Annual Meeting 2002

Opening address by Jean Lemierre, President of the EBRD

Eleventh Annual Meeting of the EBRD Board of Governors
Bucharest, Romania
19 May 2002

Sustaining the Progress

The countries from Central Europe to Central Asia have marked important achievements in promoting prosperity for their people. Future progress will depend on making the achievements sustainable.

The most evident success stories and the failures prove that the main ingredients of sustainable development are political democracy and economic freedom. These freedoms can be expressed in the ballot box and in the market place and the EBRD exists to support both.

The recipe for sustainable prosperity calls for openness, transparency, clear and fair regulations, strong governance and international engagement. Fair elections and open, contestable leadership define a sustainable system.

Market economies depend on small businesses…

Free markets are the other key ingredient of sustainability. Certainly the hundreds of thousands of small businesses we have financed are the bedrock of sustainable development and a prosperous future. When the EBRD supports banks that provide funds to small furniture makers, such as the one I visited yesterday here in Bucharest, we are fostering independence, a livelihood for local people, initiative, transparency.

These are the cogs and wheels of a well-functioning market economy. These are the people who make their enterprises work, who build the foundations for bigger businesses and more employment, and who pay back their loans with nearly 100 percent reliability. These are the people who make up the growing middle class, without which political democracy remains anaemic and vulnerable.

… and major enterprises

Small and medium enterprises are catalysts for change and innovation, embracing market approaches and building economies. But a large share of productive resources and of economic activity is concentrated in large firms and traditional industries. There will be fierce competition between nations and industries as countries try to attract investors by modernising and introducing efficiency-enhancing restructuring and market-conforming behaviour.

Romania has recently embarked on the restructuring of its industry, and in the end its economy and the Romanian people will benefit. But the hardship in terms of jobs and rejection of old ways is tough.

The role of the EBRD is to provide both financing and counsel to encourage countries across the region to persevere. The EBRD joins with our sister organisations -- the World Bank, the European Investment Bank and the Asian Development Bank -- and, with the EU and bilateral donors, to help mitigate local economic and social impact of necessary but difficult economic decisions.

For example in the seven poorest CIS countries, the EBRD is working closely with other organisations and donors to address the serious economic, financial and social problems of countries where poverty and debt burdens have risen in the past decade.

The region registered impressive growth during 2001, a year that was fraught with difficulties for emerging markets, including because of the effects of 11 September.

There have been real signs of strength and growth in the region. The transition economies have grown more strongly than most other emerging markets in Asia and Latin America and they have attracted greater inflows of private capital as international investors backed away from other emerging markets.

Strong growth in Russia and the CIS reflected recovery from the deep slump of Russia's August 1998 crisis, as well as the returns from high oil prices. Since oil prices are volatile, Russia must encourage a better climate to enhance domestic investment and make it more efficient. This requires further structural reform as well as a willingness to engage openly with the global economy.

International links to promote prosperity

I look forward to seeing countries of the region leveraging the economic progress of 2001 to build for 2002 and beyond. One expression of self-confidence in their own progress and place in the global economy would be to develop their dialogue and expand their trade with close neighbours, and with countries around the world

The prospect of EU membership has accelerated reforms in the ten candidate countries of the region, and beyond to their neighbours and competitors who are following suit. These countries will strive to keep budgets under control in order to reduce the fiscal pressure on them and on the Union as a whole. That will need more private investment.

Dramatic political and economic changes across south-eastern Europe, particularly in Yugoslavia, have helped unlock the significant potential of this area. The EBRD has responded quickly to the new-found political stability and the determination of the authorities and the people to move towards a modern market economy and political democracy. In just its first year of membership, the EBRD actively invested in Yugoslavia, with financing for banks, public transportation, drinking water and district heating for Belgrade

The Bank supports the Stability Pact for Southeast Europe and brings to this initiative a crucial private sector dimension.

Russia and most other CIS countries have taken a different approach to international integration. The United States and the European Union have renewed their engagement with Russia on security and economic issues. Significantly, the Russian government has recently made it a priority to accede to the World Trade Organisation.

But, where all but three countries of central and eastern Europe have joined the World Trade Organisation, only four CIS countries have, and none of the four largest countries (Russia, Ukraine, Uzbekistan, Kazakhstan).

There remain major obstacles to trade and transit within the CIS itself that stifle opportunity and growth.

