Tackling corruption is key to supporting transition

Wider, inclusive, open and collaborative approach is key, says EBRD President

Ladies and Gentlemen

I am particularly grateful to have this opportunity to speak to the IBA’s Anti-Corruption Conference this year, at a time when the fight against corruption is being taken to a higher level at the European Bank for Reconstruction and Development.

An international, state-owned institution that invests primarily in the private sector, the EBRD has been working for over two decades in high risk countries where corruption is often an unpalatable but unavoidable fact of life.

We began by focusing on Central and Eastern Europe and the former Soviet Union. Our investment remit now runs from Casablanca to Vladivostok, having taken in Mongolia, Turkey and four emerging democracies in the Middle East and North Africa following the Arab Spring.

When I travel to many of these countries, I hear first-hand the tales of low-level corruption that are part of daily life – informal fees that are paid to secure education or medical treatment or to overcome a plethora of bureaucratic hurdles. They have come to be accepted as the norm - a social contract for survival.

Why is fighting corruption crucial for the transition process?

But it is of course as an investor that we at the EBRD come across high-level corruption in our interaction with businesses, as we carry out our mandate to modernise economies and to introduce standards that will help countries integrate more fully into the global economy.

From an investor’s perspective, corruption means less respect for contractual rights, and a constant diversion of human and capital resources from their most efficient use. Corruption squanders talent and precious resources. It means a much higher cost of doing business, and, at the same time, greater uncertainty as regards the outcome of the investment. It makes the assessment of the risk-reward ratio an extremely difficult exercise – and purely and simply scares most investors away.

As such, a crucial element, in the process of transition to well-functioning market economies, is the development of an environment where judicial regulation is both fair and efficient, and where respect for the rule of law is upheld.

So, what does the EBRD do, as part of its transition mandate, to tackle corruption in the countries where it operates?

What does the EBRD do? (1) Demonstrating the highest standards of integrity in its projects

We first and foremost act via our investments. In all our projects, we aim to promote the highest possible standards of governance, integrity and transparency among the companies in which we invest.

In this endeavour, we are backed by a project-level anti-corruption strategy that relies on four key principles – prevention, detection, investigation and enforcement. We of course place a very strong emphasis on prevention, and each and every one of our projects is subject to particularly robust Integrity Due Diligence.

But we know only too well that no system is foolproof and that the response to those cases that do arise must be swift and decisive. That is why we have joined with other International financial institutions to establish a process of cross-debarment of corrupt companies. This has become a much greater deterrent to corruption.

Looking just at our own projects, the EBRD’s track record on preventing corruption is very healthy. The institution I head is now investing in some 400 projects a year worth about €9 billion. We have financed nearly 4,000 projects since the Bank was founded in 1991.

And in all that time investigations into alleged corruption in our projects have often revealed more incompetence and mismanagement than outright corruption. In fact, there has not been one single case where we have had to exercise our contractual remedies to exit loan agreements ahead of time because of corruption. And there has only been one case of an EBRD debarment -- of a contractor who secured one of our loans through fraud.

At the same time, there are very many cases of our having worked successfully with companies where the roll-out of higher corporate governance, ethics and compliance standards has been a condition of our lending.

And when we are investing with local authorities in the municipal sector, we insist on procurement standards that often go well beyond national norms.

So that is the view on a micro level, as seen through the prism of the EBRD’s many projects up to now.

What does the EBRD do? (2) Supporting judicial reform and capacity building

At a broader level, that goes beyond our individual investments, we also engage in policy dialogue to try to strengthen judicial systems that help build up defences against corruption.

The EBRD’s Legal Transition Programme has a team of lawyers working in many of our countries of operations to improve the investment climate by helping create a transparent and predictable legal environment.

Via training programmes and in its dialogue with the relevant judicial bodies the team has helped put in place investor-friendly legal reforms. In the Kyrgyz Republic, the Bank introduced a new transparent process for selecting and training candidate judges, whereby positions are now advertised and candidates tested on-line: selection is on merit. Elsewhere, training projects have helped build judges’ knowledge and effectiveness, making them more resistant to improper influences.

Corruption is a growing concern in our region…

But, despite all these efforts at project level and in the legal sector, can we in all honesty chalk up our progress against corruption as a success? Can we speak of real progress if many – in fact more than 50 per cent -- of the countries where we invest are still languishing in the bottom half of Transparency International’s Corruption Perception Index?

It would be naïve to assume that corruption is the sole deterrent to Foreign Direct Investment in emerging Europe or anywhere else for that matter. Fighting corruption is one amongst a whole mosaic of reforms that need to be put in place to create stable conditions for investment.

We cannot and must not, however, ignore the growing anecdotal evidence which tells us that corruption is rising, not falling, as a key deterrent to doing business in the countries where the EBRD is active.

