2003 Financial Results

2003 marked another strong year for EBRD financial performance. The institution earned a profit after provisions of €378.2 million. This compares very favourably with the €108.1 million figure recorded in 2002. The EBRD continued to see a reduction in its impaired assets (non-performing loans) in 2003. At December 31, 2003, the EBRD had 19 impaired loans totalling €125.2 million, compared with 23 such loans in 2002 totalling €204.5 million at the end of the year. The EBRD’s general administrative expenses in 2003 were £132.8 million, compared to £142.0 million at the end of 2002. This performance reflected continuing budgetary discipline, effective cost controls, a proactive cost-recovery program and a renegotiation of its Headquarters building rental contract.

The EBRD approved 119 projects in 2003, up from 102 the previous year. These commitments totalled €3.7 billion, down slightly from €3.9 billion in 2002, but within the €3.5-billion to €3.9-billion target range of the Bank’s medium-term operational strategy. Net cumulative commitments by the end of 2003 amounted to €22.7 billion. The level of disbursements, at €2.1 billion, was slightly lower than the €2.4 billion recorded in 2002. While the EBRD reports operations in euros, many of its commitments and disbursements are made in US dollars. Therefore, the depreciation of the US dollar lowered the euro value of its operations in 2003. In addition to disbursements, EBRD guarantees increased by 31 per cent to €342 million at the end of 2003.

The increasing access of the advanced transition countries to private capital and financial markets and the continued poor investment climate in many early and intermediate transition countries continue to be a challenge for the Bank.^[5] The Bank needs to continue to balance the requirement to follow sound banking principles with the need to provide transition assistance to countries where the investment climate is risky. The financial results for 2003 suggest that, so far, the Bank continues to achieve this balance.

Institutional Developments

Private Sector Development

A key part of the EBRD’s work with the private sector is its support of micro, small and medium-sized enterprises (SMEs), which are important engines for job creation and growth, and therefore poverty reduction. Canada is a strong proponent of the private sector work of the Bank, recognizing that a strong private sector is key for the successful transition to a market economy. Canada views a strong SME sector as one means of developing a "constituency for reform" in the transition economies that can act as a counterweight to powerful vested interests that benefit from weak state governance.

The Bank’s strategy for the SME sector is founded on three pillars: financing, improving the investment climate through policy dialogue, and developing business support networks for SMEs. 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. The strategy emphasizes the need to identify and promote the removal of the main obstacles to SME growth, as well as to encourage the development of strong business associations.

About 79 per cent of the EBRD’s annual business volume in 2003 was in the private sector, compared to 71 per cent in 2002 and 76 per cent in 2001, continuing the Bank’s trend of exceeding its 60-per-cent minimum requirement by a wide margin. In 2003, the EBRD continued its strong focus on supporting credit lines for SMEs through financial intermediaries in its countries of operations. Since the Bank’s first small business program was established in 1994, more than 450,000 loans worth more than US$3.0 billion have been disbursed to small and micro businesses. In 2003, the EBRD disbursed 197,802 loans for small and micro enterprises, totalling roughly US$1.2 billion.

Activities in the Financial Sector

Financial Sector Policy—The EBRD’s financial sector policy takes a country-specific approach to financial sector development, focusing on the need to promote confidence and competition in an independent financial system. The EBRD seeks to strengthen confidence in the 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 EBRD offers important insights on supervisory and regulatory requirements, which it shares with other international financial institutions 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 SMEs), facilitate foreign direct investment and strengthen the commercial orientation of state-owned financial institutions, particularly in preparation for privatization.

In 2003, the EBRD committed €1.2 billion in financing to financial sector operations. Financial sector operations represented about 32 per cent of the EBRD’s entire business for 2003.

Banking Sector Activities—In 2003, the EBRD signed new loans valued at €333 million to the banking sector, and signed 10 equity transactions with local banks. In most cases where the EBRD holds an equity stake in a local financial institution, it is represented on the supervisory board of the institution, where it promotes management accountability, good corporate governance, sound banking practices, and appropriate environmental reviews and procedures. Participation in bank privatizations is a key factor behind equity investments in early and intermediate transition countries.

