Europe and the future of development finance

By EBRD  Press Office
@ebrd

Klaus Michalak, Joachim Nagel, Sir Suma Chakrabarti, Christiane Laibach at KfW, Frankfurt

Left to right: Klaus Michalak (KfW IPEX), Joachim Nagel (KfW), Sir Suma Chakrabarti, Christiane Laibach (DEG)  

Delivered by: 

EBRD President Sir Suma Chakrabarti

Venue: 

KfW, Frankfurt, Germany

  1. Introduction

Good afternoon, ladies and gentlemen.

It is a great pleasure to be here in Frankfurt at the headquarters of KfW.

A pleasure firstly at the purely personal level.  I began my career in development in Botswana nearly forty years ago and worked closely with KfW then on many infrastructure projects. 

Later, when I was head of the UK's DFID, KfW was one of my most valued partners. 

But over all those years, I never got to your headquarters in Frankfurt.  At last! 

And, of course, it feels great to be the guest of such a close partner of the EBRD, one with which we share so many values and have worked so closely for many years.

As fellow development banks active internationally, we have developed bonds with KfW Development Bank, DEG and KfW IPEX Bank, as well.

The KfW Group and EBRD have co-financed more than 130 projects totalling €2.3 billion across most of the countries where we work together.

So I am delighted to be here at the kind invitation of Professor Nagel  - dear Joachim - to speak about the future of development finance and cooperation between us.

  1. What is the EBRD and what makes us different from other MDBs?

But, first, let me introduce the EBRD and what makes us different from other multilateral development banks, or MDBs for short.

As you probably know, the EBRD’s founding document commits us to foster the transition towards open market economies and to promote private and entrepreneurial initiative in countries committed to and applying the principles of multiparty democracy, pluralism and market economics.  So, compared to other MDBs, we are committed to a particular economic and political model.

But we are not stuck in the past!  We believe that today’s modern market economy is different from the 1991 model we began with. 

Today’s market economy has six qualities:  it is competitive, well governed, green, integrated, inclusive, and resilient.  That is what EBRD works towards in each of the nearly 40 countries where we invest.

We do so with an overriding focus on the private sector. It currently accounts for between 70 and 80 per cent of our investment in any one year.  We use the full range of financing instruments – debt, equity, trade finance and technical assistance.

And we combine that private sector focus with extensive work on policy reform to help improve the investment climate and governance in our countries of operation.  This stress on policy dialogue is based on our deep sector knowledge in our countries of operation. 

We know what foreign and domestic investors are looking for in order to invest more and EBRD can act as honest brokers with governments on creating the right policy environment.

We at EBRD are all about creating effective markets.  So, our project finance is provided at market rates of interest.  Of course, in some areas we recognise the need for blended finance and will add a grant component.  But we are careful to ensure that blending does not create the wrong incentives.

We also believe we must create local capital markets and avoid imposing foreign  exchange risks on clients that cannot bear them.  So,

in 2018 we carried out around 40 percent of our debt finance operations in local currency.  And we often issue bonds in local currency too.

And finally, although originally focused on developing open markets in the formerly command economies of communist Eastern Europe and the former Soviet Union, our shareholders have asked us to take our expertise to new geographies not once, not twice,  but on four separate occasions.

We now operate from Estonia to Egypt, from Morocco to Mongolia.  In nearly 40 economies as I said earlier.  The only so-called regional development bank that is actually pan-regional.

And when we arrive in a new region, we hit the ground running.

We have already invested more than €8.2 billion in over 200 projects in six years in our new region of the Southern and Eastern Mediterranean region (or SEMED), and which you know as MENA.

So, the heterogeneity of countries in which EBRD now successfully operates shows that our business model is not region specific.

  1. The development challenge

Why is this background on EBRD and our business model important?  Because I believe our approach will be central to meeting the development challenge of our times:  how to achieve the Sustainable Development Goals, the SDGs. 

The SDGs represent a fundamental change in the development challenge.

You will recall that from the late 1990s to 2015, the international development agenda was defined by the Millennium Development Goals, the MDGs.

