UNICREDIT ISPI EU Enlargement: Internationalisation and local development

1. UNICREDIT ISPI EU Enlargement: Internationalisation and local development The evolving role of the EBRD in the new EU members Fabrizio Saccomanni Vice President, Risk Management – EBRD Rome, 9 July 2004

2. The EBRD – Basic Facts • Founded in 1991 to help transition to market economy in 27 states • Owned by 60 states and 2 intergovernmental organisations • Capital = € 20 billion • Total outstanding facilities (Dec. 2003) = € 18.4 billion • Commitments: 20031991 - 2003 • number of projects 119 1,017 • EBRD financing € 3.7 B € 22.7 B • resource mobilisation € 5.3 B € 45.8 B • Geographical composition of commitments • Central Europe and Baltic Region (CEB): 40 % • South Eastern Europe (SEE): 20 % • Commonwealth of Independent States (CIS): 40 %

3. The EBRD’s strategy to promote transition • Financing of projects conditional on: • sound banking • additionality • positive transition impact • respect for the environment • effective policy dialogue

4. The Transition Process – Definition and Indicators • Development of a market economy system based on private sector development and on reform of: • markets and trade regimes • enterprise system • infrastructures (telecoms, electric power, railways, roads, water and waste water) • financial sector (banking and non-banking)

5. The Transition Process – Definition and Indicators (Cont’d) • EBRD developed set of indicators to monitor process of transition in general and to assess transition impact of individual projects • Each indicator uses a measurement scale ranging from 1 to 4+, where: 1 = little or no change from rigid central planning 4+ = standards of industrialised market economy • Average indicator computed for each country

6. Accession does not mean the end of transition process • Structural reforms to be completed in: - state-owned enterprises - heavy industry and agriculture - energy, telecoms, transport sectors • Low level of financial intermediation relative to GDP - capital markets and non-bank intermediaries at early stage of development

7. Accession does not mean the end of transition process (cont.d) • Establishment of a market-oriented body of laws and regulations still to be achieved - need for efficient enforcement at local level • lmplementation of acquis communautaire requires substantial investment - 4-6 per cent of GDP investment in environment and infrastructure • Administrative and project implementation capacity broadly inadequate to task - lack of experience at regional – municipal level hampers absorption of EU funds.

8. Transition indicators for the new EU member countries

9. Transition in new EU members decelerating • Indicators confirm that further transition efforts are needed in: - enterprise sector - financial sector - infrastructure • Momentum of transition process slowed-down in 2003 in most countries (except Latvia and Slovak Republic)

10. Decline of FDI to CEB in 2003, as large privatisations completed Foreign Direct Investment (US$ million, net inflows) Source: EBRD

11. EBRD transition agenda in new EU members • Focus on private sector development - promote creation of private enterprises (SME) - assist in the process of privatisation • Foster financial intermediation - encourage efficient allocation of savings - promote capital market development and non-bank intermediation. • Contribute to modernisation of infrastructure - assist national and local authorities to make effective use of EU Cohesion and Structural Funds

12. EBRD Operational strategy in the private sector • Support to SME lending facilities through local banks and in collaboration with EU • Participate in privatisation of state-owned enterprises together with local and foreign strategic investors • Introduce new financing products and structures in agricultural enterprises

13. EBRD Operational strategy in the private sector (cont.d) • Promote the development of mortgage markets to increase financing for housing and tourism development • Promote the recourse to structured financial products, equity and quasi-equity instruments

14. 2. EBRD Operational strategy in the financial sector • Develop a broader range of financial instruments for SME and other priority segments not adequately served by local banks • Increase local banks capacity to incur risk by offering credit enhancements and risk-sharing facilities

15. 2. EBRD Operational strategy in the financial sector (cont.d) • Support securitisation of mortgages and other receivables • Participate in the development of insurance companies, pension funds, asset management companies to improve the range of savings instruments and the supply of long-term capital

16. 3. EBRD Operational strategy in the infrastructure sector • Support tariff adjustment and phasing out of subsidies in the utility sector (water, power, heating) • Support privatisation and liberalisation of power sector to improve competitiveness of downstream industries • Promote commercialisation and restructuring of transport infrastructure (roads and railways)

17. 3. EBRD Operational strategy in the infrastructure sector (cont.d) • Decentralise and commercialise municipal and environmental infrastructure • Provide financing for the development of public-private partnerships in the new infrastructure sector (i.e. air transport) • Improve cross-border linkages in power and transport sectors

18. Main challenges of the EBRD • As transition advances, EBRD to move out of new EU member states: market to determine timing and modalities • In the meantime, EBRD will compete with larger flows of low cost financing to sovereign borrowers: need to coordinate action with EU Commission and EIB • Internal EU governance has changed post-enlargement: need to adjust to new organisation/financial procedures