. In addition, for the first time, the report takes a forward-looking view and identifies Canada’s future priorities over a three-year period to provide the reader with a better understanding of our objectives with respect to the EBRD. The report also identifies additional actions going forward.

The format of this report draws on improvements made last year. The improvements are based on feedback received from parliamentarians and civil society on this report and its companion report (the Report on Operations Under the Bretton Woods and Related Agreements Act). The 2007 report has been recast with three goals in mind:

1. To make Canada’s policy objectives with respect to the EBRD clearer, making it easier to measure the success of Canada’s relationship with the institution. To this end, the 2007 report includes specific actions that Canada will advocate at the Board of Directors and the Annual Meetings.

2. To have Canada continue to push the frontiers of disclosure, without violating Canada’s requirement to respect the confidentiality policies of the EBRD.

3. To reach out to a wider audience, especially professionals and students with an interest in international development.

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 the institution and in helping to ensure that the EBRD achieves its important transition mandate.

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

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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 toward 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. Through its investments, and in line with its Articles of Agreement, the EBRD promotes 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 the 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. The Environmental Policy is reviewed every three years to ensure the Bank adopts state-of-the-art best practices in all projects.

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 2007, 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 that underpin 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 ensures the financial viability of the EBRD and hence its attractiveness as a co-investment partner for the private sector. Finally, the Bank helps to ensure that environmental sustainability is reflected in all of its projects.

The Bank’s medium-term operational priorities are premised on: the central importance of creating and strengthening those institutions that ensure markets work well; the key role that small businesses can play in creating dynamic, competitive and more equitable economies; and the key role the transition process plays in 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.
• 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. There were 29 countries of operations last year.^[3]

EBRD Membership

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

 

EBRD Governance and Oversight

The highest authority in the Bank is the Board of Governors. It meets annually and approves the institution’s annual report, net income allocation, financial statements and independent auditor’s report, and 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 of the 63 shareholders.

The Board of Directors is responsible for the general operations of the Bank. It is composed of 23 members, with each representing either one member country or a constituency of member countries. The Board helps to set the strategic and financial course for the Bank, in consultation with management.

Board Committees

The Board has established four committees that are responsible for overseeing the activities of the Bank’s management team: the Board Steering Group, and the Audit, Budget and Administrative Affairs, and Financial and Operations Policies Committees. This division of labour is consistent with good corporate governance practices and provides an appropriate system of checks, balances and incentives. In addition, the structure ensures a more effective discussion by the Executive Board, once initiatives are ready for approval.

The Board Steering Group is responsible for the coordination of the Committees’ work programs to avoid overlap and ensure timely completion. The Chair of the Group manages the nomination processes for Committees. The Group is currently chaired by the Canadian Director.

The Audit Committee’s primary objective is to ensure that the financial information reported by the Bank is complete, accurate, relevant and timely. The Committee oversees the integrity of the Bank’s financial statements and the compliance of its accounting and reporting policies with the requirements set out in the International Financial Reporting System. It also reviews the EBRD’s system of internal controls and its implementation, as well as the functions of the internal audit, evaluation and risk management teams. The Committee is currently chaired by the UK Director.

The Budget and Administrative Affairs Committee is responsible for ensuring that the Bank’s budgetary, staff and administrative resources are aligned with its strategic priorities. To this end, the Committee reviews the medium-term resource framework, annual budgets and business plan. It also oversees the Bank’s human resources policies, including ethics. The Committee is currently chaired by the German Director. The Canadian Director is a member of the Committee.

The Financial and Operations Policies Committee oversees the Bank’s financial policies, including the annual borrowing plan prepared by the Treasury Department. The Committee also reviews country strategies and proposed projects. The Committee is also responsible for the transparency and accountability of the Bank’s operations, as laid out in the 2006 Public Information Policy. Since 2007, the Committee has also been charged with overseeing the net income allocation process. As well, it is responsible for the renewal of the Bank’s Environmental Policy. The Committee is currently chaired by the Hungarian Director.

How the EBRD Works

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 and the transition process 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 is primarily a financier of private sector projects, the Bank may provide finance to state-owned companies, provided they are operating competitively and, in particular, that such financing facilitates or enhances the participation of private and/or foreign capital in such enterprises. The EBRD can finance private companies that are wholly locally owned or foreign-owned, as well as joint ventures between foreign and local shareholders.

In order to ensure the participation of investors and lenders from the private sector, 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 €250 million.^[4] Smaller projects are financed both directly by the EBRD and through local financial intermediaries. By supporting local commercial banks, micro-finance organizations, 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 Interbank 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 the international financial markets through public bond issues or private placements. The EBRD’s bond issues have been given AAA rating by both Moody’s Investors Service and Standard & Poor’s.

Policy Dialogue

The Bank uses its close relationship with governments in the region to promote policies that bolster the business environment. The EBRD advises governments on promoting a sound investment climate and stronger institutional framework, which are important for the functioning of the private sector. This dialogue is typically part of the project the Bank participates in. Specifically, the EBRD works with government officials to promote sound corporate governance, anti-corruption practices, fair and predictable taxation policies and transparent accounting standards. In addition, a dedicated legal team advocates for an effective legal and regulatory framework which is not directly tied to a project.

Technical Assistance

Technical assistance improves the preparation and implementation of the EBRD’s investment projects and provides advisory services to private and public sector clients. It increases the impact of EBRD projects on the transition process by supporting structural and institutional changes, and assists legal and regulatory reform, institution building, company management and training. Technical assistance is important to the Bank as it allows thorough preparations for the investments, more effective investments in general, and investment opportunities in higher-risk environments in particular.

