The case for multilateralism through private sector investment

By EBRD  Press Office
@ebrd

EBRD President Suma Chakrabarti lectures at Tsinghua University, Beijing

Delivered by: 

EBRD President Sir Suma Chakrabarti

Venue: 

Tsinghua University, Beijing, China

Event: 

Tsinghua Global Vision lecture

WATCH THE OPENING VIDEO

  1. Intro

Good afternoon

It is an enormous pleasure to be here at Tsinghua University today.

And it is a huge privilege to be hosted by my friend Zhu Min, a great economist and advocate of international institutions, here at one of China’s – and the world’s – foremost seats of learning.

Tsinghua’s commitment to educating global citizens who can grow into the leaders of tomorrow is one I find personally most inspiring.

And this university is, of course, a forum for intellectual debate of the very highest quality.

A setting in which we can all learn from each other.  

I might add here that the European Bank for Reconstruction and Development is another such institution.

We have learnt a lot from what is one of our newest members.

And I like to think that China too is learning some valuable lessons from its experience as a shareholder of our Bank – and from the sheer range of projects we are investing in.

You caught a glimpse of that in the video we have just watched.

Before I go on, allow me to thank the People’s Bank of China School of Finance, Schwarzman College and the Centre for Global Competence for inviting me to speak to you today.

The EBRD greatly values our partnership.

  1. My subject

Let me begin by outlining my theme today.

I want to examine our priority global development policy objectives, the Sustainable Development Goals – and the Paris Agreement - and the way private finance and the private sector will be absolutely central to their delivery.

Multilateral development banks such as the EBRD have a vital role to play in mobilising that private finance.

I will therefore also need to touch on the topic of our global development architecture and why, in particular, I believe that cooperation between Europe and China is so important. 

Finally, I will be looking in more detail at the building blocks that support our work, the individual projects that we finance, and the need to uphold the highest of standards in them.

  1. The EBRD

But before I do all that, allow me to say a few words about the European Bank for Reconstruction and Development or EBRD.

It is a multilateral institution which, ever since its founding nearly 30 years ago, has been a pioneer.

The rather unique circumstances of our birth, at the end of the Cold War in Europe, have certainly had a hand in this.

And they have ensured too that our identity is rather different from that of other international organisations.

First, we work only in countries committed to multi-party democracy, political pluralism and market economies, although we recognise that the 38 economies in which we operate apply those principles unevenly. 

Second, our constitution lays down that 60 percent of our lending must be to the private sector. That figure currently stands at 79 percent. 

And third, we are project-based, providing loans and equity to companies.

And thanks to that involvement in projects and our presence on the ground in the countries where we work, we know a lot about firms, what makes them successful and the different sectors of every economy in which we invest:

in the green economy;

in infrastructure connectivity;

in the financial sector;

and in small and medium-sized businesses.

Now, let me expand a bit on the status within the Bank of the more than three dozen countries where we work, our stakeholders.

They are all members of the Bank. That is to say that they own capital in it.

The Bank belongs to them. It is their EBRD.

This is an important principle of multilateralism: that economic development is a shared enterprise, not something imposed on one group of countries by another.

These 38 economies – from Central and Eastern Europe, Central Asia, Turkey, and the Southern and Eastern Mediterranean – are also part of the Silk Road Economic Belt.

So we at the EBRD feel a lot of affinity with the “Belt” of the “Belt and Road Initiative”.

But the EBRD is thoroughly multilateral, with shareholders from 69 countries – plus the European Union and the European Investment Bank – and from five continents.

The EU holds a controlling majority of shares and will continue to do so even after Brexit.

And so, as I never tire of saying, we are a global multilateral development bank, but one with a European heart.

And, although this was not the stated intention of our founders, history has granted us another significant role.

More and more, we find ourselves serving as a bridge between Europe and Asia.

Our Asian shareholders include Japan and Korea and have more recently been joined by such modern giants of the global economy as China and India.

The day that China joined the EBRD back in 2016 was a truly momentous one.

And certainly, whenever I visit Beijing, I do so with the strategically vital partnership between Europe and China uppermost in my mind.

Amidst the complexities of that relationship, there is a clear appreciation that we need, more than ever, to come together in support of the transition to the Green Economy and investment in high quality global connectivity.

