Interview with EBRD Vice President, Finance [EBRD

Unedited interview with the EBRD Vice President, Finance, Steven Kaempfer produced by Cantos. A video/audio version is available on Cantos's website.

Transcript from Dow Jones: 19 Mar 2004 12:26 GMT DJ Cantos Q&A: EBRD Finance Vice President Kaempfer.

Challenges in central Asia

Record year for projects

This has been a record year for investment by the EBRD in new projects. Can you tell us a bit about what the EBRD has been up to?

Indeed, it has been a very active and, on the whole, very successful year for the Bank. We have indeed done more project financing last year than we've ever done before because we financed nearly 120 projects, bringing the total number of projects we've done since we started as a bank, in the region where we operate, to over 1,000.

We did, actually, EUR3.7 billion of new business volume. It would have been slightly higher had the dollar, in which a good deal of our projects are denominated, not weakened. And that brings the total investment flows that we've generated since the Bank started to nearly EUR70 billion, of which our share is about EUR23 billion. So, you could say, over time, for every EUR1 that the EBRD invests of its own capital, partners bring EUR2 to each project.

And this is the essence of the EBRD. We were created by shareholders, which are all governments, as well as the European Commission and the European Investment Bank, and over 60 governments. We were created in order to do difficult projects, where the market would not reach out without our intervention, but to be a risk-sharing partner with others. So, we go nowhere alone.

We are there to act as a catalyst for others to come with us, which is why last year it was very gratifying to see that it was the most important year we've had to date in attracting outside co-financiers to join us in lending projects. We attracted nearly EUR2.7 billion of financing from co-financiers in the projects that we did. And the projects were all over the region where we operate, which is Central Europe, the Baltics, the Balkans, the Caucasus and Russia. Those are the main areas where our focus is.

Diversifying Russia's economy

You touched there on Russia. What sort of challenges are you facing in Russia, particularly to try and diversify that economy away from its traditional energy base.

This is the real challenge that Russia now faces. Of course, Russia has had a difficult period in the immediate aftermath of the events of August 1998, when the banking sector came to a halt and much of the international payment flows coming from Russia, and therefore the investment flows into Russia, were slowed down and interrupted. But since then, there has been a very steady improvement in Russia through a combination of economic growth, stimulated of course strongly by the high price of energy on world markets, with energy being the largest sector by far of the Russian economy.

Stimulated by this, but also stimulated by good progress made by the government in reforming quite important parts of the economy, and specifically fiscal reform, as a result of which Russia now runs a fiscal surplus from what used to be a very tricky fiscal situation. And the country's monetary reserves have grown very strongly.

So, this places Russia on a strong base in order to continue precisely what you refer to, which is a programme of diversifying its economy away from only - or mainly relying - on the energy and related sectors, into broader areas. So, for us, the challenge is to participate, both in ensuring that the transition of the economy of Russia can attract the necessary finance in, of course, energy-related sectors, but specifically in sectors other than that, such as the banking sector, financial institutional sector, retail sector, in the infrastructure areas, the whole area of consumer products, but also of non-bank financing sector (such as leasing, mortgage financing) all of which are hardly in existence in Russia, where we hope to be able to make a contribution.

New EU entrants & non-EU states

Looking at the geographical area that the EBRD covers, is it broadly true to say it's those states that are about to join the EU, there's less work for the EBRD to do, and the further away you get there's more work to do? Or is that a rather crude analysis of the situation?

There is certainly a distinction. The distinction is not one based on volume, the distinction is one based on focus. When a country is in the early stage of transforming from a command economy to a market economy - that, after all, is the challenge in which the EBRD finances its portion - the crucial focus is on the banking sector. You can have no thriving market economy without a functioning banking sector. So, all our early investments in any of these countries will typically have been made in the privatisation of what used to be state-owned banks.

In those countries that you were citing that are about to join the EU, those sectors, the banking sector, has largely become a much more mature sector, where the markets can, from here on, produce investments and continue to develop without our intervention.

So, in the financial institutional sector, we've typically shifted focus to the next challenge, which is non-bank financial services (insurance, pension firms, leasing, consumer finance, mortgage financing) where the advances are yet at an earlier stage and where we can continue to play a role of added value, always as a risk-sharing partner of the private sector. If the private sector can do it without the EBRD, there is no role for the EBRD.

