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AfricaMay 2 2016

EBRD president celebrates 25 years of development

As the European Bank for Reconstruction and Development celebrates its silver anniversary, president Suma Chakrabarti tells Stefanie Linhardt why the bank is looking south to the Mediterranean and beyond in search of new opportunities.
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EBRD president celebrates 25 years of development

The European Bank for Reconstruction and Development (EBRD), the institution created to help central and eastern European countries transition into market-driven economies, is celebrating its 25-year anniversary. Over the years, the bank has made a strong impact across the region, despite at times having faced questions over its future. Yet, by adapting to ever-changing external realities, the EBRD has proved to be an important player in supporting transition, public sector development and private sector investment.

Over its quarter-century, the EBRD has invested over €100bn in more than 4500 projects across its recipient countries. Starting with just eight countries of operation in central and eastern Europe in 1991, the EBRD has broadened its mandate over the years in line with integration to have active investments in 36 countries.

Once the Czech Republic, Estonia, Latvia, Lithuania, Hungary, Poland, Slovakia and Slovenia joined the EU in 2004, steps were taken towards reducing the EBRD’s countries of operation. The financial crisis of 2008 delayed this, however, and so far only one country has 'graduated' from the EBRD: the Czech Republic in 2008.

The EBRD expanded its area of influence to include central Asian countries and Russia, which became its largest recipient of investment until 2014.

A new ally

The incumbent president of the EBRD and first British head of the institution, Suma Chakrabarti, did not have the easiest of introductions to the role. During his first term in office, from 2012 to 2016, he had to handle the conflict between Russia and Ukraine, which started in 2014, and the guidance from the EBRD’s shareholders to stop investing in Russia.

“What we have done in Russia is maintain a very strong and very skilled workforce [and we] have put them to work in two ways,” says Mr Chakrabarti. “One is to manage the [about €5.2bn] portfolio of existing projects, the ones that had already been approved and implemented [before the decision in July 2014]. The other is to utilise the workforce to help increase the annual business investment in central Asia, Turkey, Poland and also Ukraine.”

This shift of focus and resources to other countries of operation was also key from an operational perspective. With the EBRD being run on a commercial basis, the objective, apart from supporting growth in its recipient states, is to turn a profit – and 2014 was a challenging year.

For the first time since the financial crisis of 2008, the bank reported a loss – €600m net in 2014 – which was largely due to economic weakness in Russia and Ukraine. For 2015, Turkey replaced Russia as the bank's largest recipient of funds, and the EBRD reported expected 2015 net profits of €800m.

“Turkey has become our largest country of operations, [with] €1.9bn of investments last year,” says Mr Chakrabarti. “In Ukraine we have ramped up with another €1bn of investment last year and in Kazakhstan, which two or three years ago was rather stuck in terms of investment levels, we have again increased investment because reform there has really kick-started.”

Presidents of the EBRD

Southern expansion

The financial crisis and subsequent eurozone debt chaos uncovered a full-blown banking crisis in much of southern Europe and the need to support previous donor countries. Cyprus requested temporary assistance in 2014, followed by Greece in 2015.

“In Greece, we are starting off with the banking system,” says Mr Chakrabarti. “We have taken equity stakes in four systemic banks and we are also going to back that up with trade finance through these banks. [But] for Greece to really recover, we need [to invest in] those areas where Greece has a comparative advantage.”

These include tourism and the energy industry, where Mr Chakrabarti sees scope for Greece to take a leading role in southern Europe. The bank has so far invested in six projects worth €320m, including undisbursed commitments such as $70m of loans to Greek oil company Energean.

After the democratic uprisings of the Arab Spring in 2011, the EBRD started looking even further south. Since 2012, the southern and eastern Mediterranean countries of Egypt, Jordan, Morocco and Tunisia have received nearly €3.5bn in EBRD funds.

With some €1.7bn of cumulative EBRD investment across 33 projects, Egypt has so far seen the lion’s share of investment in the Middle East and north Africa region. The EBRD is seeking to help modernise the country’s financial sector, develop the agribusiness sector and municipal and infrastructure projects, while upgrading transport and telecommunications services.

The focus in Jordan and Morocco is on supporting sustainable energy, direct and indirect financing of private enterprises and promoting infrastructure reform as well as facilitating non-sovereign financing, with €532m and €948m, respectively, committed in the countries so far. The goal for Tunisia is similar but also includes restructuring and strengthening the financial sector and financing of private enterprises, as well as supporting energy efficiency.

A more international EBRD

Mr Chakrabarti has also made efforts to internationalise the EBRD’s workings with investors as well as member countries, looking to “build business development on a global scale, not just a European scale”. 

“I want us to do a lot more now with Asian, Gulf and North American businesses, who want to invest in our countries but don’t know them very well, and can then piggy-back on our knowledge and expertise both on a sector level and a country levels and can invest with us in a safe way,” he says.

To this end, the EBRD has opened offices in Tokyo and Washington, DC, and announced co-operation with China, which has been invited to join the bank as a shareholder. Mr Chakrabarti sees the Chinese involvement as “win-win-win” – enabling China to learn from the EBRD’s experience of making private sector development work in a multilateral environment, while adding additional firepower to the EBRD by bringing more Chinese entities, investors, banks and corporates to its countries of operation.

“Third – and I think most importantly – it is a win for our countries of operation because we have calculated that there is still a gap of about 40% to 50% in what China should be investing in our region,” he says. “At the EBRD we think there is an opportunity here, as a catalyst, to help these Chinese entities into the countries of operation to raise the investment levels much more.”

The EBRD is focusing on equity investments because a change in the shareholders of a company comes with scope to improve corporate governance standards, business decisions and opportunities for growth. The bank has invested some €5bn in equity stakes in more than 200 companies across its region, as well as additional resources in private equity funds.

“Equity always has the potential to make a greater transition impact than debt finance,” says Mr Chakrabarti.

In the bank’s Strategic and Capital Framework 2020 report, setting out its plans for the next four years, the EBRD highlights three priorities for its expertise in investment and policy advice: building institutions’ economic resilience in its countries of operation, which also includes the bank’s efforts to promote the inclusion of women in the workplace; integration into the global economy by supporting public and private infrastructure, but also by attracting global investors to take equity stakes in the region; and working on helping its recipient countries to meet global and regional challenges, such as food security and climate change.

Further change?

Putting aside all the developments the EBRD has gone through since 1991, 2016 could become a year of even more change for the institution. After Mr Chakrabarti’s four years in office as the sixth president of the EBRD, elections will take place this year. Mr Chakrabarti, the UK’s nominee, is running for re-election, and will be challenged by the governor of the National Bank of Poland, Marek Belka.

Mr Belka is the first nominee for election of the institution’s presidency who is a national of an EBRD country of operation, rather than a donor country. 

“The timing of the elections is symbolic,” says Mr Belka in his mission statement. “Electing a representative of a country of operation as EBRD president will be a clear sign of recognising our joint success: the bank as an institution which truly delivered advanced countries that are ready to share the leadership and responsibility of the highest management level, and last but not least, the EBRD beneficiaries that are capable of contributing to the bank’s further development. This would be a testament to the true success of transition.”

The elections will take place during the Annual Meeting of the EBRD in London on May 11. Whatever the result, Mr Chakrabarti and Mr Belka have pledged to honour by the priorities for the next four years set out in the 2020 framework.

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