Archived - Canada at the European Bank for Reconstruction and Development 2007: 3

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Annex 1—2007 Governor’s Speech

Statement by Diane Ablonczy,
Temporary Alternate Governor for Canada,
at the EBRD Annual Meeting
Kazan, Russia, Monday, May 21, 2007

It is a pleasure to address you today in Kazan, and I thank the Government of the Russian Federation and the authorities of the Republic of Tatarstan for hosting our meeting this year. We hope that this meeting will spur investor interest in the tremendous commercial opportunities offered by the region. The Republic of Tatarstan, like Canada, is a testament to the prosperity that can be achieved when people of diverse religious and cultural backgrounds strive to achieve common goals. I am particularly encouraged by the engagement of the Government of my province, Alberta, and Canadian and Tatar private sector partners in a heavy oil knowledge and technology dialogue. I hope that the seminar will lay the foundation for further exchange of experience and expertise related to technological advancements in the development of heavy oil and will result in a strong commercial partnership between the Republic of Tatarstan and the Province of Alberta.

The location of this year’s meeting, in this dynamic region of the Russian Federation, is a concrete expression of the Bank’s role as the catalyst for increased flows of financing to the private sector. It also is a testament to the EBRD’s medium-term strategy approved at the 2006 Annual Meeting, centered on shifting Bank operations further south and east—to South East Europe, the Commonwealth of Independent States, including Russia and Central Asia, and Mongolia—regions where the largest transition challenges remain. We trust that this gathering will encourage these regions in their transition efforts.

A Stronger Focus

Consistent with this geographical shift, the Bank has been working hard to support the efforts of the less advanced countries in furthering their transition. Today, we are talking about the EBRD’s renewed mission in these countries, aimed at assisting them to reach a path of sustainable growth based on market and democratic principles. Canada values measuring results and in this vein, we welcome the practical steps the Bank has taken to close three offices in Central Europe this year and to redeploy resources into areas where transition is less advanced.

The Bank’s increased focus on the "South and East" requires a continuing assessment of both challenges in the region and the means of addressing them with the right product mix and policy dialogue. Improving the investment climate and enabling environment in countries and regions where the EBRD operates is critical for the success of the Bank’s projects and private sector development more generally. The EBRD is well placed, through its technical cooperation programs and policy dialogue, to help countries improve their investment and business climates, transfer knowledge and build the right institutions. Canada is pleased to financially support the Bank’s capacity building efforts, through bilateral and multi-donor funds. Given the EBRD’s impressive financial performance, we look forward to the Bank contributing some of its net income to the same purpose.

Strengthening the Bank’s focus on the core transition challenges requires focus on measurable results. Measuring the impact of its projects is critical for results-based business planning and is key to ensuring that the Bank plays to its comparative advantages. With the new framework approved at last year’s Annual Meeting in London, Canada is looking to the Bank to sharpen its priorities and focus in the South and East where the Bank can best facilitate transition.

A Strong Institution

2006 marked the first year of the Bank’s operations under its new medium-term strategy. The financial results for 2006 were exceptional—for the first time since the Bank’s founding, EBRD’s unrestricted reserves increased above 10% of its authorized capital stock. As a result, in accordance with Article 36 of the Bank’s Articles of Agreement, from now on, Governors will annually consider and decide amongst three net income allocation options: (i) to strengthen reserves; (ii) to fund "other purposes"—such as technical assistance; and, (iii) to make a distribution to shareholders. We support the prudent approach of using the 2006 resources to strengthen reserves this year, thereby increasing the Bank’s financial capacity to support initiatives in riskier regions. However, moving forward we would want to see a full and timely evaluation of all options for allocation of net income within the framework of supporting the institution’s core mandate.

Article 1 Challenges Remain

As the geographic focus of the Bank’s operations continues to shift, the EBRD’s strong commitment to the political requirements of Article 1 remains imperative. As shareholders, we have a responsibility to ensure that the institution’s activities respect Article 1. More than a decade of the EBRD’s transition experience has demonstrated that pluralism and democracy are essential to mobilizing both internal and external resources for investment and remain a key transition success factor.