For if we can combine the best of Europe with the best of China, we can make an enormous contribution to the achievement of global development policy objectives.

  1. The SDGs and where we are today

Let me now focus on the preeminent development challenge of our time.

The overall context for the EBRD’s work and indeed that of all the Multilateral Development Banks has now to be achieving the Sustainable Development Goals. 

Unlike their predecessors, the Millennium Development Goals, the Sustainable Development Goals were defined with much greater participation by developing countries and emerging markets themselves.

Crucially for the EBRD, they include economic outcomes and sectors where we, as well as others, have a comparative advantage.  

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

By now, everyone can see that we cannot just finance their delivery in the old ways.

Areas such as infrastructure and energy – and the overarching priority of combatting climate change - require investment from a range of sources far broader than domestic resources, grant funding and the public sector.

Estimates vary, but the United Nations has told us that the financing gap for infrastructure construction in developing countries amounts to US$ 2.5 trillion – every year.

This is infrastructure that would:

meet the human development needs of developing and emerging economies;

ensure that people in those societies can enjoy the opportunities those of us from more prosperous places take for granted;

and finance the historic transition to a green economy I mentioned earlier.

Yet in 2017 the world managed to invest only US$ 500 billion in such infrastructure: less than a quarter of what we need. 

More than four fifths of that sum came from scarce public finances. And we cannot expect much more from that quarter.

So the world desperately needs to leverage more private sector financing, from new sources outside the multilateral system, such as emerging financial and capital markets and pension and sovereign wealth funds.

The implications of this for the global development architecture are profound.

Such challenges are, not surprisingly, exercising some of development’s brightest minds. 

Last year’s excellent report by the G20 Eminent Persons Group on Global Financial Governance highlighted the need ‘to achieve an important shift in business models within the system as a whole so as to effectively catalyse private investments’.

And these sentiments were echoed in the recent deliberations of the EU’s Wise Persons Group, released only last month.

They want Europe’s development banks, one of them, the EBRD, to move faster and with even more purpose on our mission to achieve the Sustainable Development Goals.

They identified climate change as our ‘single most important global challenge’ because of its increasing impact on communities and the threat it represents to biodiversity, natural resources and the risk of pandemics and forced dislocation.

But they also underlined the need to get even more involved in Africa, to support inclusive growth and job creation there as well as low-carbon transition.

The Eminent Persons’ Group in particular coined a memorable phrase to illustrate this imperative.

‘To bend the arc of history, we must succeed in Africa,’ they said.

These are global challenges.

They are challenges for China and Europe, in particular.

And we can only succeed in overcoming such challenges by working together.

  1. The action plan

So what do we need to do?

There is no doubt in my mind that the EBRD has a very large role to play here.

Indeed, without waiting for the outcome of the two very impressive reports I have just cited, we have already been working on how to add even more value, how to draw on more of our capital and what that might mean for staffing and any changes to our governance.

Under adding value I include expanding our activity within the green economy and opening for business in Sub-Saharan Africa.

The work we have already done on this should allow our shareholders to take some very important decisions about our future next May.

We are also looking very hard at how we could mobilise new sources of finance. That includes Chinese finance.

We think there is a strong case for official institutions working much more intensively together, so with new development partners such as China Development Bank and the Export-Import Bank of China.

China’s outbound investment is broad and varied, and its capital markets and pension funds are growing fast.

There is a wide range of potential new partners for multilateral institutions such as the World Bank, the Asian Infrastructure Investment Bank and the EBRD, and we need to do more to develop those relationships.   

Of course, there is also a strong argument for Multilateral Development Banks forging new partnerships in other emerging economies, for example in India, and in the Gulf. And we are doing that too. 

Because in the end, if we can find the right projects, and the right vehicles, there is, actually, no shortage of money available for investing.

Indeed, there is a whole “Wall of Money”, towering over the world economy, which we could call on if we could find the right mechanisms to do so.

Overall, if we are to succeed, the development system will have to abide by two very important principles.

  1. First, everyone operating in this space needs to understand and promote a sound policy environment.

After nearly thirty years of work in sometimes challenging markets, the EBRD knows that financing on its own is not enough.

It must go hand in glove with creating an enabling investment environment and policy reforms.