Non-Bank Financial Institutions—During 2003, the EBRD also stepped up its activities in the non-bank financial sector. New commitments of €83 million were made under the EBRD’s micro and small enterprise program. The EBRD is one of the largest financial investors in this sector, with investments in local asset management and mutual fund companies becoming increasingly important as voluntary pension sectors in the Bank’s countries of operations develop. By the end of 2003, the Bank had investments in the non-bank financial sector in most of the countries in the region, where necessary institutional and regulatory regimes had been or were in the process of being introduced. The EBRD also substantially expanded its financing of insurance companies, leasing companies and specialist mortgage lending institutions in 2003. New business totalled €295 million and was focused mainly in advanced transition countries.

Environment

Under its Articles of Agreement, the EBRD is explicitly committed to ensuring the environmental sustainability of all its projects. By investing in projects that reduce waste and pollution, the EBRD is playing an important role in improving environmental standards in borrowing countries. EBRD projects have focused on upgrading municipal wastewater plants and improving energy efficiency by upgrading power generation and distribution systems. The EBRD is also assisting borrowing countries to comply with EU environmental standards. It also works with commercial financial institutions in borrowing countries to increase the profile of environmental issues in their lending policies.

Following consultations in London, Russia, Hungary and Azerbaijan, the EBRD revised its Environmental Policy in 2003 to cover occupational and safety issues as well as core labour standards. The revisions also expand the EBRD’s public consultation process and information disclosure with respect to project environmental impact assessments. The revised policy also requires, from 2004, that the Bank publish annual environmental reports.

Apart from the initiatives to specifically redress environmental weaknesses, many EBRD projects include environmental targets—for example, to reduce atmospheric emissions and industrial wastewater discharges and promote waste recovery, recycling and clean technologies.The EBRD contributes to international initiatives such as the "Environment for Europe" process, including the Environmental Action Plan for Central and Eastern Europe, the Danube River Basin Strategic Action Plan, and the Helsinki Commission and the Global Environment Facility, for which it is an executing agency. In 2003, the EBRD signed its first project in cooperation with the multi-donor Global Environment Facility (GEF). The project consisted of loans to participating banks in Slovenia for on-lending to private and public sector entities investing in projects that reduce water pollution flowing into the Slovene portion of the Danube River. The project is also the first private sector initiative in the GEF’s portfolio of projects to reduce the pollution in international waters.

In 2003, three projects were approved for support under the recently created Northern Dimension Environmental Partnership (NDEP). The NDEP^[6] 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. Within the framework of its mandate, the EBRD supports relevant multilateral and regional agreements on the environment and sustainable development, including the Framework Convention on Climate Change and the measures agreed to in the Kyoto Protocol. Canada became an official contributor to the NDEP Support Fund at the end of 2003 and has committed €20 million. This made Canada, apart from Russia, the NDEP’s sole non-European partner. Canada earmarked its contribution for the facility’s "nuclear window," and this counts towards Canada’s commitment to the G-8 Global Partnership program. To deal with nuclear waste, the NDEP provides full funding within an international cooperation framework designed to address the complex challenges of cleaning up the legacy of the Soviet navy’s Northern Fleet.

In October 2003, together with the government of the Netherlands, the Bank launched a special EBRD Carbon Fund under the Joint Implementation (JI) mechanism of the Kyoto Protocol. This is one of the first such JI funds in Europe. Through this fund, the EBRD will purchase for the Netherlands greenhouse gas emission reductions (or carbon credits) earned through EBRD investments in renewable energy and energy efficiency projects in transition economies.

The EBRD applies environmental due diligence to all its investment and technical cooperation operations. Project sponsors are required by the Bank to undertake environmental impact assessments, analyses and audits that address potential environmental, health and safety, and socio-economic impacts of projects. Environmental impact assessments and analyses are conducted when potential impacts are significant. Environmental audits are performed post-approval. In some cases, both an audit and an assessment/analysis are performed. The EBRD also requires local financial intermediaries, through which it channels funds to micro, small and medium-sized enterprises, to adopt appropriate environmental policies and procedures.

Municipal and Environmental Infrastructure

EBRD investments in this sector focus on upgrading local facilities, such as municipal wastewater treatment plants, and on raising the service levels of municipal and local utility companies. Reducing costs and increasing the reliability of municipal services can stimulate the development of commercial and industrial enterprises. At the same time, greater access to clean water and sanitation services improves public health and increases public confidence in the transition process and ongoing reform efforts.

Over the last few years, the EBRD has increasingly relied on municipal, as opposed to sovereign, guarantees in this sector, providing local governments with important new financial opportunities and responsibilities. The EBRD’s operations policy for municipal and environmental infrastructure emphasizes private sector involvement, the development of appropriate regulatory structures and improvements in energy efficiency.

