Financial results press conference

EUROPEAN BANK FOR RECONSTRUCTION AND DEVELOPMENT

PRESS BRIEFING BY

MR STEVEN KAEMPFER, VICE PRESIDENT, FINANCE

AND MR DAVID HEXTER, DEPUTY VICE PRESIDENT, BANKING

ON THE ANNUAL FINANCIAL RESULTS FOR

THE YEAR ENDED 31 DECEMBER 2001

WEDNESDAY 13 MARCH 2002

JEFF HIDAY: Good morning. I'm Jeff Hiday, Head of Media Relations at the EBRD, with Steven Kaempfer, our Vice President, Finance, and David Hexter, who is Deputy Vice President for Banking. If you could please just identify yourself and your publication when asking a question, I'd appreciate it. Steven, I think, will make a few introductory remarks. Steven?

STEVEN KAEMPFER: Good morning. Thank you all for coming. I think most of you have already received some documentation under embargo and some of the things I might have said by way of introduction you will already have been able to deduce from the material, so I shall make just a few short introductory comments, after which I shall be very happy, together with David Hexter, to answer any questions you may have.

Let me begin with a few words about 2001. As you will have seen from the figures and the content of the press release, 2001 was a strong year for the Bank, which reflected a strong business development drive by the Bank as well as a very resilient economic performance by our region of operations, the transition economies in which we work, in a year when the global economy went through an uncertain period and when political events, particularly in the latter part of the year, caused quite a lot of volatility in markets.

In those circumstances, the EBRD has been able to produce strong operational and financial results for the year, made possible by this resilience to the global economic slowdown displayed in our countries of operations. We were able to be active in all of our countries, in accordance with our strategy, and we were able to do a number of new things which we were pleased about, such as launching operations in the Federal Republic of Yugoslavia, which is an important part of our work in south-east Europe; we increased substantially our activities in Russia; we maintained a significant business volume in the Ukraine; we continued to explore opportunities in the Caucasus; we developed, particularly in response to the events of the second half of the year, an action plan for central Asia and, as you will have seen in the press release, we were able to be active there very quickly; and we continued to support actively the efforts of the countries preparing for accession to the European Union further down the road.

The result was that we had a record volume of new business, doing €3.66 billion, signing some 105 projects, in all of our 27 countries of operation, compared with €2.7 billion the year before. In addition, we galvanised additional financing in the region through our co-financing and co-investing arrangements with co-investors and co-lenders of another €6.2 billion, compared with €5.2 billion the year before. Thus our portfolio of committed loans and equity investments rose to €14.2 billion from €12.2 billion the year before.

As you will have seen, our profit after provisions rose from €152.8 million last year, which itself was more than triple that of the year before, to €157.8 million in the year just ended. That enabled us to consolidate the return to positive reserves which we had made in the year 2000, and our reserves rose from €65.9 million to a total of €488.7 million at the year-end 2001.

That also reflected the fact that in 2001 we adopted the International Accounting Standard IAS 39, which prescribes that the listed equity participations of the Bank are marked to market; and we carry those in our reserves, so the increase was a combination of strong further profits and unrealised gains on those listed equities.

Our provisioning charges declined slightly to €137 million from the €174 million the year before, and that reflected the fact that we had a strong year in our corporate recovery efforts to recover some assets which had become impaired in the aftermath of the Russia crisis of 1998. We worked hard to recover those and some of them, importantly, took place during last year. That enabled us to release some provisions and as a result our net provisions charge was slightly lower than the year before.

Our operating profit before those provisions was the second highest we have had but slightly lower than the year before, at €294.7 million compared with €327.1 million the year before, a decline of €32.4 million, which reflects the fact that last year we made less profit on equity exits, which is not surprising given the market circumstances of last year. We therefore had profits on equity exits which were nearly €80 million less than they were the year before.

We made strong advances in all of our areas and achieved very strong new business volumes in the early and intermediate transition economies in which we are active. They advanced to €1.2 billion, which is by far the largest figure we have achieved in those countries. It was also the case in Russia, where we achieved a volume of €822 million. We also had a strong increase in our advanced transition country activities, where we had a new business volume of €1.6 billion. All in all, it has been a strong year for the Bank and a strong year for the region.

