annual report 19952 european bank for reconstruction and development highlights financial results...

1995Annual report

The European Bank for Reconstruction and Development (EBRD) wasestablished in 1991 to foster the transition towards open market-oriented economies and to promote private and entrepreneurial initiative in the central and eastern European countries committed toand applying the principles of multiparty democracy, pluralism andmarket economics.

The EBRD seeks to help its countries of operations to implement structural and sectoral economic reforms, including demonopolisation,decentralisation and privatisation, taking into account the particularneeds of countries at different stages of transition. Its activities includethe promotion of private sector activity, the strengthening of financialinstitutions and legal systems, and the development of the infrastructureneeded to support the private sector. The Bank applies sound bankingand investment principles in all of its operations.

In fulfilling its role as a catalyst of change, the Bank encourages co-financing and foreign direct investment from the private and publicsectors, helps to mobilise domestic capital, and provides technicalcooperation in relevant areas. It works in close cooperation with international financial institutions and other international organisations.In all of its activities, the Bank promotes environmentally sound andsustainable development.

Abbreviations and acronyms

The Bank, EBRD The European Bank forReconstruction and DevelopmentBOT Build-operate-transferCEAL Central European Agency LineCIS Commonwealth of Independent StatesECA Export credit agencyECLAT Export Credit Loan ArrangementTechniqueECU European Currency UnitEDC Export Development Corporation (of Canada)EIB European Investment BankESCO Energy service companyESP Enterprise Support ProjectEU European UnionFIDP Financial Institutions DevelopmentProgrammeFRA Forward Rate AgreementGDP Gross domestic productIDA International Development AssociationIFC International Finance CorporationIFI International financial institutionIMF International Monetary FundJAIDO Japan International DevelopmentOrganisationJEXIM Export Import Bank of JapanKfW Kreditanstalt für WiederaufbauLibor London Interbank Offered RateNEFCO Nordic Environment Finance CorporationNSA Nuclear Safety AccountOECD Organisation for Economic Cooperationand DevelopmentOECF Overseas Economic Cooperation Fund(Japan)OPIC Overseas Private Investment CorporationPhare Poland and Hungary: Aid for EconomicRestructuring (EU)PPF Post-Privatisation FundPTT Postal, telegraph and telephoneorganisationRSBF Russia Small Business FundRVF Regional Venture FundSMEs Small and medium-sized enterprisesSRP Special Restructuring ProgrammeTacis Technical Assistance for CIS countries (EU) TAM TurnAround Management ProgrammeTCFP Technical Cooperation Funds ProgrammeUSAID US Agency for InternationalDevelopment

Guide for readers

Operation countingOperations may be counted asfractional numbers if multiple sub-loans are grouped under oneframework agreement. Totals intables may not add up due torounding.

Exchange ratesNon-ECU currencies have beenconverted, where appropriate, intoECU on the basis of the exchangerates current on 31 December 1995.(Approximate ECU exchange rates:DM 1.84, FFr 6.28, ¥132.15, £0.83,US$ 1.28.)

The regionReferences to “the region” includeall the EBRD’s countries ofoperations.

Contents

2 Highlights

4 Letter of transmittal

5 Review of the year

11 Operational environment

15 Review of 1995 operationsIntroductionFinancial institutionsPrivatisation and restructuringInfrastructure sectorsOther key sectorsOther direct loans and investmentsEncouraging co-financingProject evaluation

36 Environment

39 Nuclear Safety Account

41 Technical cooperation

44 Financial results

49 Financial statementsProfit and loss accountBalance sheetStatement of cash flowsNotes to the financial statementsAuditors’ reportSpecial Funds

76 List of 1995 projects

84 Governors

85 Directors

86 Contact information

88 Further information

2 European Bank for Reconstruction and Development

Highlights

Financial results

ECU million 1995 1994 1993 1992 19911

--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Operating profit (loss) before provisions 82.9 24.9 43.8 3.8 (7.1)Provisions for losses 75.4 23.9 39.7 9.9 –Profit (loss) for the period 7.5 1.0 4.1 (6.1) (7.1)

Paid-in capital 2,965 2,965 2,965 2,965 2,956Capital instalments received (cumulative) 2,842 2,273 1,728 1,206 591

Total provisions and reserves 165 81 54 (8) (7)Total assets 8,728 7,528 7,036 4,929 3,494

--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Operational resultsRevalued figures2

Number 1995 1994 1993 1992 19911 Total

--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------New projects approved 134 106 70 45 13 368New projects committed 110 88 64 32 2 296

EBRD financing for yearECU million 1995 1994 1993 1992 19911 Total

--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Approved 2,855 2,147 1,832 725 294 7,853Committed 2,000 1,649 1,530 728 21 5,928Signed RVFs3 164 56 0 0 0 220Net disbursements 988 576 394 126 0 2,084

Resource mobilisationECU million 1995 1994 1993 1992 19911 Total

--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------For approvals 6,084 4,369 3,691 2,020 766 16,930For commitments 4,972 3,273 3,032 1,715 39 13,031

--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Reported figures4

Number 1995 1994 1993 1992 19911

--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------New projects approved 134 109 91 54 14New projects committed 110 91 73 36 3

EBRD financing for yearECU million 1995 1994 1993 1992 19911

--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Approved 2,855 2,409 2,276 1,226 427Committed 2,000 1,819 1,794 916 72Signed RVFs3 164 59 0 0 0Net disbursements 988 591 435 126 0

Resource mobilisationECU million 1995 1994 1993 1992 19911

--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------For approvals 6,084 4,501 5,439 3,724 1,087For commitments 4,972 3,317 3,379 1,959 81

--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

1 9 months of operation.2 Revalued figures for 1991-94 reflect subsequent changes due to exchange rates, cancellations, syndications or restructuring.3 Regional Venture Fund framework agreements. 4 Individual figures for 1991-94 are as reported for those years. They do not reflect subsequent changes due, for example, to exchange rates, cancellations, syndications

or restructuring.

Cumulative funds to be mobilisedAt 31 December 1995

European Bank for Reconstruction and Development 3

3,000

2,500

2,000

1,500

1,000

500

0

1991

1992

1993

1994

1995

1991

1992

1993

1994

1995

20,000

15,000

10,000

5,000

0

Annual approvals, commitments and disbursementsAt 31 December 1995

Cumulative Board approvals, commitments and disbursementsAt 31 December 1995

25,000

ECU million

ECU million

ECU million

Board approvals

Commitments

Disbursements

Board approvals

Commitments

Disbursements

EBRD financing approved

Non-EBRD funds to be mobilised

8,000

6,000

4,000

2,000

0

Jun

91

Dec

91

Jun

92

Dec

92

Jun

93

Dec

93

Jun

94

Dec

94

Jun

95

Dec

95

GeorgiaHungaryKazakstanKyrgyzstanLatviaLithuaniaMoldovaPolandRomaniaRussian FederationSlovak RepublicSloveniaTajikistanTurkmenistanUkraineUzbekistan

AlbaniaArmeniaAzerbaijanBelarusBulgariaCroatiaCzech RepublicEstoniaFormer Yugoslav

Republic of Macedonia

Countries of operationsAt 31 December 1995

To Governors

In accordance with Article 35 of the AgreementEstablishing the Bank and Section 11 of its By-Laws,the enclosed Annual Report of the Bank for 1995 issubmitted by the Board of Directors to the Board ofGovernors.

The Annual Report includes the approved andaudited financial statements required to be submittedunder Article 27 of the Agreement and Section 13 ofthe By-Laws. It also contains a separate statement onthe Special Funds resources, in accordance with Article10 of the Agreement Establishing the Bank, and coversthe environmental impact of the Bank’s operations, asrequired under Article 35 of the Agreement.

President

Jacques de Larosière

Directors Alternate Directors

Péter Bod Tomás ParízekJohn Coleman David HorleyStaffan Crona Håkan EmsgårdRobert Graham-Harrison David RoeJohan Hilbers Kees SpaansBrian Hillery Asger Lund-SørensenPlamen Iltchev Jan BieleckiLee Jackson –Helge Kringstad Rauli SuikkanenRoger Lavelle Terry BrownHeiner Luschin Amos RubinPatrick Mordacq Didier ElbaumAlan Morris Huhn-Gunn RoPhilippe Petit-Laurent Peter BlackieOleg Preksin Serguei OvseitchikEnzo Quattrociocche Maurizio SerraJacques Reverdin Selçuk DemìralpOleksander Savchenko Stanel GhenceaBernard Snoy Ernest MuhlenFernando Soares Carneiro Stefanos VavalidisKazumoto Suzuki Takashi OsanaiMiguel Valle Belen CristinoGünter Winkelmann Hans-Heinrich Wrede


Letter of transmittalLondon, 6 March 1996

1995 in the medium-term perspective

In 1995 the EBRD met, and even exceeded, itsoperational targets for the year. The Bank reinforcedits role in supporting the countries of central andeastern Europe and the CIS in their transition tomarket economies and in promoting private andentrepreneurial initiative. It continued to develop itsexperience and in-depth knowledge of the region andextended the range of financing instruments at itsdisposal. The first five years of the EBRD’sdevelopment show that it has enhanced its ability toadapt to the evolving transition: the portfolio is nowmore balanced in terms of product mix and risk, andgeographical diversification is fully in train.

The year was a good one for the EBRD and for itscountries of operations. The Bank built on itsachievements in fostering the transition process.Helped by the EBRD, many countries of the regionhave made substantial progress, with more of themmoving into and through the intermediate stages oftransition. Nevertheless, the region still facesenormous challenges and demand for the Bank’sservices continues to grow.

The EBRD maintained itself at the forefront ofinvestment in the region, through its innovativefinancing methods and the demonstration effect of itsprojects. The ability to attract more than twice thevolume of its own portfolio from external sourcesmeans that EBRD financing has a substantial impacton the transition process, mobilising someECU 7 billion per year, a significant proportion oftotal investments expected in the region during thetransition. The Bank’s operational effectiveness andcontribution to the transition process is underpinnedby the high priority it gives to the quality of projects.

The cumulative commitment of nearly 60 per centof its ECU 10 billion capital base in the first fiveyears of its life is an indicator of the Bank’soperational success; this achievement means thatcommitments will reach nearly ECU 10 billion in1997. As a response to the accelerating demand for itsservices, the Bank has developed a manageablegrowth strategy which, even with an active policy ofportfolio turnover, will exhaust the existing capitalresources in the near future. In 1995, therefore, theBoard of Directors continued to work on the capitalresources review to enable the Board of Governors toconsider the question of a capital increase.

In 1995 the EBRD maintained its policy of moreeffective and efficient resource management,comprising strict budgetary control and improved coststructure. The percentage of income from operationsalso continued to grow, contributing to satisfactoryfinancial results and a strengthening of the Bank’stotal reserves.

The first five years

During the EBRD’s first five years of operations, from1991 to 1995, its operational activities wereconstrained mainly by the difficult environment inmany countries of operations and the limits of theBank’s own institutional development. But as progressin reform in many countries has begun to accelerate,economic growth and the demand for EBRD serviceshave strengthened. The Bank has been able torespond flexibly and effectively, with cumulativecommitments to the end of 1995 standing atECU 5.93 billion and projects approved by theBoard of Directors at ECU 7.85 billion.

In order to achieve these operational results and tofulfil its role of promoting transition, the EBRD hashad to adapt its operations and structures. The Bankhas a precise set of operational priorities, endorsed bythe Board of Governors in 1994. These operationalpriorities are:– focus on private sector development– be active in all countries of operations– reach local private enterprises, especially SMEs– enhance the use of financial intermediaries– increase equity investment.In recent years, including 1995, the EBRD hasconsistently met or exceeded the annual operationaltargets set by the Board of Directors, and theobjectives of the overall operational strategy havebeen achieved. For example, EBRD financing of


Review of the year

1991 1992 1993 1994 1995 1996 (planned)

1991 1992 1993 1994 1995* 1996*

* 1995/96 estimate and forecast from EBRD Transition Report 1995

Cumulative EBRD commitmentsby volume

Growth of east European and CIS economiesPercentage change in real GDP

8

6

4

2

0

5

0

-5

-10

-15

-20

Eastern Europe

CIS

ECU billion

Operationaltargets met


ECU 5.93 billion has mobilised a total of ECU 18.96billion, illustrating the Bank’s ability to catalyseinvestment in the region (see Highlights on pages 2and 3).

The earliest EBRD projects were predominantly inthe state sector, as the private sector was almost non-existent in most countries. Three-quarters of theBank’s committed projects are now in the privatesector. The cumulative share of signed private sectorprojects amounts to 62.2 per cent, meeting therequirement that not more than 40 per cent of theEBRD’s total investments shall be provided to thestate sector. The Bank continued to promoterestructuring, privatisation and infrastructuredevelopment, which is critical for private sectordevelopment.

The share of Board-approved equity investmentshas increased, in response to demand for much-needed start-up capital resources and to meet therequirements of successful transition.

The EBRD is now active in all its countries ofoperations and the geographical balance of theportfolio has improved. In the past two years the Bankhas focused on developing activities in the countrieswhere it had been less active in the past, especiallythose in the early and intermediate stages of thetransition process. Progress in meeting this priority isreflected in the increasing share of total commitmentsto countries at these stages: this rose from 49 per centin 1994 to 55 per cent in 1995 (20 per cent in Russiaand 35 per cent in other countries). By offering aflexible, demand-led range of products, the Bank isable to tailor its activities to the needs of countries atdifferent stages of transition. (See also pages 15 to 17.)

Great attention has been paid to the need toincrease productivity and to ensure that shareholders’money is being used to greatest effect. Part of thiseffort has been an increase in the amount of wholesalelending. A new important wholesale approach to beused across industry sectors is the multi-projectfacility, aimed at working with co-investors to financea range of projects under standardised terms.