EBRD bankers say partner corporations are increasingly citing corruption as a reason to steer clear of our region, partly also against a backdrop of stricter enforcement of national legislation such as the Anti-Bribery Act in the UK and Foreign Corrupt Practices Act in the United States.

…at a time when the case for fighting corruption is growing bigger and bigger

This is especially worrying as this corruption-linked risk aversion is coming at a time when foreign investment is needed more than ever in the EBRD regions.

Virtually all the countries where the EBRD invests are still feeling the effects of a global economic crisis that is now more than five years old.

Economic conditions have been deteriorating in our traditional countries of operations – the former communist region – and also in the new Arab democracies, where legacy issues from past administrations and residual vested interests provide a fertile breeding ground for high-level integrity challenges.

What more can the EBRD do? (1) Act at grass roots level and spread out

As I mentioned earlier, we have robust procedures that protect our projects. But what good in the long term is an oasis of corruption-free EBRD projects, when the rest of the private sector faces corrupt practices day in, day out? What more can we do?

The first answer is to spread our wings and work directly with even more companies. If we do so, best practices and standards will gain even more visibility, and have an even greater demonstration effect.

This is one of the reasons why the EBRD is moving to increase its lending to small and medium sized enterprises, that have perhaps the greatest potential to create both jobs and growth opportunities for the future.

By working more intensely with the SME sector, we can step up the fight against corruption at grass roots level, raising governance standards in individual companies and in their supply chains, but also standing alongside our clients as a trusted partner in the face of integrity threats.

What more can the EBRD do? (2) Create platforms, join forces with others and front up

But this is not enough. The poor performance of our countries in the various corruption league tables shows that individual, clean projects do not necessarily translate into broader changes in practices.

In fact, our region is regarded as having fallen behind other emerging regions in developing instruments, institutions and processes for tackling corruption.

What is somehow missing, in most of our countries, are those platforms that can make the link between individual companies, and those in charge of the broader policies and political agenda – those who set the tone. What is also missing are people and institutions able and willing to use these platforms to front up and speak out.

The EBRD’s approach so far has been to talk about systemic corruption in private with the governments of our countries of operation. At least it was until February when I felt we had no option – because we were making no progress – but to go public during my visit on the corruption problem in Ukraine.

Ukraine is situated geographically, politically and economically at a crossroads. In the atmosphere of continued economic despondency, Ukraine stands out as being particularly vulnerable to the double impact of the slowdown, both in the Eurozone to the west and in Russia to the east.

At the same time, although it is by no means alone in the extent to which it faces serious integrity issues and widespread corruption, Ukraine is a country where the problem is most definitely resulting in growing investor reluctance.

This is a matter of particular concern to the EBRD given the importance of our role in Ukraine. The EBRD has typically been investing close to €1 billion a year in the country. But maintaining such levels of financing will be difficult, if not impossible, unless the question of corruption is tackled more aggressively.

The Ukraine Anti-Corruption Initiative

For this reason, we are working with the Ukrainian authorities to launch a Ukrainian Anti-Corruption Initiative, which brings together representatives of the Ukrainian government, business associations and international financial institutions active in the country, including the EBRD.

Work is ongoing – we had a number of meetings last week in Kiev to discuss the details of this initiative. The Basel Institute is helping us in this effort. Professor Mark Pieth, who I believe gave a speech yesterday at this conference, is leading the process, together with our team on the ground.

This is not, of course, the first effort to tackle the problem of corruption in a country like Ukraine. But what is new here, at least for our region, is the collaborative nature of this response. We are working on a Memorandum of Understanding that will set out a series of strict principles and commitments that bind in all of the parties involved. Not only the Ukrainian government, but also, crucially, companies and international financial institutions. This can only be a two-way, or actually in this case a three-way commitment and engagement.

One of the concrete commitments should be the creation of a business Ombudsman who will assist businesses to resolve complaints of unfair practices.

More work still has to be undertaken before all the elements of the Initiative are in place. But we are very pleased that the Ukrainian authorities have fully embraced the Initiative at the very highest political level and are determined to make it bite.

Concluding remarks

At the EBRD, we are convinced that this wider, inclusive, open and collaborative approach has now to be the way forward – not just in Ukraine but elsewhere among emerging economies in our regions.

It has become all too clear that we have to go beyond the micro approach that defends the integrity of our own projects if we want to make serious progress in tackling corruption at a more macro level. We need to be ambitious in our efforts, and look at best practice in other parts of the world.

We stand ready to step up our efforts to help fight corruption in our region – and by doing so support the transition to more open, more efficient, more accountable market economies and democracies.

Thank you for listening. I am now happy to take your questions.