The advance in transition, as we know, and as we discussed together last year, is a long term process and it will continue, we think, for a long time. What has been particularly encouraging is to see the region reap rewards during last year from its continued commitment to reform which goes hand in hand with making the progress in transition. We have therefore been very pleased by a strong and vigorous year to make that contribution that we are designed and set up to make to the transition process and progress of the countries in which we are active.

That is what I wanted to say by way of introduction. We shall be glad to take any questions you may wish to raise with us.

MR HIDAY - Mark?

MARK MILNER (The Guardian): You signed €3.6 billion of new business but disbursements were only €1 billion. There is quite a gap between the two. Can you explain why that happens?

MR KAEMPFER: First, we were able to take advantage of the fact that there were a lot of business opportunities and projects that were viable and open for our investment as a result of the continued progress that the transition economies are making. Secondly, we ourselves have a strong new business drive and are very active in developing new business. I think the combination of those factors permitted us to make the further advance in our new business volume.

That was not only evident in the way we were able to do new business; the other important feature is disbursements on the existing portfolio. Gross new disbursements moved up to €2.4 billion and on a net basis our disbursements, taking into account re-flows, more than tripled to over €1 billion. That is, of course, a particularly strong contribution because we make the real transition impact by getting projects not only signed but disbursed.

DAVID HEXTER: Perhaps I may add one point. In the business of project finance, particularly where one is dealing with big infrastructure projects, one certainly does not disburse all of the project in the first year. For example, for a road or a port project, the implementation life of the project could be three to four years. Therefore, although the Bank has committed to make the funds available for that project, the actual drawdown of funds on a project like that would take an extended period of time. You would never see the gross disbursements being equal to the gross new commitments in any one year.

MR HIDAY: Alex?

ALEX KACHALIN (Itar-Tass): My question is similar but with reference to Russia. Could you say what you think about the sharp rise in the volume of operations in Russia?

MR KAEMPFER: We are pleased to have been able to make good progress with the business we are doing in Russia. We were able to step it up to the largest level we have done to date and we hope to continue to do more. Russia has made encouraging progress and is on a good track to improve and to reform its institutional progress and the investment climate in the country to receive projects. We have a great many projects under development. David Hexter has been particularly involved in those and may wish to comment. There have also been a number of encouraging developments on the institutional environment front in Russia. I refer to the adoption of the corporate governance code, in which the EBRD was able to play a strong role in assisting the Federal Securities Commission, and the evolution of the securities legislation which has been initiated in Russia. These are all important steps forward that will enable us to increase our business volume.

MR HEXTER: In our medium-term plans we see that about 30 per cent of the Bank's business would be done in Russia, which we expect would be of the order of €1 billion a year for our own account. There will be four main activities representing that €1 billion. The first would be to support foreign direct investment projects in Russia. The General Motors AvtoVAZ project which we did last year is a good example of that. We should like to do more of that kind of financing.

We work with those local enterprises that demonstrate high standards in corporate governance, in transparency, in the quality of integrity of management, and so forth. We see great improvements in the quality of corporate governance in Russia, hence the ability on our part to do business with those enterprises.

The third main area of activity will continue to be small and medium size enterprises, which still represent a relatively small share of gross national product by comparison with many other countries. We have a very active programme under way. We have disbursed over €1.4 billion to small and micro businesses in Russia over the past 10 years, at an increasing rate each year, and that will continue.

Last but not least, we shall be focusing more and more on infrastructure projects - roads, ports, environmental clean-ups - and, of course, we shall continue to support the natural resource sector.

We see a broad spread of activities over those four to five areas that I have just talked about.

MR MILNER: Will the increased rate of commitment put any pressure on your capital base? Looking at the description of the activities in Russia, is that not moving slightly away from the mandate of the Bank, which was to develop the private sector? Roads and ports are hardly necessarily private sector developments.

MR KAEMPFER: On the first question, this is all part of the medium-term development. Business development in any one year is not a driver of the capital utilisation, because there are many factors in that, such as re-flows from the existing portfolio and turnover in the asset base of the Bank, which all contribute to capital utilisation, so the answer to your question is "No".

