2002 Financial Results

The EBRD approved 102 projects in 2002, the same number as in the previous year. These commitments totalled €3.9 billion, up slightly from €3.7 billion in 2001. Cumulative commitments by the end of 2002 amounted to €21.6 billion. The level of disbursements, at €2.4 billion, was roughly the same as in 2001.

The EBRD earned a profit after provisions of €108.1 million, down from €157.2 million in 2001. In 2002 the Bank reviewed its provisioning and liquidity policies. This review confirmed the adequacy of existing policies. No significant changes were recommended.

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 create 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 2002 suggest that, so far, the Bank has managed to achieve this balance. The challenge over the coming year will be to maintain this balance in an environment of slow growth and geopolitical uncertainty.

The EBRD’s general administrative expenses in 2002 were £142 million, comparable to those for 2001, reflecting continuing budgetary discipline, effective cost controls and a proactive cost-recovery program.

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 for 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 71 per cent of the EBRD’s annual business volume in 2002 was in the private sector, down from about 76 per cent in 2001 and 78 per cent in 2000. Despite this decline, the ratio is well above the target of 60 per cent. In 2002 the EBRD continued to increase the number of credit lines for SMEs to financial intermediaries and expand its various small business programs throughout its countries of operations. Since the Bank’s first small business program was established in 1994, more than 200,000 loans worth more than €1.5 billion have been disbursed. The EU/EBRD SME Finance Facility increased its funding for the loan and leasing aspects of the program to €575 million. By the end of 2002 the Bank had provided 36 credit lines to 31 financial intermediaries. As a result, over 12,300 loans worth €312 million have been extended to SMEs in the region, with an average loan size of €22,000. The repayment rate on these loans has been higher than 99 per cent. In 2002 the micro lending programs disbursed over €717 million through more than 144,000 micro and small loans.

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 2002 the EBRD committed financing to 36 financial sector operations, bringing total EBRD exposure to the financial sector region-wide to €7 billion. Financial sector operations represent about 30 per cent of the EBRD’s portfolio.

Banking Sector Activities – In 2002 the EBRD signed new loans valued at €541 million to the banking sector and took €311 million in new equity positions in 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 2002 the EBRD also stepped up its activities in the non-bank financial sector. A total of seven new transactions were signed in the sector during the year, with new commitments of €166 million. 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 2002 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.

Environment

Support for the environment remained a key priority in 2002, reflecting the Bank’s mandate to ensure sustainable long-term development in its countries of operations. This goal was bolstered by its participation at the World Summit on Sustainable Development held in Johannesburg in September 2002. Apart from the initiatives to specifically redress environmental weakness, 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 2002 six projects were approved for support under the recently created Northern Dimension Environmental Partnership (NDEP). The NDEP (which consists of Russia, the EU, the EBRD, the Nordic Investment Bank and the European Investment Bank) 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.

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. In 2002 the EBRD conducted 49 environmental analyses, 4 environmental impact assessments and 40 environmental audits on projects approved by the Board of Directors.

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 2002 the EBRD provided financing of more than €558 million to 16 projects designed to improve municipal infrastructure and promote energy efficiency. The Bank also completed the first part of a study on the potential for renewable energy projects in its countries of operations.

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 the updated Energy Operations Policy the Bank promotes energy efficiency through its operations. One of the revised policy’s key objectives is to improve environmental performance, including meeting climate change objectives and supporting renewable forms of energy.

In 2002 the Bank was particularly active in the energy sector, supporting, among other things, the promotion of energy efficiency and the modernization of Russia’s power network. €560 million was committed to projects in the energy sector, bringing cumulative commitments in this sector to over €2.3 billion. In this area the Bank seeks to work with governments to develop electricity tariffs that reflect costs while taking into account customers’ ability to pay.

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 in 2002 as they did not meet the requirements for normal Bank engagement as specified in Article 1 of the Bank’s Articles of Agreement. As a result, the Bank included alternative lower lending scenarios in the 2002 country strategies for these countries. These scenarios linked the level and nature of the Bank’s involvement to the extent of improvement in the economic and political situation. Without improvement in this area, these two countries risk continued exclusion from direct EBRD involvement with the state sector.

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 now routinely seeks the services of forensic accountants and specialized firms to perform integrity checks on companies in which it might invest and their management and shareholders. For those doing business with the EBRD, the EBRD’s public procurement rules underline 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 recently modernized 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.

In 2002, in the context of its biannual Public Information Policy Review, the Bank proposed that the public be invited to submit comments for consideration in the preparation of country strategies. It was also proposed that country strategies be translated into the national language of the country in question. Decisions on these initiatives will be taken in 2003. Other transparency-enhancing initiatives proposed in 2002 included the preparation of an annual environmental report containing data on the Bank’s environmental spending and achievements and on greenhouse gas emissions in countries of operations, and the release of Environmental Impact Assessments in local languages.

