Sir Suma Chakrabarti, EBRD President
Washington DC, USA
Organised by the Peterson Institute for International Economics
Multilateral institutions need fresh thinking and a flexible approach
Good evening, ladies and gentlemen.
Let me start by thanking the Peterson Institute and its President Adam Posen for hosting us this evening. It is a great honour to share the stage with such an accomplished line-up of discussants. I look forward to our exchange.
My starting point is that those who care about multilateral institutions – their owners and their managers – need to think afresh. I speak as someone who has been on both sides of that equation, first as a shareholder from my time in DfID in the UK Government, and now from within as EBRD President. There is nothing unique in that experience – my friends who are the heads of other Regional Development Banks can claim the same. But, although I am speaking just for myself tonight, that experience of both sides of the street does give us a vantage point in debates on the multilateral system.
The need for fresh thinking amounts to two key observations that are the subject of my talk tonight. First, there is a bias against change in the multilateral system that makes us slower than we should be to respond to shifting needs and opportunities. And second, applying that observation to the regional development banks, we too could develop a faster reaction time and catch waves when they are rising rather than falling. I go on in this speech to focus on lessons learned from the EBRD experience and on a new agenda for how regional development banks can become more effective if we listen and respond to the voices of our clients more closely than now.
Existing multilateral institutions and many of their key shareholders always question the need for new multi-nation bodies. It was the same when EBRD was first created and, more recently, when it expanded its geographical mandate. Whatever the source of the new demands, coming from regional political forces or specialised interest groups, they have one thing in common: a belief that the international system is not meeting the needs of the day. The unwillingness and inability of existing players to change and adapt quickly to meet shifting demands always leaves the multilateral system playing catch-up.
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I am sure that when the IADB, and then the Asian and African Development Banks were set up, in response to calls for greater regional empowerment than a global body could help to meet, there was disquiet in a number of major shareholder capitals. I know it was initially so when President Mitterrand conceived the EBRD. Why couldn’t the existing institutions do the job? Mitterrand’s answer – and that of those who supported him - was right: the existing institutions did not know Eastern Europe and the former Soviet Union any better, were not focused on the creation of market economies as the main spur to development, and did not have the political mandate of supporting only those countries committed to democracy and pluralism. And I know there was disquiet among some shareholders of the EBRD when it was suggested we take our experience and skills to Northern Africa in the wake of the Arab Spring.
It is the same today with the creation of the BRICS, or New Development, Bank and the mooted Asia Infrastructure Bank. The creation of these new bodies is also an implicit criticism of the existing multilateral system as being too slow to adapt to the shifting geo-political power structures and to the development needs of emerging economies.
If the system is slow to respond or downright hostile to the creation of new multilateral institutions, then it is also sometimes slow to allow existing bodies to adapt their focus, their practices and their approach to shifting needs on the ground. Partly because some shareholders are not close enough to the action on the ground to fully grasp how demands and priorities are changing. Partly because of vested interests and incentives within the existing institutions to keep doing more of the same – the new may be inconvenient and always seems more risky. And partly because some of the changes may require changes in the constitutions of multilateral institutions that are too painful and time consuming to agree among the many shareholders.
There is therefore an innate bias against rapid change in all of our institutions. A good example of the result of this bias was the creation of the specialised institutions in health and climate change in the last decade and a half. If existing bodies don’t change quickly enough, then new ones grow to fill the space.
We in EBRD have had to shake off the conservative bias at various points when it comes to what we do and where we do it. Our geographic remit has widened and the original instruments and focus of EBRD’s activities have shifted over time, from supporting privatisation and offering pre-privatisation investment at the early stage of transition in economies with very large state sectors, to focussing more sub-sovereign lending to municipal companies to improve utility services, improving access to finance for SMEs, financing sustainable energy projects and local capital market development, and more recently supporting private health care investment and female entrepreneurs.
At each stage, although the organisation has successfully moved on, there has been an internal struggle and one with some of our shareholders to validate the need for any change. It has required the support of key shareholders, in which the US has often been prominent, and some senior managers who combine vision with extraordinary reserves of patience to take on those who – I caricature, but not a lot – say the EBRD does not need to change. The battle over whether EBRD should involve itself in projects in which inclusion, in particular gender, play a part is a recent case in point. All research shows that inclusion is an important part of developing the market economy – the heart of EBRD’s mandate – but it was an internal and external struggle to establish that EBRD should involve itself in such projects.