The principal focus of wholesale approaches is to work withselected financial intermediaries so that SMEs can be servedmore efficiently and effectively, as well as to support anddevelop local banks and capital markets. With theseapproaches, the Bank can benefit from repeat projects andexperienced partners with knowledge of the local environment.Wholesale instruments include credit and co-financing lines,bank-to-bank loans, trade facilitation and equity funds.

Operational achievements over recent years have beensupported by rigorous attention to internal cost controland increasing efficiency. Budgetary control has beentightened and more resources allocated to operationalareas. This has kept administrative expensesessentially flat while the value of projects inimplementation has increased sharply. Soundmanagement has led to a significant increase inprojects approved by the Board of Directors,commitments and disbursements, and a cleardemonstration that the EBRD has deployed its capitalresources in accordance with its overall mandate.

Future orientation

Strategic direction 1996-99In 1995 the Bank outlined its strategic direction forthe next four years, building on the operationalpriorities established in 1994 and further analysis ofdemand for EBRD financing in the countries ofoperations.

In response to an expected acceleration of demandfor Bank financing, the EBRD has developed amanageable growth strategy to bridge the gap betweenthe growing level of demand and its current levels ofoperations. This growth strategy envisages an increasein annual commitments to a level of approximatelyECU 2.5 billion in 1999. At the same time the Bankwill continue to attach a high priority to the quality ofoperations and cost effectiveness.

To achieve the productivity gains implied by theseobjectives, the Bank will further emphasise awholesale approach with financial and industrialpartners. This will enable it to address moreefficiently the financing needs of the rapidlyincreasing number of local private enterprises,particularly SMEs.

The EBRD will continue to focus on the privatesector, with an objective to maintain the proportion offinancing to the private sector above the statutoryminimum level of 60 per cent; this will includeworking with SMEs, as well as with companiesrestructuring or converting to private enterprises, andproviding support for private infrastructuredevelopment. Equity, including early-stage equity, willremain a priority and will probably be expandedfurther to meet growing demand in the countries ofoperations. The Bank will continue to expand its localpresence in the countries of operations, in part toassist in project generation, implementation andmonitoring.

Review of the year

1991 1992 1993 1994

Increase in equity share of Board approv

25%

20%

15%

10%

5%

0%

1991 1992 1993 1994

Growth of the EBRD’s private sector act

100%

50%

0%

Equity share Board approved

Equity share signed

State sector

Private sector

The EBRD reports framework agreements1 as Boardapprovals. When the sub-projects are signed, they arereported as committed. For consistency with otherwholesale operations and taking a more conservativeapproach, the Bank extended this convention in 1995include Regional Venture Funds, which are a form of hrisk equity.2 Consequently the percentage of equity in Bank’s total commitments of 1995 fell to 14%, while Board-approved equity was unaffected by this reportinchange. The proportion of Board-approved equity contto expand from 11% in 1992 to 24% in 1995. In timeproportion of committed equity and Board-approved eis expected to converge.

1 Multi-project finance, trade facilitation, co-financing agency lines, and some lines of credit such as the RSmall Business Fund.

2 Regional Venture Funds (RVF) differ from Post-PrivatisFunds (PPF) and Special Restructuring Programmes (in that the EBRD is the sole investor in RVFs, whereasmay be one of many investors in PPFs and SRPs. RVFcommitted at the sub-project level, whereas PPFs andSRPs are committed at the framework level.


The financial implications of this medium-termstrategy suggest that the EBRD will move furthertowards sustainable profitability. Projections ofoperational growth also imply that the Bank’s lendingand investment capacity, based on its existing capitalstock, would be exceeded towards the end of 1997.

Capital resources reviewAt their 1994 Annual Meeting, the Governorsconcluded that, given the projected expansion of theEBRD’s portfolio, the question of its capital basewould have to be examined. The Governors requestedthe Board of Directors to examine the Bank’sunderlying operational and financial assumptions inorder to report to them in 1995. This was in advanceof the statutory requirement that the Board ofGovernors review the capital stock of the Bank atintervals of not more than five years, implying a firstreview by 1996.

In 1994 and early 1995, the EBRD undertook atechnical analysis of its operational and resourceneeds and reported to the Board of Governors at the1995 Annual Meeting. At that Annual Meeting,Governors formally requested the Board of Directorsto undertake a study on the Bank’s future resourcerequirements to finance its ordinary operations, and toreport its recommendations to the Board of Governorsfor consideration and action at the Annual Meeting inApril 1996. In response to this request, the Bank hasundertaken a review of its capital resources. Thereview observed that, under the endorsed manageablegrowth strategy, the Bank would reach its statutorylimit on the total amount of committed loans, equityinvestments and guarantees in 1997 and would thusrequire a decision on a capital increase as acomplement to ongoing efforts to maximise the use ofexisting capital resources. The Board of Directors willreport to the Board of Governors on itsrecommendation regarding the Bank’s future resourcerequirements for consideration and action byGovernors at the Annual Meeting in April 1996.

Policy developments in 1995

Monitoring of Article 1

Article 1 of the Agreement Establishing the EBRD is as follows:“In contributing to economic progress and reconstruction, thepurpose of the Bank shall be to foster the transition towardsopen market-oriented economies and to promote private andentrepreneurial initiative in the central and eastern Europeancountries committed to and applying the principles of multipartydemocracy, pluralism and market economics.”

Directors continued to pay close attention to thepolitical aspects of the Bank’s mandate. Themonitoring of adherence to the principles embodied inArticle 1 of the Agreement Establishing the EBRD isintegrated into the Bank’s operations and reflected inits country strategy papers, which include anassessment of a country’s commitment to Article 1. In1995 the Board of Directors reviewed countries’commitment to Article 1 in the context of its periodicreview of the Bank’s operations and lending strategies.Although Directors found all countries to be makingprogress towards multiparty democracy and pluralism,in a few cases progress was felt to be inadequate andthe President was asked to convey the concerns of theBoard of Directors to the relevant authorities.

The Bank’s operations are also guided by contactswith governments concerning questions arising fromthe monitoring process. In 1995 the EBRD worked inclose cooperation with the European Union, theOrganisation for Security and Cooperation in Europe,the Council of Europe and ministries of foreign affairsof member states.

Review of the year

1991 1992 1993 1994 1995

1991 1992 1993 1994 1995 1996 (planned)

Increase in local financial intermediariesand early-stage equity instruments

Board approvalsECU million 2,000

1,600

1,200

800

400

0

Number of projects in implementation and EBRD’s gross costs

300

250

200

150

100

50

0

Share in yearly commitments by Transition group*

1991 1992 1993 1994 1995

1991 1992 1993 1994 1995

6,000

5,000

4,000

3,000

2,000

1,000

0

1991 1992 1993 1994 1995

100%

80%

60%

40%

20%

0%

2,500

2,000

1,500

1,000

500

0

Cumulative and yearly commitments by Transition group*

Early: Armenia, Azerbaijan, Belarus, Georgia,Kazakstan, Tajikistan, Turkmenistan, Ukraine.

Russia: Russian Federation.

Intermediate: Albania, Bulgaria, FYR Macedonia,Kyrgyzstan, Latvia, Moldova, Romania, Uzbekistan,Regional.

Advanced: Croatia, Czech Republic, Estonia, Hungary,Lithuania, Poland, Slovak Republic, Slovenia.

£ million Administrative expenses

ECU billion Cumulative commitments outstanding

Administrative expenses

Cumulativecommitmentsoutstanding

9

8

7

6

5

4

3

2

1

0

Intermediaries

Direct operations

ECU million

ECU million

* Transition groups


Review of the year

Operational policies

The EBRD rigorously applies the three criteria of sound bankingprinciples, additionality and transition impact in its projectapproval process. In particular, the Bank has set criteria toassess the transition impact of its projects.1 These criteriafocus primarily on the contribution of individual projects to thedevelopment of competitive markets, and on the extent to whichprojects facilitate the discovery of new market skills, productiontechniques and efficient organisation. The establishment ofsuch criteria is necessitated by the mandate of the Bank, whichemphasises the advancement of market-oriented transition inthe countries of operations. In this regard, early results basedon the post-evaluation of EBRD investment operations point to astrong compliance with the principles of sound banking andadditionality.

In 1995 the EBRD worked to ensure that its impacton the transition process was maximised, continuingto base its activities on the operational prioritiesagreed in 1994. Notable was the development ofmulti-project facilities, in which the Bank will set uppartnerships with industrial partners, both fromWestern countries and the countries of operations.During 1995 the Bank signed four of these facilities,in the food and beverage, water and wastemanagement, insurance and banking sectors. It isexpected that similar facilities in these and othersectors will be developed during 1996.

Multi-project facilities are forms of cooperation, whereby theBank combines its financing and risk-sharing role with theexperience, know-how and risk-taking ability of partnercompanies which have a strategic commitment to the region.These facilities are intended to use the Bank’s capital moreproductively and to spread it more widely across the region.

The Bank also developed a number of tradefacilitation products aimed at strengthening specificfinancial and institutional infrastructures necessaryfor trade. During the year the EBRD developedinnovative approaches to financing municipalenvironment projects, and signed its first energyefficiency loan, for an energy service company(ESCO).

Trade facilitation products, intended to support local financialinstitutions lacking the resources or experience to provide tradeproducts on their own, broadly fall into two categories: globaland regional trade facilitation programmes, typically usingguarantees; and trade facilitation loans to provide import andexport finance to local banks, for subsequent on-lending to localcompanies.

Financial policies

Key elements of the Bank’s financial policies werereviewed in 1995 on the basis of experience gained aswell as market and industry developments. Significantprogress was made to ensure that these policiesremain at the level of industry best standards, withmanagement committed to continuing a regular reviewof these financial policies.

The Bank’s portfolio risk management andinvestment policies were updated, with particularemphasis on product guidelines to reflect recentwholesale initiatives. The credit process was alsoenhanced and additional attention was given toimplementation and monitoring, especially regardingfinancial intermediaries.

The provisioning policy was refined by linking theBank’s risk assessment methodologies, on whichportfolio credit risk ratings are based, to thecalculation of general loss provisions. Theseprovisions are now applied on a two-step basis withprovisioning at the time of both commitment anddisbursement.

The liquidity policy was also further refined in1995. Recognising the need for strong levels ofliquidity at this early stage of its operations, the Bankestablished a target zone above the minimum policylevel. Further, a multi-year perspective wasemphasised as a context within which to develop boththe Bank’s liquidity and its borrowing programmes.

The investment authority and guidelines for themanagement of the Bank’s treasury activities were alsoextensively reviewed, reconfirming the strictguidelines for investment activities. Furtherimprovements in the management of risk exposure,reflecting current industry best practice, are in theprocess of implementation.

During the year a programme to enhance riskmanagement was instituted, including the creation ofan independent risk control unit to ensure that allrelevant risks are consistently measured andcontrolled and that an active policy aimed at riskreduction is implemented.

1 An overview of the transition impact of investment projects is provided in theEBRD’s Transition Report 1995, Chapter 7.


Membership

The EBRD has continued to respond to the challengesof a wide and diverse membership. This wasunchanged in 1995, standing at 59 members, with 25countries of operations.

In June 1995 the Board of Governors decided on areallocation of the shares of the former Yugoslavia onthe basis of the percentage shares previously agreed atthe IMF and the World Bank. Additional shares wereaccordingly allocated to Croatia, the Former YugoslavRepublic of Macedonia and Slovenia. Some shares,however, remain unallocated.

With respect to Bosnia and Herzegovina, theEBRD prepared jointly with the World Bank a draftreconstruction programme which was presented to theinternational community in October 1995. The Banksubsequently participated in the first joint mission byinternational financial institutions to Bosnia andHerzegovina and attended the London PeaceImplementation Conference and the first DonorsMeeting held in Brussels in December 1995. In thecontext of the signing of the Peace Agreement inDayton and Paris, the Bank initiated the preparationof projects in the telecommunication, power andtransport sectors, as well as projects to support SMEsthrough the establishment of a venture capital fundand the strengthening of Bosnian banks.

The EBRD began discussions on membership withthe authorities of Bosnia and Herzegovina with a viewto the country becoming a member of the Bankduring 1996.2

In the context of the Capital Resources Review, theEBRD also took up for consideration requests forincreases in capital subscriptions of existing membersas well as new membership requests.

Performance in 1995

Operations

Within the framework of its 1995 operational policies,the EBRD’s target for signed projects for the year wasachieved: the target of ECU 1.9 billion was exceededand commitments to the value of ECU 2.0 billion weresigned. As a result the cumulative total committedduring the Bank’s first five years of operations (that is,to the end of 1995) reached ECU 5.9 billion. TheBoard of Directors approved projects with a value ofECU 2.9 billion in 1995, resulting in a cumulativeBoard-approved value of ECU 7.9 billion. Thisrepresents a total of 368 Board-approved projectssince the creation of the Bank. The increase inapprovals in 1995 compared with 1994 (23 per centby number and 19 per cent by value) has importantimplications for the Bank’s work on project monitoringand implementation. The project pipeline is strongand early indications suggest that the value of signedcommitments will continue to grow steadily in 1996.

Net disbursements also progressed in 1995,reaching ECU 988 million. This represents anincrease in cumulative net disbursements of 72 percent over the year, as net disbursements had reachedECU 576 million in 1994.

Expansion in the EBRD’s volume of operations wasaccompanied by innovative and flexible use of newinstruments available to it. This served the parallelaims of enhancing productivity and at the same timeenabling the increasing and diversifying demand forthe Bank’s services to be met throughout the region.

In order to address the rapidly increasing financialneeds of local private enterprises, particularly SMEs,the EBRD further expanded its use of the wholesaleapproach with financial and industrial partners.Wholesale operations increased from 39 per cent ofBoard approvals in 1994 to 43 per cent in 1995.

