Bank on Lemierre in regeneration game

Date: 06/09/01

As the European Bank for Reconstruction and Development celebrates its tenth birthday, Dick Leonard applauds president Jean Lemierre's approach in helping former Soviet bloc countries make the transition to market economies

HAPPY birthday to the European Bank for Reconstruction and Development. It nearly went down the sink in its early days, but is now modestly celebrating its tenth anniversary, amidst general approbation.

The EBRD started operations in 1991, with a mandate to provide investment capital, mainly for the private sector, to the countries of central and eastern Europe and the former Soviet Union, to assist in their transition to market economies. It is not an official EU institution, but the Union and its member states played a leading role in its creation and - together with the US and Japan - have provided the bulk of its operating capital.

It got off to the worst possible start, with a backstairs deal between the then-British and French governments, under which London was chosen as the bank's headquarters, while France was to pick its first president. This turned out to be Jacques Attali, a brilliant free-ranging intellectual, who had no experience as a banker but was a close associate of French President François Mitterrand.

His term of office ended - perhaps predictably - in tears, when a savage exposure in the Financial Times revealed a sorry tale of mismanagement and extravagance under his stewardship. In its first three years the bank spent more than twice as much on its running costs and offices as on loans and investments to the east. Massive quantities of top-quality marble had been bought for its London offices, lavish staff parties given and private jets chartered for the use of the president, whose expense claims beggared belief.

In the end, the bank's governing council took the only step open to them, forcing Attali's resignation and replacing him with another Frenchman, one with impeccable banking credentials and a known reputation for austerity. This was Jacques de Larosière, a former head of the International Monetary Fund and of the Bank of France.

The new president lost no time in totally overhauling the bank's operations, cutting costs and decentralising decision-making, particularly to the offices set up in each of the recipient countries.

They were close to potential clients and well placed to assess the viability of projected investments.

When he left five years later, de Larosière was able to hand over to his German successor, Horst Köhler, a lean, efficient organisation which had a real and beneficial impact on the transition process in the 27 countries in which it operates. Köhler soon moved on to head the IMF, and the baton passed to the present incumbent, Jean Lemierre, who had a long and distinguished career in the French Treasury behind him. Lemierre has taken to banking like a duck to water, and gave an enthusiastic account of the EBRD's activities during a recent speech in Brussels to the European Policy Centre. Discussing the economic prospects for the EBRD's client countries, he drew a sharp distinction between the current candidates for EU membership and the others.

The candidate states had for the most part made impressive progress, but "in terms of GDP per capita, there is a widening gap with the non-accession states in the region ... the exception is Russia, which, after a major setback in 1998, is seeing its situation improve, thanks partly to the price of oil and gas".

Some of the non-accession states, Lemierre said, had strong assets, such as quality workers, well-trained in the industrial tradition, and a good supply of natural resources.

What was often lacking, however, was good governance, a failure to comply with international accounting standards, and "a problem of asset-stripping which seems to be going on unopposed in some places, with no protection for the rights of minority shareholders. If these issues are not tackled, credibility is ruined," he said, and foreign private investment dries up.

Article One of the bank's charter requires it to promote multi-party democracy, pluralism and market economies, and this has led it to curtail its activities in countries such as Turkmenistan and Belarus, where there has been backsliding. The bank will review its decision to halt public sector investments in Belarus in the light of the outcome of this month's elections.

The EBRD, Lemierre emphasised, is not a charitable institution. It is required to operate on a commercial basis, and last year turned in a profit of 153 million euro, though this year's figure will be lower. It has no power to offer grants or soft loans, but in its ten years of operations it has disbursed some €62 billion in loans, equity and guarantees, including no less than 125,000 loans to small businesses, half of them in Russia.

The main responsibility for the regeneration of the former Communist countries lies with their peoples and governments, and with western nations and the Union for providing timely economic aid. The EBRD has played an important facilitatory role, by offering invaluable expertise and advice as well as being the major provider of risk capital.

In its first ten years more than half its job has more or less been completed, as far as the more advanced countries, such as Poland, Hungary and Slovenia are concerned. For some of those further east it may, unfortunately, take a great deal longer than another ten years before they reach the same stage.

• Correction: The figures referring to the Turkish aid package, given in Dick Leonard's article in the 2 August issue, were inadvertently expressed in millions of US dollars. They should have been given as billions.

As the European Bank for Reconstruction and Development (EBRD) celebrates its tenth birthday, Dick Leonard applauds president Jean Lemierre's approach in helping former Soviet bloc countries make the transition to market economies.