In 2003, the EBRD provided financing of more than €188 million to projects designed to improve municipal infrastructure and promote energy efficiency. About half of these projects were in EU accession countries.

Energy Sector Investments

Most of the EBRD’s countries of operations suffer from severe economic and environmental problems caused by polluting energy systems and inefficient energy pricing. Under its Energy Operations Policy, the Bank promotes energy efficiency through its operations. One of the policy’s key objectives is to improve environmental performance, including meeting climate change objectives and supporting renewable forms of energy.

In 2003, the Bank approved one of its largest energy sector investments to date, totalling US$310 million for two related projects: the Baku-Tbilisi-Ceyhan (BTC) pipeline from Azerbaijan through Georgia to the Turkish coast and the Azeri-Chirag-Deepwater Gunashli (ACG) Phase 1 oilfield in the Caspian Sea offshore from Azerbaijan. The EBRD’s decision to finance BTC and ACG reflects the importance of both projects in unlocking the economic potential of the resource-rich Caspian Basin. In addition to improving the prospects for sustainable economic development, EBRD (and International Finance Corporation) participation in the two projects brings increased transparency and improves business and environmental standards in Azerbaijan and Georgia.

Addressing Corruption and Poor Governance

The transition countries, like most emerging economies, face significant challenges in improving transparency and governance. As required by its statutes (Article 1 of the Agreement Establishing the European Bank for Reconstruction and Development), the Bank reviews on an annual basis each country’s progress towards multi-party democracy and pluralism. These principles—which Canada fully supports and encourages—contribute to transparency in public policy making and act as a check on corruption.

From this standpoint, the domestic policies of both Turkmenistan and Belarus were of particular concern as they are difficult to reconcile with the political and economic conditions set out in Article 1 of the Bank’s Articles of Agreement. As a result, the Bank’s lending programs in Turkmenistan and Belarus are restricted to the private sector. The Bank’s country strategies for these two countries link the level and nature of the Bank’s involvement to the extent of improvement in the political and economic situation. Without improvement in these areas, these two countries will continue to be excluded from direct EBRD investments in the state sector.

The human rights situation in Central Asia, and Uzbekistan in particular, was highlighted in 2003, when the EBRD Board of Governors held its Annual Meeting in Tashkent, Uzbekistan. Canada’s acting Alternate Governor stressed the important link between human rights, the rule of law, economic reform and a climate conducive to attracting investment. In his remarks to the Annual Meeting, Bank President Jean Lemierre noted Uzbekistan’s weak performance and stressed that the level of future Bank operations would depend on progress in improving human rights. Uzbekistan’s progress towards the political and economic benchmarks set out by the Bank in its March 2003 country strategy for the country was monitored over the course of 2003, and an assessment of performance will be conducted in early 2004. Early indications would not lead us to expect a positive assessment.

To a large degree, the EBRD seeks to enhance good governance and transparency in its countries of operations through the projects it undertakes. Equity investments have been an important tool in this regard. The Bank’s participation on the boards of directors of companies in which it invests has been instrumental in improving the transparency of their accounting and business practices and their respect for minority shareholder rights. It is hoped that the success of these companies will demonstrate the importance of applying similar practices more broadly in the region. In addition, all Bank business partners are examined to ensure they meet the highest standards of business practice. The Bank routinely seeks the services of forensic accountants and specialized firms to perform integrity checks on companies in which it might invest and on their management and shareholders. For those doing business with the EBRD, the EBRD’s public procurement rules set the standards of ethics and conduct required during the procurement and execution of EBRD-financed projects.

The Bank’s work in the area of legal transition also supports these goals. Under its Legal Transition Programme, the Bank has worked to improve the legal environment in its countries of operations by advancing legal reform in six areas: bankruptcy, company law/corporate governance, concessions, financial market regulation, secured transactions and telecommunications. In addition, the Bank has participated in international standard-setting efforts, including the World Bank’s Insolvency Initiative, which seeks to develop international principles of bankruptcy, and the Financial Stability Forum’s efforts to coordinate the development and implementation of international financial standards. The Bank also initiated a project with the Russian Federal Commission for the Securities Market to develop a Corporate Governance Code and helped the CIS Inter-Parliamentary Assembly draft a model securities law. To promote transparency the EBRD publishes an annual survey of the extensiveness and effectiveness of various commercial laws in the region in its legal journal, Law in Transition.