Canadians have experienced the value of the Article 1 principles first hand. Our commitment to promotion of human rights, our steadfast support for multi-party democracy, pluralism, and market economics has produced concrete socio-economic benefits. Canada therefore strongly supports the EBRD’s decision to limit operations in countries where commitment to these core principles remains weak. The Bank needs to remain vigilant in applying Article 1 principles, and constantly encourage countries of operation to commit fully to those principles. Going forward, the Bank needs to ensure that its activities reinforce good corporate governance and strengthen the investment climate.

Raising Standards

Good governance helps locally-owned companies in its countries of operations compete regionally, and even globally. By holding business partners to the highest standards of business practice, transparency, and accountability, the EBRD demonstrates that sound corporate behaviour, which is environmentally sensitive and promotes sustainable development, is consistent with profitability and the promotion of growth and prosperity. The EBRD must continue to promote good governance as a cornerstone of its work with the public and private sector partners.

This year, the Bank will make a further contribution to raising business standards in the renewal of its Environmental Policy, which will be broadened to embrace more social aspects of financial transactions. We welcome the review and look forward to having social issues more systematically addressed in the region. The inclusion of gender in the new Policy should recognize the important contribution that women make to growth and prosperity.

This renewal builds on the Bank’s "Sustainable Energy Initiative" and work promoting energy efficiency. The Bank’s increased efforts in this area respond to the G-8’s call for international financial institutions’ leadership in helping address the interrelated issues of long-term energy security and climate concerns. By financing the transition to cleaner energy and energy efficiency, the EBRD is making an important contribution to helping the region reduce its carbon footprint. Reducing a region’s footprint is a challenge that my Government knows well, as we are working hard to reduce Canada’s.

Of course, to achieve a sustainable, broad-based increase in standards, international financial institutions must work together. Such cooperation is essential, not only to avoid a "race to the bottom", but also to ensure that each plays to its comparative advantage in delivering its mandate. We ask President Lemierre, management and the Board of Directors to work with other institutions to this end, and promise that Canada will do its part at the other international financial institutions in which it is a shareholder.

Conclusion

In closing, I would like to thank President Lemierre and his staff for a productive year. Challenges certainly remain. However, Canada has every confidence that the Bank will continue to achieve progress in the coming year.

Annex 2—Summary of the Transition Report

The Transition Report is an annual publication of the EBRD that charts the progress of transition from a centrally planned to a market economy in each of the Bank’s 29 countries of operations. The Transition Report is recognized as the leading publication analyzing the progress of transition in the former Soviet bloc. The 2007 report gauges peoples’ attitudes toward transition and ongoing reforms. The report presents key findings of the 2006 EBRD/World Bank Life in Transition survey, which provides unique insights into how the transition has affected peoples’ standard of living as well as their expectations about the future.

Macroeconomic Overview and Reform Progress

The EBRD reports that the transition region continues to catch up with Western Europe and other mature market economies. It finds that transition is being driven increasingly by competitive markets rather than by governments. The 2006 average economic growth reached 6.9 per cent, the highest level since the transition started in 1991 (as compared to 5.8 per cent in 2005).

The report explains that growth was partially due to strong domestic demand (supported by rapid expansion in lending by domestic and foreign banks), high foreign direct investment and significant remittances from workers abroad. Export growth was also up, mirroring strong global demand. These factors put upward pressure on inflation throughout the region, to which many central banks responded with anti-inflationary measures, such as raising interest rates and stricter regulations on minimum reserves. Against this backdrop, the EBRD reports fiscal policy as being too loose to stem domestic demand. In fact, a number of countries plan high increases in their budgets to fund social security, pensions and public sector wages. In addition, political instability continues to hamper prospects of far-reaching fiscal consolidation, which the Bank believes necessary given the long-term implications of aging populations.