Secondly, the progress we are making in Russia, as well as in all the other countries - the early and intermediate transition economies and also the more advanced transition economies - is with a large focus on the private sector. That made up nearly 80 per cent of our business volume last year and will continue to be clearly the case because the EBRD's role is to promote the transition to market economy, which means that the private sector focus will be clearly adhered to. It is all part of a gradual process of focusing on those projects in all of our countries of operation where our transition impact can be maximised and where we can continue to write new business of the kind of medium-term level that we think we shall be achieving, in the range of €3 billion to €3.5 billion a year - some years it can be a bit more, some years it can be a bit less - in our countries of operation.

MR HEXTER: The key point, which you probably recognise, living in this country, is that a decent infrastructure is necessary to support private enterprise. That is the rule that we follow. We are not building bridges to nowhere. Our projects have direct relevance to the private sector. Let me give you a couple of examples. The development of port projects in the Black Sea and the Caspian Sea area are obviously necessary for those countries to realise their natural resource potential. In Kazakhstan, a huge country, with a huge railway network, there are very close linkages between the efficiency of the railway company, which we finance, and many small enterprises which are suppliers to those countries. When we talk about infrastructure, we are not talking about it as a separate event from our private sector activities but as very much integrated into our private sector activities.

TOM KOHN (Bloomberg News): I was looking at the provisions for losses. They seem to be the lowest in five years. I wondered if you could elaborate on the reasons behind this.

MR KAEMPFER: The main reason is that they reflect the fact that we were able to have some good recoveries on projects that had previously run into difficulty in the wake of, mainly, the events in Russia of August 1998. We have worked over the past few years on recovering those assets and have had a number of recoveries which came to fruition during the year 2001, which enabled us to release some provisions previously taken. Therefore the net level of the provisions is lower than the provisions of the previous year. It reflects recoveries.

MR KOHN: Are these charges or are they the actual amount you set aside for losses?

MR KAEMPFER: The charges are the provisioning charges we have set aside for potential future losses on the portfolio.

MR KOHN: Is it a cumulative figure?

MR KAEMPFER: It is not a cumulative figure, no. I will give you the cumulative figure. Our provisions have stayed at the level of €1.2 billion but in fact they have gone up slightly. The cumulative provisions at the year-end stood at €1224 million, which was up from €1198 million at the end of December, the year before. It is on the second page of the press release. You will see it at the fourth bullet point: total provisions, €1.22 billion, compared with €1.19 billion the year before.

MR HIDAY: Gavin?

GAVIN SERKIN (Bloomberg News): Can you tell us some of the most profitable major projects that you had last year and also some of the major projects that made a loss last year?

MR KAEMPFER: We do not look at, and do not disclose, the individual profitability of any projects because we look at the totality of the contribution we make. There is no one individual project that makes our contribution; it is the totality of our presence that makes the transition impact for which we were created.

MR SERKIN: In terms of countries, which countries have been the most profitable and which have caused losses?

MR KAEMPFER: The same comment would apply there. We look at the totality of the portfolio. You see the return we have made in the year 2001. It is part of the return that we make for our shareholders, which is based on making the return in terms of transition impact for which we were created. Our projects obviously have to achieve such an impact. They also have to meet sound banking principles, which means that they have to be set up in a commercially viable and profitable way; and the Bank has to be additional to what the market can do without the Bank. Those are the criteria that drive us and the criteria on which we steer and drive the business forward. As long as we can maintain our financial viability by being adequately profitable in the way that we are, as you can see from these figures, we can drive the shareholders' mandate forward in the years ahead.

MR HEXTER: Perhaps I can add two points. We are a very transparent institution - that is one of our guiding principles - but, of course, we do have to respect the confidentiality of our private sector clients. Certainly to give public information on things like profitability of projects and have that in the public domain would be a potential embarrassment vis-à-vis our clients.

Secondly, in relation to countries, the position is not the same year after year. The two things that drive the profitability in any one year are the size of the provisions, which is not a straight line over the years, and the capital gains we make, which are also not a straight line over the years.

MR HIDAY: John?

JOHN MUIR (Euromoney): You said that the adoption of a corporate governance code in Russia made a substantial difference to the way in which you lent to that particular market. Are there lessons to be learned in other transition economies in the way in which they approach this subject which they should be taking on board and would affect the way you approach them?

