Annual Meeting 2006 opening statement

Opening address by Jean Lemierre, President of the EBRD

Annual Meeting of the Board of Governors

London, 22 May 2006

Prime Ministers, Governors, Ladies and Gentlemen,

Anniversaries are occasions to take stock and to look forward.

As it celebrates 15 years, the EBRD can look back with admiration and pride at the progress of a region in the throes of transition to a full market economy and democracy.

In 1991, you, our shareholders, founded the EBRD with a specific mandate and an innovative way to operate.

This was to be a public institution to help replace planned economies with sustainable economies by using the tools of the private sector to invest in the enterprises and banks that constitute a free market.

But sustainable economies thrive in multi-party democracies, and the founders had the wisdom to make political progress a condition of our investment.

The founders endowed the Bank with another unique attribute: this institution must constantly test itself against the market.

As long as the Bank can offer money, or financing terms or benefits that clients need and are willing to pay for, we invest.

If private capital is available on similar terms, we leave it to the markets and move on to where our particular value is needed – the principle of additionality. 

I recall these basic principles because 15 years later, we can only applaud the founders for how well the model has worked, for the countries of operations, and for the EBRD.

The Eight European Union members

Today, eight countries are politically and economically so advanced that they have become members of the European Union.

Romania and Bulgaria are due to be the next new EU members -- an acknowledgement of the efforts that the people and governments have made to introduce reforms and embrace democracy and free market principles.

The prospect of joining the EU is an important incentive for other countries of Southeastern Europe, one that has served as a valuable accelerator of transition.

As our EC Governor, Commissioner Almunia, reported recently, the rewards of expansion have been dramatic, with much increased trade and investment in both the new EU countries and the original EU countries.

Foreign direct investment has gone from virtually nothing to almost € 200 billion a year with three quarters coming from EU-15 investors –remarkable progress in just a decade and a half.

The EBRD has helped to forge the way for that investment.

The Bank participated in privatisations, and was the first investor to take the risk in many sectors and enterprises that private investors would not take on before we worked with them to develop and understand the business case. 

Over the years, the Bank has made loans and taken equity stakes in manufacturing and other industries, in the banks that would underpin development of the real sector, and worked with municipalities to establish market-based services and infrastructure. 

The Bank has been a dedicated partner in the transition of the EU-8 countries.

Now, there are fewer and fewer companies in these countries that have to rely on the support of the EBRD to access capital markets.

And so, the shareholders of the EBRD have done precisely what the charter of the Bank prescribes.

Graduation

In the context of the medium-term strategy, we and the Board of Directors have taken the view that the EU-8 countries will graduate over the five-year period of the Review.

The Bank will be reducing investment in these countries in line with lower demand for Bank financing and will start next year to consolidate and close offices and shift resources instead to countries where EBRD capital is more necessary.

Graduation is a marvellous mark of success… For the eight countries concerned, it is the success of transition, reflecting historic achievements in their economic and political transformation.

And for the Bank, it marks the success of the model – the proof that transition works and the EBRD does what it says it will do: withdraw when we are no longer needed.

And it is the proof that the Bank’s policies of additionality and graduation can combine to rejuvenate the Bank, and ensure that it is efficient, innovative and capable of taking on new challenges.

As the medium-term strategy sets out, graduation of some countries means a renewal for the Bank as it shifts resources to Russia and countries east and south of the European Union.

Beyond the EU-8

Across the region there has been clear progress in transition.

The Bank’s activity will be underpinned by growth in countries across the region which – at 5.6 percent last year -- surpassed growth in most parts of the world.

Even if the political situation in some countries means that the EBRD has only minimal investment, in most parts of the region, transition has progressed, as we can judge from our regular survey of business people across the region that shows confidence in institutions and rule of law is increasing and corruption is starting to diminish in many countries.

That makes for an encouraging backdrop to the EBRD’s increased activities in countries in the eastern part of the region.

Countries in southeastern Europe have many of the building blocks for progress that the EU-8 had… the incentive of a closer relationship with the EU, as well as inroads into economic, market and political reform.

In Ukraine, the EBRD doubled investments in 2005 and there is scope to significantly increase investment with the benefit of a more propitious investment climate and investor appetite.

In the next five years, there will be an even greater emphasis on investment in southeastern Europe, the Caucasus and central Asia, with more than half of annual business volume going to the early and intermediate countries.

