Boosting transition is a major priority for the EBRD

One of our guiding themes will be to build resilience, says EBRD President

2014 marks an important anniversary – 25 years since the fall of the Berlin Wall and the collapse of Communism in Central and Eastern Europe.

The lifting of the Iron curtain which, in Churchill’s words, ran from Stettin in the Baltic to Trieste in the Adriatic was a momentous event for Europe, for the rest of the world, and, as it would turn out, for the European Bank for Reconstruction and Development.

Within months of those scenes of the crowds standing on top of the Berlin Wall, EU leaders and others from the international community were proposing that the EBRD should be set up to help countries make the transition from Communism to Capitalism, developing open market economies to help bolster a move towards democracy.

A quarter of a century later, our work remains as needed as ever and there is still much to do across our many Countries of Operations. In fact, as I will be setting out today, our efforts may be even more relevant as nations make a much longer transition journey than our many founding fathers, and only founding mother, Margaret Thatcher, then British Prime Minister, envisaged.

THE EBRD – PAST, PRESENT AND FUTURE

Where we operate and success

The EBRD operates over a vast swathe of territory – stretching from Mongolia on the Chinese border, through Central Asia, Russia, Central and Eastern and South Eastern Europe, down in to Turkey and across the Southern and Eastern Mediterranean region, as far as Morocco on the Atlantic coast. We have resident offices stretching from Casablanca to Ulaan Bator, allowing us to deliver impact on the ground.

We are active in 33 countries. Over the past two years, since we last updated you, we have invested more than 19.4 billion Euros with the number of projects in 2012 and 2013 at record highs – a total of 785 projects. For every Euro that we invest, we also unlock, on average, another two and a half Euros from other investment sources.

We have also been making substantial profits – over a billion Euros in the past twelve months alone. Funds which are recycled back in to building our strong capital base, helping to maintain our triple A credit rating, and, importantly, go back - through our investments- to our Countries of Operations.

Our work is not about the amount that we invest, considerable as it is. Our real focus is on the impact that we have. In 2013, 91 per cent of our projects had an expected Transition Impact rated as either Excellent or Good.

SEMED and new members/potential members

The experience that we have built up in our traditional region over the past two decades has allowed us to expand our mandate in the past two years to the Southern and Eastern Mediterranean, what were described in 2011 as the Arab Spring nations.

Tunisia, Jordan and Morocco have become full Countries of Operations whilst Egypt is a potential Country of Operations and we are investing there. These countries are challenging, both economically and politically, but we know from our earlier experience that the path of transition is often bumpy and rarely linear.

Kosovo also became a new member and Country of Operations at the end of 2012. It was not an easy decision, given existing divisions amongst member states regarding the status of Kosovo.We believe,though, that our activities there are both necessary and positive for the peoples of both Kosovo and the region.You will receive briefings on both Kosovo and the Southern and Eastern Mediterranean region later.

Whilst we are now operating in new countries, others are keen on developing their links to the EBRD. We already work with Greek and Portuguese companies in our projects, but both those countries are now exploring enhanced engagement with their businesses with us. Cyprus, an EBRD member, has expressed an interest in going further and becoming a country of operation for a limited period. Libya has applied to become a member and a full country of operations, and Lebanon is indicating that it would like to talk to us about both membership and operational status.

Impact on the ground

During my travels, I often see what our efforts produce in real terms, the tangible impact which makes others keen to join the EBRD. Included in the dozens of projects that I visited in the past twelve months were a Pharmaceutical Manufacturer whose expansion was funded by the EBRD, improving standards in its home country, and the first wind farm in Mongolia, adding five per cent to that nation’s electricity production and cutting carbon emissions.We have also worked actively with the European Investment Bank and the World Bank - cooperating in the Joint IFI Action Plan to help the countries of Central, South Eastern and Eastern Europe to overcome the impact of crisis. We committed, between us, to invest 30 billion Euros in two years and our investments are running ahead of schedule.

STUCK IN TRANSITION

Our recent Transition Report highlights the scale of the challenges facing many of our Countries.

Economic growth remains well below pre-crisis levels and many countries have turned their backs on the reforms that could put economic expansion back on track.

A number of them are, as the Report says, Stuck in Transition. Not only has reform slowed but, sometimes, it has even reversed.

Progress in transition has been closely correlated with political systems: countries which are more democratic have come further, in terms of reform, than their less democratic counterparts.

Long-term forecasting suggests that under current policies and institutions, productivity growth will remain modest over the next decade – around 2-4 per cent on average – and decline further in the following decade.