In resource-poor countries, booming consumption and investment in 2006 resulted in wider current account deficits. For example, Ukraine recorded its first current account deficit in eight years, while in Latvia it has doubled to 21.3 per cent of GDP. On the other hand, Russia and the Commonwealth of Independent States continued to benefit from high oil revenues. For example, in Kazakhstan, the 2006 current account surplus was 18.2 per cent of GDP.

The global liquidity crisis that began in the summer of 2007 has had a limited effect on the transition countries so far. Nonetheless, the report forecasts that the re-pricing of risk and higher costs for inter-bank lending will reduce demand for bank credit and lower consumption and investment, and may lead to slower economic growth in the region.

In the context of these macroeconomic challenges, the Bank reports progress in the reform process. As shown in the following table, the Bank reports 20 transition score upgrades in 14 countries and no downgrades in 2007. The Bank tracks reform developments in 29 transition countries through a set of nine transition indicators. These cover four main elements of a market economy—markets and trade, enterprises, financial institutions and infrastructure. Market liberalization—or initial-phase reform—was reported to be virtually complete in the advanced countries of Central Europe and the Baltic region and in much of Southeastern Europe, but there is still room for improvement in the Western Balkans, the Commonwealth of Independent States and Mongolia. Second-phase reform—building market-supporting institutions, such as large-scale privatization, governance and enterprise restructuring, competition policy, financial sector development and infrastructure—is far from complete.

Table 3
Progress in Transition in EBRD Countries of Operations

			Enterprises			Markets and trade			Financial institutions		Infrastructure
Countries	Population (millions, mid-2007)	Private sector share of GDP in %, mid-2007(EBRD estimate)	Large-scale privatization	Small-scale privatization	Governance and enterprise restructuring	Price liberalization	Trade and foreign exchange system	Competition policy	Banking reform and interest rate liberalization	Securities markets and non-bank financial institutions	Infrastructure reform
Albania	3.2	75	3	4	2+	4+	4+	2	3-	2-	2+á
Armenia	3.2	75	4-	4	2+	4+	4+	2+	3-	2	2+
Azerbaijan	8.4	75á	2	4-	2	4	4	2	2+	2-	2
Belarus	9.7	25	1	2+	1	3-	2+	2	2á	2	1+
Bosnia and Herzegovina	3.8	60á	3á	3	2	4	4-	2á	3-	2-	2+
Bulgaria	7.7	75	4	4	3-	4	4+	3-	4	3	3
Croatia	4.4	70á	3+	4+	3	4	4+	3-á	4	3	3
Czech Republic	10.3	80	4	4+	3+	4+	4+	3	4	4-	3+
Estonia	1.3	80	4	4+	4-	4+	4+	4-	4	4-	3+
FYR Macedonia	2.0	65	3+	4	3-	4+	4+	2+á	3-	2+	2+
Georgia	4.6	75á	4á	4	2+	4+	4+	2	3-	2-	2+
Hungary	10.1	80	4	4+	4-	4+	4+	3+	4	4	4-
Kazakhstan	15.1	70á	3	4	2	4	4-	2	3	3-	3-
Kyrgyz Republic	5.1	75	4-	4	2	4+	4+	2	2+	2	2-
Latvia	2.3	70	4-	4+	3	4+	4+	3	4á	3	3
Lithuania	3.4	75	4	4+	3	4+	4+	3+	4-	3+á	3
Moldova	3.4	65	3	3+	2	4	4+	2+á	3á	2	2+
Mongolia	2.7	75á	3+á	4	2	4+	4+	2+á	3-á	2	2
Montenegro	0.7	65	3+	4-	2	4	4á	2-á	3-	2-	2
Poland	38.1	75	3+	4+	4-	4+	4+	3+	4-	4-	3+
Romania	21.7	70	4-	4-	3-	4+	4+	3-	3+á	3-á	3+
Russia	144.1	65	3	4	2+	4	3+	2+	3-	3	3-
Serbia	8.3	55	3-	4-	2+	4	3+	2á	3-	2	2
Slovak Republic	5.4	80	4	4+	4-	4+	4+	3+	4-	3	3-
Slovenia	2.0	70á	3	4+	3	4	4+	3	3+	3-	3
Tajikistan	6.5	55	2+	4	2-	4-	3+	2-	2+	1	1+
Turkmenistan	6.5	25	1	2	1	3-	1	1	1	1	1
Ukraine	47.1	65	3	4	2	4	4-	2+	3	3-á	2+
Uzbekistan	26.0	45	3-	3+	2-	3-	2	2-	2-	2	2-
Note: The classification of transition indicators uses a scale from 1 to 4, where 1 implies little or no progress with reform and 4 implies a market economy. A rating of 4+ indicates the country has achieved standards and performance typical of advanced industrial economies. An arrow indicates change from the previous year. One arrow indicates a movement of one point (from 4 to 4+, for example) and two arrows a movement of two points. Source: EBRD, Transition Report 2007: People in Transition.

