Sir Suma Chakrabarti, EBRD President
EBRD President's speech at opening session of the Board of Governors
Prime Minister Tusk, Prime Minister Djukanovic, Prime Minister Leanca, Prime Minister Otorbaev, Commissioner Füle, Excellencies, ladies and gentlemen, a very warm welcome to the opening session of our 2014 Annual Meeting. It is a pleasure to be in Warsaw and I would like to thank the Polish authorities for extending such wonderful hospitality to us, and for this excellent venue.
It is a particular pleasure to be here in such an historically significant year – an anniversary which has significance for Poland, the wider region and for the European Bank for Reconstruction and Development.
A quarter of a century ago, in 1989, events were unfolding which would change our world. Poland would hold its first free elections, the Berlin Wall would be torn down and communist regimes would begin falling like dominoes. For those who witnessed this, for those who lived it, for those who grasped the new opportunities, life would never be the same again.
These momentous events were the trigger for the decision by our shareholders to set up the EBRD, believing that investment in developing the private sector and free market economies would eventually lead to the bolstering of democracy.
The transition to democracy and the adoption of the market economy in Poland, as well as other central and eastern European countries, has been remarkably successful. Today, these nations are established members of the European Union, having joined the EU exactly 10 years ago this month.
And that transition is driven by the yearning for individual freedoms, both economically and politically.
Poland has been at the heart of the transition success story, and is back as well at the heart of Europe. It is now a model for many others to follow.
Over the past two and a half decades, our Countries of Operations have evolved. And so has the EBRD. What was envisaged, originally, as a regional Bank operating in eastern and central Europe has changed very significantly, at the urging of our shareholders.
With the collapse of the Soviet Union in 1991 and later the fall of the then Yugoslavia the Bank took on explicitly a mandate to operate in countries stretching to Central Asia and into the Balkans. Over the next twenty years, Mongolia and Turkey followed as EBRD countries of operation. Then, in 2011, several countries of the southern and eastern Mediterranean, Egypt, Tunisia, Jordan and Morocco, joined the transition family – keen to develop freer markets and a more democratic future. We warmly welcome them as we meet here in Warsaw today after the first full year of operations in that new EBRD region.
At each step of the way, the EBRD’s shareholders have supported the Bank’s evolution. Today, we work on three continents, Europe, Asia and Africa. We deploy the skills that our shareholders recognise as unique and applicable to the transition challenges that many middle income countries face, both inside our regions of operations and elsewhere – for instance in advising global bodies on leveraging the private sector for sustainable energy.
There continues to be demand for the Bank as a tool to encourage change. Cyprus, long a member of the Bank, has requested recipient status for what it expects to be a temporary engagement. I trust Governors will vote strongly in favour of that request tomorrow and we can help Cyprus transition through the difficult challenges that it confronts, supporting the Troika programme. Libya has also requested to become a country of operations. And I hope for your equally strong support tomorrow for Libya to take the first step in this process, by becoming a member of the Bank.
There is also demand for utilising the Bank’s expertise in new ways in our countries of operation. One example is Kazakhstan, where we will be engaging with the Government in an enhanced partnership to re-energise the reform process. This partnership envisages channelling government funds through the Bank, in addition to the World Bank and the Asian Development Bank, which will enable us to deliver our country strategy more effectively. We are pleased to see such innovative action towards transition and stand ready to provide support and guidance.
So ladies and gentleman, the Bank has a long track record of achievement and its services remain in high demand.
I am also glad to be able to report to you, today that in the past year we have again had a very strong institutional performance – delivering impact on the ground in line with the Bank’s mandate and under your guidance.
We had a near record number of operations, 392 – just one short of the previous year’s all time high. Annual Bank investment was €8.5 billion. We also made a net realised profit of €1.2 billion. Whilst profit is not our ultimate objective, it is a reminder that our model is unusual amongst International Financial Institutions. Our capital base is strong and we invest without needing to go back to our shareholders regularly to replenish our funds.
Behind the stark figures lies the real story. There was a continuing focus on the transition impact of the Bank’s activities. 92 per cent of the projects signed in 2013 were considered to have good or excellent transition impact potential.
Going even deeper into the story, it is about the real impact that we have on the lives of people in our Countries of Operations.
Amongst the projects that we financed are those that will enhance energy security for citizens here in Poland. A €195 million loan to Energa will help to modernise the electricity distribution network. And, very important in a country as heavily dependent on coal as Poland, we also supported the expansion of renewables by co-financing new wind farm projects.
In Croatia, we are supporting efforts to restart production at the Sisak steel factory with a €20 million loan. It represents a major contribution to tackling regional unemployment, a serious concern.
In central Asia, we are investing heavily in municipal services, including green buses in Kazakhstan. It will mean an environmentally cleaner and more comfortable journey for passengers.
In Tunisia, we are providing €40 million of loans to micro, small and medium sized enterprises through a local bank, BTK. The funds will be used to foster the enormous potential of the country’s private sector and boost sustainable growth.