Enhancing Institutional Transparency, Accountability and Governance

The EBRD’s Public Information Policy is based on the presumption that information about Bank activities should be made public in the absence of a compelling reason for confidentiality. The following documents are available to the public, with commercially sensitive information deleted as required: draft sectoral policies (for public comment); final sectoral policies; Board-approved country strategies following consultation with the country concerned; summaries of medium- and long-term operational strategies; executive summaries of environmental impact assessments for public and private sector projects; and reports on public sector projects (on a request basis). The Bank’s policy requires management to report annually to the Board on the implementation of the Public Information Policy. These findings are made available on the Bank’s Web site.

The Bank’s Public Information Policy was reviewed and revised in 2003 to enhance transparency and to expand communications with stakeholders. As a result, the scope of information made available to the public will increase through the publication of certain project evaluation documents and the posting on the Bank’s Web site of a schedule of forthcoming Board of Directors discussions. In addition, the process of public consultation will be strengthened. Under its revised policy, the Bank will post on its Web site an invitation (with an accompanying management note) for the public to provide input into the preparation of each new EBRD country strategy. Bank management has also committed to translate, on a pilot basis, future approved country strategies into local languages. The Bank will also translate the three documents that constitute the framework for its interaction with the public: the Public Information Policy, the Environmental Policy and the document which established an Independent Recourse Mechanism.

In April 2003, the Bank’s Executive Board approved the creation of the Independent Recourse Mechanism, which has the mandate to resolve complaints concerning Bank compliance with its own policies. This is in addition to the Manager of Outreach/NGO Relations, who serves as a point of contact between the Bank and the NGO (non-governmental organization) community.

The EBRD’s strengthened framework for interaction with the public has already yielded results, with the Bank’s investments in the Baku-Tbilisi-Ceyhan pipeline and Azeri-Chirag-Deepwater Gunashli Phase 1 oilfield project being prime examples. Thanks to EBRD and International Finance Corporation (IFC) participation, the development of these projects involved an unprecedented level of consultation and transparency with NGOs and affected groups in the sponsoring countries. The EBRD and IFC held public meetings in Azerbaijan and Georgia to seek input from local communities.

To be accountable to its shareholders and its stakeholders, the EBRD evaluates its projects, usually within two years after full disbursement, to assess the extent to which the projects have met their objectives. In 2003, 83 per cent of the Bank’s evaluated projects received an "Excellent-Satisfactory" rating for their "transition impact" potential.

As part of the international effort to combat the financing of terrorist activities, the Bank adheres to internationally coordinated controls on the illegal use of funds. This includes extensive checks on the integrity of potential clients and monitoring levels of corruption in countries of operations.

Canada has encouraged these policy initiatives. In all international financial institutions (IFIs) in which it is a member, Canada has been at the forefront of efforts to enhance transparency and accountability.

Encouraging Partnerships

The EBRD is required by its founding agreement to involve outside sources of financing in its operations. The Bank plays a key role in attracting co-financiers that might not otherwise be willing to invest in the region. Co-financing has the benefit of increasing a country’s access to international capital markets, promoting foreign direct investment and allowing appropriate risk sharing. The EBRD’s main co-financing partners are commercial banks, government agencies, export credit agencies and other IFIs. In 2003, the EBRD worked with 75 commercial banks on 61 projects, for total co-financing of €2.6 billion.

The EBRD also works with donor countries to provide financing for institution building and technical cooperation. Such funding has played a significant role in promoting transition. Where possible, the EBRD also works with other IFIs in order to extend the impact of the Bank’s financing and to benefit from complementarities with the other institutions. In 2003, the EBRD worked with other IFIs on projects involving €303 million in co-financing. Key partners for the EBRD included the World Bank, the Asian Development Bank, the European Investment Bank and the IFC.

Canada has encouraged this cooperation and coordination among multilateral development banks and is pleased with the efforts of the EBRD to work more closely with its sister institutions.

Human Resources

At end December 2003, the EBRD had regular staff of 946 at its Headquarters, down from 955 in 2002. Locally hired staff in the Bank’s Resident Offices totalled 206, down from 218 in 2002. There are approximately twice as many male professional staff as female professional staff.

Canadian Priorities in 2003

Canada is a strong supporter of the Bank’s medium-term operational priorities, which 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 relevance to the transition process of the Bank’s mandate to support countries committed to and applying the principles of multi-party democracy and pluralism.

To achieve these priorities going forward, Canada continues to support the Bank’s focus 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 SMEs;

• 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; and

• promoting sustainable development and environmental due diligence.