The MDGs concentrated on what I would call social goods, such as health and education, and eradicating poverty.

And most of these needed grant financing, public sector delivery, and were focussed very much on the low income developing world.

But the Sustainable Development Goals  - the SDGs - were defined with much greater participation by developing countries and emerging markets themselves, and include economic outcomes and sectors where the EBRD and other development finance institutions have a comparative advantage. 

And the SDGs are much more explicitly set as goals for all countries, not just low income ones.

And, by now, everyone can see that we cannot finance them in the old way.

Of course, we will need to call on the domestic resources of the countries concerned. 

Grant funding will continue to be required, too.

The public sector will remain important for delivery of some of the goals.

But the SDGs, with their interest in hard economic areas such as infrastructure and energy, cannot  - should not - be financed from these sources alone.

The annual investment needed to meet the 2030 goals is estimated to be twenty times the current volume of official development assistance. 

If we are to meet the SDGs, we desperately need to leverage more private sector financing.  And private sector delivery expertise.

That includes attracting new suppliers of finance from outside the multilateral system, for example from pension and sovereign wealth funds.

The MDBs and DFIs alone simply do not have the resources to deliver the SDGs by themselves.

Business models that are focussed on the private sector and the mobilisation of additional financing are now absolutely core to mainstream development thinking.    That is where the EBRD comes in.  Why our business model should be part of the response to the challenge.

And the challenge is now urgent

The SDGs have to be delivered to a hard deadline of 2030.

And my fear is that many global decision-makers may not focus on what needs to be done and what needs to change until very late in the day.

  1. Addressing the challenge

If that is the fundamental challenge, then is the existing development architecture up to it?  Will business as usual be enough to meet the challenge? 

The short answers from me are “no” and “no” again.  We have to move more boldly than ever before.

So how can we accelerate progress? 

Having each development institution attempt to change its business model to match the new needs of the 2030 agenda will take a long time…time we do not have. 

A faster route may be for our shareholders to recognise – as they have already done with the EBRD – that business models and specialist expertise can trump geographical neatness.

I would argue that there is a real opportunity here for the system as a whole to be more efficient, more relevant, and deliver better.

We need a mix of models.

We will not succeed in delivering the SDGs if every institution behaves like the EBRD or KfW and DEG.

But nor will we do so if everyone focuses on traditional public sector projects.

We need to move to a world in which our shareholders empower us to explore different partnerships with other DFIs, joint ventures or common investment platforms, for example.

That way, private sector financing and delivery mechanisms for the SDGs could be put in place far more rapidly.

EBRD’s first priority is, of course, reviewing what more we can do in our existing regions in order to optimise our delivery there.

We are also working on an initial analysis of what extra capital capacity the EBRD might have, and whether we could effectively deploy our resources and skillset in the region of the world which faces the biggest development challenge: sub-Saharan Africa.

“To bend the arc of history, we must succeed in Africa,” the recent G20 Eminent Persons Group report proclaimed.

We agree. And I am sure many of you do, too.

Indeed, the KfW Group is already very active in sub-Saharan Africa.

Of course, if our shareholders do give us the green light to deploy beyond Northern Africa, we will be very keen to continue the collaboration with the Compact with Africa we already have in Egypt, Morocco and Tunisia.

And that means working even more closely with you, the African Development Bank and the IFC, among others.

I do want to make one other point in the wider context.

The development ambitions and the private sector financing and delivery I have just outlined are not the monopoly of economic and social liberals. 

They represent a crucial agenda for conservatives, too.  

Without successful development, there is unlikely to be any easing of the migration pressures and security risks that we have seen here in Europe.

Moreover, growing and developing economies provide the neighbouring markets of the future with which to increase trade.  

And conservatives, other than the most extreme economic nationalists, should also welcome our emphasis on the private sector and open and well-governed markets.

But this point is rarely articulated by those in office or opposition leaders.

I believe that it is up to us as development practitioners to make it more strongly in the future.

