Ten years ago, the EBRD was founded on a pair of simple ideas: democracies and market economies go hand in hand; and, thriving market economies could be built by private capital if the high levels of risk to private investors were mitigated.
A decade later there is a report card of progress from central Europe to central Asia to prove that the concept was right then, and will be right for the future. The EBRD - which was created as a publicly-owned project-financing bank - has spurred investment in virtually all sectors. It has invented tools and found innovative approaches to draw investment to countries and companies where investors would not have ventured without our help.
In the years ahead, the effectiveness of the EBRD will depend on the support that the international community offers the region. And, critically, it will depend on the reforms adopted by each of the countries in central and eastern Europe and the former Soviet Union.
Ten years of progress
It is little more than a decade since November 1989 when the Berlin Wall fell and the process of building a new political and economic system began. In a mere decade, the intelligence, energy and persistence of people from eastern Europe to central Asia have dismantled one society and constructed a different economy and approach.
The enormous progress today can be measured by the extent of free elections, free choice, ability to build a business and choose a job. The progress is uneven. No country in the region has completed the transition. Even the most advanced of the 10 candidates for accession to the European Union have not yet achieved complete global best practice.
But across the region, there have been huge efforts and great strides towards full transition. Yugoslavia is the most recent to join those efforts. The EBRD is proud to be the first of the international organisations to welcome Yugoslavia as a member and begin the work of transition in earnest - as it has in 26 other countries where transition is already advancing.
The EBRD has been an effective part of transition because of its unique design as a transparent public sector institution that uses private sector standards and tools of investment to finance projects. Its role is to reduce the risk for investors. The Russia crisis of 1998 was painful proof that real transition will never happen through the kind of euphoric huge private float of short-term capital that Russia had seen through the mid-1990s. Sustainable development needs long-term investment. EBRD fosters that long-term investment by mitigating the risk that private investors face.
EBRD invests in progress
Our involvement has been substantial. The Bank has committed EUR17.5bn since it was founded. It has mobilised another EUR44.5bn from other investors, for a total value of close to EUR6bn. EBRD investment accounts for 9 percent of all the foreign direct investment in the region in the past decade.
Those investments financed about 100 projects a year, helping to privatise state-owned enterprises, investing in private industry, fostering a small business sector. We have financed public and private infrastructure that keeps plants and corporations running and standards of living respectable. And we have built banking that will sustain an expanding private sector.
Many projects have been developed alongside local communities to invest in rational, environmentally safe development of natural resources. We have been instrumental in the decommissioning and clean-up of unsafe facilities. We have helped rebuild crucial sources of energy and bring on new renewable energy sources. The EBRD administers EUR1.5bn worth of funds for nuclear safety, including at Chernobyl and for decommissioning in Bulgaria, Lithuania and the Slovak Republic.
EBRD investments have grown in ten years of operations. Since 1995, the portfolio has doubled, to more than EUR12bn. Annual business volume last year rebounded to EUR2.7bn and net income of EUR153m. That brought the Bank back to positive reserves, after the setback of the Russia crisis. But despite that growth, the budget is 9% lower in real terms than it was in 1995. This strength of investment, combined with continuing efficiency of operations, are the product of an effective three-part combined force.
The staff of the Bank is exceptional. The quality and expertise of staff members, the experience we have collectively acquired over ten years and a decentralised organisation are all valuable assets.
Donors to our technical co-operation programme have been highly supportive. I must pause here to thank donor countries and the European Union for their contributions, which are indispensable in preparing the ground for financing of many projects - and especially environmental projects.
And finally, the Board of Directors lends support and guidance as well as providing clout and political comfort for the ambitious investment programme of this Bank. In particular, we have been grateful to the United Kingdom, host country to our headquarters, as well as to the city of London.
The management and the Board, together, share a commitment to high standards of governance and accountability, as well as outreach to local communities.
EBRD: a focused bank
I look forward to a future that is just as ambitious and every bit as challenging as our first decade has been. Those future plans, though, require no increase in our capital base for the coming five years. The portfolio has matured, affording significant ability to recycle capital. The Bank has the capacity to provide about EUR3.4bn of financing per year without any capital increase, according to the Capital Resources Review which we have just completed.
This is an appropriate basis for investment. This Bank will continue to rigorously respect the scope of our mandate: when an investment is viable for the private sector without the assistance of the EBRD, then we should evolve to other kinds of investment. We can develop new products, enter new sectors and work in new geographical areas. We can work within regions of countries and we envisage more investment that encompasses several countries to foster regional co-operation.
The central test for all investments is the market and the added-value that the EBRD can offer over what private investors would provide on their own. There will increasingly be products and sectors that no longer require our financing - the way we have exited the banking sector in Poland and Hungary. Guided by the market, we have also, at times, come back into sectors that we had exited because they have later lost their attractiveness to investors.
