Building strong institutions is more difficult than passing laws
Legal reform has been an important part of the EBRD’s transition work since its establishment in April 1991. In line with its mandate, the Bank has focused on key commercial and financial laws and the establishment of institutions necessary to support private sector enterprises and sound financial transactions.
As early as November 1991, within months of the Bank’s inauguration, international lawyers and legal experts gathered for a regional seminar with funding from the government of Japan to discuss how to promote legal transition in the countries of central and eastern Europe with the support of technical assistance.
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The Bank offered strong support for the process of transforming centrally-planned, state-controlled economies into private sector-led market economies. The to-do list for the transition process to succeed at that time seemed long and daunting. It included promoting competition, establishing commercial law and accounting systems, and nurturing the cultural change needed to build a transparent and predictable investment climate.
The EBRD was involved in areas such as banking system reform, price liberalisation, privatisation and the creation of appropriate legal frameworks for property rights.
At its first Annual Meeting in Budapest in 1992, a round table on creditors’ rights and secure transactions led to the Bank starting work on securities. It aimed to ease the chronic shortage of credit to companies by establishing a modern legal system for collateral. The EBRD directly supported this reform in Hungary, Latvia and the Slovak Republic and, with the publication in 1994 of the Model Law of Secured Transactions, the Bank provided a template which was later adopted in virtually all the countries in the EBRD region and beyond, including Vietnam, Sri Lanka, China and in Latin America.
Other EBRD contributions to standards for reforms that aim to achieve specific economic objectives include, for example, Publicity of Security Rights: Guiding Principles for the Development of a Charges Registry (published in 2004), which addresses the basic requirement for the development and operation of a registration system for security interests. The Policy Brief for Corporate Governance in Banks in Eurasia (2008) identified governance challenges and provided recommendations on how to address them to support policy-makers, banking supervisors, stock exchanges, banking industry associations and banks.
During the early years, requests for the Bank’s assistance in legal reform were multiplying. In response, the EBRD institutionalised its work in this field with the creation of the Legal Transition Programme (LTP) in 1997.
The Bank’s legal assistance, grant-funded by donors and the EBRD Shareholder Special Fund, draws on the EBRD’s experience as a major lender in the region and takes into account the views and concerns of local stakeholders, thereby increasing the effectiveness and practicality of the suggested solutions.
Over the years LTP has grown to include new focus areas, for example promoting public-private partnerships in public infrastructure projects, strengthening public procurement, strengthening dispute resolution through courts and other mechanisms and, most recently, promoting energy efficiency and renewable energy laws and regulations.
While the EBRD regions and the needs of countries’ individual legal frameworks have changed over the past 25 years, the Bank’s approach has remained fundamentally the same. In eastern Europe as much as in the southern and eastern Mediterranean (SEMED), the EBRD’s newest region, legal reform starts with an assessment of the current legal system in place in each country.
Diagnostic activities included instruments such as the Legal Indicator Survey (1995-2002), recording the perceptions of practising lawyers. As of 2003, the Bank analysed how commercial laws were applied in particular scenarios. More recently, assessments have been based on how efficiently the law is applied in the pursuit of specific economic objectives, such as the development of mortgage laws or telecommunications regulations.
These assessments inform the EBRD’s policy dialogue agenda. They are integrated in the sector and country strategies, and are used in the Bank’s investment risk analysis. They also help identify needs for technical cooperation (TC) projects. In two decades, LTP has delivered over 200 technical projects in more than 30 countries.
Through TC projects, for example, the Bank was able to assist EU accession countries in harmonising their laws with European Union directives and regulations. As creating strong institutions is more difficult than passing laws, the Bank has focused for the last 15 years on building the capacity of institutions that can implement laws. A particular focus here is on the judiciary to bolster the capacity to assess commercial law cases and enhance the role of courts in adjudicating business disputes.
In 2015, the EBRD rolled out its first legal courses in the SEMED region under the auspices of Jordan’s Ministry of Justice. The pilot training programme involved 160 judges and covered key areas such as competition, intellectual property and the enforcement of arbitration awards.
Sharing experiences and lessons learned with the international legal community and academic institutions is another goal of the EBRD’s legal reform work. Since 1998, the Bank’s outreach activities have included the publication of the legal journal Law in transition and the collaboration with other international financial institutions and organisations such as World Bank, International Monetary Fund, United Nations Commission on International Trade Law (UNCITRAL), International Institute for the Unification of Private Law (UNIDROIT) and International Development Law Organization (IDLO).
“25 years on, many transition countries have made significant progress towards fully functioning market economies with well-developed laws,” says Michel Nussbaumer, EBRD Director, Legal Transition.