Ladies and gentlemen, let me highlight just a few points regarding the Bank’s delivery last year.
•It was the first full year of operations in the southern and eastern Mediterranean. We are proud to have invested nearly half a billion Euros in 21 projects. We are working hard to exceed these numbers in 2014 and 2015 and scale up to full potential in our SEMED region.
More than a quarter of operations now have a strong sustainable energy dimension and these are overwhelmingly in the private sector. It is a unique capability among the multilateral development banks and one that is in great demand. Both as energy costs continue to be a vital component for business competitiveness and with growing evidence and fears around climate change.
Building on that, we have also made a rapid start with our Sustainable Resource Initiative. Projects are in the pipeline which will help to address pressing water scarcity and excessive waste in production.
We have responded to your guidance at last year’s Annual Meeting. We have developed the Small Business Initiative which draws on a range of EBRD strengths, from indirect and direct investment to capacity-building and policy. Around a third of EBRD resources are employed in helping SMEs, especially in Early Transition Countries. We know this is crucial for economic development.
We have rolled out the local currency and capital markets initiative, a pressing need throughout the region as businesses want to borrow and raise money in local currencies, alleviating the need to worry about foreign exchange risks.
We have also launched our Gender Initiative and will build further on this in order to fully mainstream gender objectives in our work. Under the initiative, we are screening all EBRD projects to ensure we capture gender concerns and opportunities. We have delivered four times more projects with a gender focus over the past 12 months than over the preceding four years. We have ensured inclusion of gender considerations into all country and sector strategies over the period. And we have launched a €1.5m Gender Advisory Service TC Programme.
These are just a few of the highlights. I could give you many more. But, for all of our successful projects, we have to be honest about the challenges that many of our countries face. A number are `Stuck in Transition’ as we said in our well-publicised Transition Report last winter.
- The general picture of transition gives cause for concern. There is a marked slowdown in reforms virtually throughout the region. The financial crisis did not help, many feel left out. Politics is sometimes turning against markets. Even though well-functioning, well-governed, transparent and inclusive markets are the long-term solution.
- Forecasts suggest that under current policies and institutions, productivity growth will remain modest over the next decade – around 2 to 4 per cent on average – and decline further in the following decade.
- At that rate, convergence with living standards in western Europe would stall in some EBRD countries of operation and slow to a crawl in many others.
- Only the countries of central Europe and the Baltic states would reach or exceed 60 per cent of the EU15 average per capita income in the next 20 years. Most countries in the transition region would remain far below this threshold.
- That is a depressing prospect. It requires rethinking of the way that the EBRD and the wider international community address the challenge.
- We need to find a way of getting transition unstuck, to re-energise transition.
- This will be the theme which underpins our meeting, particularly our working session this afternoon.
- Together with the Board of Directors, we have developed, and are proposing to you for discussion this afternoon, medium-term directions that address that challenge of re-energising transition. We believe these directions are robust against the difficult and shifting geopolitical context in our region.
These medium-term directions build on the Bank’s core competencies and the important initiatives that we have taken over recent years with three key aims:-
- First, to build resilience into the transition process, in terms of sound institutions, inclusion and economic structures. Let me add here that no Bank can be successful unless there is the right policy and institutional framework. It is the task of Governments to adopt policies that hasten transition. It is the role of the EBRD to help Governments in our regions of operation formulate those policies and build those institutions. It is also the role of the EBRD to provide the finance, largely to the private sector, for projects that will have sustainable impact because the right policies and resilient institutions are in place.
- Our second aim is to promote economic integration both globally and regionally. Integration has been at the heart of the transition project, helping to raise levels of growth and improve standards. We need to do more on this score, such as introducing new investors to our regions and supporting cross-border infrastructure.
- And our third aim is to address common global challenges such as climate change, water scarcity and food security. But also energy security as Prime Minister Tusk has highlighted recently. These are areas where we already do a great deal, as I have mentioned, but where our particular skills fuel our ambition to do much more.
We propose no revolutionary departure but an evolutionary approach where we draw on the Bank’s existing and proven capacities. But at the same time we want to bring these capacities together in a dynamic, results-oriented manner. We are suggesting fine-tuning our business model—for instance, with respect to risk-taking—in order to deliver most effectively.
The medium-term directions also propose an approach to our geographic planning that is responsive to changes in the business environment while remaining ambitious and closely guided by the Board. They maintain our general orientation towards increasing operations in the East and South of the Bank’s region. And they present a consensus view on the expectation of graduation from the Bank’s operations by the EU7 countries, which in the meantime still require our help to address their remaining transition gaps.
In summary, our regions of operation, and the Bank with it, will be successful if we can help to re-energise transition over the coming planning period - if we see important transition reforms moving forward and institutions strengthened.
For me, one example of the problem makes the general case. And that is Ukraine. I came straight to Warsaw from Kiev and it is in Ukraine that we can see what the Bank's Medium Term Directions really mean when they are translated from theory to practice.