  1. Mobilising Europe’s development system

Allow me to turn now to the future of development finance and how the system, in particular Europe’s development system, could perform better. 

I have proposed three simple principles for the international development system and want these to influence the Multiannual Financial Framework debate and the Franco-German Wise Persons Group initiative.

First, all DFIs need to promote sound policy reforms in a coordinated manner.

Financing alone is not sufficient and must go hand in glove with the creation of an enabling environment and policy reforms in partner countries.

This requires DFIs to coordinate their approaches in dealing with national partners and to invest in policy engagement, capacity building and, most importantly, to enforce conditionality where appropriate.

Second, all DFIs should use market-based pricing which crowds in rather than crowds out the private sector

We will only achieve sustainable, long-term growth in partner countries if we foster local financial and capital markets, by seeking actively to crowd in private finance.

As public institutions with taxpayer backing, we must be particularly vigilant that we do not distort the market.

The caveat here is that, in lower income countries, fragile states or those affected by conflict, grants remain vital for affordability reasons, to encourage changes of behaviour, build capacity or reduce risk.

For some sectors or new areas of work where the business case still needs to be made, blended finance – used with discipline and in accordance with the Blended Finance Principles – is also very useful.

And third, DFIs need an open architecture to have maximum impact 

DFIs are both partners and competitors.

As long as the ground rules I have just outlined are followed, such competition is healthy and rejuvenating, and good news for both European taxpayers and development partners.

No single DFI should have a monopoly of particular resources or an exclusive role in managing financial instruments.

I know that KfW colleagues share these principles.  Working together, we seem to be moving in the right direction on the MFF but there is some way to go until we reach the finishing line.

  1. Cooperation with KfW

Ladies and gentlemen, allow me to finish with some words about the EBRD’s cooperation with KfW.  Over the years KfW and the EBRD have been firm friends and partners.

Together, we have excelled in the promotion of financing for green energy, PPPs, equity and innovative capital market instruments.

But the fact is that KfW and the EBRD can, and should, work together even more effectively.

How can we do that?

With DEG we are discussing a Master Cooperation Agreement which will facilitate the standardisation of our due diligence and project approval processes.  This will help us speed up and increase our joint delivery.

It is clear there is scope to do more of what we are already good at – renewable energy, energy efficiency, PPPs, equity – but also to get better at sovereign and municipal deals.

We should also engage more in lending that promotes policy reform.

I am very glad to hear we are discussing just that in Georgia in the context of reforming the energy sector.

I am also confident that, sooner rather than later, we will also be able to scale up our joint activities in the EBRD’s newest region, SEMED.

There, and in Turkey – for that matter – there are also opportunities to support companies wishing to go international, and to expand to sub-Saharan Africa in particular.

There are also opportunities awaiting us in Uzbekistan, given its recent return from self-imposed isolation.

One way to move our cooperation forward is to engage more vigorously at country level and within regional platforms such as the Western Balkans Investment Framework.

Another is to ensure alignment on country diagnostics and strategies to make sure we share a full understanding of local needs and priorities and agree on joint work or the division of labour.

We at EBRD also want to learn more from KfW in general, given your much higher annual business volume and broader geographical outreach.  This learning will be a priority for our feasibility study on expansion to sub-Saharan Africa. 

We would love to learn more from KfW’s newest subsidiary, KfW Capital, and its future work on private equity in support of SMEs and start-ups.

We would also be interested in having regular exchanges on our digitalisation initiatives and on how we can better promote greater female participation at higher management levels.

And, of course, we are keen to continue our effective cooperation on the future of the European development architecture.

  1.  Conclusion

Ladies and gentlemen, there is so much more we can do together.  When Professor Nagel and I first met last spring, we were in close agreement that EBRD and KfW could and should come closer still.

I realise that we cannot see eye to eye about every single particular of the bilateral and development agendas.

But we do look to KfW as a very powerful ally and force multiplier in the countries where we work together and in the discussions about Europe’s development architecture.

And today I look forward to engaging with you, answering your questions and finding out more about your thinking.

Vielen Dank!