So, the market will tell us how much and for how long we will do our work and in which sectors. But for the time being, the prospects are for continued important work to be done in these countries, but in different sectors. Non-bank financial I have mentioned.

Another key sector is small enterprises and mid-sized enterprises, because these countries have a number of large companies that are now well-known also here in the European Union and to Western commentators, but they have a very limited sector what the Germans would call the Mittelstand, which is a very important sector to maintain and sustain the transition toward a market economy, these countries have already experienced. So, that's now an area where we continue to focus strongly.

Also, investment in regions. A lot of investment has already gone into these countries at the centre, the capitals or the main towns. But in the regions and in rural areas, investments have lagged, and there remain opportunities where we can add value to share risk with others. Another typical sector where we have been very active and expect to continue to be very active is in infrastructure investments at sub-sovereign level for cities and for regions, where we often do public-private partnership or work with private enterprise.

Central Asia's economies

Looking at the Central Asian Republics that the EBRD operates in, do you think there is a need for a greater degree of transparency in these places, also a more business-friendly infrastructure? What are the challenges that these republics are facing that the EBRD can assist in facing up to?

There are plenty of challenges, but they vary from country to country. Some of the countries in Central Asia and elsewhere in the region have a very active oil and/or gas sector. In countries like Azerbaijan and Turkmenistan, these are the important sectors, the energy sectors, that are developing.

There, clearly it is important to focus on making sure these energy needs are met, and if the market cannot do it without us, there's a role for us. And we did fulfil that role earlier this year when we were instrumental in arranging the financing of the largest gas pipeline that has so far been put on the table to be built, which is the pipeline that goes from Azerbaijan through Turkey to the Mediterranean, where we work with a consortium of oil companies led by BP, and a range of international financial institutions, including also the IFC in Washington, to arrange a very large financing. So, there are clearly projects in that sector.

But these countries that have that phenomenon have the challenge to diversify their economy. So, for them, the challenge there - and this is where we are focusing - is to improve their investment and business climate so that they can actually make it attractive for foreign investors, and local investors, to make the investments to diversify the economy.

Then there are other countries which have not such an endowment of hydrocarbon assets that can be financed. For these countries, there are other challenges. They have the challenge of doing trade with their neighbours. They have challenges of a more basic kind, for instance, water rights, access to water, how to share the water. They have real challenges from the point of view creating a business climate where foreign investors can invest in what are still economies in an early transition stage, where a lot has to happen to make the investment climate more transparent and open and, therefore, welcoming for such investors. But that poses for us a real challenge.

EBRD - cost control & profit

In terms of the EBRD itself, you've already been carrying through cost controls. Can you give us some idea of how this has impacted on your results?

They've had a favourable impact because we are very keen on our cost controls, because we are acutely aware that we are funded by equity capital, which by now, including reserves, totals more than EUR6 billion paid in and EUR20 billion authorised. We are funded by equity capital that is made available by governments, which means by the tax-payer. So, we have a huge duty, a real fiduciary obligation, to be both transparent and very tough on our budgetary resources.

For that reason, we've been running flat budgets now for the last eight years. Three or four years were absolutely flat. The other three or four years were flat in real terms. But we can say that we have had a declining budget and declining actual costs now for some time. And that has contributed to our good result for the year 2003.

And what's the picture on profitability?

Well, last year, we achieved profitability of, in round numbers, EUR380 million, which is by some measure the largest profit we have made to date, which was made possible by very good returns from the equity portfolio, which is about 20% of our overall project finance portfolio. It has had very good returns. We have also had good returns from the treasury portfolio of the bank. And at the same time, as you've said, we had good results on the costs side, but also we've had very good results, in terms of the risk side of our portfolio. That means in financial terms, we've had to set aside much less for provisions for potential impairment than we would do in average years.

So, looking forward, we expect that trend not to continue because over time we will get again some deterioration. So, if you assume that will return to a more normal level, then our expectation is that we shall continue to have very sensible profitability, but not quite at the level of the year 2003.

On top of that, of course, the profitability at any time is strongly related and vulnerable to the sustainability of global economic conditions, because these influence international investors and domestic investors in our region. But at the same time, we should commend our region for the fact that it has been very stable and it has economically shown a relative out-performance of the global economy, which is why it as done well, and that has been reflected in our results.

Transcripts