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Early Transition Countries

By Katarzyna Kukula

When small projects have bigger impact

Among the many lessons learned since the EBRD’s establishment 25 years ago, one is that transition has not advanced evenly across the regions where the Bank invests. Some countries turned out to be front-runners in the process, especially those joining the European Union in the 2000s or the EU candidates. Others, however, progressed more slowly or got “stuck in transition”, as the 2013 Transition Report put it.

Many of these countries had emerged from the Soviet Union with a heavy legacy: state control had all but destroyed private entrepreneurship. The legal framework and business environment had to be built from scratch. Decades of under-investment had left infrastructure in urgent need of repair. Lack of exposure to the outside world resulted in poor integration and little foreign direct investment. The slow pace of democratic and legal reform as well as a lack of employment and business skills did not help make them more attractive as investment destinations.

All this increased the risk of investing in these countries and limited the private sector’s ability to access international capital.

The Early Transition Countries Initiative

To target these challenges, the EBRD launched the Early Transition Countries (ETC) Initiative in 2004 for countries facing the most significant transition challenges. These include: Armenia, Azerbaijan, Belarus, Georgia, the Kyrgyz Republic, Moldova, Tajikistan, Uzbekistan, and since 2006 Mongolia and Turkmenistan.

“We launched the initiative because it was the only way for the Bank to be useful in countries that were at an early stage of development,” says Olivier Descamps, for many years the EBRD Managing Director for the ETC region. “We had to change our approach. We had to go with small-scale investments. We had to go local. And we had to take a certain number of risks, and also reach out to donors, to pull it off,” he adds.

The ETC Initiative facilitated first and foremost the development of local businesses, vital infrastructure and the financial sector. Thanks to the Initiative, the Bank was able to increase the share of projects in these countries from 8 per cent of the total in 2002 to over 32 per cent in the period 2013-15.

The Early Transition Countries Fund

Donors’ support for the initiative was immediate and continuous from the beginning. Donors’ funds and input were essential to help the Bank mitigate the higher risks associated with transactions in the region and the relatively larger processing costs. In 2004, Canada, Finland, Germany, Ireland, Japan, Korea, Luxembourg, the Netherlands, Norway, Spain, Sweden, Switzerland, Taipei China and the United Kingdom formed the Early Transition Countries Fund.

The Fund became a flagship multi-donor vehicle which to date has mobilised over €93.6 million in contributions. Other significant donors to the ETC region are the European Union, the Swiss State Secretariat for Economic Affairs (SECO) and the US Treasury.

Thanks to donor support, constraints in project preparation and implementation, project affordability and regulatory environments can be overcome, skills can be transferred to clients and there is a better chance of delivering long-term, systemic impact.

Donors helped, for instance, to increase direct financing for small- and medium-sized enterprises (SMEs) and to strengthen the financial sector through local currency lending. This has a particularly strong impact as SMEs are often the main contributors to economic growth and job creation.

To support both local banks and their potential private sector clients, the EBRD also designed the Medium-Sized Co-Financing Facility (MCFF), which co-finances loans extended by local partner banks to selected enterprises and shares up to 50 per cent of their risk. In the ETC region, the MCFF is also supported by the ETC Fund through specific training programmes for credit officials of participating banks.

The EBRD and donors can look to a long list of achievements in the ETC region. They have set up investment councils (dialogue platforms between the private sector and authorities) and promoted stakeholder programmes in municipal projects. They have facilitated access to essential services (such as water supply, wastewater, solid waste management and district heating), delivered sustainable private-sector employment and helped to narrow gender and economic inclusion gaps.

Supporting countries at their early stages of development is as much about quality as about the volume of investments. The Bank is addressing the needs of these economies. Small projects, big impact – this is what the Early Transition Countries (ETC) Initiative has delivered with over 1,100 projects that have benefited millions of people.

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