And here I would highlight the power of strong human capital and good governance to attract and retain foreign direct investment.                                                                                                  

Indeed, I would urge you all to read our new Transition Report on this subject, entitled ‘Better Governance, Better Economies’, when it is published next week.

By good governance we mean authority, decision-making and accountability, and - at the centre of that - the quality of institutions and the processes they support.

At the EBRD we focus in particular on the importance of good corporate governance.

Actors such as the EBRD have an absolute duty to work with our partners to insist on high standards – and to do so in alliance with one another.

Not to do so is to risk creating more uncertainty for all, undermining competitiveness and worsening inequality by privileging members of the elite with the right connections over everyone else.  

And the consequences of that for economies and indeed the legitimacy of political systems can be very grave.

We sometimes hear discussion of the need to respect local standards and thereby not to impose standards from outside.

I strongly urge those who subscribe to this school of thought to think again.

We need, rather, to avoid imposing negative consequences through our investments.

If the prevailing local standards incur the risk of such consequences, we should shun them.

We should, instead, replace them with the very highest of standards out there, whatever their provenance.

  1. Beyond showing a united face on policy reform, such as raising standards of governance, the second principle multilateral and bilateral development banks need to observe is this:

We should all use market-based pricing which crowds in rather than crowds out the private sector.

Sometimes it is appropriate – even necessary - to subsidise investments to achieve specific policy or social objectives.

But we need to be very careful that we do so in such a way as to strengthen the market, and create capacity and incentives for sustainable investment from the private sector.   

If not, we are sabotaging the way the market works, actually harming the ability of our partner countries to attract the investments they need.                                                                  

If we can all work with a common approach to the policy environment and a market-oriented approach to pricing, then our cooperation will be healthy, and our competition will be healthy too: good news for shareholders, taxpayers and our partners.

And we can, I believe, secure this happy state of affairs if we work on the basis of openness, dialogue and transparency.

These are multilateral principles, and, as a major player in multilateral institutions, they are, I am sure, also China’s principles.

  1. A good news story

Ladies and gentlemen, I have been talking at some length about the challenges and how to overcome them in general terms.

I now want to change gear for a moment and focus on a specific example of how we are already putting these principles into action – and having significant impact as a result.

Come with me to Africa’s largest solar plant.  Some say the world’s largest solar plant.

Come with me to Benban in the Egyptian desert, and its six million panels stretching over 32 plots and 37 square kilometres, powering one million homes.

It is one of the real stars of the video we watched just now.

This mammoth project is, as of last month, now fully constructed, connected to the national grid and generating a reliable supply of green energy for North Africa’s largest economy.

‘Its location is magic,’ one of our partners says. Magic not least because it brings foreign investment to a region in particular need of employment opportunities.

Benban might be of particular interest to a Chinese audience because Industrial & Commercial Bank of China, ICBC, is one of the banks supporting the project and its solar panels, supplied at a very competitive price, also come from China.

But I also mention it today because it illustrates many characteristics of the approach we need to adopt if we are indeed to deliver the Sustainable Development Goals on time.

On Benban we worked together on policy reform, negotiating the regulatory framework and power purchase agreement with the Egyptian government for two years before we could start financing the project. 

We enabled the private sector to do its work: a world class Saudi sponsor, commercial banks from around the globe, and a wide range of international contractors.     

And, although we are the largest financier, we did all this within an open architecture that saw us working together with other development partners such as the Asian Infrastructure Investment Bank, the International Financial Corporation of the World Bank Group, the Netherlands’ Development Bank FMO and the Green Climate Fund, as well as many other international commercial partners.

Benban offers us a glimpse of the development finance of tomorrow.

But the model is already up and running today. 

  1. The importance of projects

One of the great strengths of the EBRD approach to development has been our focus on individual projects.

We have invested in more than 5,500, most of them on a rather more modest scale, since our creation.

We have combined that work on projects with significant involvement in policy reform as well – and turned that into another of our competitive advantages.

And yet I believe most strongly that policy initiatives should complement, but can never replace, the hard work our staff put into delivering high quality investments at the individual, project level.

Multilateral development banks such as the EBRD talk at length about the principles of open and competitive procurement, high environmental, social and governance standards and debt sustainability.

This is not empty rhetoric.

These principles really do reflect our values.

They are deeply held.