Report Focus: "People in Transition"

The EBRD reports that the favourable changes that have swept across many transition countries have brought everlasting improvements to many aspects of life. Democracies and market economies have taken root, businesses and entrepreneurship have flourished and much of the physical infrastructure has been renewed. However, despite high growth rates, across countries and cities, there are large variations in levels of income and opportunities. The survey has found evidence that levels of life satisfaction are lower in the region than in other parts of the world, and in some cases there is a pervasive sense of dissatisfaction with some of the outcomes of the transition process. Support for democracy is fairly strong in the transition countries.

The following charts^[11] summarize peoples’ attitudes toward democracy and a market economy. They are based on interviews with 29,000 people in 29 countries.

Annex 3—CIDA Programming in EBRD Countries of Operations

In order to increase the effectiveness of its programming, CIDA is focusing its efforts on a limited number of countries in the region. Efforts in the region are therefore concentrated in Ukraine, which is the main country of operation. CIDA also has active bilateral programming in the Balkans (Bosnia and Herzegovina, Serbia, and Montenegro), Tajikistan and Russia, as well as regional programming in the South Caucasus (Armenia, Azerbaijan and Georgia). The timeline for disengaging from the Balkans is 2010. The highlights of CIDA’s programming in EBRD countries of operations can be found below.

Ukraine

—Since 1991, Canada has provided C$342 million in development assistance to Ukraine. CIDA’s Ukraine Program focuses on democratic governance, with particular emphasis on accountable public institutions and the rule of law, as well as private sector development and the enabling environment for business. The 2008–2012 Country Development Programming Framework for Ukraine is currently in the advanced stages of development.

Russia

—As a G8 member, a nuclear power, a key partner in the fight against terrorism and Canada’s largest northern neighbour, Russia is of great strategic importance. To date, Canadian technical cooperation programming expenditures in Russia total over C$350 million. Current CIDA programming in Russia is focused on delivering results related to governance and economic well-being. It covers four areas: increasing public sector competence, building an enabling environment for a market economy, building an engaged civil society, and supporting sustainable regional economic development in the Russian north. CIDA’s Russia Program is preparing a new programming strategy that will manage a smaller but strategically focused program that targets democratic governance. CIDA will continue to emphasize a whole-of-government approach to the Canada-Russia relationship.

Balkans

—The international community’s strong commitment to peace, stability and cooperation in the Balkans has started to show concrete results. A fragile peace has emerged, and the political discourse is increasingly focused on the future and closely bound with the institutions and prosperity of Europe and EU accession. Since 1990, CIDA has disbursed over C$540 million in funding to the Balkans for approximately 800 projects. The program is focusing its efforts in countries that are key to regional stability: Bosnia and Herzegovina, Serbia (including Kosovo) and Montenegro. CIDA’s Balkans Program has shifted from post-conflict technical assistance to institutional capacity building, and is directed at initiatives that contribute to public sector reform and enhance social capital in the areas of rule of law, health and education. Gender, youth, environment and refugees are all cross-cutting issues. CIDA is planning to disengage from the Balkans by 2010.

