Archived - Canada at the European Bank for Reconstruction and Development 2007: 2

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Canada at the EBRD:
What Happened in 2007

Canada’s Priorities in 2007

In the 2006 annual report, we identified Canada’s priorities for 2007, which were: (1) promoting the highest standard of governance; (2) commitment to Article 1 regarding engagement in Belarus; (3) promoting a strong transition focus and a sound investment climate; (4) environmental stewardship; and (5) advancing Canadian commercial interests. In this section, we describe specific actions that were taken in 2007 in support of Canada’s priorities.

1. Governance and Accountability

A key element underpinning the Bank’s ability to influence transition in its countries of operations is the demonstration effect of its own governance policies. As a result, Canada has pressed the Bank to adopt the very highest standard of internal governance. In 2006, the EBRD broadened its public disclosure policy, in line with modern corporate governance practices. The Bank now discloses minutes of Board of Directors meetings, posts on its website project summary documents and a list of policies and strategies scheduled for development or review in the year ahead, and provides a summary of the annual staff compensation and benefits proposals. In 2007, as required under the revised Public Information Policy, the EBRD held public consultations on its Hungary country strategy, which defines the Bank’s activities in the country over the next three years. Comments received from the public were incorporated into the final strategy. Going forward, Canada will continue to advocate for the Bank to follow the same process for all its country strategies.

2. Commitment to Article 1—Engagement in Belarus

The EBRD has an explicit political mandate, set out in Article 1 of the Agreement establishing the EBRD, which is 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, 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. Canada strongly supports this mandate and has continuously stressed its application. For example, in 2006, during the review of the Belarus country strategy, Canada took a strong stand in favour of a vigorous interpretation of the Bank’s responsibilities under Article 1. And, as a result of pressure exerted by the Bank’s shareholders, the EBRD’s new strategy in the country focuses exclusively on the financing for the private sector. In 2007, the Bank approved only seven projects in Belarus, all focused on small and medium-sized enterprises, as well as the investment enabling framework for the financial sector. Over the coming years, Canada will continue to monitor EBRD activities in Belarus to ensure that they are consistent with the country strategy.

3. Maintaining a Strong Transition Focus

Canada played an active role in the development and discussion of the EBRD’s third Capital Resources Review, 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 2007 Annual Meeting, Canada supported an allocation of 2006 net income to reserves so the Bank could pursue higher-risk projects that are essential for transition in these countries.

In the fall of 2007, the Board of Directors undertook an intense program of analysis reviewing the Bank’s business potential until 2010, capital adequacy, possible other uses (i.e. technical assistance and investment grants to support banking, funds for nuclear safety), and distribution of dividends, as possible options for allocating 2007 profits. Ultimately, Directors will recommend a decision on which Governors will vote at the 2008 Annual Meeting. Going forward, Canada will continue to press the EBRD to use its capital base for activities that generate strong transition impact and are consistent with the Bank’s mandate.

4. Environmental Stewardship

In 2006, Canada supported an expanded role for the EBRD on the issues of climate change and increased energy security. As one of the fastest-growing parts of the world, the EBRD 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 economies that causes environmental and economic damage and contributes disproportionately to climate change. In fact, the Bank estimates that the transition region uses up to seven times more energy per unit of gross domestic product (GDP) than Western Europe. In 2007, the Bank approved a first clean-coal project in Mongolia, which will set standards of transparency and sustainable environmental conduct. Specifically, the project will improve corporate environmental management practices through the preparation of the first ever mine closure plan for a Mongolian mining company, in compliance with the EBRD’s environmental and social assessment plan. The project will also ensure that the company’s business practices are consistent with the Extractive Industry Transparency Initiative. Over the medium term, Canada will continue to support the Bank’s efforts in selecting sustainable projects that promote best environmental and social practices.

At the 2006 Annual Meeting, Governors launched the Sustainable Energy Initiative, which commits the EBRD to investing a1.5 billion in energy efficiency and renewable energy projects over the next three years. It also commits the Bank to strengthening policy dialogue with governments and to working with donors to support sustainable energy projects.