An Independent Recourse Mechanism, which would resolve complaints concerning Bank compliance with its own policies, was also proposed. 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 usually evaluates its projects within two years after full disbursement to assess the extent to which the projects have met their objectives. In 2002 more than three-quarters of the Bank’s evaluated projects received an “Excellent-Satisfactory” rating for “transition impact.”

During the year the EBRD established a hotline to report allegations of fraud, corruption and other misconduct in the Bank’s activities and projects.

As concern within the international community related to terrorism continued into 2002, the Bank adhered to internationally coordinated controls on the illegal use of funds. This included extensive checks on the integrity of potential clients and monitoring levels of corruption in countries of operations.

Canada welcomed 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. By virtue of its guarantees to a project, the Bank can play 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 2002 the EBRD worked with 41 commercial banks from 16 countries on 30 projects, for total co-financing of nearly €900 million.

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 2002 the EBRD worked with other IFIs on 25 projects involving €612 million in co-financing. Key partners for the EBRD included the World Bank, the Asian Development Bank, the European Investment Bank and the International Finance Corporation.

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/Changes in Senior Management

At end December 2002 the EBRD had regular staff of 907 at its Headquarters, down from 913 in 2001. Locally hired staff in the Bank’s Resident Offices totalled 237, down from 247 in 2001. There are approximately twice as many male professional staff as female professional staff.

Johnny Åkerholm, a Finnish national, was appointed Secretary General in March 2003, replacing Antonio Maria Costa. In December Joachim Jahnke retired as Vice President, Evaluation, Operational and Environmental Support. He will be replaced in early 2003 by Fabrizio Saccomanni.

Canadian Priorities in 2002

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, Canada supports 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 John Manley, Deputy Prime Minister and Minister of Finance, is the Canadian Governor and Mr. Gaëtan Lavertu, 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 Scott Clark. The Minister (Economic/Commercial) at the Canadian High Commission in London, 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 was, until September 2002, a member of the Financial and Operations Policies Committee, which reviews financial policies, including the Bank’s borrowing policy, general policies relating to operations, and procedures and reporting requirements. In September 2002 the Canadian Director joined the Audit Committee, which reviews items such as the budget, institutional performance reports and other issues affecting the financial performance of the Bank.

Positions Taken in 2002 – 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 2002 Canada’s Director spoke on the need to address issues related to graduation from Bank operations for those countries that will be acceding to the EU in the near term.

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 and shareholder accountability, believing that the Bank should be a model of behaviour for the region. Canada has also supported measures to strengthen internal governance at the Bank to ensure that all staff function at the highest standards of business integrity, as well as efforts to strengthen the budget process.

Canadian Staff at the EBRD – Canadians are well represented on EBRD staff. At the end of 2002 there were 23 Canadian professionals on the staff of the EBRD, representing 3.6 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. A key task 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 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 2002 the EBRD’s Board of Directors approved EBRD participation in one Canadian-sponsored transaction, for MobiFon in Romania. The aggregate size of this project is US$300 million, of which EBRD financial commitments are US$230 million. A description of the transaction is given in Annex 2. Additionally, the Board of Directors approved an equity increase in a Canadian-sponsored project in the Czech Republic (originally approved in 2000) to bring the Bank’s shareholding to US$26.2 million from US$25 million, in TIW Czech N.V., a telecommunications provider owned by Telesystem International Wireless Inc. (Canada).

With respect to official co-financing and technical cooperation, in 2002 the EBRD committed approximately €2.1 million for projects in several countries of operations. Under the CIDA-EBRD Cooperation Fund for Southeastern Europe, Canada committed approximately €50,000 to finance the Macedonia portion of a regional civil aviation upgrading project. Through the Canadian Technical Cooperation Fund, Canada committed €1.82 million to finance projects in four countries of operations (Russia, Uzbekistan, Armenia and Lithuania) as well as two regional projects in a variety of sectors-municipal and environmental infrastructure, transport, energy, finance/business, community/social services, manufacturing and construction. In addition, through the TurnAround Management Programme, Canadian advisors were awarded contracts totalling €224,000 to assist with airport modernization in Russia and the retail sector in Ukraine. 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. 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.

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, in particular, which has intensified post September 11th, is expected to sharpen further as the Bank prepares to hold its Annual Meetings in Uzbekistan in May 2003. 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.

The first decade of transition has provided clear lessons for the future. Countries that have achieved more rapid and comprehensive reforms – particularly in liberalizing markets and trade, respecting government budget constraints and fostering the private sector by removing obstacles to the entry and exit of enterprises – have laid solid foundations for sustaining progress in reform. 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.

 

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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