The Bank also extended its range of wholesaleinstruments by adding the multi-project facility. Thisshowed strong initial growth and contributed ECU 234million to Board-approved operations, 8 per cent ofthe total.

Review of the year

disbursementsup by 72%

ECU 2 bnsigned

in 1995

2 At its meeting on 5 and 6 March 1996, the Board of Directors decided totransmit a recommendation to the Board of Governors that Bosnia andHerzegovina be admitted to membership in the Bank, with a request thatGovernors vote on the membership resolution within 30 days.


Review of the year

Over the past year the Bank maintained its moreactive approach to the use of equity, therebyaddressing the need for capital investment tounderpin the transition process. In 1995, Board-approved equity investments in private enterprisesgrew from 21 to 24 per cent of EBRD operations. TheBank also increased its use of guarantees to meetinvestor demand.

The geographical diversification effort continued. Ithas focused on developing activities in countrieswhere project creation has proved more difficult, inparticular those in the early and intermediate stages oftransition. This has intensified the Bank’s impact onthe transition process, but the degree of difficulty hasplaced greater demands on Bank resources andrequired higher provisioning for operations in thesecountries.

Financial results

The financial results for 1995 were both satisfactoryand above expectations. The net profit after provisionswas ECU 7.5 million, which was a good outcome giventhe significant increase in total reserves together withthe other prudential measures taken.

The operating profit before provisions for the yearwas ECU 82.9 million, more than three times the resultfor 1994. This increase resulted primarily from higherincome from Banking operations, which included forthe first time significant income from the EBRD’sequity portfolio arising from the ECU 37.9 millionprofit on sale of share investments and dividend incomeof ECU 5.8 million. This lifted the contribution to grossincome from Banking operations during the year to over35 per cent. At the same time the Bank’s treasuryoperation continued to provide a reliable flow of above-benchmark income from investments.

Following continued budget discipline andadditional focus on cost recovery and similarinitiatives, the Bank’s administrative expenses werebelow approved budget and almost at the same levelas in 1994. The very slight increase over 1994 relatedto accruals for the cost of work on the Headquartersbuilding in preparation for further subletting.

Depreciation has nearly doubled during the year toECU 21.5 million, primarily relating to charges takento achieve a more efficient and effective use of theHeadquarters building in the future and also to fullydepreciate assets considered to no longer havematerial economic value.

Provisions of ECU 75.4 million have been madeduring the year following a refinement of the Bank’sprovisioning policy. The significant growth overamounts provided in 1994 reflects the marked growthin commitments and disbursements and, in particular,in the early-stage equity programme.

Management of resources

The EBRD continued in 1995 to concentrateresources on operational activities, to exercise strictbudgetary discipline and to improve the managementof its resources. These efforts have consistentlyincreased productivity, which rose by 14 per centduring 1995. Against the background of the expandedoperational activity, these efforts have helped reducefurther the ratio of administrative expenses tocumulative commitments.

In addition to maintaining control of expenditureand the efforts to reduce overheads, two significantinitiatives to improve the Bank’s cost structure wereagreed in 1995. First, the Board of Directors decidedon a reduction of its direct costs and a reduction ofDirectors’ office space by more than a third. Thisallowed the second initiative – to sublet a further floorof the EBRD’s Headquarters as from June 1996 – tobe implemented, followed by rearrangements of theremaining floors to make better use of available space.

These actions have contributed to limiting budgetgrowth in 1996, to only 2.6 per cent or almost zero inreal terms (in sterling). At the same time additionalbudget resources will be created in 1996 throughsavings and increased cost recovery, which will beused to create 46 staff positions, reinforcing theBank’s operational activities.

Staff numbers at 31 December 1995 were:permanent staff of 698, contract staff of 145, locallyhired staff in Resident Offices of 121, Board ofDirectors staff and special employees of 89.

net profit ECU 7.5 m

productivityincreased by 14%

This section draws upon the EBRD’s work in analysing theissues confronting the economies of the region, particularlyinformation published in the Bank’s Transition Report 1995.

Investors in central and eastern Europe and the CIShave seen a notable improvement in the businessenvironment over the past 3-4 years. Market-orientedreform has been advancing rapidly. Inflation has comedown sharply and positive economic growth isreturning to parts of the region. Having gone through ademanding adjustment process, the countries thatembarked on transitional adjustment the earliest arenow beginning to see very visible benefits of reform.Meanwhile, those governments and central banks,notably in parts of the CIS, that initiated reform andstabilisation in earnest only 1-3 years ago still wait forpositive growth to help generate across-the-boardpolitical support for market principles. In these

countries, patience, perseverance along the road tofinancial stability and structural reform, and externalsupport will all be required for the full potential ofmarket reforms to be realised in the years ahead.

Market-oriented reform

Most countries in the region have implementedwidespread liberalisation of prices, external trade andcurrency arrangements, and privatisation of small-scale units, all of which constitute necessaryconditions for the development of private sectoractivity. These measures involve limited institutionaldevelopment and could thus be adopted rapidly. Theearly lead of countries in central and eastern Europehas been narrowed by continued progress in this areain most of the CIS.

Operational environment


Progress in transition in central and eastern Europe and the CIS1

Enterprises Markets and trade Financial institutions Legalreform

Private Banking Securities Extensivenesssector share of Trade reform markets & effectiveness

GDP in %, mid-95 & foreign & interest & non-bank of legal (rough EBRD Large-scale Small-scale Enterprise Price exchange Competition rate financial rules on

Countries estimate) privatisation privatisation restructuring liberalisation system policy liberalisation institutions investment

Albania 60 2 4 2 3 4 1 2 1 2

Armenia 45 2 3 2 3 3 1 2 1 2

Azerbaijan 25 1 1 2 3 2 1 2 1 1

Belarus 15 2 2 2 3 2 2 2 2 2

Bulgaria 45 2 3 2 3 4 2 2 2 3

Croatia 45 3 4* 2 3 4 1 3 2 3

Czech Republic 70 4 4* 3 3 4* 3 3 3 4

Estonia 65 4 4 3 3 4 3 3 2 3

FYR Macedonia 40 2 4 2 3 4 1 3 1 2

Georgia 30 2 3 2 3 2 1 2 1 2

Hungary 60 4 4* 3 3 4* 3 3 3 4

Kazakstan 25 2 2 1 3 3 2 2 2 2

Kyrgyzstan 40 4 4 2 3 4 2 2 2 2

Latvia 60 2 4 2 3 4 2 3 2 2

Lithuania 55 3 4 2 3 4 2 3 2 2

Moldova 30 3 3 2 3 4 2 2 2 2

Poland 60 3 4* 3 3 4* 3 3 3 4

Romania 40 2 3 2 3 4* 1 3 2 2

Russian Federation 55 3 4 2 3 3 2 2 2 2

Slovak Republic 60 3 4* 3 3 4* 3 3 3 3

Slovenia 45 3 4* 3 3 4* 2 3 3 3

Tajikistan 15 2 2 1 3 2 1 1 1 1

Turkmenistan 15 1 1 1 2 1 1 1 1 1

Ukraine 35 2 2 2 3 3 2 2 2 2

Uzbekistan 30 3 3 2 3 2 2 2 2 2

1 The classification system for transition indicators is complex; for a fullexplanation see the EBRD’s Transition Report 1995. Category 1 generallyindicates little progress. Most advanced industrial economies would qualifyfor the 4* rating for almost all the transition indicators. The table assesses

the status rather than the pace of change. For instance, Slovenia’s score of 4* on small-scale privatisation, despite the absence of a comprehensiveprivatisation programme, reflects the fact that small-scale activity in Sloveniawas largely private before transition began.


However, despite substantial liberalisation in mostcountries, energy prices remain well below costrecovery levels in the region. Further liberalisation isnecessary to improve price signals for investment and,indirectly, to reduce environmental pollution, but theshort-run impact on enterprises and households maylimit the politically feasible speed of adjustment.

Progress in large-scale privatisation and enterpriserestructuring has been slower. These initiativesrequire more preparation, both to build the necessarypolitical consensus and to create the implementationinfrastructure. Many countries in central and easternEurope have privatised a major share of their large-scale enterprises, most notably the Czech Republic,Estonia, Hungary and the Slovak Republic. Withinthe CIS, Kyrgyzstan, Russia and Uzbekistan haveimplemented fairly comprehensive large-scaleprivatisation programmes.

Land privatisation has been particularly slow in theCIS. The long history of collectivisation and the verylarge size of farms (with associated methods andequipment) generate severe problems in designingand organising privatisation. And there has been nopolitical consensus on how to proceed. Significantprogress has been made in enterprise restructuring,especially in central and eastern Europe. Thisprimarily reflects progressively hardened budgetconstraints and enterprise autonomy associated withmacroeconomic stabilisation (elimination of budgetaryand off-budget subsidies), product marketliberalisation and privatisation policies, rather thanspecial government restructuring programmes.

Other types of institutional change – bankingreform, private non-bank financial institutions,competition policy and investment-related legalreform – are still at a relatively early stage in mosttransition countries. Very few countries havesuccessfully restructured the banking system,including recapitalisation and bank privatisation, andput in place an effective system of prudentialregulation and supervision. Effective financial marketregulation will be required to underpin the continuedgrowth in finance to enterprises from “outsiders” (inthe form of debt and equity, as opposed to retainedearnings). Outside finance can not only supportinvestment but also improve corporate governance anddeepen capital markets.

Particularly rapid change is now taking place inthe countries of the CIS, most of which are pursuingambitious reform programmes. The Russiangovernment has privatised the majority of thecountry’s large-scale industrial enterprises and has,since 1992, been putting in place an increasingly

liberal price and trade regime. Ukraine embarked inthe second half of 1994 on liberalisation of prices andforeign trade. Each of these two large countries is nowmoving through the intermediate stages of transition tothe market economy. Assuming continued pursuit ofmarket reforms and macroeconomic stabilisation incoming years, important investment opportunities willaccompany these changes. The bulk of the smallerCIS countries have also taken action to broaden therole of markets and to intensify competition betweenenterprises.

The countries of central and eastern Europe, whichimplemented comprehensive market liberalisation andsmall-scale privatisation in 1990-92, have in recentyears embarked, with varying degrees of intensity, onmore challenging reform measures. These includelarge-scale privatisation, enterprise restructuring andfinancial sector reforms.

Growth prospects

All countries in central and eastern Europe havegrown in 1994 and 1995 at annualised rates of 2-6 per cent, following a precipitous contraction over the preceding three years. Most of thesecountries are likely to see growth rates at the higherend of this range in 1996.

Output is still declining in most of the CIScountries but at a gradually slower pace. Manyforecasters expect positive growth in Russia next yearand in Ukraine in 1997. Some of the smaller CIScountries, including Armenia and Moldova, havealready seen positive growth in 1995.

Central and eastern Europe and the CIS offer aparticularly strong potential for high medium-termgrowth. The region is characterised by an educatedlabour force, openness to foreign trade, competitivewage levels and an increasing degree ofmacroeconomic stability. For the past 2-3 decades,these factors have underpinned high growth in EastAsia. They can do the same in eastern Europe.

Gradually improving fiscal and monetary policycontrol, and advancement of market-oriented reformthroughout the region, will help ensure that availablesavings are channelled into productive uses. The ratioof investment to GDP is about 20 per cent in much ofcentral and eastern Europe and the CIS. This is closeto typical levels in advanced industrialised economiesbut substantially below levels in East Asia.

But central and eastern Europe and the CIS maywell be able to achieve relatively high output growthwith relatively moderate investment rates. Production



growth per unit invested is likely to be much greaterin central and eastern Europe and the CIS than inEast Asia. This is because the east Europeaneconomies offer a vast supply of highly skilled labourand vacant “old” machines and buildings – factors ofproduction which are currently under-utilised and canbe employed with increasing efficiency in the yearsahead, even in the absence of a major increase in thequantity of investment.

At the same time, there is a good chance that theratio of investment to GDP will rise in the yearsahead. Strong investment growth has been recorded inthe past year, for example in Poland and the CzechRepublic. It is worth remembering that investment insome of the most successful East Asian economiesremained below or close to 20 per cent of GDP duringthe initial part of the high-growth era. The famousAsian investment ratios of 35-40 per cent were seenonly many years later. A similar pattern may wellemerge in eastern Europe.

Inflation has fallen sharply in the past few years inthe vast majority of countries in central and easternEurope and the CIS. Inflation is now below 10 percent in six of the EBRD’s countries of operations. Anincrease in the predictability of market and costconditions will provide a welcome boost to investment.

Only two years ago, prices rose more than 10-foldin 10 of the 12 member states of the CIS. By October1995, inflation exceeded 250 per cent only inTurkmenistan, while in two CIS countries, Kyrgyzstanand Moldova, inflation fell to a range between 15 and25 per cent.

Foreign finance / domestic savings

Under the assumption of greater economic andregulatory stability, and further advancement ofmarket reforms, investment opportunities will expand.Further macroeconomic stability, in particular, willhelp governments as well as private entities in theregion to attract funding from abroad. While theexperience from elsewhere in the world shows that thebulk of the region’s investment needs will have to befinanced from domestic savings both now and in themedium term, there is plenty of scope for foreigndirect investment into the region to grow.

Foreign capital markets tend to remain cautiousuntil policy changes have become firmly established.Once an inviting investment environment is regardedas lasting, however, the flow of funds can rise sharply.

The role of the EBRD

External contributions that are directly associatedwith quality investments and that involvecommitments for the medium term can help boost thegrowth potential of the region in a number of ways.Foreign participation in the investment process willfacilitate a skill transfer from other countries and willhelp accelerate the much-needed industrialrestructuring during the period of market-orientedtransition.

