Supporting the region's early transition countries

The EBRD launched an initiative for the Bank’s early transition countries (ETC) in 2004. What has been achieved so far?

Chris Clubb: The ETC Initiative originally included Armenia, Azerbaijan, Georgia, Kyrgyz Republic, Moldova, Tajikistan, and Uzbekistan, with Mongolia added in 2006, Belarus in December 2009, and Turkmenistan in March 2010. Over the past six years, the EBRD has increased its delivery capacity by taking more risk while respecting sound banking principles, as well as by increasing dedicated resources and financial products for small and medium-sized businesses. The Bank has taken considerably more risk, as witnessed by the trebling of outstanding portfolio to around €1.8 billion. It has also increased personnel resources to the ETC Initiative by doubling staff located in resident offices and by establishing Tbilisi as a regional ETC hub. Donors have backed the ETC Initiative by providing €145 million (including €68 million from the ETC Fund and €23 million from the Shareholder Special Fund) which have been committed to around 595 technical cooperation projects.

This strengthening has borne fruit. The Bank has met the key objective of boosting the impact on transition by increasing loan and equity activities, completing 463 transactions worth €2.02 billion in 2004-2009 with an additional 100 projects for around €700 million expected in 2010. During this period, annual transaction numbers have increased five-fold and now account for around 30 per cent of EBRD annual transactions compared to only 8 per cent before the initiative.

Most importantly the Initiative's impact is felt by people in the early transition countries. ETCI investments have broadened the investor base directly and indirectly to local enterprises (from micro to large-sized companies). The average transaction size has been around €4 million, with the Bank typically completing more that 40 direct financings annually of less than €5 million. The Initiative has also completed innovative intervention in public sector reform such as creating four Investment Councils allowing direct public – private dialogue leading to legislative changes to simplify onerous regulations which have lead to good job creation.

The ETC Fund provides support for projects in the early transition countries. Why was the fund created and what has been achieved so far?

Werner Gruber: The Fund is a flagship vehicle launched in 2004 by donors to support the work of the Bank’s ETC Initiative when it became clear that an increase in the EBRD’s activities in the lowest income countries of operations would not be possible without considerable donor support. Aligning the Bank's mandate and donors' development objectives, the Bank and donors work together to accelerate transition in countries where many people still live below the poverty line. To date, 14 donors have pledged €68 million to the ETC Fund.  Other donors have decided to provide bilateral support to the initiative alongside the Fund, and since 2008, the ETC Fund’s contributions to the work of the Bank have been match-funded by the Shareholders Special Fund. More than 60 per cent of ETCI projects are supported by donor funds either through technical co-operation or grant co-financing. Donor commitments to ETC projects have risen from about €8 million a year in 2003 to a record €28.6 million in 2009 across 174 projects. Donor funding pays for consultants to strengthen private sector projects by, for example, improving marketing, accounting or other skills, importing new technology, adopting new standards in production, labour management and the environment, and providing implementation and post-investment support. Donors also pay advisers to help governments improve their national investment climates. This may include clearing regulatory hurdles for banks dedicated to small businesses, improving commercial law and its application, and introducing laws to cover leasing arrangements so that small businesses can lease rather than buy equipment. Donors may also co-finance investments that have a widespread economic and social impact but where affordability constraints limit the investment capacity of the country, for example in water services, energy and transport systems.

Belarus and Turkmenistan recently joined the ETC Fund.  What needs will donor funding address in these two countries?  

Werner Gruber: The ETC Fund Assembly of Contributors approved the inclusion of Belarus and Turkmenistan as beneficiary countries of the ETC Fund in July 2010. Members were convinced that the use of technical assistance would be crucial to support the Bank in achieving transition challenges in these countries and to implement the recently approved new country strategies. The most imminent needs for technical assistance exists in the financial sector, including lending to small businesses and trade financing, in pre- and post-investment support for clients of the Direct Lending Facility, the Direct Investment Facility and the Medium-Sized Co-financing Facility as well as in energy efficiency investments. Technical assistance could also be used for legal, regulatory and institutional assessments. As for the Bank's support to these countries, the form and amount of contributions from the ETC Fund will strongly depend on progress in reforms, transition, democracy and human rights. The acceptance of the two countries does not amount to an endorsement of their political and economic progress. Therefore, the eligibility of these two countries to ETC Fund funding remains limited to a period of two years and needs will be reviewed by the Assembly of Contributors at the end of this period.

What role will donors continue to play in the early transition countries?

Werner Gruber: The grant contributions of donors will continue to play an important role in the development and strengthening of the Bank's activities in the early transition countries. Difficult business environment, weak institutions and the small size of business in these countries make the provision of technical cooperation indispensable for the Bank to develop substantial activities in these countries and to provide thus strong support to their transition to market economies. The priority of the ETC Fund will remain in the fields of the development of market-supporting institutions, the provision of capacity building to banks, the establishment of risk sharing mechanisms, and the capacity building of small and medium-sized enterprises (SME), as well as the development of sustainable infrastructure. A new focus might be given to the development and introduction of financing schemes for the agricultural sector and - even more then before - to energy efficiency. In addition, donor financing can play an important role in supporting EBRD financing in local currency, availability of which is still a strongly limiting factor for the expansion of the Bank's SME financing. The ETC Fund will therefore remain an important tool for the development of the Bank's activities in the early transition countries.

What is the way forward for the ETC Initiative?

Chris Clubb: In the years ahead, the EBRD will focus on strengthening key sectors such as the financial sector, energy and infrastructure, agribusiness, and manufacturing.  

In the financial sector, the Bank will invest in programmes targeted at developing market-supporting institutions. The EBRD will continue to offer products that address local banks’ ability and willingness to lend money to the continuingly capital constrained real economy. It will work with microfinance institutions, targeting in particular those active in rural areas to ensure that financing reaches rural borrowers. We will also support funds focusing on turnaround situations, or enterprise restructuring to accelerate recovery in the region.

In agribusiness, we will introduce financing schemes that expand farmers’ and primary food processors’ access to credit. The Bank will also finance projects that address inefficiencies and low productivity in primary agriculture, particularly where up-to-date farming techniques and machinery can be introduced.

In energy and infrastructure sectors, we will focus on developing small and medium-sized renewable projects, focusing on hydro. Investments in generation will focus on increasing efficiency and promoting the development of a region-wide supply market. The Bank will pursue projects to rehabilitate infrastructure, restructure services and promote tariff reform. Support to the water sector will remain a top priority through a series of investments in small and medium-sized cities, in association with reform undertakings to develop governance and regulation mechanisms.

In the manufacturing and services sector the Bank’s focus will be on improving competition, efficiency and governance standards. We will also pursue investments in local manufacturing enterprises especially with a focus on energy efficiency, knowledge transfer, export-orientation and improved competitiveness.

The Bank is also innovating its financial products to better serve the needs of financial institutions and companies. The bank is actively engaged in a program to boost the Bank’s ability to extend loans in local currencies in ETCs given the average ETC has a large currency account deficit with volatile foreign exchange rates. Reducing borrowers’ vulnerabilities to local currency devaluations will make the borrowers more solvent, and allow them to focus more on the other financial and commercial risks they are better able to manage.

Last updated 10 November 2010