Annual Meeting 2005 opening statement

Opening address by Jean Lemierre, President of the EBRD

Annual Meeting of the Board of Governors

Belgrade, 22 May 2005

Prime Ministers, Governors, Ladies and Gentlemen,

Welcome to the EBRD annual meeting. And welcome, most especially to Belgrade. Holding our meeting in Belgrade is a mark of the progress in all the countries of the western Balkans, in Serbia and Montenegro, in Albania, Bosnia and Herzegovina, Croatia and FYR Macedonia.

These countries have emerged from repressive political regimes, years of instability or war and years more of the debilitation of the aftermath of war. There is democracy where once there were dictators. Planned economies have turned to growth driven by markets. And, perhaps most crucial to their future, a new way of thinking is developing. Today people have aspirations, and real hope of a prosperous future, for themselves and for their children.

This is transition. Here in this part of south-eastern Europe the radical break with the past is expressed in many ways, including the symbolically important act of bringing war criminals to justice. It will progress with the security and political commitment that solidify the democratic process through free and fair elections and a thriving civil society. Trade and investment are tools of transition, not least because they help to erase geographic and ethnic divisions.

Now there is solid growth, lower inflation, higher foreign investment in the region and there is cooperation between countries that would have been unimaginable a few years ago.

International support for south-eastern Europe

The international community has played a significant role in achieving the progress so far. And it has much more to do.

The EBRD made its first investment in Serbia four years ago, the first institution to join the new government in its construction of a market economy.

Across south-eastern Europe the EBRD has invested almost €6.5 billion in the banks, enterprises and infrastructure that fuel growth. We have supported trade and investment between these countries in the region, through expansion of enterprises such as the Croatian dairy company Lura into Serbia or Serbian food products firm Marbo into neighbouring countries. Our investment in infrastructure contributes to a future as a transit corridor, as well as linking countries in a unified energy system. And in Kosovo, our investment in ProCredit microfinance bank has resulted in loans to 27,300 small businesses. And each year, that figure is increasing by the thousands.

Alongside its investments, the EBRD has devoted much attention to policy dialogue and encouraging countries to work collectively towards their mutual future prosperity. To paraphrase a recent headline, it’s a question of ‘team up or give up’ in this region.

That collaborative effort underpinned the seminars that we have hosted during this past year, bringing together sector specialists, policymakers, entrepreneurs and politicians from around south-eastern Europe. Under the patronage of the Prime Ministers of Bosnia and Herzegovina, Albania, Croatia and FYR Macedonia, we exchanged experiences about regional transportation, municipal matters, energy and how to promote entrepreneurship.

Other parts of the international community have contributed to the security, economic, political and social dimensions through the Stability Pact, UNMIK, K-FOR, the European Agency for Reconstruction and the Council of Europe Development Bank, as well as through the World Bank, IMF and the institutions of the European Union such as the European Investment Bank.

The EBRD has an important role, and so do many countries such as the United States, Canada, Japan and Switzerland. The EU is critical because, along with its many programmes in the western Balkans, it provides tremendous hope. The recent International Commission on the Balkans, chaired by President Amato, reported that the prospect of closer ties with the EU is this region’s most powerful incentive to undertake the reforms necessary for a strong economy and society.

With the publication of a Feasibility Study in April, Serbia and Montenegro were deemed  ready for talks about a future relationship within the EU. Croatia is an official candidate for EU membership, and Bulgaria and Romania are on course to join the EU in 2007. 

The region beyond the Balkans

It was just a year ago that eight EBRD countries of operations acceded to the European Union in an affirmation of the strides they have made in political and market reform. Even if transition is not complete in the eight new EU countries, their progress is impressive.

With market-supporting institutions in place in the new EU countries, market conditions will eventually be right for private investment in all sectors of the economy. Meanwhile, the EBRD will stay engaged and continue to invest in sectors which do not yet attract private investment without encouragement – in some areas of financial services, for example, and support for middle-sized companies to expand, or financing for municipalities to provide market-based services such as urban transport, water and waste disposal.

Progress in the new EU countries is a reminder of the importance of strong institutions. This lesson is relevant for the whole region, including the resource-rich countries. A sustainably strong economy is built on the institutions of democracy and market economy, and through constructive participation in international relationships, arrangements, and organisations such as the World Trade Organisation. A strong society and economy need rule of law, fairly and transparently implemented, as well as balanced growth based on a diversified economy and that benefits all segments of society.

The best time to implement the reforms that will make growth sustainable is in periods of high revenues that we see today in Russia and other resource-rich countries. Russia was, again, the country where the Bank invested most in support of the government’s efforts to diversify the economy from excessive reliance on the resource sectors and to build the economy in less populated regions of the country.

The Bank put a high priority for operations in the South Caucasus and Central Asia, as well as south-eastern Europe and Ukraine. The EBRD is responding to the new priorities set by new leadership in Georgia, Ukraine, and the Kyrgyz Republic, and a significantly different leadership approach in Moldova.

The challenge is very different in those EBRD countries where development has not been sufficient to build the basis for strong self-sustaining growth and investment. The seven poorest countries of operations need an approach designed to facilitate investment that will spur even the smallest businesses, promote international trade, and encourage an entrepreneurial culture. A year ago the priority attached by the EBRD to these countries was reflected in a new Early Transition Countries Initiative for Armenia, Azerbaijan, Georgia, Kyrgyz Republic, Moldova, Tajikistan, and Uzbekistan. The Initiative increases the risk that the Bank accepts, and streamlines processes to encourage much-needed investment. It has proved a clear success in bringing business to countries where injections of investment are most needed.