The role and responsibility of the EBRD isimportant in this regard. It is not only a provider offoreign savings and a facilitator of the skill transferfrom the advanced economies. The Bank’sparticipation also helps stimulate domestic savings inthe region by raising the average returns toinvestment. Both industrial and infrastructure projectscontribute to this process. The EBRD aims, throughits financial sector projects, to improve the efficiencywith which domestic savings are allocated toproductive uses. Its scope to operate in accordancewith these objectives is expanding as the authoritiesin most of its countries of operations increasinglyadvance the market-oriented transition. Meanwhile,the actions of the Bank will directly contribute to thetransition both through financial transfers and bydeveloping prototypes and frameworks that willinfluence the future transition of the region.

The EBRD has been actively involved – byarranging seminars and through an extensive networkof direct contacts – in the exchange of views withparliamentarians from the countries of operations onthe processes at work in market economies.

Institution building

EBRD operations have played a catalytic role ininstitution building and in fostering the process oftransition through the promotion of competition,market efficiency, raising the standards of corporategovernance and the development of skills. The Bankhas directly helped improve the functioning ofmarkets for goods and services through itsparticipation in the creation of wholesale markets in anumber of countries of operations. In preparing itsinvestments, the Bank has increasingly emphasisedthe importance of compliance with applicable law,respect for the rights and interests of minorityshareholders, and ethical conduct on the part ofmanagers and directors. When specific concerns havearisen as to the governance of a particular Bank



client, it has taken up these concerns directly with themanagers of the enterprise. In 1995, the EBRD beganto articulate coherent standards of corporategovernance to serve as a model in the future: in theRussian Novoship transaction, the Bank required theenterprise to agree to abide by specific principles ofcorporate governance as a condition to its investment.

The Bank has also contributed substantially to thedevelopment of local financial markets. An example isthe establishment in June 1995 of the RussianNational Registry Company, providing independentregistrar and transfer agent services for debt andequity securities issued by Russian enterprises thatmeet international standards. The project strengthenscapital markets in Russia by offering otherwise non-existent, reliable evidence of equity and debtownership. The project also resulted in a PresidentialDecree being issued in July 1995 which shed somelight on the question of the potential unlimitedliability of a shareholder for transactions entered intoby a joint-stock company and in bankruptcyproceedings.

Another instance is EBRD participation in theprivatisation of local banks such as WielkopolskiBank Kredytowy (WBK) in Poland and the ForeignTrade Bank in Hungary. In the case of WBK, forexample, initial restructuring efforts helped improvethe internal organisation of the bank and strengthenthe ability of WBK’s staff to evaluate creditapplications. At last year’s Annual Meeting, the Bankorganised a round table discussion entitled“Regulation of Capital Markets and CollectiveInvestment Vehicles in the Bank’s Countries ofOperations”, which covered the aspects ofinternational placements and offerings of shares anddebt securities of central and east European issuers.

Legal transition

The EBRD’s mandate to work with both the privateand public sectors places it in a unique position tomake a valuable contribution to law reform tofacilitate transition in its client countries. At themicro level the Bank has provided legal advice andassistance in removing legal bottlenecks in the contextof specific investments. At the macro level it is wellplaced to assist in identifying priorities in legaltransition. Throughout the year the Bank has liaisedmore closely with other multilateral and bilateral

entities engaged in law reform, particularly the WorldBank. It has also entered into a dialogue with theEuropean Union on closer collaboration in the field oflaw reform.

One example of the EBRD’s contribution toimproving the operational environment through itslegal transition activities is the ongoing assistance itprovides to several countries in the reform of theirsecured transactions laws. Using its Model Law onSecured Transactions, which was developed in 1993-94, the Bank has been assisting Azerbaijan,Bulgaria, Hungary, Kyrgyzstan, Moldova, the RussianFederation and the Slovak Republic on thedevelopment of secured transactions legislation. Keyelements of the Model Law have also been drawnupon by other law reform providers in the reform ofsecured transactions laws in Armenia and Poland.

During the year, the Bank became an activeparticipant in the Foreign Investment AdvisoryCouncil in Russia, which operates as an informalforum for voicing concerns and identifying legalobstacles relating to investments. In addition, inresponse to a request from the Russian FederalBankruptcy Agency, the EBRD provided assistance incarrying out an independent review and commentaryon a proposed draft of the new Russian law onInsolvency of Enterprises and other related laws andregulations. The Bank also provided legal advice toother countries of operations on a range of topics,including foreign investment legislation, mining law,concession law and shipping.

Investments with Bank participation in localnetworks of roads, telephone lines and electricityconnections have made it possible for producers andconsumers in industry, agriculture and the servicesector to communicate and trade in ways anddirections that used to be blocked. This stimulatescompetition and creates new markets. It alsoencourages the transfer of skills and innovation. A precondition to making certain infrastructureinvestments, particularly those with private sectorparticipation, has been the establishment of anappropriate legal and regulatory framework. The Bankhas provided legal advice to governments on thelegislation and institutions needed to prevent abuse ofa monopoly position and to safeguard the publicinterest.



Introduction

In 1995 the EBRD continued to respond to thechanging demand for its services from its countries ofoperations. As in previous years, the portfolio is aresult of the changes in countries’ needs and theirrelative progress of transition.

The most salient changes in the portfolio over thepast five years are highlighted in the Review of theyear (pages 5 to 7). This section breaks down theportfolio in more detail according to three elements:country, sector and product mix.

Country analysis

The EBRD continued to focus on developing activitiesin the countries where it had been less active inprevious years, especially countries in the early andintermediate stages of the transition process. Itsprogress is reflected in the increase in the share of totalcommitments of countries at these stages, particularlyRussia, in 1995. By the end of the year, the EBRD hadapproved investment projects in all but one of its 25countries of operations and had approved 17 regionalprojects. First disbursements took place on projects inAzerbaijan, Croatia, Georgia and Kyrgyzstan.

Strengthening the local presenceIn line with the EBRD’s policy of building a stronger localpresence, 1995 witnessed a consolidation of its Resident Officenetwork. The Bank opened a Resident Office in Ljubljana,Slovenia, and regional offices in St Petersburg and Vladivostok,Russia. At the end of the year it had 18 local offices covering16 countries of operations (listed on page 87). The staffing ofthe Resident Office network has grown from less than 30professional staff at the end of 1993 to 66 by the end of 1995.Half of the present professionals have been recruited locally,whereas in 1993 virtually all were expatriate staff. The ResidentOffices also employ locally hired support staff. The Resident Offices are moving from a representational roletowards deeper involvement in operations, and this is beingreflected in the staffing profile. As the EBRD’s portfolio grows,crucial tasks such as project monitoring and supervision dependincreasingly on local offices, and where a vibrant local privatesector is emerging they are assisting in the preparation of newdeals. Also most financial sector operations depend on closecooperation with local banks and financial institutions. Plans are under way for offices in Azerbaijan, Croatia, FYRMacedonia and Moldova, and two additional sub-offices inRussia; these will bring the number of EBRD local offices to 24in 1996, employing about 200 mostly local people.

EBRD financing approved by countryCumulative to

1995 31 December 1995---------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------

Number ECU million Number ECU million---------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------Russian Federation 27 811 64 1,717Hungary 13 406 44 1,063Poland 9 107 50 818Romania 4 139 21 582Czech Republic 5 100 21 452Slovak Republic 5 71 14 361Slovenia 3 61 15 332Ukraine 12 148 17 303Kazakstan 1 96 3 203Bulgaria 4 66 15 192Croatia 4 95 7 185Uzbekistan 5 76 7 176Belarus 1 21 6 162Lithuania 6 58 10 138Estonia 4 33 11 134FYR Macedonia 3 45 8 120Latvia 4 51 9 112Moldova 6 80 7 105Kyrgyzstan 3 68 5 83Armenia 1 12 3 74Azerbaijan 2 26 3 68Albania 1 10 7 58Turkmenistan 1 24 2 52Georgia 1 9 2 23Regional 9 244 17 341---------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------Total 134 2,855 368 7,853---------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------

Sectoral analysis

In 1995 the financial institutions sector again formed– by a large margin – the main element of theportfolio both by value and number of projects (seetable and graph overleaf). Of all signed projects,22 per cent were wholesale operations and a further6 per cent were direct financial institutions sectoroperations, representing a total of 28 per cent

Review of 1995 operations

Tajikistan

Georgia

Turkmenistan

Albania

Azerbaijan

Armenia

Kyrgyzstan

Regional

Latvia

Moldova

FYR Macedonia

Lithuania

Kazakstan

Estonia

Belarus

Uzbekistan

Croatia

Bulgaria

Ukraine

Slovenia

Slovak Republic

Czech Republic

Romania

Poland

Hungary

Russian Federation

0 200 400 600 800 1000

Cumulative commitments by country by yearECU million

increasing the geographical

spread

1995

1994

to end 1993

committed to financial institutions. Manufacturingprojects and those that helped to create the physicalinfrastructure needed for private sector growth alsoremained prominent, particularly transport, energyand telecommunications.

EBRD financing approved by sectorCumulative to

1995 31 December 1995---------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------

Number ECU million Number ECU million---------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------Finance, business1 63 1,185 147 2,666Transport 13 395 44 1,362Telecommunications 6 267 29 935Manufacturing 22 349 61 911Energy/

power generation 11 325 27 854Extractive industries 4 97 12 503Primary industries 3 105 16 216CEALs, co-financing

lines and RVFs2 1 36 7 176Commerce, tourism 2 39 14 134Community/social

services 6 43 10 81Construction 2 16 2 16---------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------Total 134 2,855 368 7,853---------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------

1 The finance, business sector does not equate with the financial institutionssector. See page 17 for information on the financial institutions sector.

2 Central European Agency Lines, Regional Venture Funds.

Product analysis

The EBRD tailors its activities to meet the changes indemand as countries progress in transition. It altersthe financing mechanisms that it uses to match theneeds of each country. An analysis of the relationshipbetween the evolution of the EBRD’s product mix andthe countries’ progress in transition shows that theBank is not following a static supply-side drivenpattern in its operations, but is operating at theforefront of transition.

The share of equity funds in overall Bank activitytends to grow as countries move through theintermediate stages of transition. Responding todemand, the EBRD increased its Board-approvedequity investments from 21 to 24 per cent during1995, to ECU 695 million for the year. At year-endalmost one in three of its projects involved equity.

The share of direct private lending rises ascountries move into the intermediate stages oftransition, and increases even more as they enter theadvanced stages. Credit lines also grow at theintermediate stages but fall at the advanced stages, ascountries get better access to other foreign financeand their own banking systems improve. ApprovedEBRD loans (including credit lines) increased during the year: up 15 per cent from 1994 toECU 1,865 million in 1995.

A credit line is an EBRD loan to a local bank, to provide fundingfor small subloans extended by the local bank to localborrowers. A guarantee is a legal obligation to compensate alender if the borrower fails to perform under conditions specifiedin the guarantee.

The Bank’s use of guarantees and other off balancesheet items, which help encourage investors byisolating and transferring risks, particularly at theintermediate stages of transition, continued to growdramatically. From ECU 136 million at the end of1994, guarantees rose to ECU 410 million at the endof 1995, an increase of over 200 per cent.



increasingwholesaleoperations

EBRD financing approved by sector 1995

Power/energy 11%

Other sectors 4%

Extractive industries 3%

Finance, business 42%

Manufacturing 13%

Transport 14%

Primary industries 4%Telecoms 9%

EBRD financing approved by type of facilityCumulative to

1995 31 December 1995----------------------------------------------------------------------------------------------------------------- -----------------------------------------------------------------------------------

Number ECU million % Number ECU million %----------------------------------------------------------------------------------------------------------------- -----------------------------------------------------------------------------------Loans 77 1,865 65 236 5,932 76Equity 46 695 24 119 1,511 19Guarantees1 11 295 10 13 410 5----------------------------------------------------------------------------------------------------------------- -----------------------------------------------------------------------------------Total 134 2,855 100 368 7,853 100-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------1 Guarantees and other off balance sheet items

Several innovations have been introduced to increaseproductivity. The central one is a wholesale approachwith financial and industrial partners, which willenable the Bank to address more efficiently thefinancing needs of the rapidly increasing number ofprivate enterprises, particularly SMEs, in its countriesof operations. A related approach has been tradefacilitation programmes, several of which were signedin 1995. (See also pages 6 and 8.)

Financial institutions

The Bank’s operations in the financial sector continue to pursuethe following important objectives:– privatisation and restructuring of the financial sector– channelling of loan and equity funds to the emerging private

sector– support of a variety of new financial sector institutions– development of trade finance and trade-related services.For this purpose the EBRD provides a full range of bothwholesale and direct financial instruments and products.

The EBRD’s continued emphasis on the support andstrengthening of the financial sectors of its countriesof operations has resulted in 43 signed agreements(totalling ECU 545.8 million). On a cumulative basisthis means that the EBRD has signed ECU 1.65billion for 114 projects in the financial sector as of theend of 1995, or 28 per cent of all cumulativeoperations.

