WSJ_EBRD Forever? (May 23)

23.05.2008

At its annual meeting in Kiev this week, the European Bank for Reconstruction and Development -- founded in 1991 to assist the former Soviet bloc states -- confirmed that, among other things, it wants to explore projects in Turkey.

That's an odd idea for a bank whose mission is to "foster the transition towards open market-oriented economies and to promote private and entrepreneurial initiative in the Central and Eastern European countries committed to and applying the principles of multiparty democracy, pluralism and market economics." Turkey is a democracy, has an open market, and isn't in Central or Eastern Europe.

What's really going on here is the same thing that's happening at the Asian Development Bank: a search for meaning. As the global economy has boomed, the countries the banks were chartered to serve have prospered and are able to access private capital, yet the banks continue to behave as if nothing has changed.

Last year the EBRD's committed capital outflow was up 13% on the prior year. Legally, 60% of the bank's resources have to be committed to the private sector, but that number is now at 86%. It made €1.1 billion ($1.7 billion) in net profits after provisionsin 2007, and wants to set aside 80% of that in reserves for future investments.

Yet invest in which countries, and why? There's a good argument for the EBRD to invest in countries that can't access private equity capital, but that's a shrinking list in Central and Eastern Europe. Many of the former Soviet bloc countries have developed rapidly since adopting capitalism and have attracted bucketloads of private foreign investment. Estonia, Latvia and Lithuania are now members of the European Union. The Czech Republic fully repaid all its EBRD commitments last year. The Baltic countries, Hungary, Slovakia, Slovenia and Poland are expected to do the same by 2010. Poland's GDP in 2006, by the way, exceeded that of Ireland, Argentina and Thailand, according to the World Bank.

None of this fazes the EBRD, which argues its mandate is different than that of other development banks. It invests like a private equity firm might, but claims to promote entrepreneurship in ways the private sector doesn't do. The bank has a hard time objectively quantifying that added value, which private equity firms measure by return on capital. The answer is that there is no better way to stimulate competition than through free markets and risk capital with the expectation of a positive return.

In recent years, the bank has moved south and east as Soviet bloc countries have grown richer. Fully 42% of its investments last year went to Russia. Never mind that Russia is rolling in oil revenues and also receives subsidized capital from the International Finance Corporation, an arm of the World Bank. EBRD President Thomas Mirow, who took office on Monday, says he supports Turkey's request to have the EBRD invest there. To his credit, he also says he supports a "thorough procedure" to review the bank's operations, currently scheduled for 2010.

A reality check comes from Down Under. Speaking at the Kiev meeting, Peter Reith, EBRD director for Australia and New Zealand, said that "the EBRD has achieved a great deal in its 17 years." "It is in this context of a job well done," he announced, "that the Australian government intends to withdraw from the bank by 2010."

Australia has given the EBRD €52.5 million since the bank's founding, about a quarter of the €200 million it originally committed. The EBRD's biggest shareholder, the U.S., committed €2 billion and has so far paid in €525 million. David McCormick, Treasury Undersecretary for International Affairs, says the bank is at a "crossroads," but that the U.S. "remains a strong supporter." Australia looks smarter.

 http://online.wsj.com/article/SB121148203341214927.html