MR KAEMPFER: It is a general part of our focus in the development of our projects and the business we do in our countries that we focus very strongly on the transparency of information, the governance of projects and corporate governance among our clients in the projects that we do. Much of the conditionality of our projects is geared towards engendering and enhancing progress on that front. We welcome very much the fact that steps forward are being made in Russia, as well as in other countries of operation where we are active. Certainly there are a number of areas where further progress needs to be made, whether in Russia or elsewhere, but it is part of the step forward that we welcome.

MR HEXTER: To clarify a couple of points, the new corporate governance code was adopted only quite recently, after a lot of work by the Federal Securities Commission, where we arranged the funding of the technical assistance necessary to develop the new good corporate governance code. I was not saying that it was the adoption of the code, only now, which is the sole cause of the improvement of corporate governance in Russia; I think there has been an improvement over the past two to three years in any event. What the new code will give is a common language, a basis. What it will mean for us is that in our loan documentation we shall insist upon adherence to those governance standards on a continuing basis as a condition for the maintenance of our lending facilities. It is really the next step in a process which has already started.

MR MILNER: Do your rules about client confidentiality extend to your dealings with Mittal Steel, where the Bank's internal procedure seems perhaps to have been misunderstood in certain quarters?

MR KAEMPFER: I am not aware of any misunderstanding.

MR MILNER: I think there have been suggestions that the Bank has been unduly influenced by one particular country in granting finance to projects involving Mittal Steel.

MR KAEMPFER: Are you referring to the Sidex project?

MR MILNER: The one in Romania and, I think, a couple of others, as well.

MR KAEMPFER: The answer to that point is that we do projects when they meet our criteria for investment, in terms of transition impact, sound banking and additionality, and also in terms of the environmental standards which we strive to adhere to, and so on. When that is the case, they are put to our shareholders for approval. That was very much the case with the projects you refer to. They were discussed and approved by our shareholders in the normal way. There was no special influence by one particular shareholder. That is the background to those projects, so I do not think there was any scope for misunderstanding.

MR HEXTER: Having been involved in both of the transactions that the Bank has done with the Mittal Group, the first one in Kazakhstan and the second one in Romania, it is important to emphasise the following. Both of these are privatisation transactions, and that is what the Bank stands for. When we have a privatisation transaction, we are concerned to ensure that it is a transparent and open process. We were happy that that was the case in both of those transactions.

As a matter of principle, we do not side with any one institution before the government of the country awards the privatisation. After the privatisation, should the successful bidder come to the European Bank and request financing, we shall evaluate that request based upon sound banking principles, the transition impact of the project and the additionality of the project. There was no deviation from this approach or these principles in either of the two transactions regarding the Mittal Group.

YAMATO SATO (Nikkei): Do you have any plans to support further Central Asian countries because of their support for the war against Afghanistan?

MR KAEMPFER: We adopted last year a Central Asia Action Plan, whereby we propose to increase our activities. Last year in Central Asia we did €310 million of new business, which was a 66 per cent rise, so a substantial advance. Under our Action Plan we expect to make continued progress in channelling financing and generating co-financing into the Central Asian region.

MR SATO: Do you have any numbers for your activities this year?

MR KAEMPFER: No. The figure I just gave you was what we did in 2001. We expect to make further progress and we shall see how much we can do in the year 2002. David Hexter has been very much involved in the Central Asia Action Plan.

MR HEXTER: Let me add a couple of brief points to what Steven has said which I think must be emphasised. Certainly there is very much a wish and a will on the part of the European Bank to do more business in Central Asia. The amount of human resources that we have dedicated to doing business in Central Asia is quite disproportionate to the overall business of the Bank. In terms of commitment of resources, the wish and the will is very much there. However, it must be recognised that it takes two to tango, and we are only as effective, or as potentially effective, as the quality of the investment climate in a particular country. If you have a positive investment climate in a country, foreign direct investors are interested and there are more potential projects for us to do. If, however, there are serious problems in the investment climate, with things like multiple exchange rates or problematic taxation systems, foreign direct investors are not very interested and therefore we lack the partners that we need to do projects. The wish and the will are there, but it has to be recognised that in a number of Central Asian countries the investment climate shows a lot of room for improvement.