5. Advancing Canadian Commercial Interests

The EBRD offers a number of investment opportunities for Canadian businesses and financial institutions. One of the objectives of the Canadian office is 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 this objective, 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 CIDA, promotes Canadian technical cooperation activities and official co-financing with the EBRD. Going forward, the Canadian office will continue to organize business events that raise awareness among Canadian companies about opportunities with the EBRD.

The following events in 2007 were supported by the Canadian Director’s office and promoted Canada’s interests:

• The Canadian Director, Business Advisor and the First Vice President, Varel Freeman, met with Canadian oil and gas businesses in Calgary and general corporates, including forestry, in Vancouver to present the work of the Bank and to discuss possible partnerships in February 2007.
• 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 in June 2007 and arranged a business program, including additional meetings with Canadian corporates interested in investment in the Bank’s region. The President also attended meetings with senior government officials in Ottawa.
• As in previous years, a senior natural resource banker participated in the Prospectors and Developers Association of Canada annual event in Toronto.
• The Business Advisor and a senior natural resource banker participated in a Private Sector Roadshow in Vancouver, Calgary, Toronto and Montréal. This event raised awareness for Canadian companies interested in investing and doing business in the region.
• 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 2007 Transition Report on developments in the business and economic environments of the Bank’s countries of operations.
• In addition, the Canadian office at the Bank in London received a steady stream of business visitors from Canada and supported them in their dealings with the EBRD.

Canada’s Voting Record in 2007

Canada and other shareholders typically raise concerns and questions about specific Bank operations before they get to the Board of Directors. As a result, decisions at the Board are generally taken by consensus. Directors may, however, abstain or vote against projects or policies in consultation with their constituencies. The Canadian Director supported all policies in 2007, as well as the vast majority of the 262 projects approved by the Board. There were 14 exceptions, which reflected four main reasons.

• Lack of additionality. Additionality is one of the EBRD’s core operating principles, whereby project investments support private investors without crowding them out. Typically, concerns are raised if it is possible that an investor might have access to private sector funding on reasonable terms. The Canadian Director abstained or voted against five projects on these grounds.

• Lack of transition impact. Helping to move a country closer to a full market economy (the "transition impact") is another of the EBRD’s core operating principles. As per Article 2 of the Agreement establishing the EBRD, transition is fostered through various measures including: promoting the establishment, improvement and expansion of productive, competitive and private sector activity and the mobilization of capital and experienced management to this end; fostering productive investment, including in the service and financial sectors, and in related infrastructure where necessary to support private and entrepreneurial initiative; providing technical assistance; and supporting multinational projects and/or projects with more than one donor country. Concerns are raised whenever it is anticipated that an investment will not achieve an incremental transition impact on these terms. The Canadian Director abstained or voted against three projects on these grounds.

• Inconsistency with Canada’s policy on steel. Canada does not support steel projects at multilateral development banks that contribute to excess global capacity, given there is already global oversupply. The Canadian Director abstained or voted against two projects on these grounds:

• Concern over the business environment in countries of operations. Country strategies describe the Bank’s three-year plan of engagement in its countries of operations. Specifically, they provide an assessment of a country’s progress towards transition and identify key areas where the Bank can provide assistance. The country strategy for Bulgaria was being reviewed in 2007. The Canadian Director had concerns with aspects of the business environment in the country and did not want to vote on projects in Bulgaria until the new strategy was adopted (properly noting the problems). The Canadian Director abstained or voted against four projects on these grounds:

Summary of the EBRD’s Operations in 2007

2007 marked the second year of the Bank’s operations under the new business model, the third Capital Resources Review (CRR3), which focuses EBRD operations in the East and South of Europe^[5] and commits the institution to a gradual phase-out of Central European countries. By 2010, the 8 countries that acceded to the European Union in 2004^[6] (the EU8) will graduate from the Bank’s lending program, and the remaining 21 EBRD countries of operations will be from the East and South of Europe. The Bank’s operations in these countries differ significantly from its involvement in the EU8: major projects centre on the energy sector and more of the portfolio is oriented toward smaller projects that require greater oversight and more proactive capacity building.

