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Ottawa, April 18, 1996

Notes for a Statement by 
The Honourable Doug Peters, Secretary of State (International Financial Institutions), to the Fifth Annual Meeting of the Board of Governors of the European Bank for Reconstruction and Development

Sofia, Bulgaria
April 15, 1996

Delivered text is official version

Introduction

I would like to thank the Government of Bulgaria and the City of Sofia for welcoming us here on this fifth anniversary of the EBRD.

We hope that this meeting will demonstrate to investors the tremendous opportunities offered by Bulgaria and its neighbours. Canada has been urging the Bank to move its centre of gravity eastwards and become more active in countries like Bulgaria. We trust that this gathering will encourage these countries, including our new member -- Bosnia/Herzogovina -- in their transition efforts.

The high hopes that accompanied the launch of the EBRD in early 1991 could only be realized through careful management and the creation of a realistic vision. President Jacques de Larosière, with the help of Directors and staff, has brought the EBRD to the point where now its shareholders look to double its capital. We salute him and his associates. Canada enthusiastically supports the proposed capital increase.

Progress in Transition

As deserving as the Bank is of its shareholders' support, we would not be considering an increase in its resources if the countries of operation had not been making steady progress in the transition to market economies. Private sector development is central to the Bank's raison d'etre and that development is advancing throughout the region and creating demand for the Bank's services.

Growth in Central Europe is now very robust and this, together with stronger legal frameworks, should increasingly attract private capital. Progress also is being made in the countries of the former Soviet Union in setting the stage for the resumption of growth.

The experience of countries where transition is most advanced shows that improved living standards will be achieved when sound macroeconomic policy is complemented by a robust private sector. The private sector grows and deepens when countries pursue - and persevere with - market liberalization, privatization, financial institution reform and the development of an appropriate legal framework.

EBRD's Recent Achievements

Mr. Chairman, in considering recent developments in the Bank, I want to mention five specific areas which offer grounds for particular satisfaction.

First, it is especially encouraging that the Bank's operating income is making an increasing contribution and that, thanks to productivity improvements, the Bank has achieved significant growth in its portfolio while holding its administrative costs stable for three years in a row.

Secondly, the EBRD has broadened the scope of its operations in countries where the transition is less advanced.

Thirdly, the Bank's private sector activities now account for three quarters of its overall operations. In some countries, however, its private sector operations have not reached the target level of 60 per cent.

Fourthly, last year, for the first time, Canada's Export Development Corporation and Canadian banks participated in a co-financing operation with the EBRD in support of a gold mining project in Kyrgyzstan. The EBRD's catalytic role was critical.

Finally, earlier this month, the Bank's Board of Directors adopted public information and disclosure rules which will parallel those of the World Bank (IBRD) for public sector transactions and the IFC for private sector transactions. This policy will help the Bank in gaining public support for its activities.

Now we need to get on with implementation. At our last two annual meetings, I asked that the Bank gather and publish data on procurement, disbursements and contract awards, as is done in other multilateral development banks. I am pleased that a proposed methodology and tentative figures have been made available in recent days for Board consideration.

New Resources -- Future Directions

Now, Mr. Chairman, I would like to look to the future and to the use which the Bank will make of the doubling of its resources. As we expect this will be the last time shareholders need to put money into the Bank, it is natural to ask the Directors and management to consider future directions. Here are some thoughts for an agenda:

First, we need to ensure that the capital increase really will be sufficient to allow the Bank to support the transition process for years to come. The Bank needs to do further work to develop specific policies and programmes that will stretch its resources. These include co-financing, loan syndications, portfolio turnover, and measures to increase the leveraging of EBRD resources with private sector sponsors.

Secondly, we need to set in place this year a robust and market-oriented graduation policy. This should ensure that the Bank gradually winds down its operations in areas where private capital becomes increasingly available. We must gradually free sufficient resources to meet increasing demand in countries which are now at the early and medium stages of transition.

Graduation is already taking place de facto in certain sectors of the advanced countries as short- and medium-term private finance becomes available. The Bank must adapt to - not resist - these market developments. It must not fall prey to the institutional inertia which has affected other international organizations which have failed to refocus their operations as they see their markets change.

Thirdly, we need to think more about the Bank's role and product mix in early and intermediate transition countries. In this connection, more work needs to be done on measuring the social impact of the transition to a market economy and the income distribution aspects of our operations.

Fourthly, we need to consider how the Bank can more actively encourage development of stable, democratic institutions. These go hand in hand with the promotion of private sector development and investment and with the setting up of appropriate social safety nets.

Finally, the Bank needs to think about its longer run management and governance.

Despite necessary cost-cutting so far, the Bank must be sure, in the future, to devote enough resources to monitoring both the projects as they are dispersed and the overall portfolio as it grows. It needs to consider further measures to strengthen risk management beyond last years additional provisioning policy.

The Bank also needs to review its decision-making. The Board of Directors has taken important cost reduction steps. Now the Board must consider how to focus more on general policy and control issues, and less on individual projects.

None of these points will affect fundamentally the direction which the Bank has taken since we approved its medium-term strategy two years ago. That strategy has proved to be robust and flexible. But we think it would be useful for us, at our 1997 Annual Meeting, to review its implementation. We should ask the Bank to report then on measures to assure the long-run sustainability of its operations, better tailor its product mix to various categories of countries in support of the medium term strategy, and further improve the management and governance of the institution.

Thank you, Mr Chairman.