MR SERKIN: Could you comment on your pipeline of future projects for this year? Specifically, the EBRD has been mentioned in connection with some of the Russian banks in which the government is looking to sell its ownership, in relation to Gazprom and also in relation to oil projects in Russia?

MR KAEMPFER: I will make a couple of comments of a general nature. First, the Bank's pipeline of new projects that we have under consideration to implement has continued to develop very healthily throughout the region. In the advanced transition economies, in the early and intermediate ones and in Russia the pipeline has been very substantially strengthened, and that is on top of all the business that has already been done. As you will have seen in today's handout, we have been responsible since inception for a total channelling of some €67 billion, including our own participation, of investments into the region. Our pipeline supports our expectation of being able to add substantially to that in the years ahead throughout the region.

In terms of one or two specific items that you mentioned, we certainly welcome any moves to be made in Russia towards privatisation of the banking system. If those go ahead, we shall welcome them. If we can play a role in that which is in accordance with our mandate, we should welcome that. Certainly there have been some initial discussions on that subject. We shall wait to see what progress is made and whether that can develop into an actual project that meets our criteria. No decisions on that have been made as yet.

I think you know our position on Gazprom. We monitor the situation and see how it develops. If, at the right time, depending on what further steps Gazprom takes, there is a transaction which meets our criteria, we shall evaluate it on its merits.

MR KOHN: Looking at the EBRD as a borrower, interest rates are low, bond yields are low, I wondered how you planned to take advantage of these rates. Do you have a borrowing projection in the bond market for the coming year?

MR KAEMPFER: Yes. Last year we did nearly €2.8 billion of new medium and long-term borrowings at an average cost of LIBOR less 26 basis points. For the current year we would expect to continue with medium-term borrowing in that range, probably in the €2 billion to €2.5 billion range. On top of that, we usually do a programme of shorter-term debt borrowing, which would make a total of something in the range of €3 billion to €3.5 billion of borrowings that we expect to do in capital markets, which is in line with the normal ranges in which we operate.

MR KOHN: Is that all in euros?

MR KAEMPFER: Euro equivalent. We borrow in very many currencies, including a growing presence in local currencies, supporting local currency lending that we did. We intend to add to that in the years ahead because part of our focus is not only to finance the projects that we are ourselves engaged in but also to stimulate the development of domestic capital markets in our countries of operation. We made our first early transaction in roubles at the end of last year, when we financed part of a St Petersburg project in Russian roubles. We did that by financing in the short-term Russian capital market. We hope that we can build on that in the years ahead, particularly if the Russian capital market opens up to longer-term capital market financings in which we should be interested in participating. That is part of our focus when we speak about our medium and long term borrowing programme.

MR MILNER: In the more advanced, pre-accession countries are you bumping up against the European Investment Bank at all in terms of people coming to you to do the same projects? The EIB has a mandate, as well, now, does it not, to help with the accession process?

MR KAEMPFER: I cannot comment very well on the European Investment Bank, of course, but I can comment on the EBRD's practice. Our focus, as you know, is on being of assistance in the transition process. The transition process of the advanced transition economies, particularly those that wish to accede to the European Union, is to prepare for that accession. There is an enormous amount of work that needs to be done. Our private sector focus is on engendering capital flows from private sector international investors or lenders into the region, into largely, though not only, private sector projects.

The European Investment Bank probably focuses particularly strongly, but not only, on infrastructure projects. In practice, there are a number of projects on which we find ourselves operating very well together, probably mainly in the infrastructure field. In other areas there is such a huge financing need that our focus on what we do and their focus on what they do works very well.

MR SERKIN: Looking at your financing commitments, Poland is second and Romania follows. In light of these being accession countries to the EU and your focus being more now on the CIS and Russia, do you foresee those countries having reduced commitments during the next year?

MR KAEMPFER: I think it would be wrong to think in terms of a box where something that happens more in one place happens less elsewhere. The point I was emphasising earlier was that, if you look at the strong progress we have made in the countries that you have mentioned outside the advanced transition economies, i.e. the early and intermediate countries and Russia, where we have achieved the highest levels ever, it has not been at the expense of doing something elsewhere. It is not the case that out of a limited choice we have channelled our commitment in one direction versus another. We have continued with our commitment to help these early and intermediate and less advanced transition economies, and we shall continue to grow that, depending, as David Hexter pointed out earlier, on their progress on investment climate issues.