The EBRD evolves with the region

Across the region, the EBRD invested €4.1 billion in a record 129 projects.  That was a result of much hard work by the staff. I would like to pay a special tribute for that success to those of my colleagues on the Executive Committee who leave the Bank this year.

The profiles and needs of the 27 countries of operations are very different now than in 1991 when the EBRD was founded, initially to help Central Europe and the former Soviet Union through the transition.

The EBRD, too, must change… and even faster than our countries of operations. For your consideration at the Annual Meeting of 2006, we will work closely with the Board of Directors to develop a new strategy for the use of our capital for the next five years. It will require much reflection in a constructive spirit. We will seek guidance from you, Governors, on the objectives and priorities that should direct our work.

We see the priority continuing to shift to countries further east and south. That trend of the past few years will mark the coming five years. It is a deep challenge for the Bank because it means adapting our business model to new conditions that will be at least as difficult as the mission we undertook following the fall of the Berlin Wall. It means both renewal and fundamental change within the Bank.

The new business model

The new business model of the EBRD must deliver the kind of value-added that the Bank’s work on privatisation and market structures brought a decade ago. Today, our bankers must be at the leading edge of a new market place. There is an appetite today for creative ways to bring more equity investment, especially to help mid-sized businesses become bigger international enterprises. The market needs help to work in traditionally public sector projects, such as providing municipal services. We will develop capital markets in the region and use capital markets as tools to promote investment, for example by financing in local currency  as we have done recently in Russia. We are also finding ways to improve the flow of remittances from abroad into formal banking institutions. And we need a model that encourages innovation in sectors such as energy, where the future is in solutions beyond traditional oil and gas supplies.

The EBRD will need a structure that is more closely adapted to the new priorities and business model. The geographic shift of priorities will have implications for allocation of staff and resources as projects will be smaller and more labour-intensive. And there will be a change in the needs for skills, creativity and ability to work closely with clients. As the Bank evolves, we will continue to adapt and improve the working environment. I know that I can count on your support, Governors, to continue to provide the staff with the rewards they deserve.

The value of monitoring and integrity

With cumulative business volume – all our operations over 14 years – at €25.3 billion, we must devote increasing attention to monitoring of projects that are already operational. The reputation of the Bank depends not only on the conditions that ensure profitability, good business practice, strong integrity and respect for the environment. It depends on making sure that those conditions continue to be met, year after year. We have reinforced the independence of our project evaluation team to check on the effectiveness of projects. We must also reinforce our ability to stay close to clients and maintain high standards through the life of the project.

This is closely related to the many measures the Bank has adopted to ensure integrity. In the past year we have reinforced internal controls to stay current with best practice. The office of the Chief Compliance Officer has been strengthened and, with the Board, we are reviewing the Code of Conduct of the Bank. And even though we are working in more difficult environments and we have introduced some streamlining, there is rigorous due diligence to minimise the risk of corruption, money laundering or other illegal practice.

Partners and policy dialogue

The priorities of the coming years will also be based on a good deal of policy dialogue. It is useful for countries of the region to come together to discuss mutual concerns, as they did here in the Balkans through the series of seminars we held this year, and as you do here at this Annual Meeting. Countries in earlier stages of transition have welcomed the Bank’s knowledge of their concerns and the open dialogue on how the EBRD can help address them.

It is through dialogue that the Bank sets its investment strategy and signals where countries need attention to aspects of building a market economy and democracy. In Turkmenistan and Belarus, the slow progress in democratic and market transition has severely limited what the Bank can achieve. In Uzbekistan, we can only condemn indiscriminate killings and the situation is cause for serious concern. As the Bank has stressed in its Strategy for Uzbekistan, without openness and dialogue with people, there can be tragic results.

In the context of shifting priorities, good projects will depend ever more on good preparation. In this, donors have made the difference. Your support has been crucial for small business programmes, TAM and BAS, the Legal Transition Programme, environmental and safety programmes, including decommissioning old nuclear plants. Donors have recently increased the fund to build the Chernobyl Shelter, and under the Northern Dimension Environmental Programme, work has begun on decommissioning nuclear submarines in Russia. A recent innovation in the use of decommissioning funds has been the cofinancing of energy efficiency projects such as district heating and retrofitting buildings in Sofia, and small-scale renewable energy projects financed through Bulgarian banks.

And certainly the move in new directions means redefining our relationships with other international institutions to gain the greatest efficiency in our respective operations. In particular, we have had constructive discussions with the European Investment Bank about the best way for our two institutions to work together in the region.

Consultations with non-governmental organisations will, of course, continue to guide our thinking.

The world context

Across the region and around the world, there are mixed messages about the future.

The average growth in the 27 countries of operations is 6.5 percent, with a healthy annual flow of €34 billion foreign direct investment. But the growth rates are not even, and in some parts of the region there are net outflows of investment. The outlook is for a less benign setting than the favourable global economic environment of the past two years.

There is progress but many countries of the region are still struggling with how to share prosperity with all parts of society and with remote regions.

The EBRD has no ready solutions. In this evolving world, the Bank itself has to question itself and prove that it can adapt a model that was designed for a newly free central Europe in 1991 to the context of a more mature region with a new generation of needs. It will take innovation and sensitivity.

But what I do know is that there is a highly dedicated staff working with people in all our countries on a shared vision that has proven its worth: building a sound market economy in conjunction with democratic principles is the surest way to sustainable prosperity. We will continue to work with all our partners in each of our countries to realise that vision. 

Thank you.