EBRD signed operations to financial institutionsCumulative as at 31 December 1995

Numberof projects ECU million %

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------WholesaleCredit lines 33 606 46Apex facilities 6 326 25Stand-by and guarantee facilities 2 55 4Trade finance 5 86 7Agency/co-financing lines 3 10 1Equity funds – standard 21 200 15Early-stage equity 3 2 0Special Restructuring Programmes (SRPs) 1 30 2Multi-project finance 2 6 1------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Total 76 1,322 100------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Direct to financial institutionsEquity investments in banks 24 181 55Equity investments in

insurance companies 5 5 2Equity investments – other 3 4 1Loans to banks 4 101 30Loans – other 1 29 9Bonds – underwriting 1 8 3Business services 1 2 1------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Total 38 330 100------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Total financial institutions operations 114 1,652------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Share of cumulative commitments %

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Wholesale 22Direct 6Financial institutions 28------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As in previous years, the EBRD took the lead in anumber of significant equity operations in thefinancial sector. It participated in Hungary’s secondbank privatisation, that of Budapest Bank. Thistransaction broke new ground as the governmentreduced its holding by 60 per cent to 22.5 per cent foran amount of US$ 87 million. The EBRD acquired32.5 per cent, with GE-Capital as a strategic investorholding 27.5 per cent. Together with the strategicpartner, it will bring to Budapest Bank a wide range ofnew products, particularly focused on the retail andthe consumer finance market, which will stimulatedevelopment and competition in the financial servicessector.



meetingchangingdemand

Wholesale39%

Wholesale approvals

Direct61%

1994

Direct57%

Wholesale43%

1995

Product mix – 1995 commitments

Equity 12%

Loans66%

Credit/agency lines 15%

High-risk equity 1%Guarantees 6%



A new commercial bank in Ukraine, KievInternational Bank (KIB), capitalised at ECU 5 million,will be established with the EBRD’s participation ofECU 1.8 million. KIB will provide a full range ofcommercial banking and corporate finance services,focusing on long-term funding for medium-sized privateenterprises in Ukraine. The EBRD holds 35 per cent ofthe bank’s capital; the Ukrainian Financial Group holdsa further 35 per cent, and Kredyt Bank of Poland holds13 per cent.

A significant equity investment that the EBRDmade in 1995, its first capital market infrastructureoperation, was an ECU 1.2 million investment in theestablishment of a new company registry in theRussian Federation. This will help to end a criticalbottleneck in the development of Russian equitymarkets by providing large enterprises with anindependent share registration service to meet therequirements of both local and international investors.The new joint-venture company is 40 per cent ownedby two Russian institutions (NIKoil and United ExportImport Bank), which each invested ECU 1.6 million;the Bank of New York is the principal shareholder,with an ECU 2.3 million investment; and the IFC hasinvested ECU 1.2 million. The project is sponsored bythe Russian Federal Commission for Securities andCapital Markets and USAID provided technicalassistance support.

A framework agreement signed by the EBRDprovides equity financing up to ECU 11.7 million forco-investment with the Commercial Bank of Greece tosupport its investment programme in Balkan andBlack Sea countries. This ECU 35.5 million multi-project finance programme is designed to establishproject banks in several countries, initially inAlbania, Armenia, Georgia and Moldova. Theoperation will boost the transition process in thesecountries by providing financial services that areessential for modern business in markets where suchservices are often unavailable. The technical andmanagerial support provided by the Commercial Bankof Greece is expected to establish the project banks asbenchmarks of good banking practice in theirrespective markets.

Simple on-lending operations were furtherexpanded by the EBRD through an ECU 16.3 millioncredit line each to Tatra Banka and Istrobanka in theSlovak Republic for the dual purpose of financingsmall and medium-sized private enterprises and thefacilitation of trade operations. It also participated ina capital increase of Slovenska PolnohospodarskaBanka.

The EBRD’s first loan to a Croatian financialinstitution and its first private sector loan to thecountry was a credit line in the amount of ECU 27.2million to Zagrebacka Banka d.d., one of the strongestprivate sector financial institutions in Croatia. The 6-year loan facility furthers the development of theSME sector by providing funding for investmentprojects in both the corporate and retail sectors.

Two credit lines totalling ECU 18.7 million for on-lending through local commercial banks to privateSMEs were signed in Moldova, one with VictoriaBank, the other with Moldagroindbank.

In the past year the EBRD has made good progresson the implementation of the Apex facilities it set up inBelarus, Kazakstan, Kyrgyzstan, Russia (ESP/FIDP),Ukraine and Uzbekistan. In both Kazakstan andUkraine, the first tranches of their respective loanswere fully committed. Significant progress was alsomade in Belarus with respect to committing the firsttranche (ahead of schedule) of the loan. The onlyfacility that is not yet effective (and is beingredesigned) is that in Turkmenistan.

An Apex facility is a “two-step loan”, where the EBRD lends to amember country which then on-lends these proceeds to anumber of participating local banks (selected on the basis ofspecific criteria) for on-lending.

The full-scale ECU 234 million programme for theRussia Small Business Fund (RSBF) for micro andsmall enterprise development in Russia was approvedin 1995 by the EBRD’s Board of Directors. Half ofthis amount will be financed from the EBRD’sordinary resources, while the balance is to befinanced by the G-7 countries and additional donors.The RSBF, through its first two pilot programmes, hasdisbursed close to 1,000 loans to small businessesthrough Russian banks and has also made manyequity investments in various sectors of the Russian



economy. The RSBF continues to be extended to newbanks and regions, and at the end of 1995 the EBRDwas working with 15 Russian banks. The RSBF thuscomplements the Financial Institutions DevelopmentProgramme, where the EBRD works with 13 Russianbanks.

In the Baltic states, the EBRD focused its efforts onthe financial sector, recognising its importance as avehicle for providing finance to enterprises which,reflecting the size of the countries themselves, wouldbe too small to borrow directly from internationalsources. The Bank signed four new projects in Estonia,three in Latvia and three in Lithuania; they includedequity investments, credit lines and trade financefacilitation. The strategy of supporting the financialsector will continue, with the Bank exploiting the highlevel of development within the sector to introducenew products and to encourage innovation. Thestrategy of creating a core group of banks in each ofthe Baltic states, to represent a demonstration effectfor the banking system and at the same time to buildsolid defences against the turmoil of transition, hasproved to be giving results. The first phase of theBaltic Investment Programme, funded by the Nordiccountries and aimed at supporting SMEs, wassuccessfully completed in mid-1995. An extension ofthis programme, covering the period 1996-99, wasapproved subsequently by the Nordic and Baltic states.

Trade facilitation

One of the key aims of transition is to integrate countries intothe larger European and world economies. The EBRD offerstrade facilitation products aimed at strengthening specificfinancial and institutional infrastructures necessary for trade andso contributes directly towards enhancing trade flows. Suchproducts are intended to support local financial institutions thatlack the resources or experience to provide trade products ontheir own.

Trade facilitation operations signed by the EBRD in1995 included a loan of ECU 39 million to Investicnia Postovni Banka a.s., one of the oldest banks of theCzech Republic, which is currently the country’sthird-largest bank in terms of assets. The medium-term funding line is for export and pre-exportfinancing of products and services of Czech industrialcompanies.

Under the ECU 78 million Russian TradeFacilitation Programme, the EBRD signed an ECU15.6 million guarantee line with the Russian StolichnySavings Bank, which will enhance its capacity toprovide trade finance services to its clients and todevelop its trade-related business with its foreigncorrespondent banks. Stolichny Bank is the first of agroup of Russian banks to be signed up under theprogramme, which will run for two years. Theprogramme will ultimately include as many as10 Russian banks, agreements with three of whichwere signed in 1995.

A trade facilitation agreement was also concludedwith the Hungarian Foreign Trade Bank (MKB), wherethe EBRD holds a 17 per cent equity stake. Throughthis agreement, the EBRD is for the first time directlypromoting trade between its countries of operations.The agreement enables MKB and a group of selectedbanks from the EBRD’s countries of operations todevelop their trade-related services, which therebybecome more accessible to their client companies;thus the project encourages trade between Hungaryand other countries of the region. Under the terms ofthe agreement, both MKB and the EBRD will provideup to ECU 19.5 million to share country and creditrisks in the financing of foreign trade transactions.The EBRD will extend its guarantee for the benefit ofMKB, which will confirm letters of credit issued byqualifying banks in the region and issue trade-relatedguarantees upon instruction of such banks.

The EBRD also signed its first agreement with an Uzbek bank (the National Bank of Uzbekistan for Foreign Economic Activity) as part of theECU 39 million trade facilitation programme set up infavour of a selected group of banks incorporated inUzbekistan. The programme will improve the ability ofthese banks to finance trade flows between thecountry and its major commercial partners. The tradefacilitation programme is for an initial 2-year term.Under the facility, the EBRD will guarantee theobligations of participating Uzbek banks, under trade-related financial instruments, to participating foreigncorrespondent banks. The EBRD will guarantee ahigh percentage of the amount outstanding and leavethe banks and their correspondents to negotiate as tothe necessity for security for the uncovered element.

integratingcountries

into worldeconomies



Leasing and other non-bank financial intermediaries

The establishment of other forms of financing such as leasingwill mean more choice for the growing private sector, which islooking for better terms and conditions for procuring equipmentand services.

The EBRD participated in the establishment of theSt Petersburg Investment Finance Company. This willprovide term lending and related corporate financeadvisory services to joint ventures and private SMEsin the St Petersburg and North-West Russian area; itwill also provide support to encourage foreign directinvestment into the region. Shareholders include theEBRD, Finnfund, Merita Bank, Bank St Petersburgand Baltiyskiy Bank.

The Bank also participated in the establishment ofthe first leasing company in Uzbekistan, UzbekLeasing International AO. The EBRD’s initialinvestment represents 15 per cent of Uzbek Leasings’sshare capital; sponsors are Malayan Banking Berhad(the largest bank in Malaysia) and the Uzbek NationalBank for Foreign Economic Activity, and the IFC isparticipating on the same basis as the EBRD. Thecompany will provide term financing of machinery,transportation vehicles and office equipment for joint-venture companies and SMEs.

Lastly, the EBRD participated in the establishmentof Polski Fundusz Leasingowy S.A., which willfinance investment in business assets by companies inPoland. It will be the country’s first dedicated big-ticket asset finance company. The EBRD’s investmentof ECU 1.5 million formed part of the initial equity ofthe company; other investors include the PolishAmerican Enterprise Fund and a subsidiary of Orix,the leading global asset finance company.

Insurance sector

The development of modern and efficient insurance markets inits countries of operations is an increasingly importantcomponent of the EBRD’s activities. Modern insurance marketswill contribute to an increased protection of assets, stimulatesavings and play a major role in the establishment of capitalmarkets in the region. The EBRD is planning to become acatalyst for the development of promising private sectorinsurance companies and will play a major role in therestructuring and privatisation of state-owned insuranceinstitutions.

The EBRD continued in 1995 to promote thedevelopment of the insurance markets in its countriesof operations. In Poland, the Bank invested inBankowe Towarzystwo Ubezpieczen i ReasekuracjiHeros S.A. (Heros) one of the country’s largest andmost promising private sector insurers, subscribing to17.6 per cent of the company’s shares.

The Bank’s first investment in the Russianinsurance sector was concluded with a participation inthe establishment of a Russian life insurancecompany together with Russia Life Management Ltd(a consortium comprising, inter alia, ScottishProvident Institution and Employers ReassuranceInternational), as well as the Framlington RussianInvestment Fund and the Independent Trade Union ofServicemen of the Russian Federation.

In 1995, the EBRD and Winterthur, the leadingSwiss international insurer, developed a multi-projectfacility whereby the EBRD will participate in thedevelopment of Winterthur’s subsidiary companies inthe Czech Republic, Hungary, Poland, the SlovakRepublic and Slovenia over the next three years. Thisproject will involve the establishment of newcompanies in the fields of non-life, life and privatepensions, and should have an important demonstrationeffect in the local markets of these five countries.

Equity funds

Recognising the need for private equity to finance the growth ofprivate sector companies and to help them to restructure andexpand their operations, the EBRD continues to sponsor equityfunds in all its countries of operations. These funds aremanaged by experienced professionals with a track record inemerging markets and all have local presences.

During 1995 the EBRD contributed ECU 63.2 millionto eight new funds, mobilising a total of ECU 230.4million (including EBRD contribution) in equity.These were usually targeted on medium-sized privatesector companies in amounts between ECU 0.5 and3 million. To date the EBRD has invested ECU 200million in 21 funds, representing a total equitycommitment from all sponsors of ECU 971 million.More than 150 individual investments have beenmade to date and over 52 per cent of funds aredisbursed.

The EBRD subscribed to 20 per cent of theECU 78 million East European Food Fund, the main



objective of which will be to make equity and equity-related investments in food and beverage companies.The fund was the first joint activity between JupiterAsset Management (JAM) and Commerzbank AG,since the latter acquired JAM’s parent company inearly 1995. Most of the fund’s investments will be inunlisted companies issuing shares through privateplacements and in privatisations. The balance will beinvested in listed securities.

The Bank also participated in the establishment ofSector Capital, a financial company integratingRussian stock portfolio management, financialadvisory services and a direct investment fund. TheEBRD’s ECU 7.7 million investment gave it an initial25 per cent of the company. The Sector Capital Fund(one of three entities to be set up under SectorCapital) will provide direct investment capital,particularly in the transportation and logistical sectorsfocusing on the Russian Far East. Major shareholdersinclude the IFC, Sovcap, Inc. (a Russian advisoryfirm), and the European Privatisation and InvestmentCompany, an Austrian-based financial advisorycompany.

The EBRD also entered into a co-financingagreement with the IØ Fund, a public institutionoperated on a private sector basis by the Danishgovernment. Participation enabled the fund tomobilise more private equity transactions in theBank’s countries of operations.

Privatisation and restructuring

Early-stage equity instruments

The process of transition to market economies in the EBRD’scountries of operations creates a large population of SMEs inneed of long-term capital, management assistance and effectivegovernance. Equity and quasi-equity finance is appropriate duringthis delicate early stage, because it strengthens the balancesheets of the enterprises and does not make unsustainabledemands on cash flow. However, equity is not usually availablefrom the emerging local capital markets, nor from foreigninvestors because of the perceived higher risk.The equity financing instruments used by the EBRD to supportprivatisation and restructuring of medium-sized enterprises arecalled collectively “early-stage equity”. In mature marketeconomies, this term is often applied to seed or start-up capitalfor new businesses. The term is chosen here because the equitycapital provided will usually be the first the enterprises receiveduring or after privatisation. Post-Privatisation Funds (PPFs) andSpecial Restructuring Programmes (SRPs) are two early-stageequity instruments developed by the EBRD.

