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| Jean Lemierre: president of the EBRD says its fundamental principles are not contradictory. |
After making mistakes early in its life – think marble floors in its London HQ and losses in Russia – the European Bank for Reconstruction and Development has forged a role for itself as one of the most important market participants in the central and eastern European region. It is the largest CEE private-equity investor, is involved in the biggest deals, and is the most active and most prominent multilateral. Indeed, the European Investment Bank, which is far larger than the EBRD and is a shareholder in it, is quietly envious of the amount of publicity the younger institution gets.
Its distinct culture combines the dynamism and decent salaries of the private sector with the idealism of, say, the Department for International Development. This culture is a product of the EBRD's unique mandate, the brain-child of its creator, French philosopher Jacques Attali. It is a public-sector institution dedicated to promoting private-sector activity.
Today, 12 years after it was set up, the bank faces two key challenges. First, now that central European countries are acceding to the EU, is it time for it to accept that these countries have made the transition to free market democracies, and that the bank's work is finished there? Secondly, as the bank moves east into central Asia, is it attempting the impossible in trying to get these states to move to free market multi-party democracies?
Contradictory principles?
Under its principle of additionality, the EBRD is meant to work only in areas where the private sector won't go. Under another principle of its mandate, it is supposed to operate only under good banking principles. Aren't these two principles mutually contradictory?
Putting this question to EBRD president Jean Lemierre (pictured above) in his office in the City of London almost derails our interview before it has started. "I would have thought 12 years of the bank's existence have answered this question," he says. "We have proved it is not a contradiction. It is the way of the future. I don't understand this question. Well, I do understand it, but it's not sensible."
The way the EBRD gets around the apparent contradiction is to act as a catalyst. It goes into areas where the market is reluctant to go, and pulls in the private sector after it. Two examples of the success of this approach are the central European private-equity market and the eastern European financial sector.
The bank played a central role in getting private equity off the ground in eastern Europe in the mid-1990s. One private-equity investor says: "Countless early funds in the mid-1990s wouldn't have been set up without EBRD money. It was only the severe due diligence that the EBRD undertook that gave other investors the confidence to join these funds."
The CEE private-equity market is now growing in maturity, with some companies setting up their fourth or fifth fund, and new names are poised to enter the market in May 2004, when a number of central European countries accede to the EU.
More evidence of the success of the EBRD's approach is the strength of the banking sector in eastern Europe. In the mid-1990s, it took equity stakes in many central European banks in preparation for their privatization. Adrian Walker, head of syndication for financial institutions and corporates at Standard Bank, says: "Its equity investments helped give these banks commercial discipline and thus made them more attractive to foreign investors. Its role in that sector is one of its big successes." Foreign banks now own around 60% of all banking assets in CEE, excluding Russia.
The EBRD is now performing a similarly important role as a catalyst in Russia and southeastern Europe. In the past few months, for example, it made a e90 million equity investment in Banca Comerciala Romana, the biggest bank in Romania, to help prepare it for privatization. When Euromoney suggests that a bank as profitable as BCR should be able to find investors on its own, this again strikes a wrong note with Lemierre. "Give me their names," he says. "Don't listen to too many people. I'm serious. When I see journalists like you saying people are ready to buy... Who? If people say they are ready, call me immediately."
EBRD is also working with the Russian government to prepare the privatization of Vneshtorgbank.
And in the Balkans it is also taking the markets where they had been reluctant to go. For example, in December it helped arrange the first syndicated loan to Bosnia and Herzegovina – a $45 million loan to RZB's BH subsidiary, which involved such unlikely participants as the State Bank of India and American Express Bank. It is also helping to prepare the first big privatization in BH – telecom utility Telecom Srpske.
In the debt markets, the EBRD is no longer active in sovereign borrowing, where countries can now access the long-term bond markets without its assistance. But it is helping, for example, Russian companies get long-term loan financing. Noreen Doyle, first vice-president of the EBRD, says: "We've been able to syndicate both oil and non-oil financing and bring lenders into even seven-year structures, where the longest maturity available without the EBRD is only three years, even for the best oil and gas names."
The bank is able to syndicate longer maturities to commercial banks because its loans carry a special contract under which they will not be subject to any state moratorium – a clause that was crash-tested during the Russian crisis. It is now helping to push out the maturities in rouble bonds with a programme of issues that began in the first quarter of 2003.
Should it be in these countries at all? According to its mandate, the EBRD should only work in countries where transition is not complete. If it is active in a country, that country is not yet a fully functioning free-market democracy. The bank's presence is a sign of dysfunction. So might it not make sense to make central European countries graduate, to acknowledge that they have successfully made the transition?