Transition impact is one of three key principles governing the EBRD’s project activities, together with sound banking and additionality. The Country Sector Economics team assesses the transition impact of every project as part of the process of choosing, preparing and appraising projects.
Understanding transition impact
There are broadly three areas in which an EBRD project can contribute to the process of transition:
- The structure and extent of markets.
- The institutions and policies that support markets.
- Market-based behaviour patterns, skills and innovation.
These three areas are further divided into seven sources of the transition impact.
- Greater competition in the project sector
- Expansion of competitive market interactions in other sectors
- More widespread private ownership
- Institutions, laws and policies that promote market functioning and efficiency
- Transfer and dispersion of skills
- Demonstration of new replicable behaviour and activities
- Setting standards for corporate governance and business conduct
1. Greater competition in the project sector
A project can promote greater competition in its sector of activity. Increased competitive pressure is likely to improve the efficiency with which resources are used, demand is satisfied, and innovation is stimulated. However, in some circumstances a project might lead to a slackening of competitive pressure on market participants, including the project company itself.
2. Expansion of competitive market interactions in other sectors
A project can help to set business relationships in other markets on a more competitive basis. The benefits for the transition process would be similar to those described under the impact discussed above. There are two important ways in which markets can be extended and their functioning improved by projects:
- Through interactions of the project entity with suppliers and clients.
- Through project contributions to the integration of economic activities into the national or international economy, in particular by lowering the cost of transactions.
- To have a structural effect, these contributions should not be one-off but should enhance competitive market interactions on a sustained basis. This would generally be achieved either through the formation of actors, methods of work, policies and institutions which last, or through interactions that have a strong demonstration effect.
A project may result in increased private ownership through privatisation, or new private provision of goods and services. This can generally be expected to strengthen market-oriented behaviour, innovation, the pool of entrepreneurship and, more generally, commitment to the transition. Private ownership is also in itself part of the transition objective. With the right kind of business standards, regulation and legal environment, private ownership is complementary to, and often a condition for, the expansion and improvement of markets.
A project may help to create or reform governmental or private institutions, policies and practices whose function is to enhance entrepreneurship, and the efficiency of resource allocation. This is particularly relevant where not only the project entity itself but also other economic activities benefit. Four types of contribution are of particular importance here:
- The creation/strengthening of public and private institutions that support the efficiency of markets.
- Improvements to the functioning of regulatory entities and practices.
- Project contributions to government policy formation and commitment, competition promotion, predictability and transparency.
- Contributions to laws that strengthen the private sector and the open economy.
Projects can directly contribute to providing and improving the skills required for well-functioning market economies. This may include management, procurement, marketing, financial and banking skills. Such a transfer represents a relevant transition impact if the skills are likely to be spread to also benefit non-project entities. Skill transfers are often complementary to other transition-related project impacts such as institution-building, market expansion and demonstration effects.
A project may lead the way by showing other economic actors what is feasible and profitable and thereby inviting replication. There are three types of demonstration effect which are of particular importance here:
- Demonstration of products and processes which are new to the economy.
- Demonstration of ways of successfully restructure companies and institutions.
- Demonstration to both domestic and foreign financiers of ways and instruments to finance activities.
By implementing high standards of corporate governance and business conduct in entities supported by the Bank, projects may contribute to spreading behaviour and attitudes that enhance the legitimacy and functioning of the market economy. This is a form of demonstration effect which functions by establishing reference points for other firms and individuals concerning businesses that they wish to invest in or interact with. Where role models for business conduct and corporate governance are rare, such pressures are less likely to materialise.
Transition impact analysis
For each EBRD investment, the OCE assesses how the project contributes to the Bank’s mandate of promoting entrepreneurship and open, market-based economies. The assessment covers both the potential transition impact of a project and the risks involved. Ratings for both dimensions are provided at various points in the project cycle.
Transition impact potential is defined through the seven categories in the transition impact checklist above. The rating of transition impact potential derives from the country and sector context, related transition challenges, and the way these are addressed by project selection and design.
Transition impact potential is measured on a scale of:
Risks to transition impact depend both on the likelihood that transition impact potential will not be realised and on the risk of negative transition impact deriving from wrong signals or certain attributes of the project. The focus is on the degree to which project design and technical assistance can be expected to deliver transition benefits.
Risks to transition impact are classified as:
Transition Impact Monitoring System (TIMS)
What is TIMS?
In 2003, the CSE started to monitor systematically the implementation of transition impact components identified during project preparation. The monitoring targets and the systematic reporting on transition impact implementation fall under the Transition Impact Monitoring System (TIMS).
The key objectives of TIMS are to
(i) improve the structure of projects by fine-tuning the balance between transition targets, project covenants, and risk-mitigating conditions
(ii) address transition impact problems consistently as they arise, to facilitate corrective action and the transition-related dialogue in the Bank and between the Bank and the Client
(iii) provide a regular assessment of the transition impact of the Bank’s portfolio against institutional scorecard targets.
TIMS builds on the ex-ante assessment of transition impact potential of each EBRD operation where an important task is to establish key transition objectives, monitoring benchmarks and expected timing of implementation of each benchmark. Transition impact benchmarks must be
(i) concrete, measurable and verifiable
(ii) establish a baseline for quantitative benchmarks
(iii) clearly linked to project objectives. Implementation timing specifies project stage, date or period for implementation.
An example of transition impact benchmarks table
Reduced market share for the dominant player (from y% to x%)
Demonstration effects of new ways of financing activities
3 similar corporate bonds issued
By June 2012
Standards of corporate governance
Agree institution building plan (IBP)
TIMS is different from the evaluation made by the Evaluation Department.