South Caucasus

—CIDA has been present in the South Caucasus (SC) region since 1992, lending its support to initiatives aimed at improving governance structures and institutional capacity, strengthening civil society, promoting peace and security, and enhancing respect for human rights and democracy. To date, CIDA has disbursed over C$60 million in assistance to the SC. The majority of funding has been allocated through responsive programming, with remaining funds provided via humanitarian assistance grants and the Canada Fund. Georgia has received C$33 million, which represents the majority of CIDA’S assistance.

Tajikistan

—CIDA’s main area of assistance is agrarian reform, as well as the governance and strengthening of private sector development. The initiatives support:

• The development of a comprehensive regulatory system and related procedures in support of the country’s agrarian reform (e.g. debt resolution, farm restructuring and land rights).
• The resolution of excessive government centralization and lack of cooperation and understanding between local authorities and communities (e.g. partnership between local governments and civil groups to manage the communities’ development).
• Building the capacity of the State Land Committees and community organizations to monitor land reform progress.
• Advancing women’s access to land, and assuring their participation in their communities’ decision making.
• The reorganization of agricultural enterprises to a market economy, including improved farmer access and utilization of strengthened market information systems.
• The access of farmers to micro-credit and technical assistance.

Europe Regional Program (ERP)

—The ERP works with selected multilateral and bilateral institutional partners that are addressing issues of regional and trans-boundary interests in the region. The ERP collaborates with the EBRD and the Organization for Security and Co-operation in Europe in the areas of governance, private sector development and environment, with gender equality as a cross-cutting theme. The ERP helps co-ordinate and facilitate program activities undertaken by geographic programs, and collaborates closely with other government departments to ensure policy coherence and a whole-of-government approach.

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¹ In 2006, all members formally accepted Mongolia as the Bank’s country of operations. [Return]

² Article 1, Agreement establishing the European Bank for Reconstruction and Development. [Return]

³ The Czech Republic ceased to be a country of operations in December 2007. [Return]

⁴ This amounts to C$7.35 million to C$367 million, based on the 2007 exchange rate. [Return]

⁵ East: Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyz Republic, Moldova, Mongolia, Russia, Tajikistan, Turkmenistan, Ukraine, Uzbekistan. South: Albania, Bosnia and Herzegovina, Bulgaria, Croatia, FYR Macedonia, Montenegro, Romania, Serbia. [Return]

⁶ Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovak Republic, Slovenia. [Return]

⁷ This amounts to C$144 million, based on the 2007 exchange rate. [Return]

⁸ The Bank’s actual operations have been much higher than projected in CRR3, mainly due to an increase in the number of projects. The portfolio is now forecast to reach €26.2 billion in 2010, with an annual volume of €6.3 billion. The geographic composition is expected to increase even further in favour of Russia (43 per cent of the Bank’s portfolio in 2010). The reported portfolio is currently estimated at €20.2 billion, up 14 per cent from 2006. The number of active portfolio operations increased by 5 per cent to 1,341 at the end of 2007. Following Board approval to revise downward the planning €/US-dollar exchange rate to reflect the US-dollar depreciation against the euro, the Bank’s capital utilization, with no allocation of net income to the Bank’s reserves, is estimated at 87 per cent, relative to the 82 per cent set in CRR3. [Return]

⁹ In 2006, the EBRD’s unrestricted reserves increased above 10 per cent of its authorized capital stock. As a result, in accordance with Article 36 of the Bank’s Articles of Agreement, Governors now annually consider and decide among three net income allocation options: (i) to strengthen reserves; (ii) to fund "other purposes"—such as technical assistance/cooperation; and (iii) to make a distribution to shareholders. [Return]

¹⁰ EBRD Sustainability Report, 2005. [Return]

¹¹ Source: EBRD, Transition Report 2007: People in Transition. [Return]

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