Lessons learned from EBRD’s experience in Central and Eastern Europe


Delivered by: 

Sir Suma Chakrabarti, EBRD President

Venue: 

Jeddah, Saudi Arabia

Event: 

Islamic Development Bank Governors luncheon

EBRD’s focus remains clear: re-energising transition and boosting growth

Excellencies, Governors, Ladies and Gentlemen,

It is a pleasure and an honour to be here today. I would like to thank Dr Ali and the Islamic Development Bank for extending this kind invitation to me. I would also like to congratulate Dr Ali on the 40th anniversary of the IDB.

Dr Ali has asked me to reflect on the lessons learned from EBRD’s experience in Central and Eastern Europe and its relevance for our new countries of operation – Morocco, Tunisia, Egypt and Jordan – in our Southern and Eastern Mediterranean region (SEMED as we call it). So, as we celebrate 40 years of the Islamic Development Bank, I would like to call your attention to another anniversary, next month. November 9th, 2014 marks 25 years since the fall of the Berlin Wall and the collapse of communism in Central and Eastern Europe. This event, of course, proved to be momentous for Europe. In addition, it was a moment in history which triggered the creation – in 1991 – of the European Bank for Reconstruction and Development. Specifically, the EBRD was created to support its countries of operation in their democratic transition, by helping them make the transition from command to open market economies. In doing so, a somewhat unique institution was created; one focused on promoting the private sector and private entrepreneurial activity.

As I reflect upon the EBRD’s history, I am proud to report that the EBRD’s model has proven robust. The Bank remains necessary and relevant, and I believe this is why our shareholders have called us to expand our activities into new countries and regions. The EBRD has a strong track record in being able to take on new tasks, new countries and deliver swiftly. Today the Bank operates across three continents – Europe, Central Asia and North Africa. We are a semi-global Bank.

The EBRD invests primarily in individual projects in the private sector. This year alone we expect to invest around €8.5 billion in around 370 projects - investments that really do make a difference and can change lives through developing the private sector in pursuit of our transition mandate.

The EBRD is active across the entire spectrum of economic activity, promoting the stability of financial sectors, the expansion of small and medium sized enterprises, often through the provision of local curerncy funding, developing manufacturing, supporting sustainable agriculture and food security, modernising infrastructure and ensuring energy security. We have been pioneering in our work on energy efficiency, making economies more competitive, while at the same time combatting climate change.

We are also heavily present on the ground – this is critical to the way in which we work, to knowing our countries, our clients, to initiating private sector business and to delivering real reform impact. As a result we have resident offices stretching from Casablanca to Ulaan Baatar.

Let me now turn to the lessons that we have learned in the EBRD’s more than two decades of operation and in particular those that are particularly relevant to our engagement in the Southern and Eastern Mediterranean. We have been operating in Egypt, Jordan, Morocco and Tunisia since 2012. We know that the region in which EBRD started working in 1991 and the new SEMED region are very different in terms of culture and history, but there are also similarities in the economic challenges they face.

A first observation concerns the speed and sequencing of reforms. Many will remember the confrontations over “shock therapy” vs. gradualism in some former communist countries. These emotional debates have been replaced by a broad consensus that while we need to exploit political windows, not everything can be done at once and reform stagnation or reversal is always a risk. In our ‘legacy’ region, we have seen reversals in some countries and flat lining of transition in others, which was the focus of last year’s Transition Report. Our medium term strategy is built around the need to ‘reenergise’ transition.

A second observation is that the state has an important role to play in the process of transition. Early calls in many countries to dismantle the state have given way to more sophisticated assessments. An effective state is critical in supporting nascent markets and enforcing laws and regulation. A capable state is also needed to invest in productivity-enhancing education and health care.