In the advanced transition economies, there is a lot of work to be done. So long as we are additional in what we do and can make the transition impact for which we are set up in a sound and balanced way, we shall continue to participate. It is certainly not a given that it will always be at this level. It depends on what projects occur in any given year.

MR HEXTER: What we find is that we are not doing the same kind of projects or products that we did five years ago. The projects and the products are becoming more sophisticated and risky, for example more equity and high risk mezzanine debt. In the accession countries there is a real gap in terms of equity finance and mezzanine finance. What we do not do as much of these days is financing which the private banks are very happy to do, such as senior loans and secured senior loans. We are graduating into different kinds of products which remain very relevant for those accession countries.

MR KAEMPFER: Also, we extend our sectoral reach - for instance, in the financial sector where the focus has tended in the past to be particularly strongly on the banking sector. As that is maturing, we have shifted our focus gradually, and that shift carries on, into the non-bank financial sectors, such as the insurance world, pension funds and asset management spheres, leasing and mortgages, as well as stimulating what we do throughout the region, but also in those countries in particular, stimulating the continued development or financing of small and medium-sized enterprises.

MR MUIR: With regard to what you describe as the largest ever loan, to the Polish mobile phone provider, in terms of its scale and the sector that it was addressing, could that be described as pretty much a one-off? With the benefit of hindsight, it sounds "large large" and I guess that it is an example, if you like, of what you would have done two years ago but you would not look at now.

MR HEXTER: I would not say that it is a one-off but I do not think we would expect to see too many transactions of that magnitude. There are two or three areas in our countries of operation which are capital-intensive. I think telecoms is one of them, and Poland is a big market, and therefore you would expect to see a big number associated with a telecoms project in Poland. Another area where we would expect to see large projects would be in natural resources in Russia and in Central Asia in those capital-intensive businesses. By comparison, if we look at the agribusiness field, we do a lot of €10 million to €15 million sized projects, the reason for that being that agribusiness is not as capital-intensive as natural resources or building a telecommunications infrastructure.

MR SATO: Japan is a big sponsor of EBRD projects. Do you think the fact that the Japanese economy is in a bad state and the Japanese Government is facing fiscal problems will have any influence on EBRD projects?

MR KAEMPFER: David Hexter has just been to Japan and will comment.

MR HEXTER: I will make two comments, not about the Japanese economy but to clarify the role of Japanese companies in relation to the EBRD. We have not done very much over the past 10 years in terms of projects with Japanese sponsors, and we very much hope that that situation will change. I made two marketing trips to Japan last year to make sure that they knew who we were. As a matter of fact, we have very few Japanese-sponsored projects in our portfolio at this point in time.

My second comment is that the Japanese Government has been extremely generous to the European Bank in providing what we call technical assistance funds to support our project development, particularly in Central Asia. When we do projects in Central Asia, typically project preparation is lengthy. External consultants are needed to help structure the project. Project implementation often involves difficulties, where continuing technical assistance is needed to support the projects. Without the Japanese Government technical assistance funding, we should certainly not have been able to do the broad range of projects that we did.

I will give one example. In Tajikistan, which is a very poor, very small country, we were last year able to do a very significant transaction with the telecoms company. That project would not have been possible without the availability of grant funded support from the Japanese Government to Tajikistan. The blended cost of funds - the EBRD funds, the cost of which is of course commercial, and the Japanese support - meant that this was a project that was economically sustainable. It would not have happened without the support of the Japanese authorities.

MR SERKIN: I apologise if this has been talked about previously; I arrived late, unfortunately. Is the profit level that you are reporting today a record for the EBRD?

MR KAEMPFER: Yes.

MR SERKIN: When was the closest to it?

MR KAEMPFER: The closest to it was last year.

MR HIDAY: In a radical break from tradition, we are having sandwiches brought in. If you would like to stay and ask more questions informally, there will be time for that. If there are no more formal questions, we can finish at this point.