The first PPFs were established in Russia in 1994 asRegional Venture Funds (RVFs). The implementation ofthe RVF programme has continued in 1995, with sixmore RVFs approved during the year: the Lower Volga(co-financed with the USA), Southern Russia (co-financed with France), the North-West (co-financedwith Norway, Sweden and Finland), Central Russia (co-financed with Germany), Western Russia (co-financedwith Italy) and West Siberia (co-financed with the EU).One more RVF is planned for 1996, completing theprogramme. The four RVFs approved in 1994 havestarted to make investments in sectors such as food,glass, textiles, construction materials and services. Thisfirst experience confirms the impact on SMEdevelopment of equity capital combined with technicalcooperation. The latter is provided by donor countriesto assist the transition to the market economy.

In central Europe, the first PPF was approved forthe Slovak Republic. It similarly addresses the capitalneeds of small and medium-sized, newly privatisedenterprises. It also inaugurates a new form ofpartnership with the EU’s Phare programme, whichhas co-invested with the EBRD in addition toproviding technical cooperation funds. A PPF with thesame structure is being prepared for Romania.

SRPs have been designed for countries (such as Poland,Hungary and Slovenia) where restructuring is undertaken beforeor during privatisation. They associate closely the state agenciesin charge of managing public assets, the local banks and theEBRD. The SRPs take majority ownership in state-owned or newlyprivatised enterprises, with the purpose of fostering theirrestructuring, and prepare them for further sale to privateinvestors.

The first two SRPs were launched in Slovenia during1995, in cooperation with the Development Fund ofthe Republic of Slovenia and Splosna Banca Koper, aSlovene commercial bank. They target 12-15 medium-sized Slovene enterprises that belong to the portfoliosof these two institutions, making equity investments ofup to ECU 30 million. Three more programmes havebeen developed for Poland, Hungary and the Balticstates; these are expected to be launched in 1996.

supportingnewly

privatisedenterprises



Complementary initiatives

The other EBRD privatisation and restructuring initiatives arefocused on the concrete implementation of programmes or pilottransactions. The key criteria for the EBRD’s participation arethe demonstration effects and the possibility of extendingfinance to sustainable projects.

The EBRD is supporting the Polish Mass PrivatisationProgramme (MPP) by extending loans to NationalInvestment Funds to which the government hastransferred shares in 522 companies. The proceeds ofthe loans will cover the early operating costs beforethese can be met by cash flow generated by the Fundsfrom their companies’ operations. In addition, theBank intends to support companies participating inthe MPP, either directly or through finance providedto the National Investment Funds.

In Romania, the Investment-Led PrivatisationProgramme supervised by the EBRD and funded byEU-Phare has assisted the State Ownership Fund toclose three large privatisation transactions. Theprogramme has been extended to provide advice inthe context of Romania’s current mass privatisation.

To complement the work of international agenciesalready advising the Ukrainian government onprivatisation issues, the EBRD has been focusing onpilot privatisation transactions in that country. Thelargest example to date has involved Ukrrichflot, ariver shipping company which the EBRDaccompanied through the entire cycle, from the startof privatisation in 1993 to the provision of loanfinance in 1995.

Investment can catalyse a stalled privatisationprocess and foster a company’s strategic development,as shown in Hungary when the EBRD invested in theEGIS pharmaceuticals company in December 1993.This was the first step in the privatisation process andwas followed by a successful flotation on BudapestStock Exchange where it became one of the mostactively traded stocks. The management of thecompany undertook a gradual restructuring andidentified the need for a strategic partner. In thesecond half of 1995, a European pharmaceuticalscompany purchased the EBRD’s shares along withthose of another investor.

Capital recyclingIn 1995 the EBRD sold its 12 per cent stake in Cokoladovny a.s.,the Czech Republic’s leading confectionery company and theBank’s first and most mature investment in the country. Thismarks a natural departure for the EBRD, as Cokoladovny is atransformed company able to compete and succeed in itsmarkets: since 1992, it has restructured and rationalised itsproduction operations, distribution and sales organisation, and ithas a strong brand portfolio.

The sale illustrates a cycle which allows the EBRD’s funds to be redeployed for fresh investment. The shares were sold toNestlé S.A. of Switzerland and Groupe Danone (formerly BSN) of France, the company’s industrial partners from its originalprivatisation.

In Russia, the ECU 78 million loan extended to theheavy trucks manufacturer KamAZ is the largestcommitment made by the EBRD for corporaterestructuring. It will be used primarily for financingworking capital, paying suppliers and employees, andcapital expenditures. The restructuring of thefinancial debt of KamAZ is a condition of thedisbursement of the EBRD’s loan.

The TurnAround Management (TAM) programmehas continued to assist qualified enterprises to moveto the market economy. To date, about 240 seniorindustrial advisers have been engaged by the EBRDto provide “hands-on” advice. Some 150 enterpriseshave now been involved with the TAM Programme in12 countries. Operations have been extended to theRussian Federation with the commencement in thelast quarter of 1995 of a 60-enterprise programme.

The EBRD’s education and training programmebuilds the capabilities of in-country institutions todeliver training and other services locally in supportof the transition process and the Bank’s activities. In1995 these bank training schools and businessadvisory centres reached over 15,000 companymanagers and bankers. The Bank also delivered fiveseminars at the Joint Vienna Institute on practicalenterprise management skills to 125 senior managersnominated by EBRD Banking teams.



Retainer contract between the EU and the EBRDThe EBRD has continued to provide technical services, on acost-recovery basis, to the EU’s Phare programme and to itsbeneficiary countries. On the basis of accumulated privatisation,restructuring and banking experience, EBRD bankers have, inresponse to Phare’s requests, advised on the design and/ormonitoring of Phare operations. Target areas have included:removal of obstacles to investment in Albania; the massprivatisation programmes in Bulgaria and Romania; privatisationand restructuring in the Slovak Republic; strengthening of thefinancial sector and/or SME financing in Albania, Bulgaria,Hungary, Poland (including support to loan work-out departmentsof state banks), Romania and Slovenia; and regional investmentcompanies in the Czech and Slovak Republics.While achieving a direct policy and operational impact on transition,these advisory activities are complementary to the EBRD andenhance the success of the operations of both Phare and the Bank.

Infrastructure sectors

Telecommunications

The type of telecommunications projects in which the EBRDinvested in 1995 shows a shift from the Bank’s “firstgeneration” of projects. Access to internationalcommunications, particularly in capital cities, is now muchimproved in almost all the region, both as a result of privatesector investment and earlier EBRD-funded projects. Anincreasing proportion of investment in 1995 was directedtowards the development of local networks, with the objectiveof broadening the access to telecommunications for smallbusiness and residential subscribers. The EBRD anticipatesthat the heaviest investment in the telecommunications sectorover the next five years will be in the local network, for thedelivery of telecommunications and cable television, andemploying both traditional wire-line solutions and emergingwireless alternatives.

The EBRD’s strong commitment to telecommunicationsinfrastructure development continued during 1995,with six projects approved over the course of the year,representing a Bank investment of ECU 267 million.At the end of 1995, the EBRD’s portfolio of approvedtelecommunications transactions stood at ECU 935million, making it the largest financial investor in thissector in the region.

Several examples of EBRD projects aimed at localnetwork development are to be found in Hungary.Over the course of 1995, the Bank approved fourseparate projects, representing a total Bankinvestment of ECU 142 million, for the start-upfinancing of recently created local telephone

concessions in southern and central Hungary. Theseconcessions were able to attract foreign investorslargely due to the relative clarity of the Hungarianregulatory environment, which serves as something ofa model for other countries in the region. Similar localconcession investment activity is expected to occur inPoland and possibly the Czech Republic in 1996.

In 1995, the Bank also co-arranged an ECU 233.9million loan for Matav, the privatised Hungariannational operator. By taking the longer maturities forits own account, the EBRD was able to arrange for thesyndication of ECU 150 million to commercialinvestors, demonstrating the rapidly improvingperceived creditworthiness of telecommunicationsinvestments, particularly in the countries moreadvanced in the transition.

The EBRD has taken the lead in assistingtelecommunications regulatory reform. In countriessuch as Hungary, such reform has already paiddividends by allowing the country to attract significantprivate investment. Over the course of 1995, the Bankorganised extensive technical cooperation efforts in anumber of countries directed at producing appropriatetelecommunications legislation and regulations, whichwill lay the foundation for large-scale mobilisation ofprivate investment while striking a proper balancebetween public and private interests. To this end, inApril the EBRD convened a regulatory round tableand a major symposium on the theme “Acceleratingtelecommunications development in central andeastern Europe and the CIS”. This was attended byover 250 delegates, including many ministers ofcommunications and PTT directors from the region.

In the last quarter of 1995, the EBRD wasrequested to take the lead in assisting thereconstruction of Bosnia and Herzegovina’s shatteredtelecommunications infrastructure. By the year’s end,the Bank had begun detailed assessment and planningof both the physical reconstruction programme and theassociated institutional development programme, bothof which will be needed to revitalise a sector whichwill play a critical role within Bosnia andHerzegovina’s overall reconstruction and economicdevelopment.

committed toinfrastructure

development



Transport

In the transport sector, the EBRD gives priority to matters ofefficiency and corporatisation, leaving the issue of ownership tobe determined by the individual countries. These, in turn, areexpected to be guided by the experience gained from the moreadvanced efforts at privatising transport infrastructure inWestern countries.

The EBRD’s work in the transport sector continued itsstrong growth during 1995. Thirteen transport projectswere approved, adding financing of ECU 395 million tothe pipeline of projects already under implementation.At year-end, the Bank’s investment in its 44 approvedtransport projects stood at about ECU 1.4 billion. Total disbursement for transport projects under imple-mentation amounted to ECU 226 million in 1995.

As transport infrastructure investments naturallylie primarily within the state sector, some 50 per centof the EBRD’s transport project commitments are inthe state sector compared with the average of 38 percent for all its project commitments. This ratio is notexpected to change significantly in the next few yearsbecause of demands from the Bank’s countries ofoperations for an efficient transport system which cansupport the overall economy and stimulate the growthof the private sector.

Nevertheless, the EBRD is pursuing opportunitiesto get the private sector more involved in transport-related projects. This is particularly true for projectsthat support the road haulage, shipping and airlineindustries, which often involve joint ventures betweena Western partner and an established local company.A typical example is the Ukrainian Iveco-Kraz truckmanufacturing project, at ECU 14 million the EBRD’slargest investment in the Ukrainian private sector. Thejoint venture links Iveco SpA, a leading Italian truckmanufacturer, and the Kremenchug Automobile Plant,Ukraine’s biggest commercial vehicle manufacturer.

However, even in the more traditional state sector,opportunities to involve the private sector have beenfound and are expected to take on added significance.

Examples include toll road projects executed as build-operate-transfer (BOT) schemes, such as the M5motorway in Hungary, which saw financial closing inDecember. Other examples are airport terminals andport superstructures where the airport and portauthorities, acting as landlords, lease out space forprivate operators to build and operate specialisedterminals for a predetermined concession period. Inthis category, an ECU 14.8 million project will enableMoldova to develop a riverport oil-importing facilityon the River Danube, allowing the country to meet itsenergy requirements more cost-effectively andefficiently. The facility will be majority privatelyowned, the Moldovan shareholder being the largest.

In the railway subsector, the EBRD has focused onthe much-needed restructuring of the railways as aprerequisite to attracting private sector interest. TheCzech and Bulgarian railway projects signed inSeptember and November respectively are examplesof this policy. Future projects may include privatesector involvement in rolling stock leasing,maintenance works and even specialised trainoperations. The first EBRD rail project in Bulgariawill help limit the need for public financing and setthe stage for future private sector participation. Thetotal project cost of ECU 229.9 million is co-financedby the World Bank, export credit agencies and EU-Phare. An ECU 35.1 million loan will help to upgrade455km of the Czech Republic’s key railway corridor,which interconnects Vienna, Prague and Berlin. Otherproject funding is being provided by the EIB, TheExport-Import Bank of Japan, Kreditanstalt fürWiederaufbau (KfW) and EU-Phare.

The EBRD continued its active role indevelopment of the Via Baltica road connection on aregional basis together with the Baltic states, Finlandand Poland.



Power and energy utilities

In 1995 the region saw more movement than before towardsreform in the energy sector, which is expected to continue in1996. Leading the way was the successful privatisation of mostof the electric and gas utilities in Hungary. In many of theBank’s countries of operations tariffs increased in real terms. Insome cases, however, this has led to a growing problem ofaccounts receivable and the Bank’s attention is increasinglyfocused on promoting better collection practices anddetermining effective tariffs. A number of countries have alreadytaken steps to address this issue.

As economies in the region are stabilising andbeginning to recover, a clearer picture is emerging oftheir energy sector investment needs. In 1995 EBRDoperations were directed towards increasing energyefficiency, supporting the integration of countries ofoperations with western Europe, promotingcommercialisation of state-owned utilities, andmobilising co-financing and private funds to meeturgent investment requirements. All projects approvedwere high priorities at national level, as demonstratedby least-cost development plans for the sector,including explicit evaluation of demand-side andeconomic pricing policies on demand. The Bankprovided its first public sector power loans in Croatia,Kyrgyzstan, Moldova and Romania for rehabilitationand energy efficiency investments. It also made asecond loan to Albania and initiated new projects inseveral other countries.

In Croatia, the Bank signed a loan of ECU 34.3million equivalent to a project to support thereconstruction of the distribution network in war-damaged areas. A programme of technical cooperationwas launched in parallel to strengthen the financialmanagement of the sector and promote institutionaland regulatory reforms.

A loan of ECU 29.6 million went to Kyrgyzstan forthe upgrading of the transmission system andreduction of transmission losses. This project was vitalin ensuring a reliable power supply to a large privatesector gold-mine development also financed by theBank. These complementary loans demonstrate theunique mandate of the EBRD to work with both publicand private sector clients to facilitate the transitionprocess.