CRR3 CRR3 was approved by Governors at the 2006 Annual Meeting and covers the period between 2006 and 2010. CRR3 mapped out how the Bank could best meet the needs of its clients within its mandate. It identified the tools that the EBRD could use to ensure strong development results and also prescribed the financial discipline that was required to guarantee sustainability of the Bank’s operations. Given the growing demand for EBRD services in the early and intermediate transition countries, the emphasis was placed on shifting the Bank’s core activities to the South and East of Europe and gradually phasing out the eight countries in Central Europe that benefited from EBRD support early in their transition process. The operational objectives of CRR3 are to develop the portfolio in line with a base case target of 21.9 billion by 2010, and to achieve an annual business volume of around a3.6 billion. The geographical composition of the annual business volume is projected to shift in line with the strategic direction of CRR3, as the portfolio share of early and intermediate transition countries and Russia is set to grow to around 87 per cent by 2010.

Recognizing that the new group of clients faces different challenges than the EU8, the Bank has begun to develop new approaches to doing business. In particular, greater emphasis is being placed on good governance and the need for companies to follow best practices. To ensure effectiveness of meeting its transition objectives, the Bank, in addition to improvements to its own internal policies and strategies, is including corporate governance plans as part of the project preparation and is encouraging its clients to disclose company information. The Bank has also increased its financing for technical capacity building to enable the development of the regulatory and legal frameworks necessary for private sector development. In 2007, the Bank spent €98 million^[7] on technical assistance, on:

• Consultancy services for feasibility studies as part of project preparation.
• Procurement assistance during project implementation.
• Development of management skills under the Bank’s Turn Around Management Programme.
• Legal advice to improve legislation and corporate governance and to promote regulatory development.

The number of projects in non-EU8 transition countries now represents 56 per cent of the Bank’s portfolio and Russia accounts for 29 per cent. By 2010, the non-EU8 region and Russia will represent 87 per cent of the Bank’s operations. Despite the increase in higher-risk projects (now accounting for almost 23 per cent of all operations), in 2007 the share of new stand-alone signings with a transition impact potential rated "good" or "excellent" totalled almost 90 per cent. To further minimize reputation and integrity risks, management—and increasingly the Executive Board—is relying on the Office of the Chief Compliance Officer to ensure that the highest levels of ethical standards are maintained in all of the Bank’s operations. In 2007, the Office prepared 240 integrity reports. In addition, the Evaluation Department published 10 reports on the Bank’s participation in sectors where the EBRD is becoming more involved, and which will be the core of its activities going forward (e.g. water supply and sewage services, energy sector, micro and small enterprises sector). The key findings should further assist management in improving the effectiveness and efficiency of projects.

To support the ongoing shift in operations, the 2007 operating budget of € 293.6 million enabled the Bank to hire additional staff to further strengthen its presence in regional offices, prepare new sustainable projects in key sectors where the Bank has increased its participation, and improve analysis and knowledge of horizontal issues such as climate change and clean energy. These resources will enable the Bank to further align its operational needs with its mandate.

Yet, transition is a complex, demanding and lengthy process. A market economy has to be supported by an effective institutional framework and a functioning state. In the new regions of the EBRD’s operations, there are basic weaknesses in key institutions—particularly concerning finance, regulation and competition, corporate governance, and the rule of law and its enforcement. The main challenges for the transition process in the coming years lie in creating a reliable institutional and policy environment that attracts investment flows; encourages the growth of the new private sector and the restructuring of the old; improves the functioning of markets; fosters entrepreneurial and market skills; and strengthens the confidence of the population in the reform process. To better understand the attitudes of clients toward democracy and economic reforms, the Bank conducted—with partial funding provided by Canada—a Life in Transition survey, which measures peoples’ satisfaction with democracy and economic outcomes of transition. The key findings could assist the Bank in fine-tuning the tools it uses to develop a sustainable private sector (see Annex 2 for details).