The medium-term strategy calls for the EBRD to continue to focus on the poorest countries, where the donor-funded Early Transition Countries Initiative has supported the creation and expansion of many smaller businesses as well as infrastructure and industries, creating jobs and a strong foundation for a market economy.

Investment is more challenging in these countries and the new strategy is based partly on the Bank’s ability to take more risk because of its financial strength of past years.

Russia

Russia has a particular composite of needs and responses.

After the break-up of the Soviet Union, Russia’s focus was on achieving political stability, and economic stability after the financial crisis of 1998.

In many ways Russia is only now becoming fully engaged in the most difficult part of the transition process.

Russia is making strategic decisions about equitable sharing of oil wealth, about structuring its economy to make the most of its strategic resources.

Partly, that has meant correcting what was widely seen as the unfair way resources were distributed after the collapse of the Soviet Union.

If there is support for more state control of some of the country’s most critical resources, the challenge must be to ensure that resources are redistributed and managed in a fair way that the people and investors can understand.

Transparency and strong legal and political institutions that build public participation and support have proven to be a fundamental element for all the countries that have come closest to full transition. 

Such an institutional framework would be the underpinning of membership in the World Trade Organisation – an important goal that Russia has set. 

In managing its transition, Russia faces the paradox that it benefits from windfall gains from the rise in the price of oil, yet much of the country is poor, ill-equipped with infrastructure even for energy and with insufficient or uncompetitive industries.

President Putin has set goals for diversification in order to build a strong private sector beyond the oil and gas industry. A balanced and diversified economy and strong institutions are critical in order to ensure that petroleum wealth fuels the full economy and brings more prosperity to all parts of society.

To build its market economy, there are massive needs for long-term investment that far exceed the flow of cash from oil revenues.

Russia wants to improve its ageing industries and infrastructure and improve the market economy in the regions outside the main cities.

Its banking sector could better support the real economy. And municipalities have an appetite for sustainable market-based approaches to providing to services such as water and heating.

The EBRD will work closely with Russia in all these areas, encouraging transition with tools and approaches adapted to the Russian environment.

More staff and resources are being devoted to Russia and two new offices will support more financing across the Federation, with a readiness to take more risk including through equity participation.

The Bank will take advantage of new legislation that opens the way to public-private partnerships.

The EBRD can develop projects that fit the goals of the national investment funds that have been created to ensure that the whole economy benefits from oil money – for example through projects tapping the huge potential savings from reducing waste in the energy sector -- valuable even in an oil-rich country.

Energy initiative

Indeed, across the whole region, the EBRD has set a high priority on better use of energy.

The global concern with climate change is one good reason to reduce the use of fossil fuels.

Another, is the terrible waste of energy in every EBRD country.

The legacy of planned economies is that our region uses seven times more energy per unit of GDP than western Europe, according to the International Energy Agency.

If the EBRD region had the energy efficiency of Europe, world energy demand would be reduced by more than 7 percent.

That is why the Bank is launching a Sustainable Energy Initiative focused on climate change and energy efficiency.

There is a solid business case for energy efficiency measures, with clear cost-effectiveness for energy efficiency improvements in industrial projects, and for renovation of district heating, electricity grids and ageing hydro plants.

The Initiative will also aim to develop the feasibility of newer renewable technologies.

The EBRD intends to double its financing for energy efficiency and renewables.

We are asking your support with donor funding that would help to increase awareness of the returns on investment from energy efficiency measures. And donor funding will help us to make the business case for the newer technologies that are not well developed yet.

I appeal to you, as policy-makers, for financial support of the initiative but mainly for your leadership in setting a high priority on improving efficiency, energy security and cost-effectiveness of energy use.

Helping the poorest countries

Donor funding has brought gratifying results through another initiative that was launched two years ago – to support financing in the poorest countries of operations.

The Early Transition Countries Initiative was designed to stimulate investment in smaller enterprises that will strengthen market economies and provide the jobs that reduce poverty.

To date, the EBRD has financed more than 100 projects under the ETC Initiative, and we are now creating a matching Initiative for the Western Balkans, to accelerate investment in a part of the region that is benefiting from political stability to build national economies and international trade.

Capital Markets initiatives

These Initiatives are just one form the Bank has used to spur progress towards transition beyond its traditional tools of project financing.