The first EBRD energy efficiency loan to Moldova,of ECU 18.6 million, is intended to reduce heatinglosses in the Chisinau district heating network and tosupport reforms for its commercialisation. Moldova isentirely dependent on energy imports, of whichdistrict heating accounts for 15 per cent. This projectwill help improve the country’s energy efficiency,reduce fuel imports and contribute positively to thecountry’s balance of payments and the government’sstabilisation programme.

The Bank also made its largest-ever power sectorloan of ECU 78.1 million to the Romanian powerutility RENEL, to improve efficiency of the powersupply system through rehabilitation of four thermalpower plant units and upgrading of the transmissionsystem. Rehabilitation of such essential infrastructurewill increase operational efficiency and help Romaniaachieve the technical standards required forinterconnection with the western European grid. Theloan is also designed to encourage private sectorinvestment and development of a competitive andefficient power industry. Co-financing for this projectwas mobilised from the EIB and EU-Phare.

In Albania, the Bank complemented its earlier loantowards rehabilitation of hydro power plants (the DrinRiver Project) with a project to improve thetransmission and distribution of electricity. TheECU 10 million loan, financing metering anddistribution equipment, is aimed primarily at reducingtechnical and non-technical losses in the network andsupporting further sector restructuring andcommercialisation. Other co-financiers of this projectare the World Bank (IDA), the Japanese OverseasEconomic Cooperation Fund, and the governments ofSwitzerland and Italy.

In addition to its continued public sector activities,the Bank was increasingly involved in private sectorpower projects. Progress with sector reforms andregulations has led to an increasing number of privatesponsors developing bankable projects in the region.The Bank is currently active with private initiatives inseveral countries. It is highly likely that in 1996 itwill sign its first private project in the power sector.



Energy efficiency

In all the EBRD’s countries of operations, energy wastage is oneof the major barriers that must be overcome in the transition tosuccessful market economies. Energy usage remains 2-7 timeshigher, per unit of GDP, than the average in OECD countries; thisunnecessary wastage is a serious obstacle to recovery.Solutions in the power supply sector, to meet the need toreplace old and unsafe plant, must be balanced with investmentto reduce energy demand. This is all the more importantbecause the average cost of saving one barrel of oil equivalent(by more efficient energy consumption) is 3-4 times less thanthe cost of producing the same amount of oil.The EBRD’s Energy Efficiency Team was set up to identify anddevelop energy-saving projects. It considers any project thatwould result in material energy savings by consumers and thatwould meet the Bank’s usual credit requirements. Typicalexamples include district heating rehabilitation and end-userimprovements, energy-saving investments in schools, hospitalsor other public buildings, energy efficiency improvements inindustrial processes, efficient lighting projects and renewableenergy projects.Many energy-saving investments are relatively small and fallbelow the EBRD’s minimum lending requirements. Accordingly,effort is being focused on establishing financing mechanisms forthese projects. These include credit lines with local banks andco-financing with bilateral sources such as the EU-Phareprogramme. Another important mechanism is the developmentof energy service companies (ESCOs) which make energy-savinginvestments in their clients’ premises and are repaid from therealised energy savings.

In its first full year of operations the EnergyEfficiency Team has established a strong pipeline ofprojects. In December the EBRD signed its firstenergy efficiency loan – to the Hungarian ESCO,Prometheus – of ECU 4 million. In the pipeline for1996 are several multi-project facilities with Westernclients to enable regional ventures to be established.The multi-project facilities cover both new ESCOsand the manufacture of energy metering equipment.Other activities include establishing dedicated energyefficiency credit lines with local banks and otherbilateral funding sources. The EBRD is alsodeveloping a number of direct energy efficiencyinvestments in larger private sector enterprises.

Municipal and environmental infrastructure

The adequate provision of environmental and municipalinfrastructure and services is essential for the economictransition process in the region. Poor quality and undersupply ofmunicipal services limit industrial productivity and hamper theemergence of viable SMEs. Deficient management of wastedisposal and water resources are causing problems ranging fromwater shortages to the occurrence of cholera and diphtheria.Further, the countries that have signed Europe Agreements withthe EU face the need for large capital investment to meetenvironmental accession standards. Few municipalities in thesecountries come close to meeting EU environmental standards indrinking water quality, waste-water treatment and solid-wastedisposal.To address these problems directly, in August the EBRD createdthe Municipal and Environmental Infrastructure Team. Itsupports investments mainly for municipalities, which areemerging as an important client group for the Bank. Mostprojects developed to date deal with water supply, sewerage andwaste-water treatment, industrial waste management and districtheating. The team also helps prepare projects with industrialclients in the areas of waste-water treatment, pollution controland hazardous waste management.In the state sector, the team’s approach is to develop thecreditworthiness of municipal entities and thus reduce the needfor sovereign guarantees. Through its projects it promotesdecentralisation of service provision, involvement of the privatesector in the provision of public services, corporatisation ofmunicipal utilities, cost recovery through user charges, andeconomic efficiency in resource use and allocation.Building on the EBRD’s unique mandate, the team operatesacross the full spectrum of private/state sector financing. Ituses an array of instruments including limited-recourse loans,municipal credit facilities, environmental funds and privatemulti-project financing. It has specialised expertise instructuring municipal projects, in dealing with public and privatecompanies providing municipal services, in municipal andenvironmental finance, and in the assessment of municipal andregulatory risks.

The EBRD leads in developing innovative approachesto municipal and environmental financing in itscountries of operations. In 1995, the EBRD signedfour loan agreements totalling ECU 60 million forprojects in Azerbaijan, Estonia, Lithuania andRomania to renovate and upgrade municipal watersupplies and waste-water infrastructure. The loansigned for the project in Romania finances aprogramme of investments in five cities. It is the first

developinginnovativefinancingapproaches



operation where the Bank has used the instrument ofprogramme financing and has concluded projectagreements directly with municipalities. A similararrangement was adopted in the Estonia project,where 12 small rural municipalities have formed aconsortium to build, own and operate waste-watertreatment facilities. The project in Azerbaijan marksthe first time that the EBRD and the InternationalDevelopment Association have co-financed aninvestment programme.

In addition, the Bank signed a frameworkagreement with a large international municipal utilityoperator, Lyonnaise des Eaux, for a municipal servicesmulti-project facility. Under this agreement the EBRDwill provide equity and loan financing for a programmeof 10-15 small and medium-sized investments for theprivate provision of municipal services including watersupply, waste-water treatment, district heating andsolid-waste management. The Bank will finance anamount of up to ECU 70.2 million, supporting a totalinvestment of ECU 233.9 million. This constitutes thefirst-ever financing by an international financialinstitution of private investments in municipal servicesand infrastructure in the region. It offers an innovativeand effective vehicle to support private sectorprovision of these services which is expected to bringmajor benefits.

The EBRD has developed a strong pipeline ofprojects in the municipal and environmental sector: at the end of 1995, over 20 projects were beingprepared, several of which are in an advanced stage ofdevelopment.

Other key sectors

Natural resources

The geographical and industrial scope of EBRD projects in thenatural resources sector increased during 1995. The portfoliocontains many projects that are of major importance for certaincountries: stimulation of oil and gas production, construction ofa reliable hydrocarbon transportation system, development of acompetitive gold-mining industry, modernisation of refineries andupgrading of chemical complexes. Most of the projects involve astrong Western sponsor contributing capital, Western technicalexpertise and management support.

The Bank has been active in financing upstream oiland gas projects: an ECU 62.2 million EBRD loanwas signed for the KomiArcticOil Joint Venturebetween British Gas, Komineft and Ukhtaneftegas forthe development of the Vozey Oil Fields in the KomiRepublic of the Russian Federation (total investmentECU 251.8 million). The Bank also signed anupstream oil development project in Ukraine,sponsored by the British company JKX. Total projectcosts will be ECU 15.6 million, with an EBRD loan ofECU 6.6 million.

Natural gas distribution, an industry traditionallydominated by state-owned entities, is another area inwhich the EBRD has been active. It signed an ECU8.1 million loan with Slovenski Plinovodi for theconstruction of natural gas distribution networks in sixSlovene municipalities. Slovenski Plinovodi, aSlovene company majority owned by the Dondi groupof Italy, will build, own and operate the distributionsystems which will then be transferred to themunicipalities after 30 years. By awardingconcessions the municipalities have been able to freelimited financial and managerial resources for otherpurposes.

A major study of the gas pipeline system in theRussian Federation was completed with Gazprom andseveral contractors, sponsored by Canada, France, theNetherlands, the United Kingdom, the United Statesand Nova Gas International of Calgary, Canada. Thisextensive study, which was carried out over a periodof two years and had a budget of ECU 7 million,arrived at important conclusions regarding therehabilitation and safety of the gas pipeline grid, and



identified several projects. This can be seen as amajor contribution to the improvement of the safety ofRussia’s huge gas pipeline network. Together with theWorld Bank, the EBRD also participated in therehabilitation of the Kharyaga-Usinsk pipeline in theKomi Republic of the Russian Federation, where alarge oil spill accident occurred in 1994. The twoinstitutions provided loans totalling ECU 109.2million for the containment and recovery of the spiltoil, and for the pipeline rehabilitation. With thisinitiative, the EBRD helped to prevent anenvironmental disaster and contributed to thesuccessful emergency operations.

Several projects are under way in the refiningsector with a view to upgrading certain refineries inthe CIS countries.

The EBRD has been especially active in the gold-mining sector, where two projects were signed during1995. The first was the Kumtor project in Kyrgyzstan,sponsored by Cameco of Canada and Kyrgyzaltyn (thestate gold-mining company in Kyrgyzstan). The totaldevelopment cost of the gold mine will be ECU 280.7million, of which the EBRD financed ECU 31.2million. It will be extremely important for Kyrgyzstan:it is the largest project in the country and will providelong-term hard currency income, employment for localstaff, technical know-how transfer and Westernmanagement support. Once completed, it will be theseventh-largest gold mine in the world. The EBRDalso completed the financing for the Kubaka goldproject in the Magadan Oblast in the RussianFederation. The total project cost will be ECU 140million. The Bank is lead arranger of an ECU 77.5million debt financing package raised for thefinancing of this project, of which it contributes anECU 37.0 million loan. Sponsors of this project areCyprus Amax and Russian companies.

During 1995 the EBRD also fully disbursed theloan provided for the gold-mining project Zarafshan-Newmont in Uzbekistan, and increased its facility tothat project by an additional ECU 23.4 million.

Agribusiness

The EBRD continued to consolidate its agribusiness operationsduring the year. Board-approved deals amounted to ECU 300million while signings reached ECU 200 million. Its activities inthis sector are structured around an inventory of products, eachtargeting specific food and drink subsectors and countries invarious stages of transition.

Agribusiness is particularly suitable for multi-projectfacilities, owing to the relatively small size of dealsand the increasing involvement of large local andforeign groups in the sector. The EBRD’s first suchfacility, for up to US$ 100 million (ECU 77.8 million),was with Groupe Danone. The EBRD is now indiscussion with other major agribusiness companies toestablish additional facilities in the region. Thesefacilities simplify the project approval process andstandardise the security package and distribution.

Another innovative product, developed specificallyfor the agribusiness sector, is management andinvestment companies. The concept has now beenconverted into a transaction in the Czech Republic,where the EBRD and other financial investors aresetting up a holding company to provide equityfinancing and management expertise to local food anddrink companies. The EBRD has committed ECU15.6 million to this vehicle which will participate inthe food industry post-privatisation. The concept isrelevant in countries where the privatisation process isjust starting (such as Romania) and where it isentering a second phase (such as the CzechRepublic). In all instances, this product is analternative for local companies not associated withlarge foreign strategic investors and faced withdifficulties in securing capital injections onreasonable terms. The EBRD hopes to replicate thistype of operation in other countries in the region.

The Kyrgyz Agribusiness Company projectrepresents another ground-breaking concept. Thisinvolves setting up specialised service companies toimport and distribute essential inputs to farmers(agrochemical products, fertilisers, seeds, fuel,equipment and agronomic services) and helping to



market the final products (either in raw or processedforms in the local or export markets). The operation isvital for Kyrgyzstan, as it focuses on the key grainindustry and targets at least 50 farms totalling some50,000 hectares. With a total investment of ECU 17.7million, of which the EBRD has contributed ECU 7million, the company will be able to increase grainproduction to replace current imports running ataround US$ 40 million a year. Co-investors are aCanadian farm management company and three largemultinationals, besides four local investors. TheEBRD is working to replicate the agribusiness servicecompany concept in countries such as Bulgaria,Kazakstan, Russia, Turkmenistan, Ukraine andUzbekistan.

The establishment of fruit and vegetable wholesalemarkets to cater for the needs of farmers, traders andconsumers continued in 1995. The EBRD already hasunder implementation markets in Belarus, Hungary,Romania and Ukraine. In 1995, it added projects inArmenia and Bulgaria. Work is also advanced inAzerbaijan, Croatia, Georgia and Poland.

Credit lines are used by the EBRD to reachsmaller projects requiring debt finance. During 1995,the EBRD prepared targeted agribusiness credit lineswith two banks in Croatia and a private bank inUkraine. It also extended the credit lines with BancaAgricola in Romania and with Budapest Bank inHungary. The co-financing line in the SlovakRepublic generated its first projects. Targeted linesprovide debt finance for small projects.

The EBRD developed an investment fund for thefood sector with Jupiter Tyndall and Commerzbank.This fund, which has attracted some ECU 78 millionfrom institutional investors, will enable the group tofinance smaller projects requiring capital rather thanjust debt finance. It will also stimulate joint venturesand other investment by Western agribusinesscompanies, as well as by financial investors.