The third lesson is that the investment climate and governance matter greatly. At our last Annual Meeting in Warsaw this year, the Bank’s Governors decided to put far greater emphasis on strengthening governance and the investment climate in our countries of operations. Since then we have launched a specific initiative to address issues like transparency and disclosure; business regulation, and incentives to reduce the incidence of both public and private corruption. Linked to this new approach, the Bank has recently signed a Memorandum of Understanding with the government of Ukraine establishing a Business Ombudsman and an MoU with the Government of Albania on ways to improve the investment climate and address the problem of ‘informality’ and the shadow economy.

A fourth lesson is that transition can easily be knocked off course if all sections of the population are not included in the process of economic transformation. In Central and Eastern Europe the emergence of private small- and medium-sized firms helped to secure support for market economy and democracy, particularly among younger generations. Developing a private sector with meaningful jobs is even more important in countries in SEMED with generally much younger and rapidly growing populations.

One example of how we do this in practice is in Turkey, where – with European Union support and working with the Turkish authorities - we have recently launched a Women in Business Programme. It is a powerful package of dedicated financing lines to several commercial banks in Turkey (amounting to €300 million), credit enhancement and technical assistance to help banks better serve this important client segment. In turn it is combined with direct advice to women entrepreneurs to help them grow their businesses and to gain access to finance. We have also expanded the initiative to Arab countries such as Jordan where the Bank provided a loan of US$ 4 million to Microfund for Women (MFW) to support the development of microfinance enterprises in the country, with a focus on women entrepreneurs.

The fifth lesson is that transition countries can only prosper through regional and global integration. In our over twenty years of experience, promoting economic integration both globally and regionally has been key. Integration has been at the heart of the transition project, helping to raise levels of growth and improve standards of living. In the case of integration into WTO and the European Union, this has served as a strong anchor for market-based reform.

Gaps in cross-border transport, power and water infrastructure are particularly striking in Central Asia and South-Eastern Europe. This is also true of the South and Eastern Mediterranean. This is why the Bank will make regional integration a key element of its operations and policy over the medium term. We recognise that in many regions this is not a simple and straightforward process, for historical, geopolitical and other reasons. Like other elements of transition, patience and persistence is required. The Bank has sought to play a supportive role in promoting integration, not only through finance, but by promoting an appropriate mix of public and private involvement, high-quality regulation, helping to prepare and structure projects and addressing the need for coordination across borders.

The last, but by no means least, the path of transition is often bumpy and rarely linear; and no two transitions are alike. The former communist bloc, where we have been active since 1991, has seen periods of social and political instability and at times open conflict. Periods of rapid economic reform have often been followed by reversals or inertia. Indeed, I am concerned that a number of our countries of operations may currently be ‘Stuck in Transition’ - as we noted in our last Transition Report. In the wake of the financial crisis, many citizens feel left out and in turn political rhetoric and policy making is often turning against markets. Collectively, we need to find a way of getting transition unstuck, and of re-energising reforms, without which economic and social progress will remain stalled.

These are just a few of the key lessons that the Bank has learnt over its years operating in the post-communist transition countries.

Nevertheless, throughout what have often been tumultuous years, the EBRD has remained a strong and reliable partner. We have worked consistently to help support successful development, especially of the private sector. Today, we are proud of having contributed to economic reforms and private sector development that allowed 11 of the Bank’s countries of operations to join the European Union.

We know that just as differences in history, socio-economic development, and political culture in EBRD’s traditional region of operations have produced different transition outcomes, similar differentiation is to be expected in the countries of the Southern and Eastern Mediterranean. The countries have different starting points, the motivations and political economy constraints vary and hence the paths in transition will undoubtedly be different.

In addition, SEMED countries are facing a number of challenges specific to the region: they have been marked by widening socio-economic disparities due to high unemployment rates; they face many common development problems that have been less prominent in the post-communist region, such as higher incidence of poverty and sometimes illiteracy; and gender inequality remains a big concern.