The EBRD is the only multilateral financial institution that has an explicit requirement that its members be committed to and apply principles of multi-party democracy and pluralism. Canada fully supports this requirement and believes it is appropriate for the Bank to limit its participation in those countries not living up to the principles embodied in Article 1.

Promoting a multilateral rules-based trading system is also a key Canadian priority, and many of the Bank’s activities work to support the integration of the transition countries into the world trading system.

The EBRD is committed to working closely and cooperatively with other IFIs and donors in the region. Canada strongly supports this approach. Coordination with other IFIs and donors is an important determinant of the EBRD’s effectiveness in promoting the transition to a market economy. Further, the role of other IFIs in addressing poverty directly can complement the EBRD’s work in the region.

Managing Canada’s Interests

Role of Governors—The highest authority in the Bank is the Board of Governors. A Governor and an Alternate Governor represent each member country. The Honourable Ralph Goodale, Minister of Finance, is the Canadian Governor and Mr. Peter Harder, Deputy Minister of Foreign Affairs, is the Alternate Governor.

Role of the Board of Directors—The Board of Directors, which is responsible for the general operations of the Bank, is composed of 23 members, of which 4 are non-European members. Canada is the third largest non-European shareholder, after the United States and Japan, and by virtue of its share has the right to elect its own Director. Canada also represents Morocco at the Bank. The Canadian Director is Mr. Scott Clark. The Minister (Economic/Commercial) at the Canadian High Commission in London, Mr. David Plunkett, is the non-resident Alternate Director and represents Canada in the absence of the Canadian Director.

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 a member of the Board of Directors’ Audit Committee, which reviews the integrity and soundness of the Bank’s policies and practices as well as the independence and performance of the Bank’s internal controls. The Audit Committee also reviews reports of the Bank’s External Auditor. The Canadian Director also participates in all meetings of the Board of Directors’ Financial and Operations Policies Committee and the Budget and Administrative Affairs Committee.

Positions Taken in 2003—The Canadian Director has frequently spoken to the Board on the importance of the Bank’s charter requirement that member countries be committed to market reform and multi-party democracy. In 2003, Canada’s Director spoke on the need to address issues related to the disregard for human rights and democratic principles, especially in Uzbekistan. Canada’s Director also spoke strongly on the need to rigorously apply the additionality test for projects in EU-accession countries and stressed the importance of the Bank’s goal of shifting operations to the south and east to early and intermediate transition economies.

To ensure EBRD operations are additional (i.e. do not replace private sector investment) and contribute to the transition process, Canada continued to advocate increased Bank efforts to find sound projects in countries that are in the early and intermediate stages of transition, respect the principles of multi-party democracy and are making efforts at reform. In our view, only by focusing on quality projects will the Bank contribute to advancing transition in these countries. In the advanced transition countries, Canada has underlined the need for Bank financing to be additional, as the Bank’s Articles of Agreement state that it should not displace financing available from the private sector on reasonable terms. Therefore we have urged the Bank to be increasingly focused and strategic in the advanced transition countries, where private sector financial and capital markets are increasingly active.

Canada has also been a strong proponent of greater EBRD transparency, accountability to shareholders and improved internal governance, believing that the Bank should be a model of behaviour for the region.

Canadian Staff at the EBRD—Canadians are well represented on EBRD staff. At the end of 2003, there were 24 Canadian professionals on the staff of the EBRD, representing 3.8 per cent of total professional positions, in line with Canada’s 3.4-per-cent share of the institution’s capital. It is noteworthy that a Canadian is Director of Communications and that a Canadian also heads the Procurement and Purchasing Department.

Canadian Commercial Interests

The EBRD offers a number of investment opportunities for Canadian businesses and financial institutions. The objectives of the Canadian Office are 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 these objectives, 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.

In 2003, 16 contracts that totalled €2.9 million were awarded to Canadian consultants across a variety of sectors and countries.