Particularly among the landlocked countries of Central Asia and the Caucasus, the elimination of artificial barriers and the opening of dialogue and links between immediate neighbours would offer enormous opportunity in terms of sub-regional trade and the potential to attract foreign investment.

The EBRD is involved in a number of projects designed to link countries in the region, such as the Silk Road initiative. And along with other multilateral development banks as well as the WTO, we are helping to build the institutional and technical capacity of these countries so that they can meet the latest world trade standards.

2001 - a strong year for the EBRD

The Bank's particular focus on Central Asia this year was partly a consequence of post-11 September concerns. But across the EBRD region, activity was stronger than in any of the previous 10 years of operations.

The EBRD invested € 3.6 billion, to finance 102 projects, across each of the 27 countries of operations. This is the Bank's highest ever annual business volume and represents a 37 percent increase over the previous year. More than three-quarters of that business was with private investors. The important measure of effectiveness on the ground - disbursements - rose by 67 percent, to €2.4 billion.

The Bank's own spending catalysed co-investment from commercial banks, strategic and other investors, and from our partners in national governments and other organisations. All together, these co-partners amplified the impact of the EBRD's own financing by investing two Euros for every Euro which the Bank invested.

The cumulative business volume since the founding of the EBRD in 1991, stood at € 20.2 billion in 2001, for a total project value of €67.8 billion.

The Bank continued to exert tight resource control, marking its eighth year of no real growth in the budget.

Strong operations were matched by a strong balance sheet, with profit after provisions of €157.2 million. With the positive 2001 results, the Bank remained well on course to maintain levels of operations into the coming years with no capital constraint.

But the year-end results are only an encapsulation of the results on the ground.

In the most remote reaches of Russia, a loan to the Buryatzoloto gold mine, where the Bank was already an investor, will finance installation of a power line. That will shut down 15 diesel generators, reduce air pollution, lower the risk from transportation of diesel fuel and put new communities onto the power grid for the first time.

An energy efficiency and district heating project in Andijan, Uzbekistan, will make dramatically more efficient use of water and fuel with better service and reduce emissions.

The Bank bolstered its new programme to lend in local currencies, including, recently, roubles. The Bank doubled its programme to streamline approval of small equity investments.

We helped to modernise and diversify retailing in the Baltics through investment with a Finnish retailer.

In countries such as Bulgaria and in Central Asia, a new grain receipt programme will provide financing to farmers using their future grain deliveries as collateral.

The EBRD manages €1.5 billion for projects to clean up obsolete nuclear sites and make them safe. Funds overseen by donor countries will lead to completion of a shelter at Chernobyl in Ukraine, and safe decommissioning in Bulgaria, Lithuania and the Slovak Republic.

Here in Romania during the few days of our Annual Meeting, we are signing new investments in banks, and projects to commericalise local services. With an investment of €34 million, the EBRD will help a Spanish company to make Moldova's power supply vastly more reliable.

Evolving priorities

The focus is increasingly on investment in the less advanced countries. As the Governors set out last year in the Capital Resources Review, the resources of the Bank are being shifted to these countries. We have increased the resources of London-based teams that generate and nurture business outside of the advanced countries, and introduced similar skewing in the one-third of our staff who work in the countries of operations.

In 2001, the Bank invested more than the Capital Resources Review had anticipated in the early and intermediate countries, and already this year, there is proportionately more new business in less advanced countries.

In Russia, there will be a continuing increase in focus and investment, in projects that benefit from more rouble lending. There will be more projects beyond the major cities such as Moscow and St. Petersburg in the Russian regions.

The Bank is maintaining a strong presence in the more advanced countries of central and eastern Europe and the Baltics. We continue to design and market innovative products tailored for their relatively more sophisticated economies where private investment will make an important contribution to limiting the demands on national budgets.

It is clear that the EU-candidate countries will face increasing fiscal pressure before and after accession, yet domestic investment will not be sufficient to continue making real progress in transition. Flows of foreign direct investment are increasing in most countries. But it is still going heavily to a few more advanced countries and is still concentrated in the natural resources sector. As countries introduce reforms that make more attractive investment climates, the EBRD will continue to mobilise investment from abroad for as long as there is an investment requirement and the markets need particular help and encouragement to fill it.

