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Europe: After A Slow Start, The EBRD Builds Market Economies

London, 11 November 1997 (RFE/RL) -- Recovered from the scandal that marked its early years, the European Bank for Reconstruction and Development (EBRD) has emerged as one of the most significant institutions helping the Eastern reforming countries build market economies.

The London-based EBRD, founded in 1991, has so far approved (as of December 31, 1996) spending of $11.4 billion on private and public projects in 26 countries of Central and Eastern Europe, the Baltic states and the Commonwealth of Independent States (CIS). Its activities encourage large-scale privatization, help develop financial institutions, improve energy and transport facilities, and lend support to small businesses. Last year, the EBRD approved 119 major projects across the region.

The idea of an Eastern development bank was conceived by a brilliant French intellectual, Jacques Attali, after the 1989 fall of the Berlin Wall. Attali "sold" the idea to the late President Francois Mitterrand who, in turn, persuaded Western governments to provide funding. Initially, the proposal met skepticism from critics who said there was no need for a new international bank -- or a new bureaucracy -- since existing institutions such as the World Bank and the International Financing Corporation (the private-sector arm of the World Bank) could handle the job.

In the event, the EBRD was launched with the support of 40 nations from east and west. Its largest shareholders were the United States and the 12 members of the European Community, the predecessor of the European Union. In a reported behind-the-scenes trade-off between France and Britain, the job of president was given to a Frenchman -- Attali himself -- while London won the prize of its headquarters.

The bank was given a specific mandate to promote private-sector development in nations committed to democratic politics and market economics. The U.S. pressed a requirement that 60 percent of its resources must be devoted to the private sector.

Attali proved to be a "high-profile" president who was widely credited for his perceptive analyses of the problems facing the former communist countries. But he and the bank became the focus of unfavorable publicity when it emerged in 1993 -- three years after its foundation -- that the EBRD had spent twice as much on its running costs and offices as on loans and investments to the east. Attali was forced to resign in June 1993 after revelations of over-spending, including the chartering of private jets and lavish staff parties.

At the time, critics also complained that the EBRD was too cautious, slow-moving and remote from the Eastern countries, and that it was over-bureaucratic. The EBRD's international Board of Governors chose another Frenchman as the new President: Jacques de Larosiere, a former head of the International Monetary Fund and of the Bank of France .

In contrast to the flamboyant Attali, De Larosiere, who will step down next January after almost five years in the job, is very much the "professional banker." Within days of taking office, he launched a bank-wide economy drive, ordered a freeze on the hiring of new London-based personnel and put pressure on staff to achieve results. Most important, he ordered a sweeping re-organization that in efect brought the bank closer to its clients in the Eastern countries.

At the outset, the EBRD was split between a development banking wing designed to lend to the public sector in the East, and a merchant banking wing, concentrating on the private sector. De Larosiere swept this structure away. In its place, he created a new country-focused structure which, in effect, amounted to a de-centralization of operations.

Today, the EBRD has 24 regional offices which cover 26 countries. Its eight country teams are grouped into the following categories: Baltics and Belarus; Azerbaijan, Kyrgyzstan, Tajikistan and Turkmenistan; Kazakhstan and Uzbekistan; Bulgaria, Albania, Macedonia, Slovenia, Armenia and Georgia; Hungary, Czech and Slovak Republics; Poland; Ukraine, Romania, Moldova and Croatia; Bosnia-Herzegovina; and Russia. The bank has more than a dozen sector teams responsible for promoting areas such as tourism, transport, telecommunications, agro-business and power and energy utilities across the Eastern region.

The EBRD also runs the Russian Small Business Fund, which disperses funds both from the Group of Seven industrialized nations countries and from the EBRD itself to small- and medium-sized businesses -- some of them no larger than a dentist's practice or a news stand. (This funding model may now be extended to Kazakhstan and Albania.) The EBRD is also investing in a micro-credit bank in Bosnia-Herzegovina, a move designed to assist recovery from war.

In the six years to date, Russia has benefited the most from EBRD disbursements, followed (in descending order) by Hungary, Poland, Romania, Slovakia, Ukraine, the Czech Republic, Croatia, Slovenia, Uzbekistan, Bulgaria, Kazakhstan and Lithuania. Financial institutions account for the largest slice of the EBRD's disbursements (36 percent of its portfolio last year). But, in the past year, it has placed increasing emphasis on transport -- especially railways, ports and airports -- energy and power generation, manufacturing and environmental clean-up operations.

Has the EBRD justified its existence? A spokeswoman told our correspondent that 70 percent of its operations are now in the private sector -- proof, she said, that the bank has made a big difference.

This is part five in a five-part series on the role of Europe's multilateral organizations in integrating Central and Eastern Europe with the West. See Europe:Has The West Embraced The East?