With respect to technical cooperation, in 2003 the EBRD committed approximately €3.1 million of Canadian technical cooperation funds for projects in several countries of operations. Canada signed a new agreement with the EBRD’s TurnAround Management Programme to provide €1.5 million over five years to be used to hire Canadians to work as advisors to SMEs in EBRD countries of operations. Under this agreement, Canadian advisors were awarded contracts totalling €85,000 to assist with airport modernization in Serbia. Under the CIDA-EBRD Cooperation Fund for Southeastern Europe, Canada committed approximately €634,000 to finance a public consultation and awareness program in Serbia and Montenegro, a standard-setting for charges registers in the Balkans, the provision of an air transportation advisor, as well as the provision of support for the conduct of due diligence for an EBRD Direct Investment Facility that provides equity investments to SMEs in the region. Canada committed €1.1 million through its Canadian Technical Cooperation Fund. These commitments supported transportation and environmental projects in Russia as well as the financing of a Canadian bankruptcy specialist to work within the EBRD’s Legal Transition Team. After January 1, 2004, Canada will no longer fund technical cooperation assignments in the Central European and Baltic countries that are acceding to the EU. In 2004, CIDA and the EBRD will work to align more closely their technical cooperation activities with CIDA programming priorities.

Looking forward, the EBRD hopes to increase the number of high-quality Canadian project sponsors with whom 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.

Challenges Ahead

In assisting its countries of operations over the second decade of transition, the EBRD will face significant challenges in expanding and managing its portfolio. In particular, the advanced transition countries, most notably those acceding to the EU, are increasingly able to obtain private sector financing. This suggests the need to focus the Bank’s activities on those areas that represent real additionality and have sufficient transition impact to warrant the use of Bank resources.

In Russia, given the volatility of oil prices, priority will need to be given to promoting investment in a wide range of sectors, including the financial sector. In the early and intermediate transition economies, the challenge will be to find quality projects in a high-risk environment that is characterized by a lack of market-supporting institutions. Given that the Bank’s focus will be shifting more to the south and east, the Bank will be reviewing how it operates in early and intermediate transition countries, with a view to increasing both the effectiveness and the volume of its activities in these countries. The Bank must continue to work in close partnership with other international financial institutions. Expanded cooperation will also be necessary to develop high-transition impact projects with explicit social and poverty alleviation benefits in order to strengthen the willingness of governments in some of the least advanced transition economies to move forward with politically difficult but essential reforms, particularly the restructuring or closure of large state-owned enterprises.

The transition experience of the Bank provides clear lessons for the future. Countries that have achieved more rapid and comprehensive reforms—particularly in liberalizing markets and trade, respecting government budget constraints, fostering the private sector by removing obstacles to the entry and exit of enterprises, and promoting democratic reforms—have laid solid foundations for sustaining progress in reform. Transition is deepest in those countries that have made progress on economic and democratic reforms. In these economies, market-supporting institutions have tended to develop. These institutional frameworks—predictable fiscal and regulatory environments, secure property rights, an impartial judiciary and sound financial supervision and regulation—combined with appropriate macroeconomic policies, will lay the foundation for sustained rapid growth and increased access to international capital markets.

In contrast, in some countries in the Bank’s region of operation, particularly those further east, progress in putting in place the institutions that underpin a market economy has been limited, and the process of liberalization and privatization is far from complete. As a result, economic growth remains vulnerable to external and internal shocks. In addition, the significant increase in poverty and inequality since the start of transition has eroded support for necessary reforms in many countries. Overcoming resistance to reform will be a challenge; it will require creating new employment opportunities and social fallback options for those displaced by structural change, and breaking the hold of powerful vested interests over the reform process.

Good governance will continue to play a critical role in the future success of the region and, in this regard, the EBRD will need to find ways to conduct its business to promote its Article 1 commitment to the principles of multi-party democracy and pluralism. Attention to governance issues in Central Asia, and in Uzbekistan in particular, will be centre stage in 2004, as the Bank will assess that country’s progress towards meeting key political benchmarks. Specifically, the Bank will be looking for evidence of greater political openness and media freedom, the free functioning of independent civil society groups and implementation of the recommendations of the UN Special Rapporteur on Torture. This assessment will also include a stock-taking of the country’s progress towards meeting the EBRD’s economic benchmarks. The level of future Bank operations in Uzbekistan will depend on this assessment being positive. Canada will continue its vigorous support for Bank efforts to address issues related to the rule of law, human rights and democratic principles.

Good corporate governance will also figure prominently in the period ahead, and the EBRD will need to continue 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.

Finally, good governance within the EBRD itself is also important. Since the EBRD, as a multilateral institution, is not regulated, the Bank must push itself more to adopt and maintain the highest industry standards. To this end, a process is underway to review the Bank’s governance standards with a view to strengthening them where needed. In particular, in light of recent problems in the private sector, the role of the Audit Committee is being examined to ensure that it is guided by the best and most appropriate standards.

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), 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 Web site: http://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)

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