Many transition challenges remain in the Bank’s countries of operations in the South and East. While the Bank has a strong record of success, going forward it will be crucial that the institution remains focused, selective and driven by strong transition results.

Challenges Going Forward

• For the last two consecutive years, a high growth in the Bank’s portfolio has exceeded the projections of CRR3.^[8] The increasing demand for EBRD services requires that the Bank be more selective in the projects it finances and that it continue to focus on the importance of choosing quality over quantity. Going forward, the Bank’s activities must be realigned with its core mandate of fostering the transition to market principles in its 28 client countries. This may include a greater focus on projects that promote environmental standards and good labour practices.
• The 2007 Transition Report indicates that the commitment to democratic reforms in the region has weakened. It remains both a priority and a challenge for the EBRD to encourage adherence to good governance in line with the principles of Article 1 regarding multi-party democracy and pluralism. In countries where the commitment to Article 1 remains weak, the Bank should continue its narrow scope of operations. In countries where governments are entering the most difficult stages of reform, the Bank should develop high transition impact projects with broader social benefits.
• At the 2006 Annual Meeting, Governors approved the Bank’s plan for a gradual withdrawal from the EU8 countries by 2010. After the graduation process is completed, the Bank will stop doing new business in those countries, while monitoring existing projects for compliance with Board decisions. The graduation of the Czech Republic signalled the country’s progress in achieving transition to a full market economy and democracy. As well, the EBRD has closed three offices in Estonia, Latvia and Lithuania. Over the next two years, shareholders will continue to support the Bank’s direction of phasing out its operations in the EU8 countries.
• At the 2007 Annual Meeting, Governors allocated the 2006 net income to strengthen reserves, thereby increasing the Bank’s financial capacity to support higher-risk initiatives in the South and East. At that time, Governors also asked that, going forward, the Bank develop other options prescribed by the EBRD’s Articles of Agreement,^[9] specifically, funding for other purposes, such as technical assistance/cooperation and a "distribution" to shareholders (i.e. payment of a dividend). Achieving agreement among shareholders on income allocation and capital adequacy will remain an ongoing challenge for the EBRD.

Table 2
Financial Results (2004–2007)

	2007	2006	2005	2004
Number of projects	353	301	276	265
EBRD financing (a million)	5,583	4,936	4,277	4,133
Resources mobilized (a million)	8,467	8,915	6,211	8,799
Total project value (a million)	14,050	13,851	10,499	12,932
(€ million)
Operating income	1,934	2,667	1,543.9	658.6
Expenses and depreciation	(251)	(225)	(218.9)	(189.8)
Operating profit before provisions	1,683	2,442	1,325.0	468.8
Provision for impairment of loans and guarantees	201	(53)	200.6	(67.2)
Net profit for the year	1,884	2,389	1,525.6	401.6
Reserves and retained earnings	8,6761	6,974	4,656.1	1,686.0
Provisions for impairment of loans and guarantees (cumulative)	124	341	351.6	539.5
Total reserves and provisions	8,800	7,315	5,007.7	2,225.5
1 A decision regarding the allocation of the Bank’s 2007 net income will be taken by Governors at the 2008 Annual Meeting. For presentation purposes, the report has included net income in the reserves and retained earnings figure.

Canadian Policy Priorities in 2008–2010

Between 2008 and 2010, the Government of Canada has three priorities for the EBRD. These priorities respond to the challenges identified in the previous section. The rationale behind Canada’s priorities for 2008 to 2010 is that strong results should inform and guide the Bank’s activities to ensure consistency with the EBRD mandate of:

1. Promoting good governance and accountability, and effective use of the Bank’s capital base.

2. Ensuring that the EBRD maintains a strong transition focus and is highly selective in its programming.

3. Promoting environmental sustainability and gender equality of EBRD projects.

1. Governance and Accountability

Greater Transparency in the Appointment Process
of the EBRD President

Canada continues to support the Bank’s commitment to enhance the transparency of its own activities, which is in line with modern corporate governance practices. This focus is also consistent with efforts at other international financial institutions (IFIs).