Technical assistance projects are funded by governments and international institutions and managed by the EBRD.

Project Cycle

The EBRD’s bankers and their project leaders have the primary responsibility for ensuring a project’s compliance with four principles: transition impact, additionality, sound banking and environmental sustainability. However, to ensure that projects continue to generate a significant transition impact, risk management and evaluation groups provide independent advice, lessons learned, and monitoring and review functions throughout the project cycle.

Canada’s Representation at the EBRD—The Honourable James M. Flaherty, Minister of Finance, is the Canadian Governor and Mr. Leonard J. Edwards, Deputy Minister of Foreign Affairs, is the Alternate Governor. Canada’s representative on the EBRD Board of Directors is Mr. André Juneau. The Canadian Director represents our constituency, which includes Morocco. The Minister (Economic/Commercial) at the Canadian High Commission in London, Ms. Judith St. George, is the non-resident Alternate Director and represents Canada in the absence of the Canadian Director.  Canadian Staff at the EBRD—Canadians are well represented on EBRD staff. At the end of 2007 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. Canadians fill the following senior positions: Director of Communications, Deputy Chief Compliance Officer, and Director of the Early Transition Countries Initiative.

 

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), evaluation reports, 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 website at www.ebrd.com. Requests for information can be addressed to Publications Desk European Bank for Reconstruction and Development One Exchange Square London, EC2A 2JN United Kingdom Fax: +44 20 7338 7544

Canada at the EBRD

Benefits of Membership

Canada’s membership in the EBRD, and its active participation in the discussion of policy and operational issues, are an important means to help shape regional norms and rules in the EBRD’s 29 countries of operations. 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 shares with the Bank the overriding objective of developing a strong private sector in its 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, Canada has been able to press for greater attention to governance issues in the Bank’s operations. Moreover, Canada has been able to help shape the environmental and social safeguards that govern the EBRD’s lending. The Bank also provides Canada with a vehicle to reach poor transition countries that are not normally part of our bilateral development assistance programs.

Canada is also interested in raising awareness among Canadian companies about the EBRD. Canadian companies can seek financing for projects undertaken in the Bank’s countries of operations. In addition, in order to implement transition projects, the Bank often relies on goods and services from its members through procurement. This allows Canadian firms to have access to different markets and enjoy commercial opportunities they may not have had otherwise. For example, consulting services is an area where Canada has a comparative advantage and where Canadians have been successful in winning EBRD-financed contracts.

Role of Canadian Government Departments

Within the Canadian government, responsibility for oversight of the EBRD’s activities resides with the International Finance and Development 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.

Contribution to Ordinary Capital Resources

At the end of 2007, the total authorized capital of the Bank was €20 billion. Canada’s share is 3.4 per cent—or €680 million (C$1 billion), of which 25.3 per cent, or C$252.7 million, is paid in. The remainder is callable and would be provided only in the unlikely event that the institution would face severe financial difficulty. Canada’s paid-in contribution is treated as a non-budgetary expenditure, as shares in the Bank are considered an asset.

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 encashed over five years). Canada’s last note encashment will be made in 2009.

Table 1
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	4,699,2912
2008	2,914,880	3,132,8612
2009	1,457,440	1,566,4302
1 Exchange rates are based on Bank of Canada annual noon exchange rate averages. 2 2007 exchange rate used as an estimate.

EBRD Transactions in Canada or in Canadian Currency

The EBRD did not issue debt in Canadian currency in 2007.

Contribution to Special Funds

As part of a loan or equity investment, the EBRD often provides its clients with advice on how to improve the project by ensuring thorough preparation and effective implementation. This advice is often paid for out of special funds, which are set up by donor countries and international institutions and are managed by the Bank. These funds mobilize investment capital and expertise in the EBRD’s countries of operations by giving local business access to consultant experts. The consultants assist in the preparation of projects and strengthen local management know-how. They also develop environmental strategies and work to improve the legal framework in which businesses operate. Canada has contributed to the following special funds:

Early Transition Countries Multi-Donors Fund

—CIDA is one of 12 donors to this fund, which was launched in 2004 and targets Bank programming in the poorest countries of the EBRD’s operations (Mongolia, Moldova, Azerbaijan, Armenia, Georgia, Tajikistan, the Kyrgyz Republic and Uzbekistan). This fund is the first EBRD funding mechanism to be classified Official Development Assistance by the Development Assistance Committee of the Organisation for Economic Co-operation and Development. 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$19 million to the EBRD for technical cooperation since 1992. Canada’s contribution was renewed in 2006 for an additional three years, until 2009, and includes technical cooperation in Armenia, Georgia, Russia and Ukraine. The sectors of focus include: 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 efforts to achieve broader energy sector reform in the region. Canada has contributed C$19.5 million to the total fund of US$280 million. Canada’s contribution has been completely disbursed.

CIDA-EBRD Cooperation Fund for Southeastern Europe (CFSEE)

—By 2002, Canada had contributed C$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 were used in Albania, Bosnia and Herzegovina, Bulgaria, Croatia, FYR Macedonia, Romania, Serbia, and Montenegro, and supported activity by Canadian consultants. In 2003, an additional C$6 million was added to the CFSEE, which focuses on CIDA priority sectors and countries of focus. CIDA is participating, through the CFSEE, in the 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 management know-how and develop business skills so that these companies can become competitive and profitable. Canada has contributed C$3 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 focused 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 C$20 million, which is earmarked for the facility’s "nuclear window" and counts toward 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 strengthening institutional capacity development of local institutions working in private sector development and micro-lending institutions. This is the first Canadian bilateral fund at the EBRD that untied 100 per cent of Canada’s assistance (i.e. procurements are not limited to Canadians).

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