And these values are important because, only by respecting them, can we deliver projects that meet people’s needs.

However, a reality check is in order here.

I have dwelt at some length about the challenges the Sustainable Development Goals represent and how we need to change our response to them.  

But the fact is we face some of our greatest obstacles at the level of individual projects.

And at the same time it is at that level that we can also resolve many of our differences.

Every investment project is different, reflecting the diversity of markets, regulations, political economy and culture particular to each country.

That is why country knowledge is so critical and why the EBRD has so many offices – more than fifty of them – in the countries where we work.

Finding the solutions to each small problem in each project is the only way we can secure a flow of bankable projects that will attract private finance.

It is at the project level that we see that quality investment standards and sustainable commercial outcomes are two sides of the same coin.

If you economise on environmental, social or governance standards, you increase risk.

If you fail to conduct procurement properly, you lose value.

If you burden a country with too much debt, you can expect it to default on some of its loans.

And unless you exercise due diligence in your analysis of apolitical economy, prepare for some nasty surprises.

The good news is that investors the world over, including here in China, seem increasingly to appreciate these truths.

We saw this reflected in the measures on debt sustainability, green finance and anti-corruption measures adopted at the most recent Belt and Road Initiative Forum.

And they were important themes of the G20 quality infrastructure principles and the EU’s Europe-Asia Connectivity Strategy.

We can and must come together on sustainable projects that can deliver real impact.

This is how we will mobilise the resources and the international expertise to address the global challenges we confront together.

  1. Opportunities for China

We are already doing so with our many partners.

And we are doing so successfully in partnership with Chinese outbound investors, working on high quality projects in dozens of different countries, many of them participants in the Belt and Road Initiative.

Our partnership with AIIB goes from strength to strength. We were once the new kid on the Multilateral Development Banks block. Now they are.

We are sharing our experience and co-financing with them and running our own joint unit.

And we are working with other international initiatives China has proposed, such as the China-International Monetary Fund capacity development centre and the Multilateral Cooperation Centre for Development Finance.

The volume of China-EBRD business is on the up and up too. Our work with Chinese banks, contractors, trade finance and direct investment already amounts to more than US$1.1 billion.

There are many stand out highlights but for now I would just mention our project with Angel Yeast in Egypt, our first with a Chinese company in the corporate sector, and several solar power projects in Kazakhstan.

The last time I was in Beijing, a year ago, I co-hosted a major conference on investment in Central Asia with Deputy Governor Chen of the People’s Bank of China.

That was a historic event. We recognised that we are global partners with a responsibility to deliver the SDGs.

And China, the EU and the EBRD agreed to work together to increase both the quantity and the quality of investments in line with Central Asian countries’ priorities and with a particular focus on the private sector.

And I arrived here today straight from a roundtable with Chinese business leaders on green transition.

It is clear that China can make a major difference on climate change internationally.  

My exchanges with financial sector and corporate leaders left me in no doubt about that.

We hope China can shine an ever brighter light on the financing and technology of renewable energy.

And we are also confident that it can help other developing countries make their own transition away from dependence on coal.

Such dependence, we all know, is increasingly risky financially as well as damaging to the environment.

  1. The big picture

Ladies and gentlemen, I am optimistic about the future.

But at the same time we must be realistic about what lies ahead.

The sums of financing we need to raise are enormous.

The costs of inaction or inertia will be immense.

Time, to put it bluntly, is not on our side.

And we all know that multilateralism is under strain as never before.

The EBRD offers a very valuable model of one approach to these challenges.

I believe that its direct impact and influence can only grow.  

But it is a relatively small player, certainly compared to some of the institutions whose leaders I met this afternoon.

That size can sometimes be an advantage, allowing us to experiment with ideas that might gain less traction elsewhere.   And to move faster.

But none of us can solve our problems on our own.

So we look to our friends, allies and partners for help.

And we look to you and your generation, future Chinese and indeed global leaders, to lead the way. 

I therefore hope that some of you here today may yourselves join international organisations such as the EBRD and help us achieve our goals.

It will be up to you to apply the principles of multilateralism to foster sustainable and inclusive growth for our planet.

For that to happen, we will need to mobilise huge volumes of private finance in the interests of all - and to ensure that what it funds meets the very highest of standards.

I have every confidence that, together, we can do so.

Thank you very much.