President Jean Lemierre will step down as the President of the EBRD in July 2008. The 63 Governors, who are responsible for electing the head of the EBRD, will be asked to vote for his successor. The new President will be elected at the Annual Meeting in Kiev in May 2008 by a majority of Governors’ votes. An open and transparent nomination and selection process for the President of the EBRD is a priority for Canada. This will ensure that any member country can nominate a candidate, that the process is guided by publicly available rules and procedures, and that a majority vote or consensus decision should be reached based entirely on the merit of the candidate. The EBRD should move towards these types of clear and public rules.

Action in 2008: Push the Bank to develop a transparent, open and merit-based process for selection of the President that is in line with the standard developed by other IFIs. Action in 2009–10: Encourage the Bank to consider officially incorporating the new process into the EBRD by-laws.

Sustainable Finances

Canada strongly supports good financial governance at all IFIs. It ensures the development and implementation of sound administrative budgets and an adequate capital base that supports the IFIs’ mandates.

Sufficient Administrative Budget
in Support of the EBRD’s Mandate

As mentioned earlier, in the South and East projects require greater oversight and capacity building. In line with CRR3, over the last two years the Bank’s budget was increased by a total of 7.5 per cent to enable the EBRD to achieve the right skill mix and staff level. As transition proceeds at different paces across the South and East, the Bank will need to ensure that it is effective and efficient in its allocation of funds and that the budget is aligned with its strategic directions. This means that the Bank will need to look at an internal reallocation of resources from less relevant activities to fund emerging priorities.

A Sustainable Capital Base

For the last two consecutive years, the Bank’s results, driven mainly by high portfolio growth, have exceeded the projections of CRR3. The high growth in the EBRD’s portfolio has put pressure on the Bank’s capital adequacy and risk ratios. The Board is currently considering options aimed at rebalancing portfolio growth in line with the capital base that supports Bank activity. It is important that the Bank use its limited resources to focus effectively on its core mandate. The decision taken by the Board must ensure adequate discipline and selectivity in the use of capital. It must also set a target for a sustainable portfolio size and, as a result, the scope of activities and their consistency with the mandate.

Action in 2008:Advocate for a reformed process for preparing the Bank’s budget and work plan (such as a three-year rolling plan), similar to requirements of the Canadian Financial Administration Act. Action in 2008: Advocate for a decision on the 2007 net income allocation which ensures discipline and selective use of the Bank’s capital in support of activities that are consistent with the EBRD’s mandate.

2. Institutional Effectiveness

Article 1

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); to promote increased transparency, optimal use of investment funds, the rule of law, human rights, safety and equality; and to encourage mechanisms of multilateral cooperation on democratic issues. EBRD analysis shows that the establishment of strong, democratic institutions is a key transition success factor. The need for good governance in all recipient countries will continue to figure prominently in the period ahead, and the EBRD will need to promote sound institutions, 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. Canada has maintained that the Bank’s fundamental priority for private sector development is to create an enabling environment for investment supported by sound regulatory frameworks. Good governance helps ensure that corporations integrate into the international financial system and strengthens their international competitiveness.

In keeping with its mandate to promote economic and democratic reform, the Bank regularly reviews its countries’ political and economic progress toward transition. In countries where the commitment to core democratic principles is particularly weak (such as Belarus, Turkmenistan and Uzbekistan), the EBRD has limited its operations. In countries where the willingness of governments to move forward with reforms is diminishing, the Bank should focus on identifying projects where it has the potential to effect "bottom-up" change by championing best business and environmental conduct. Specifically, the Bank should select private sector clients that are likely to lead the rest of the industry to adopt best practices in the area of environmental and business conduct.