So I start with a general appeal to the owners and managers (like me) of multilateral institutions – we need to be much more open to responding rapidly to demand from our clients – recipient countries or partner companies - and much less prone to keeping things as they are.
What does this appeal mean for the regional development banks going forward? Let me address this from the viewpoint of experience of the EBRD. What lessons have we in EBRD learned that might be useful to a debate about the future of regional development banks?
One thing we learned is that moving into new arenas, and be successful in them, required that we look carefully at what the recipient countries need, what we can bring to the table and where our particular value lies relative to others. For example, when EBRD was asked by its shareholders to expand operations into Mongolia, Turkey, and later North Africa, we knew we were moving into territory where other institutions had more local knowledge, well-developed relationships, and experience. There was no sense in our trying to replicate the work they did, and our shareholders weren’t asking us to. But at the same time, we needed to leverage the experience of our peer institutions on the ground.
First, we cooperated closely with those who knew the territory well. The African Development Bank was both generous and instrumental in sharing their expertise and knowledge with us as we worked to get up to speed in our new countries of operation in North Africa.
Second, we differentiated our work by focusing on our private sector business model. This is a labour-intensive relationship-building model that bears fruits only after a great deal of effort is put into studying the local market, undertaking due diligence, and meeting clients, one at a time.
The exercise also gave rise to a central observation, one that may seem obvious but that all too rarely is. The lens through which we should approach a new agenda for RDBs – Regional Multilateral Development Banks – is that of the recipient countries. That is the correct lens. It is the demand rather than the supply side which ought to be in the driving seat: it is recipient countries where priorities are recognised and defined, and the multilateral system should tailor itself flexibly so it best delivers on these priorities.
The geographical division of the RDBs is clear and well understood, and it can be a great strength of the multilateral system. Focusing our operations on a targeted region allows us to ground our work in a robust local presence, nurture long-term relationships and know our markets so that we can offer greater value to clients and donors, and effectively engage policymakers.
Less appreciated outside of the institutions themselves is how this geographic division and the differences in mandate and ownership of MDBs give rise to different niches of expertise. We each have different and complementary sets of skills. Our regions present their own challenges and have shaped our abilities.
Some of our institutions have particular expertise operating in fragile and conflicted-affected states. Others have spent time developing innovative mechanisms to reach the rural poor or instruments for bottom-of-the-pyramid entrepreneurs. Some are experienced in local capital markets development, financial engineering and structured products. Others have invested in incubators for innovation or higher-risk experimentation, pushing the boundaries of how we operate.
If that is the picture of our different skills sets, how can we maximise our impact? What would recipient countries, who are less interested in territorial behaviour and more interested in utilising those skills to best effect on the ground, want the regional development banks to do. A lifetime of working with recipient countries suggests an agenda for change for regional development banks.
I start with a point of principle. I believe most recipient countries are less hung up on geographical boundaries between the regional banks than are the main owners and some of the managers. The recipients I speak to would say that, in certain circumstances, these skills and tools and pockets of deep, specialized expertise, should be shared across our regions. That is how a global enterprise would operate across regional divisions in response to demand. But even though the regional MDBs have many of the same owners we find it hard to do so. Right now, the boundaries to those exchanges are often forbidding, and we struggle to identify viable mechanisms to tap into one another’s expertise horizontally.
This is not simply a question of better coordination. This is about building into our existing geographic architecture selective cross-cutting mechanisms that allow a more flexible skills-based architecture.
Why does this matter? The needs that our recipient countries are tackling now are not the ones that had been envisioned in 1945, 1966, or 1991. We are grappling as a global community with climate change, with the particular development challenges of middle income countries still pockmarked with areas in extreme poverty, with high youth unemployment, with the complex task of channeling education into innovation, countless municipalities in need of functioning utilities and modern information technology infrastructure. And we are grappling with all of this at a time of ever scarcer public resources.
The same geographic division that has helped MDBs be so effective in their markets and to hone tools to tackle some of these challenges, also hinders us from sharing those tools horizontally when needed. We need to make better use of what we have, and we need mechanisms beyond working groups and coordination to tap into one another’s expertise. Surely, that is how a recipient country would organise the multilateral system if it had its way.
What are some ways in which this could work? Let me present some examples that we in EBRD have been developing and others that we can think about for the future. These ideas are grounded in what our recipient countries are telling us they want from the multilateral system – their view of the “new multilateralism”.