On Monday, I signed a Memorandum of Understanding with Prime Minister Yatseniuk on an Anti-Corruption Initiative agreed by Government, business leaders, and international partners led by EBRD.
Corruption in Ukraine has been a scourge eating away at economic and political life. Tackling the problem, through an independent business ombudsman and other measures, will help to build Ukraine's resilience a key goal of the Medium Term Directions. The agreement shows what can be achieved when the EBRD engages in policy dialogue.
We will also help Ukraine pursue the other Medium Term Direction goals. We will work with companies and the government to boost regional and global economic integration, e.g. by improving export performance and raising quality standards. And we will also aim to help improve the country's energy security and energy efficiency.
To re-energise transition in Ukraine requires us to accept more risk.
But it is the right thing to do to scale up our support for Ukraine at this
difficult political and economic juncture, to back the reforms and the reformers, to help put the country on to a better transition track. That will not be a one year effort, it has to be for the medium to long-term.
So, ladies and gentlemen, I look forward to our discussion with Governors this afternoon on the Medium Term Directions and how we can deploy them in all of our Countries of Operations.
The medium-term directions provide solid guidance to the Bank, but we should remain aware of the uncertainties that we are facing.
Our Annual Meeting is taking place against a background of severe, and dangerous political tensions at the heart of our traditional region of operations. The political tensions are beyond our powers to influence.
But with backing from shareholders, we should work to support reformers everywhere. Successful, inclusive and integrated market economies are a foundation for democracy, pluralism and - I believe - moderation.
In the short term, the tensions surrounding relations between Russia and Ukraine can present the Bank with major challenges.
One of these challenges is to the Bank’s business plan, which we have recently reviewed with the Board. To the extent that we are unable to fully meet our plans in one region, the Board reaffirmed the concept of managed flexibility in reallocating the Bank’s spare capacity to other regions where there is opportunity in line with the Bank’s mandate.
But, one thing is clear, we will need to keep developments and the Bank’s response under close review.
These tensions and the challenge of re-energising transition makes it even more imperative that the Bank delivers peak performance and remains agile.
We have pressed on with modernisation of the EBRD as I promised during my election two years ago. This is a fine and very effective institution, and we want to keep it that way in a changing environment.
We want to move to the cutting edge of management practices, results-orientation, efficiency and innovation.
Over the past year, we have put in place the first of our internal changes.
- We have also reinforced our accountability framework by introducing a new corporate scorecard which better reflects the full breadth of the Bank’s activities.
- We have created a senior management committee on strategy and policy, appointed a Vice President for Policy, and localised economists in regional hubs, including here in Warsaw, thus strengthening the link between investments and reforms at the broader sector or country level.
- We have modernised our transition impact methodology and developed and implemented results frameworks for technical cooperation, country strategies and strategic initiatives.
- We have introduced new performance frameworks, invested in training programmes, diversity initiatives and leadership forums in order to modernise our people management practices. The return to this investment is the very positive staff response to improved line management.
- And we have also undertaken the first phase of a cost efficiency review with savings targets in place for 2014. Further savings are to be identified in the coming weeks for implementation in 2015.
Going forward, we will review the Bank’s budget process to closely align resources across the organisation with priorities; we have informed the Board of the first steps that we intend to take this year.
One more word on planning: you will have seen that management and the Board are working towards modernising the Bank’s planning cycle and documentation, to replace the current approach to capital resource reviews and annual business plans and budgets. The intention is to move away from the current massive and overly rigid framework and introduce a more focussed and strategic 5-year Governors’ paper, the Strategic and Capital Framework, which will first be presented to you in Tbilisi next year. Accompanying the framework will be a rolling three-year business plan and budget.
This programme of modernisation (the One Bank programme), by delivering internal improvements and strengthening the Bank’s capacity to deliver effectively on its priorities, will enable the Bank to maximise its external impact, its impact on the ground in our countries of operation.
I am grateful for Governor’s support, and the Board of Directors’ support, for the modernisation programme.
But, most of all, I am grateful to the staff of the EBRD. Without their drive, determination and professionalism, day in and day out, we would not be able to achieve the fine results on the ground, where it matters.
So, ladies and gentlemen, we face many challenges, both political and economic. The EBRD is no stranger to such an environment. We have spent the past 23 years navigating the path of transition in countries where progress is rarely either smooth or linear. We will now bring this hard won experience to forge the future. Our focus is clear: re-energising transition in our Countries of Operations to boost growth, modernising the Bank internally to boost efficiency and positioning the Bank to boost its ability to respond effectively and swiftly to fast changing events.
Poland’s progress in democratic and economic transition spurs us on.
The EBRD is dedicated to helping other countries of operation replicate that success and move forward, economically and politically. Poland has evolved, the EBRD has evolved – we will both continue that journey of evolution. It is the key to future success.
Thank you very much. I wish you all an excellent Annual Meeting.