Action in 2008: Actively participate in Board discussions on the Uzbekistan and Turkmenistan country strategies. If the analysis indicates that these countries have been slow in implementing Article 1, continue to support limited scope of Bank activities (i.e. support small EBRD operations with private sector entities that address basic human needs). Action in 2008: Press the Bank to identify effective approaches for supporting transition in countries whose commitment to democratic and economic reforms is waning. For example, the Bank should consider focusing on engagement with companies that can demonstrate to the rest of the industry the benefits of environmental and business best practices.

Strong Transition Impact

Canada has a strong interest in ensuring that nascent democratic regimes have access to the financing and advice they need to make successful and sustainable transitions to market-oriented democracies. The EBRD has an important role to play in these efforts. The entry of eight EBRD borrowers into the European Union in May 2004 marked a significant milestone in the transition process. The EBRD played no small part in this process, as it assisted the countries in building the right conditions to attract private sector financing.

As the Bank begins to fund increasingly higher-risk projects in the South and East and pushes governments to continue with more difficult reform efforts, greater importance will be placed on reviewing operations to assess their effectiveness, learn from past experience and improve the development of future projects. The Evaluation Department, an independent group reporting directly to the Board of Directors, will play an even more essential role in assessing the EBRD’s performance and providing advice on how to improve it.

The current system of assessing transition impact was developed 10 years ago and was mostly focused on advancing and measuring transition in the EU8. Now, as the Bank shifts its focus to the East and South, there is a need to modify the ratings to better account for the characteristics of its new clients. Specifically, the current criteria should include indicators such as development, poverty alleviation, institution building or sustainability, which indirectly affect transition to a market economy.

Action in 2008: Encourage the Bank to continue its analysis of indicators to ensure a better assessment of its transition impact. Action in 2008: Encourage the Bank to calculate the financial and economic rate of return for projects to better capture the viability of the EBRD’s investments.

3. Environmental Sustainability and Gender Equality

Environmental and social issues are increasingly regarded as fundamentally interconnected with
long-term economic and political sustainability, as well as the quality of life for a region’s inhabitants. Canada has an interest in promoting sustainability in the region as a means of fostering a strong global economy. Canada is therefore a strong proponent of sustainable best practices with respect to the EBRD’s investments.

The current Environmental Policy was approved by the Board in April 2003. In 2006, the Bank decided to review the policy to better respond to the environmental and social challenges in its countries of operations, and to reflect emerging best practice among the IFIs and the private sector. For example, the standards adopted by the International Finance Corporation have become a point of reference with respect to environmental and social sustainability.

The policy revision process took place throughout 2007. A round of public consultations outlining key topics was held with non-governmental organizations, other financial institutions, the World Health Organization, the International Labour Organization and indigenous peoples’ representatives. The Bank is currently working on draft language for the new policy, which is expected to be ready for public discussion in the first quarter of 2008.

Gender equality is a cross-cutting theme of Canada’s development assistance throughout Eastern Europe. The EBRD made a commitment to mainstream gender equality in its programming. Much work will be required in the coming year to reach this objective and Canada, in collaboration with other like-minded donors, will continue to make it a priority in our relationship with the institution.

EBRD environmental and social priorities include:^[10]

• Fully integrating environmental and social considerations (e.g. health and safety, labour and community issues) 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 waste water management, energy efficiency and renewable energy; and working in partnership with other institutions to address regional and global environmental issues.

Action in 2008: Advocate for a timely adoption of the Bank’s Environmental and Social Policy, with a target date of the summer of 2008. Action in 2008: In collaboration with other donors, encourage the Bank to develop and implement gender policy, similar to what is being done at other international financial institutions.  Action in 2009–10: Encourage the Bank to develop a methodology to collect sex-disaggregated data and include gender equality in project assessment. Over time, as more data become available, press the Bank to consider mainstreaming gender equality into its Environmental and Social Policy.

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