The first concrete item on the agenda for change demanded by recipients would be in the area of technology transfer. This is one area where EBRD is already experimenting. Over the years EBRD has worked on a private sector approach to climate change and energy efficiency investments. In the course of this time, we have developed a great deal of technical expertise in establishing and scaling-up Sustainable Energy Financing Facilities. In essence, this is a tool that allows us to structure credit lines to local banks along with a carefully calibrated incentive structure and energy audits so that the local banks can and will on-lend for energy efficiency and renewable energy loans in their communities. We have tested and refined this model with 80 banks in 19 countries, and they in turn have financed over 55,000 loans for industrial, commercial, and residential energy efficiency projects. But of course we know that the demand for this type of financing goes well beyond our region of operations.
Therefore we are pursuing a vision to transfer that model and mechanism to partners – both our peer regional development banks and national development banks – who do have the mandate to invest in and operate in other parts of the world. The Global Environmental Facility has given us the funding to kick-start this approach. We will provide the technical assistance and guidance on transferring these tools into the local banking and regulatory environment, and partner institutions implement and finance the resulting projects.
In the same way, EBRD could benefit from very particular forms of expertise that others have developed – for example, a mechanism for health sector interventions, a new area for us.
The second item on the agenda for change from recipient countries that want RDBs to maximise their impact and be less concerned with territorial behaviour would be to consider creating joint ventures between the regional development banks. Why not find a structure that allows us to collaborate with peers from other institutions in order to translate a solution into a new region and combine our institutions’ know-how and financing? An established joint venture structure would give us the flexibility to tap into proven, successful tools and staff and financial resources without having to recreate them from scratch in every region.
The third item on the wish list of change from the emerging markets that EBRD works with would include the creation, at the global level, of cross-cutting platforms that bring together expertise on a particular development challenge. This can be another powerful means of collaborating across boundaries. Climate change is perhaps the purest example of a global challenge for which we need all possible road-tested tools available across all regions. And the climate agenda has perhaps made more progress than most other global challenges in focusing our resources and building the sort of cross-cutting mechanisms, funds and facilities that we need. Partnerships such as the Global Environment Facility help us to peer across geographic barriers and share knowledge, funding, and expertise across institutions.
The same sort of cross-cutting mechanisms are now being devised for infrastructure investments, spurred by the Australian G20 Presidency and their focus on addressing the global infrastructure gap. The G20 forum and the infrastructure platforms that will be created as a result have already forged extremely useful partnerships across regions: from MDBs to institutional investors to governments and corporations. We are already seeing concrete results of this cooperation. MDBs got the message loud and clear from infrastructure investors: the problem is not a lack of finance; the problem is that we don’t have bankable, creditworthy infrastructure projects with transparent procurement practices to invest in. And that is why MDBs have spent the last year creating new infrastructure project preparation facilities or infrastructure funds precisely as a result of these conversations.
There is enormous scope for MDBs to look at possibilities following these types of models. All of these models help build flexibility into our multilateral architecture, and channels for concrete collaboration without abandoning or foregoing the benefits that come from regional specialization.
My fourth and last item on the agenda for change from the recipient country viewpoint may, in fact, be the most radical. Imagine yourself to be the Finance Minister in a recipient country where a number of regional development banks are operating. Each of these banks will need to work up a country strategy that fits its mandate and skills. You, the Finance Minister, will want a set of RDB strategies for your country that match your long-term development strategy. You will also want to minimise the unnecessary transaction costs that are imposed by all these multilaterals asking very similar questions. So why not synchronise the timing of these country strategies and why not draft one country strategy covering all the RDBs and respecting the different mandates? Why not? Because I suspect the vested interests of the different multilaterals makes it difficult to even think about such a nirvana. I would like, before I finish my career in development, to see if we can at least pilot such an idea.
My intention tonight has been to consider a different frame for the way we think of multilateral development banks and how they can contribute to development priorities. There are, no doubt, important questions to ask as new MDBs establish themselves in a system that has tried to harmonize its operational and governance standards.
But among those questions I hope we can ask are what skills and approaches these institutions will bring into the mix and how we can incorporate them into horizontal structures of collaboration.
We must not lose sight of the fact that the resources of development banks are still a drop in the ocean compared to global financial flows and global development needs. The New Multilateralism is about how to ensure we leverage our institutional knowledge for the global good, and in the true interests of our partner recipient countries.
And, as I said at the beginning, we can only seize this new agenda if we challenge head on the assumption that business as usual is sufficient. Our countries of operation are telling us that it is not. They deserve better. We are doing a good job but the regional development banks can do an even better job if we respond rapidly to this agenda for change.