Evolving according to market signals
Using that test, the Bank will evolve. The emphasis will shift towards Russia, Ukraine, southeastern Europe, Central Asia and the Caucasus. But the Bank will nonetheless maintain its programme of investment in the central and east European countries in order to lend support to their efforts to join the European Union.
The nature of investment will also shift - with greater development of equity investments in some countries.
The EBRD will be involved in industrial restructuring that is key to developing efficient markets. Our role in financing will be complemented by helping to design restructurings to cause least harm to those affected. And there will be financing of new activities as well as more of the very positive investments that have already been undertaken in municipal infrastructure. Equally, there will be a focus on investment in disadvantaged localities, to support fair and balanced economic development within countries.
One of our most successful programmes will certainly continue to be financed in the future: support for small and medium enterprises. This Bank has contributed to the financing for 100,000 small businesses. That has brought enormous returns in entrepreneurial spirit, development of markets and in simply giving hope and optimism to so many.
Growth in the region
Today there is clear progress across the region, with economic growth across the countries of operation. Despite lower demand for exports in an expected slowing world economy with falling oil prices, the region will maintain growth rates, forecast at 3.7 percent, that are stronger than in much of the rest of the world.
While the high growth rates of last year will not be sustained in 2001, there is a healthy investment climate. Central and eastern European countries are firmly focused on western Europe and integration into the European Union. The CIS countries experienced strong expansion last year; a wide range of investment opportunities and continuing efforts to reform can keep this region attractive to investors. The refreshing promise of peace and stability in southeastern Europe offers prospects for new investment and trade.
The lessons of transition
Over ten years of investing in central and eastern Europe and the CIS, we have learned that there are some basic ingredients for durable transition.
First and foremost, the concept of the founders of this Bank - that democracy and a market economy are closely linked - is validated by results on the ground. Transition has been most effective where democracy has taken root best. It is essential for all countries to nurture the mechanisms that give real application to the principles of democracy. In compliance with its political mandate, the Bank brings to the attention of national authoritiescircumstances that may emerge that are not consistent with Article 1 of the Agreement.
Effective transition will be sensitive to the environment and to the concerns of local people. To build the future, it is important to repair the legacy of environmental neglect and abuse of the past. All of us must be involved, for there is much to be done. The environmental role of this Bank owes a great deal to our open and permanent dialogue with non-governmental organisations. We value that relationship and consultation plays an important part in shaping the choice and design of our investments.
Equally, we have learned that transition brings hardship as well as development. It would be wrong to conclude that negative social impact implies that the transition should not have happened. The perpetuation of the old system was not an option. Central planning and communism collapsed under the weight of their internal failures and contradictions.
Only sustainable economic growth can address widespread poverty. It is the role of this Bank to stimulate growth by building enterprises through investment. But on the way to growth, some people, some communities may endure suffering. In some countries the increase in poverty has been significant, public health indicators have declined, and the quality of education and training has deteriorated.
These are human problems that do not fall within our mandate or expertise. This Bank does make an important contribution to alleviating poverty through, for example, our extensive investments to support small business.But other international organisations are well equipped to develop social support systems and capacity building alongside governments and enterprises. There will be as much need, or more, in the future as in the past for that kind of help and we look forward to continuing our partnership with sister organisations to ensure that market and social development progress in tandem. As we end one decade and start the next, it will be crucial that the international community does not lose its focus on the real needs of the region.
The need for reform
The final lesson I would draw from 10 years of transition is one that I think has already been well understood. It is clear that the most successful transition is anchored in reforms which give investors confidence. These economies have enormous investment needs that can be satisfied only by the market. A thriving market requires careful attention to the legal and fiscal environment and the laws and regulations. Excellent government and corporate governance are the single most important factor to increase the effectiveness of our work at the EBRD. Reforms, and the confidence they bring, are key to building markets, bringing growth and ensuring returns on investment.
We are committed to accelerating the improvement of the investment climate through dialogue with national authorities. We conduct that policy dialogue both as a public institution and as the lead private investor in the region. To support some of our projects, we are looking at ways to build the institutions that bolster the marketplace, perhaps through new funding.
A wish for the future
Our vision of the decades ahead is of a region that will attract the investment that will fold it firmly into a global world. The EBRD will take its agenda of development financed by private investors further afield and into new areas of innovation. We will lead by taking risks and we will lead by example, insisting on international standards of corporate governance that will set local standards.
But success or failure in the transition will, in the end, be 'made at home', by the people of our countries of operations, their institutions, cultures, policies and hard work. They have proven with their perseverance that there is no success without hardship. We must help to make markets work well, but we must not be lulled into abandoning our commitment because we assume that the private sector is a panacea. Above all, we must never stop listening to the people who know so much about their own past and the most appropriate ways to craft a prosperous future.
Mr Lemierre is President of the European Bank for Reconstruction and Development in London.