At that rate, convergence with the living standards in western Europe would stall in some countries 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 of our countries in the transition region would remain far below this threshold.

It is a depressing picture and requires some rethinking of the way that the EBRD and the wider international community address the challenge.

UNSTICKING TRANSITION

So, we need to find a way of unsticking Transition.In order to support countries in their long-term transition to democracy, we must encourage policies and foster institutions that underpin economic growth, foster market reforms and assist countries that are rich in natural resources as they seek to diversify their economic base.

Some of the solutions are clear: we need to ensure openness to foreign investment and other forms of international integration. The presence of foreign companies can generate demand for better government services and set standards for better corporate governance.

International Institutions, like the EBRD, can provide inspiration, expertise and commitment. External benchmarks can encourage improvements in certain aspects of the business environment, such as cutting red tape.

There is sometimes scope for political reform that supports economic reform. Even where incumbent elites or vested interests prevent the reform of political institutions at the national level, it may be possible to reduce corruption and foster transparency at local and regional levels.

Non-governmental organisations can have an important role to play in demanding transparency and holding government institutions to account.

WHAT CAN THE EBRD DO?

So, amidst those general solutions, what can the EBRD, do specifically to boost change?

That question is at the heart of our institutional discussions, right now. We are in the midst of an internal debate about the Bank’s medium term directions as we prepare for our next five year resource planning, CRR5, as we call it.

The Transition Report findings will provide the backdrop informing our thoughts.

We are, of course, a small player and we cannot resolve these problems on our own. However, over more than two decades, we have built up huge expertise in our Countries of operations. In the majority of them, we are also the largest non-oil and gas investor and the biggest foreign investor.

Resilience/integration/common global challenges

Our guiding themes will be to build resilience, help to integrate our region in to the global economy and promote solutions to common global challenges.

To do this, our operational responses need to be framed by strengthened policy dialogue.

We can boost our firepower by partnering even more actively with others and, this year, we will start to do that by mobilising even more sources of investment, alongside our own.

We will be more ambitious on helping to develop Small and medium sized Enterprises – key for economic growth. We have just approved a new Small Business Initiative which aims to marry money with the sort of expertise that businesses need to tap in to.

For many years, we have had a very successful Sustainable Energy Initiative, accounting for about a third of our investments. We are now expanding that in to a Sustainable Resource Initiative, touching on the use of wider material efficiency. This should help companies and, therefore, economies become more competitive – crucial in today’s recovering global economy.

We aim to do more lending in local currencies and develop local capital markets.

We also need to be more assertive in getting our countries to improve their investment climate, including tackling corruption at every level. If they don’t do that, much needed investment will go elsewhere. We are now working on a plan of activities that specifically target the investment climate and good governance in our countries.

We are cooperating, closely, with other international partners, primarily the EU, which has recently put the need to improve economic governance at the centre of its enlargement strategy. The EBRD will focus on areas where we can bring added value in promoting these objectives through our investments and policy advice on the ground.

We can also play a role in highlighting the Countries of our regions as investment destinations. We are organising, at our Headquarters in London, later this month, a high level regional conference for the Western Balkans. The Prime Ministers of all six Western Balkans’ countries, plus Croatia, will be participating. Besides facilitating much needed foreign investment, it will promote regional cooperation which is indispensable for the sustainable development and political stability of the region. It will send a strong political signal of the level of maturity and stability in the region.

It is a good example of where the Bank’s expertise and contacts can add real value.

ONE BANK CHANGE PROGRAMME

Re-energising transition also requires the EBRD to examine its own internal processes. Just as we are reviewing our external response, we are also changing internally. Success requires that these two approaches march hand in hand.

Over the past 18 months, our One Bank modernisation strategy has been clear in its aim. We are making sure that we continue being as efficient and effective as possible so that we are able to deliver the impact that our countries need in a world which is much more complex than it was in 1991.

We are modernising the management culture of the Bank, streamlining our focus on the impact that we achieve, encouraging the development of innovative new products and enhancing policy dialogue. We will be able to answer better the needs of our countries.

Just as we have been fit for the past, we want to be fit for the future.

CONCLUSIONS

Our enthusiasm for our mission remains undimmed and we now want to plough that energy and commitment in to unsticking transition.

It is a huge task.

A quarter of a century ago, the international community thought that political and economic transition in the former Communist world would be accomplished in a decade or two.

We are now much more realistic. Building up the private sector, fostering open market economies as a support to democracy will take a long time yet.

The EBRD is as determined as ever, even as the challenges are clearer and more daunting.