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Early Transition Countries initiative

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"We are committed to a custom-made approach to the ETCs", said Noreen Doyle

Jessica Irvine, Head of Europe and Central Asia, UK Department for International Development

Tom Adams, Deputy Coordinator of Assistance to Europe and Eurasia, US Department of State

Farmer, Azerbaijan. OSCE photo

Herdsman, Tajikistan. OSCE photo

Silk factory, Uzbekistan

Farm labourers, Central Asia. OSCE photo

International community rallies to support investment in poorest countries

Donors are expressing keen interest in providing financial aid to support EBRD investments in its seven poorest countries of operations under the Bank’s new ‘Early Transition Countries’ initiative.

Last week  representatives of 23 donor governments and international institutions - the World Bank, International Monetary Fund, United Nations Development Programme, Asian Development Bank, Organisation for Security and Co-operation in Europe, and United Nations Economic Commission for Europe – gathered at the EBRD’s invitation to discuss potential ‘technical cooperation’ assistance for the countries. These grants would finance experts to advise governments and businesses how to clear away hurdles to investment and growth, paving the way for increased financing through loans, equity investments and guarantees by the EBRD and others.

 “There was a broad endorsement by the international community for the EBRD’s strategy to promote growth in these poor countries,” said Fabrizio Saccomanni, EBRD Vice President for Risk Management.

Donor governments agreed with the country-by-country and sector-by-sector priorities set by the EBRD. In addition to the established bilateral programmes, through which major donors such as the EU and the US will continue their support, a new multilateral fund was endorsed with the firm commitment of the UK, Finland, Sweden and Switzerland. Other donors – Japan, Spain, Canada, Ireland, Taipei China and the Netherlands – also expressed strong interest and will consider taking part in this new Multidonors Fund. Implementation arrangements will be agreed with donors in the coming weeks.

The Early Transition Country (ETC) initiative is directed towards seven countries – Armenia, Azerbaijan, Georgia, Kyrgyz Republic, Moldova, Tajikistan and Uzbekistan – where the post-Soviet transition from command to market economies and democracies has been slowest. Half the population in these countries live below the poverty line.

To boost investment and the EBRD’s impact in those countries, “we have to rekindle the original spirit of the EBRD, which is to be a pioneer,” said Noreen Doyle, EBRD First Vice President.

Breaking the mould

The EBRD was created 13 years ago mainly to focus on the transition from command to market economies and private-sector development. But in the seven poorest countries it is clear that poverty is so deep and pervasive that building market economies requires a new approach, with more international coordination.

After more than a dozen years of working in the seven ETCs, the EBRD knows how challenging it is to do business there. Foreign investors and local entrepreneurs alike face poor infrastructure, inadequate banking services, corruption, lack of transparency in both government and corporate sectors, and immature commercial legal systems.

The Bank, with the full endorsement of its shareholders, is committed to a new approach based on:

• increased risk-taking while still observing the rules of sound banking. This means, for example, doing deals solely with local partners rather than depending on additional financing from foreign investors to spread the risk.
• using local rather than international law and accounting practices as the standards for transactions. This will decrease clients’ costs and test the robustness of local standards.
• strengthened co-ordination between the Bank’s small and medium enterprises lending operations, its agribusiness operations, and its advisory services to local businesses.
• recognising bankers for their creativity in deal-making, as a means of encouraging staff to do the smaller, more complex and difficult projects available in the ETCs.

Custom-made approach

 “We’re not reinventing the wheel or creating a new Bank but we are committed to a custom-made approach to the ETCs,” Ms Doyle said.

The Bank’s ETC priorities have been determined through another innovation -- a ‘thinking outside the box’ gathering of 65 EBRD bankers, economists, lawyers and risk management experts in Istanbul in June.

 “I don’t think we’ve ever brought so many staff members, from so many different disciplines, together for a retreat to gain common understanding and commitment in implementing a new Bank-wide initiative,” explains George Krivicky, head of the Bank’s new ETC banking team. “We had senior and junior people, from headquarters and from our offices in the region, with sectoral expertise ranging from agribusiness and infrastructure to small businesses lending and investing in larger financial institutions.”

Macro and micro approaches

In advance of the donor meeting, prospective donors were given concise descriptions of technical cooperation projects proposed for each country, with an explanation of how each fits into the relevant national strategy.

Some of the projects proposed to donors are aimed at creating acceptable business conditions for all investors, for example, through insolvency laws to establish the rights of creditors and debtors. Other requests for donor aid are more closely linked to particular EBRD investment proposals. Examples include:

• advising the Armenian government on regulations to govern renewable energy, a sector in which the EBRD has a number of investment projects under preparation.
• advising ETC commercial banks on managing small business clients and on trade finance. This advice is crucial if those banks are to boost credit availability to entrepreneurs.
• generally increasing the availability in the ETCs of the EBRD’s business advisory services for entrepreneurs -- the TurnAround Management Group.

The ETC initiative seeks in particular to make more investments in the €500,000 to €4 million range – a niche where credit is hard to come by in these countries, says Mr Krivicky. Requests will be made to donors to fund advisory services for medium-sized firms that would like to attract EBRD investment in these amounts, be it via trade finance, equity or direct lending.

The EBRD expects to treble the number of its investments in these countries over three years with a view to investing around €150 million annually. To accelerate institution building and skills development locally, the Bank is requesting that donors raise their annual technical cooperation grant funding for the ETCs from the current €10 million to €30 million.

Contact: George Krivicky
Director, ETC Initiative Team
Banking Department

25 June 2004