The looming need ahead in these more advanced countries is for equity participation to encourage the growth of mid-sized firms, both new start-ups and restructuring existing enterprises. The Bank has much experience in helping cities to commercialise their local services, bringing market-driven investment to urban transportation, water and waste. The coming year will certainly incorporate a shift from the main cities to the peripheral and rural areas and small towns that can benefit from EBRD financing. These are all areas where the EBRD can prove its value, by identifying the areas where private investors are reluctant, and stepping in to provide the financing and encouragement.

The challenge of the Bank is to identify both the particular needs for investment, country by country, and the appetite for investment. The EBRD is focused on making marriages between investors and investment potential. Developing new business is a top priority, because with a wide menu of prospective deals, the Bank is best able to select those which offer the greatest impact for local economies and the people of the region. Business development and catering to clients drive the work of the EBRD.

One innovation that emerged from evolving needs and opportunities is introduction of a tool to improve the environment as well as benefiting our clients, through the trade of carbon emission rights. This will help countries to cost-effectively meet their obligations for reduced emissions under the Kyoto protocol.

This innovation underlines our strong emphasis on promoting strong environmental standards in all our investments, and helping the countries of the region to shed the massive inefficiencies of energy use under non-market systems.

Governance - setting an example

The EBRD works to finance transition that is sound and sustainable, in banking terms and environmental terms. But that will depend on legal systems that are in parallel transition, with laws, regulations and enforcement that progress to greater degrees of predictability, fairness and transparency.

The highest norms of governance will make the best setting for sustainable economies and societies.

The Board and the management of the Bank are constantly striving to hone our own governance and management as well.

For example, we are constantly strengthening the project selection criteria - including our assessment of transition impact - and have significantly improved our criteria and methods in recent years. I joined with the Heads of the other multilateral development banks at the recent UN Conference on Financing for Development to introduce better measuring, monitoring and managing for transition and development results. This joint work is now underway.

We have strengthened our adherence to the UN rules on money laundering, a reflection of the Bank's total commitment to the international fight against terrorism. Since its founding, but in particular since last September, the EBRD has been a committed partner in the international coalition to suppress terrorism by cutting channels for illegal financing. We call on our partner banks to share our high standards of transparency, and we build on already-scrupulous due diligence. The EBRD is grateful to those member countries that have assisted us in this cause by providing the practical information that makes our anti-terrorism efforts more efficient.

The staff of the EBRD are building new business, finding new approaches and products, and taking their expertise into new areas of endeavour that will promote prosperity. But the quest for new business is undertaken in the context of a culture of rigorous governance, overseen by the Bank's Chief Compliance Officer. Unceasing attention to the integrity of the clients we work with is fundamental to sound banking and to the Bank's credibility, and indeed to the quality of the transition impact of our projects.

With encouragement and helpful ideas from the community of non-governmental organisations, the Bank is about to implement another important improvement to our governance by introducing a mechanism to query Bank decisions.

We will soon launch a wide consultation process on our proposal to make the Bank more open to public scrutiny by a simple process to receive public complaints that could be considered with the help of independent outside experts. We see the mechanism not only as a check on adherence to our own policies, but also as a channel for public concern with any aspect of an EBRD project, whether or not it is a complaint directly related to Bank policies. For example, if a planned factory complies with all our financial and environmental standards but imposes an unforeseen negative impact on a community, we would invite local people to use the mechanism to alert the EBRD.

There will also be enhancements to our Public Information Policy, designed to increase transparency and ease of access to information. That will involve more translations into local languages and invitations for more public comment as we prepare strategies.

The way forward

The year behind us has been fruitful, thanks to the roadmap that our 62 shareholders gave us at the London Annual Meeting a year ago.

Our vision is that the roadmap for the coming year will guide us towards making further progress in the transition to open, effective market economies in each of our 27 countries of operation.

But this vision for the EBRD will be realised in tandem with developments in the region. The progress of each country is made at home. The efforts of each country in developing democratic institutions, fostering reform and inviting investment will drive progress and make it sustainable.

It is a difficult time to reach for more. Many countries are already facing the painful social repercussions of courageous economic decisions. It is never easy to impose higher tariffs on electricity that was virtually a free good in the old days. It is destabilising to lay off many workers in the name of efficiency for the future. Yet each country in the region must know that through whatever difficult circumstances lie ahead, the EBRD and its shareholders will encourage and support the choices that underpin democracy and that strengthen markets. This is the way to make progress sustainable through future generations.