In the past year, the EBRD has contributed to the development of capital markets for example by helping to introduce instruments for securitisation, developing mortgage lending and launching bonds in local currency.

The launch of rouble bonds in Russia provided the Bank with roubles to finance projects – especially for municipalities and to modernise the power sector – in local currency rather than coping with the volatility of loans in dollars.

But just as importantly, with its first launch of a rouble bond in 2005, the EBRD helped establish a credible new currency index for Russia, the MosPrime rate.

Results

The Bank has proven that it is efficient and able to adapt to a new business model based on evolving geographical priorities and to develop innovative approaches to meet particular current needs.

With a focus that moved eastwards to less advanced countries, there were more projects than ever last year – 151 projects with a value of new business totalling € 4.3 billion.

In part, the Bank will be able to take more risk in more difficult and unpredictable environments further east because of last year’s healthy net profit of € 1.5 billion.

It will be important for the Bank to continue its policy of financial prudence to increase its reserves as protection against the riskier investment profile that lies ahead.

Over the previous five-year strategy period, the results have been just as gratifying, and were delivered with a zero-real growth budget. The results over the period 2000-2005 exceeded the targets set in the strategy for the period in terms of the financial results but also, for transition impact and higher than anticipated volumes of business.

We can confidently expect to maintain the same strong performance of transition impact and volume in the coming years.

The strong volume and profits of 2005 are a tribute to the work of Steven Kaempfer who has served as First Vice President for the past nine months as well as Vice President Finance. Steven has devoted enormous personal effort and considerable personal sacrifice to lead in delivering outstanding results in both portfolios. I would like to thank Steven for his remarkable dedication and ability.

Corporate governance

The new business model of the coming years will also be bolstered by strong institutional decisions recently on the governance of the EBRD.

For the first time in many years of zero-growth budgets, the Board of Directors decided that the Bank should underpin its new business model with added resources to work on more and smaller projects in more onerous conditions and more often in the countries rather than at headquarters.

Additional resources, in part, will support the Bank’s mandate to ensure its projects are sustainable in environmental terms.

There has been a significant effort to go even beyond the EBRD’s rigorous Environmental Policy to consult extensively with non-governmental organisations and other constituencies before adopting projects and policies.

The Board adopted a new Code of Conduct that updates and improves integrity standards and sets out new detailed procedures for adherence by Directors and staff members alike.

Adjustments to the retirement scheme for staff members were approved, to encourage personal saving, increase the value of the post-retirement package to reflect the current environment, and raise the retirement age to 63. 

And the shareholders have completed much of the process to admit Mongolia as a new country of operations, with a view to beginning operations there in the coming year.

Strategy for the future

Much of the institutional focus of the past year, though, has been on preparing the strategy for the next five years, the Capital Resources Review that I have recommended, along with the Board, for your endorsement here.

I am confident that this medium-term strategy will be delivered successfully, based on the healthy financial situation and strengthened corporate governance of the EBRD.

The strategy depends on close partnership with other institutions – especially the European Investment Bank, the World Bank Group and the Asian Development Bank. 

But the strategy also relies on the ability of the staff to keep the Bank efficient, innovative and ready to address the real needs of the region.

EBRD staff have used skill and understanding of the needs to deliver exceptional results over the years. And, because they have a deep commitment to the region, I know that staff will evolve to take on new challenges and approaches as the Bank’s priorities shift.

The strategy confirms that the capital of the Bank is sufficient but the appropriate way to allocate resources over the review period has been the subject of much deep discussion between shareholders.

The mandate and methods of the Bank were never in question. But discussion was needed to forge the consensus on how best to achieve the goals that are clearly spelt out in the Bank’s policies.

The unanimous support of the shareholders for the strategy gives strength to the institution, particularly at a time when the challenges will be greater further east, and the operations more difficult.

For all of us, the process of planning the future has served to remind us of the vision at the heart of the EBRD.

It is a vision of more prosperous people, thriving in a free political system and in free markets.

It is also a vision of the hope and engagement that ensues when countries join together, in mutual trust and respect, to build an international organisation with a clear purpose that is embraced by all shareholders.

When you, Governors, agree to support and rejuvenate the EBRD as an effective and relevant tool of transition, you are serving the people of the region well.

Thank you.