Against this challenging background, the EBRD has so far invested € 1.2 billion in some 40 projects across the region and we are now heading towards a portfolio of € 1.5 billion. From a standing start, less than three years ago, this emphasises the speed with which the EBRD can heed the calls of the international community and our shareholders – taking on a new task and getting to work with very quick implementation. We are still building up capacity in the countries and expect the amount that we invest to continue growing at its current pace for the next couple of years. In addition, as you know, we don’t do these investments alone. For every euro that we put into a project, it attracts, on average, more than two euros of private sector money.

But, of course, performance is not just about figures. It is about the tangible impact on people’s lives - we are proud of investing in changing lives. We work hard to leverage the impact of our investments by providing a combination of support and expertise in the form of policy dialogue, capacity-building and other forms of technical assistance.

In 2014, we have focused our work on four main priorities in the SEMED region: fostering SME development; developing non-sovereign financing solutions for infrastructure, including PPP structures; promoting sustainable energy and energy efficiency initiatives; and supporting and developing local capital markets.

In Jordan for instance, last month, the Bank signed a US$ 30 million loan with Jordan District Energy to finance the construction of the country’s first district cooling and heating plant, at the Abdali Urban Regeneration development in the capital. This will help address acute energy shortages the Jordanians are daily faced with.

In May, in Egypt, we invested through a €126 million loan in the modernisation of the country’s railway system to improve journeys for millions of passengers on the country’s busy trains between Cairo and Alexandria.

Last June, we helped Tunisia expand international and intra-regional trade by providing a US$ 10 million trade finance facility to Banque Tuniso-Koweitienne (BTK). Together with BTK, we will reach out to Tunisian exporters and importers and help increase the volume of trade between Tunisia and its partner countries.

In Morocco, we are supporting the development of tourism, one of the country’s priority sectors, with a €10 million investment signed last month in Alliances Investment SA for the construction and operation of hotels in the country. The investment will make an important contribution to the local tourism sector by filling a gap in the 3 to 4 star hotel sector, thus strengthening a vital part of Morocco’s economy.

The EBRD has been very conscious since its start up in the SEMED region that we were the new and small kid on the block; there are many IFIs, such as the IDB, that have a long and rich experience of working in the region. In starting up in the region, the EBRD worked hard to ensure that it would collaborate with fellow IFIs, forming effective partnerships, co-financing projects, where each institution brings its own skills and experience, and each complements the efforts of the others.

In particular, I would like to highlight our relationship and partnership with the IDB with which we had already worked in other regions and which is a key player in the IFI world. The IDB has been extremely helpful in supporting the EBRD’s integration into the SEMED region. In particular:

Islamic finance is a new frontier for us and in this regard, we are very grateful to the IDB and its private-sector arm, ICD, to have hosted two EBRD secondees earlier this year (a senior banker and a senior counsel). These colleagues learnt a lot and returned energised by the experiences they gained in Jeddah.

In the context of the Deauville Partnership, we have been working together in response to calls for economic change in the region. The IFI Coordination Platform of the Deauville Partnership provides the ideal forum to do this. We succeeded the IDB in the role of the Secretariat of the IFI Coordination Platform in January this year. I must confess that the IDB left big shoes for the EBRD to fill, but IDB colleagues greatly helped our EBRD colleagues when handing over to us.

This year we were also pleased to co-finance the upgrade of the El Shabab and Damietta power plants in Egypt with the IDB. We are also looking into establishing an investment fund with ICD to support SMEs across the region. I am sure those projects are just the beginning of a successful cooperation in the SEMED, replicating in this region what we have achieved together in other common countries of operation such as Turkmenistan, Azerbaijan and Kazakhstan.

To conclude, Ladies and Gentlemen, while the region continues to face many difficult and complex challenges, we at EBRD have a lot of experience to draw from and many great partners to work with and learn from in the Southern and Eastern Mediterranean. We knew that transition would not be easy; progress is mixed so far in the Arab transition countries, just as the process was far from smooth in Central and Eastern Europe. Nevertheless, the EBRD’s focus remains clear: re-energising transition in our countries of operations to boost growth and enhancing our ability to respond effectively and swiftly to fast changing events.