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EBRD: The World's Easiest Bank To Criticize (Part 1)

  • Mark Baker

The European Bank for Reconstruction and Development (EBRD) is the largest lender by far to the transitional countries of Eastern Europe and the former Soviet Union. Yet the bank has been dogged since its inception by criticism that it's wasteful, ineffective, and unnecessary. Officials at the bank understandably see the matter differently and point to a string of successful deals in which their role, they say, was crucial. Ahead of the bank's annual meeting this weekend in Bucharest, RFE/RL correspondent Mark Baker filed this two-part series. The first part looks at criticisms of the bank. The second part will look at some of the bank's accomplishments and at its future.

Prague, 16 May 2002 (RFE/RL) -- Few financial institutions ever had a rockier start than the London-based European Bank for Reconstruction and Development (EBRD).

The bank was formed in 1991 with the laudable intention of helping countries in Eastern Europe and the former Soviet Union rebuild from decades of communist mismanagement and neglect. But since its inception, the bank been dogged by criticism that it's wasteful, ineffective, and counterproductive.

The British newspaper "Financial Times" struck the first blow during the bank's annual meeting in 1993. In a series of articles, the paper blasted the bank for spending lavishly on its London headquarters instead of funding projects in Eastern Europe.

The "FT" focused on expensive Italian marble that the bank had ordered for its head office at a cost of more than $1 million. At the time, the EBRD was spending twice as much on itself -- in salaries and furnishings -- than it was in Eastern Europe.

The marble scandal prompted changes, and then-President Jacques Attali was ultimately forced to step down. Yet the criticism continued.

To be sure, it was never going to be easy for the EBRD. The bank had to allocate resources among 27 former communist countries while balancing the preferences and petty jealousies of its more than 50 shareholders. These include the U.S., the European Union, and the transition countries themselves.

To make matters worse, regional development banks like the EBRD had become unfashionable by the early 1990s. There was concern that these types of banks -- which also exist in Asia, Africa, and Latin America -- unfairly compete with and "crowd out" private lenders. Development banks were seen as favoring projects that harmed the environment and served political rather than economic interests.

To satisfy critics, the EBRD adopted strict guidelines on the environment and pledged to operate according to what it called "sound banking principles."

The bank went a step further, pledging in its charter to refuse loans to regimes that were not democratically elected or responsive to their populations. The EBRD thus became the world's first development bank to make the promotion of democracy one of its aims.

In practice, though, the bank has found it difficult to reconcile these frequently conflicting demands, providing ample ammunition to its detractors.

Sam Vaknin is an economic adviser to the Macedonian government in Skopje. He is unsparing in his view that the EBRD has not worked. "The EBRD has failed on all counts. Instead of serving as a regional development bank with emphasis on small and medium-sized enterprises, entrepreneurship, corporate governance, property rights, and so on, instead of fostering a private sector where there was none, the bank [has] actually cast itself as a competing investment bank with subsidized financing."

Vaknin says the EBRD, by virtue of its size and access to governments, has pushed the private sector out of the market and taken the best projects for itself. He adds that the EBRD has failed in its mission to support small businesses by relying on local banks, which are often corrupt, to distribute the loans. He says the situation in Macedonia is typical: "Most of the money [the EBRD made available to small businesses in Macedonia] was channeled through five banks -- one of which went belly up, two of which are under criminal investigations. And the other two are without proper capital adequacy."

Noreen Doyle, the EBRD's first vice president and its top banker, disagrees. She says she's aware of concern that the EBRD may be "crowding out" private-sector lending but says the bank tries to work with -- not in competition with -- private lenders. "I have always been conscious that our role is not to crowd out private financial lenders or investors, and to complement what they will do, either by helping them to do it or by taking more or longer or different risks than they take. One of the early decisions that the EBRD took was not to provide financial advisory services for a fee because the private sector could do that [better than we could]."

Doyle says that in many of the bank's target countries, there are no private-sector lenders to crowd out. "If you take a country with both political and economic difficulties, like Georgia or Armenia, we would be very hard-pressed to find private sector lenders to take [very long-] term maturities."

Doyle also acknowledges the difficulties of working with local banks, but points to more than 200,000 loans the bank has made through its small-loans program since 1994.

That's not to say the bank has been perfect. Doyle admits the EBRD has made its share of mistakes over the years. The worst, she says, occurred during the Russian financial crisis in August 1998, when the country's banks went insolvent overnight. The EBRD lost millions of dollars and much of its Russia portfolio. "We certainly have made mistakes. Probably our most costly mistake was assuming in Russia, in the banking system, that we could determine which were the best banks based on financial due diligence and by knowing the management of the banks."

The Russian debacle and the steady stream of criticism have forced the bank to change its outlook and scale down its ambitions. There are no plans to change the marble on the wall, and bank officials no longer speak in terms of "reconstructing nations," as first bank president Attali once famously remarked, but rather of making loans.

Even Vaknin concedes the EBRD has made changes. He dates the turnaround from two years ago, when current President Jean Lemierre took office. "[The EBRD] has become much less grandiloquent and grandiose in its aspirations. It's more down-to-earth. It works directly with the private sector in a few countries. It has altered the internal composition of its portfolio by getting rid of prime assets -- mainly in the Czech Republic and Russia. It has refrained from lending to corrupt or to companies which are not properly governed -- which do not apply proper corporate governance, such as Gazprom in Russia. It has withstood political pressures from its masters -- or actually, its shareholders -- regarding a few dubious financing schemes, mainly in Ukraine. All in all, the bank has improved considerably over the last two years."

But he still wonders whether the bank was ever necessary in the first place.