A number of innovative stand-alone projects werealso financed over the year. These include the firstedible-oil industry transaction in the Ukraine, the firstbrewery project by the EBRD in Russia and a new

yeast plant in Romania with one of the world’s largestmanufacturers. The stand-alone agribusiness projectpipeline has grown rapidly over the year, creating asound base for a significant expansion during 1996.The industry coverage is broad, encompassingbrewing, confectionery, bakery, packaging, marketingand distribution.

Property and tourism

The EBRD’s countries of operations continue to suffer from awidespread shortage of modern commercial property and hotelfacilities. Despite clear demand in many markets, developers’attempts to build modern facilities have been hampered by theunderdeveloped legal framework in the region, insecure landownership rights, political uncertainties, hostile tax policies andbureaucracy. In this environment, securing long-term debtfinancing remains particularly problematic.

In the office sector, the EBRD continues to prioritisedebt financing in markets where there is a significantimbalance of supply and demand, and where otherfinancing is not available on reasonable terms. InWarsaw, the EBRD arranged an ECU 17.1 millionloan for the construction of the Sienna Centre, a26,000 square metre facility. This project wassponsored by two of Belgium’s leading propertycompanies, The Buelens Group and CompagnieImmobilière de Belgique, with co-financing providedby Generale Bank, Belgium’s largest commercialbank.

Growth in manufacturing and trade in the region iscreating demand for modern warehousing anddistribution facilities, particularly in the countriesmost advanced in the transition. Responding to thisdemand, the EBRD entered the industrial propertysector in 1995 by supporting the development of twolight industrial projects in Poland. The WarsawDistribution Center, signed in April, is the firstWestern-style industrial park to be developed inPoland. Parc Logistique, the EBRD’s secondindustrial project, is the first large-scale distributionlogistics facility anywhere in the Bank’s countries ofoperations.



Activity in the hotel sector slowed in 1995,reflecting a more prudent estimate of future hotelperformance by investors and lenders. Though theEBRD did not commit to any new hotel financingsduring the year, several new projects were initiated,particularly in the three- and four-star categories. Theyear saw the opening of three EBRD-financed hotelprojects: the Tirana International and the HotelEuropapark in Tirana, Albania, and the Radisson/SASHotel in Riga, Latvia.

The EBRD considered opportunities in two otherproperty-related areas in 1995: the retail sector andoff-street car parking. Retail trade is the third-largestemployer in the OECD region, but this sector remainsunderdeveloped throughout the Bank’s countries ofoperations. As the final link in the distribution chainfor consumer products, modern retailing facilitiespromote efficiencies in retail trade and contribute toexpanded consumer choice.

The need for off-street car parking is growing inmajor cities throughout the region, as car ownershipbecomes more widespread and city centre trafficincreases commensurately. The EBRD is exploringopportunities in several cities to attract privatefinancing to address this important infrastructureissue.

In the tourism sector, the EBRD has undertakenseveral technical cooperation projects, includingstudies in Albania, Hungary, Kyrgyzstan and Ukraine.While the Bank’s early work in the sector was aimedat developing the legislative framework, evaluatingphysical infrastructure needs and recommending othergovernmental initiatives to stimulate tourisminvestment, its current efforts are being directed toproject preparation and project financing. During1996 the Bank expects to deepen its involvement inAlbania, and initiate activities in Croatia.

Other direct loans and investments

Encouraging direct investment into the region remains a crucialobjective for the EBRD, and work with industrial partners hascontinued across the region. The Bank encourages the formationof joint ventures with partners from both inside and outside itscountries of operations.

In Hungary, the Bank financed a management buy-outof a successfully privatised and restructured company.Its ECU 2.4 million equity investment in GraboplastRt., the country’s leading artificial leather, floorcovering and wallpaper manufacturer, will enable thecompany to expand production and restructure arecently acquired carpet-making subsidiary –assisting one Hungarian company to restructureanother which is emerging from liquidation. AsGraboplast is publicly traded on the Budapest StockExchange, it also demonstrates the EBRD’sconfidence in the company and the Hungarian capitalmarket. The company’s privatisation was leadmanaged by Creditanstalt Securities, Budapest.

The EBRD’s first involvement in the restructuringof one of the largest Czech conglomerates alsodemonstrates that Western involvement is not aprecondition to EBRD financing. An ECU 17.9million loan will help finance a new investmentprogramme for the Czech company Skoda Kovarny,Plzen s.r.o., a manufacturer of forgings and a whollyowned subsidiary of Skoda a.s. of Plzen. Theinvestment programme will upgrade Skoda’s capitalasset base by offering integrated machining capabilityfor heavy free-forged products and will help thecompany to buy equipment to produce finishmachined free forgings mainly for export markets.Komercni Banka is providing the remainder of thefinancing under a parallel loan structure.

The first direct corporate investment by the EBRDin Croatia (of ECU 48.3 million) is to be made inPliva d.d., a well established and diversepharmaceuticals company in the process of beingprivatised. Pliva plans to construct a new plant whichwill produce Azithromycin (an advanced macrolideantibiotic) and other antibiotics. Azithromycin is theproduct of Pliva’s own research and is a drug forwhich it holds the world-wide patent. ZagrebackaBanka and Union Bank of Switzerland are tocoordinate a domestic and international publicoffering of shares.

working with partners



In Turkmenistan the EBRD helped Gap-Turkmen,a joint-stock company part-owned by a Turkishtextiles group, to create the first vertically integratedtextile production company in the country. Its ECU10.8 million equity investment and ECU 13.6 millionloan will enable the company to expand an existingdenim weaving plant by building a spinning plant anda ready-made jeans manufacturing plant. The projectmarks a significant step in attracting foreign currencyearnings and foreign private investment toTurkmenistan.

Encouraging co-financing

The EBRD gives high priority to encouraging the involvement ofco-financiers in its operations: by its mandate it is a co-financinginstitution. Success in attracting external finance for EBRD-sponsored projects increases the total resources available forthe pursuit of its mandate and operational objectives. Bycatalysing funds from external sources, the Bank can support awider range of projects. Co-financing is an important aspect ofEBRD philosophy for the following policy and operationalreasons:– for the countries of operations it furthers access to

international capital markets and other sources of funding;– it promotes and facilitates foreign direct investment;– it establishes risk-sharing with the appropriate risk-takers;– for the EBRD it can be a portfolio management tool.The co-financing instruments available to the EBRD are manifold.The choice made for a given project depends greatly on thespecific needs of the client, the stage of transition of theircountry and whether the project involves state or private sectorsupport. External finance originates from both commercial andofficial sources, and sometimes from a combination of the two.The main co-financing partners for the EBRD are:– commercial banks: through lender of record arrangements (B

loans and participations), assignments, bonds, parallel loansand credit lines

– Export Credit Agencies (ECAs): through direct financing, andexport credit and investment insurance guarantees

– international financial institutions: sovereign lending foreconomic and financial infrastructure, and private sectorlending for larger projects

– bilateral financial institutions and government agencies:private sector loans, sovereign (including concessional) loans,and grants for economic and financial infrastructure.

In 1995, 41 operations were arranged with co-financing, of which 28 were in the private sector and13 were in the state sector. These arrangementstogether mobilised co-financing totalling ECU 1.86billion, of which ECU 934 million was for privatesector projects and ECU 931 million was for projectsin the state sector.

During the year the Bank increased the number ofits co-financing partners and, for approved and signedprojects, it was working with 283 companies orpartners, from 47 countries, in 416 investments.

Commercial co-financing

Significant volumes of commercial co-financing wereachieved in 1995, chiefly through the closing ofseveral large projects such as the M5 Toll Motorway,Novorossiysk Shipping and Matav/Investel. It isnotable that the 1995 large-scale successes are inHungary and Russia, offsetting the decline in lendingopportunities in Poland, which accounted for a largepercentage of the volumes in 1994. In addition tovolume achievements, the Bank can report a numberof innovative accomplishments. First-time commercialco-financings were signed in Kazakstan, Kyrgyzstan,Moldova and the Slovak Republic; the first B loan wassigned in respect of a Ukrainian borrower and the firstparticipation signed in respect of a Romanianborrower; the Bank signed its first ECLAT financingfor a rail project in Bulgaria; the Bank used itsauthority to issue guarantees for a major infrastructurefinancing in Hungary.

The Export Credit Loan Arrangement Technique (ECLAT) offersthe client a mixture of EBRD financing and ECA/commercialbank funding for contracts awarded after internationalcompetitive bidding.

As part of the EBRD’s mandate to mobilise externalcapital, it is important for it to maintain a diverse baseof co-financiers and to keep that base growing, to theextent possible in the prevailing market conditions.This entails a constant task of broadening the pool ofinvestment funds, thus enabling the EBRD’s countriesof operations to develop broad sources of co-financing.In 1995, the EBRD was able to mobilise commercialco-financing for Bank-funded project financings forthe first time from commercial banks from Canada,Greece, Hungary, Japan, Korea, Luxembourg, theSlovak Republic, Spain and Turkey.

1994 1995 Cumulative------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Number of co-financing banks 44 61 95Nationalities of co-financing banks 14 21 25------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

complementing other lenders

at the forefront of investment



Of the many co-financing projects signed in 1995,several were distinguished. For Investel/Matav inHungary, a US$ 300 million financing was jointlyarranged by the EBRD, the IFC and Deutsche Bank.This loan package was for a time the largest non-sovereign borrowing in Hungary. The deal wasinnovative in that the financing was a US$ 100 million10-year A loan (shared between the EBRD and theIFC), a US$ 100 million 8-year B loan (with theEBRD and the IFC as lenders of record) and a US$100 million 5-year C loan (without IFIs as lenders ofrecord). The B and C loans were fully underwritten byfive commercial banks. The B and C loans werefurther distributed in a general syndication. Thirty-five banks participated in the financing,demonstrating the success of the structure and theattractiveness of the borrower when accompanied byIFIs in its fundraising in maturities beyond five years.

An A/B structured loan is where the EBRD finances a portion ofthe loan (the A part) from its own funds and syndicates theremainder (the B portion) to a commercial lender.

Also in Hungary, an ECU 364.7 million financingfor the M5 Toll Motorway, to run from Budapest to thecountry’s southern border, was jointly arranged by theEBRD, Commerzbank and ING Bank with the EBRDacting as lender of record. An ECU 179.4 million Bloan was successfully syndicated to 16 internationalbanks. The project overtook Investel/Matav to becomethe largest loan syndicated for a private sectorHungarian borrower. The project was innovativechiefly for the Optional Refinancing Guaranteeprovided to the banks by the EBRD, whereby theEBRD guarantees repayment of principal of the Bloan in year 13, thus allowing the project to beamortised over an 18-year period.

North-Western Shipping, Russia, entailed an ECU15.8 million 10-year loan for the financing of river-seavessels. The EBRD acted as lender of record and anECU 12.0 million B loan was successfully syndicatedto four banks, demonstrating a successful continuationof the dual registry structure for east Europeanshipping deals. In this case, banks were prepared toaccept Russian inland waterway risk without politicalrisk insurance.

Also in Russia, Novorossiysk Shipping was thebeneficiary of an ECU 175.4 million loan to finance11 product tankers, jointly arranged and underwrittenby the EBRD, ABN AMRO Bank and MeesPierson.This underwriting represents a considerableachievement by the client and the arrangers. TheB loan was more widely syndicated in January 1996.

In Ukraine, an ECU 25.1 million 10-year loan wasmade to Ukrrichflot for the financing of five river-seavessels. Although this is a relatively small loan, it issignificant as it is the first term loan for a Ukrainianborrower under the EBRD’s lender of record structurewith a commercial bank B lender. Bank of Scotland isparticipating for ECU 6.5 million.

The EBRD actively seeks co-financing opportunities with exportcredit agencies and other international financial insitutions as ameans of leveraging the funds available to finance projects in itscountries of operations.

The EBRD, along with the IFC, Canada’s ExportDevelopment Corporation (EDC) and a syndicate ofcommercial banks, financed the Kumtor GoldCompany – a Kyrgyz joint-stock company ownedjointly by Kyrgyzaltyn, a Kyrgyz state concern, andCameco Corporation, a large Canadian uraniummining company. The EBRD provided aUS$ 30.0 million senior loan and a US$ 10.0 millionsubordinated loan to the project company. Co-financing on a parallel basis were the IFC(US$ 30.0 million senior debt and US$ 10.0 millionsubordinated debt) and EDC (US$ 50.0 million seniordebt). In addition, EDC and the MultilateralInvestment Guarantee Agency (MIGA) togetherprovided US$ 150.0 million in political risk insuranceto Cameco Corporation, and the US OPIC providedpolitical risk coverage to the commercial banksparticipating in the US$ 140.0 million syndicate ledby Chase Manhattan Bank.



The EBRD, along with Spain’s Banco BilbaoVizcaya and Instituto de Crédito Oficial, providedparallel loans of US$ 7.3 million, US$ 3.4 million andUS$ 3.4 million, respectively, to Ascom-Kelme Joint-stock Company, a Moldovan joint venture betweenAscom, a Moldovan trading company, and Kelme S.A.,a Spanish manufacturer of sports and leisure shoes.Spain’s export credit agency Compañia Española deSeguros de Crédito a la Exportación (CESCE)provided support to the two Spanish institutionsfinancing the project.

Official co-financing

Official co-financing plays a crucial role in supporting EBRDinvestments in physical and financial infrastructure in itscountries of operations. Also, because of its oftenconcessionary terms, it can be particularly beneficial to thelower-income countries.

Of the other international financial institutions, theEuropean Investment Bank, the International FinanceCorporation and the World Bank have been particularlyimportant co-financing partners in EBRD projects.These institutions co-financed 11 operations for anamount of ECU 814.7 million, 44 per cent of all co-financing mobilised in 1995. Their co-financing supportwas prominent, particularly in areas such as railwaysmodernisation, highway reconstruction, regionaltelecommunications links, mining, power and energy.

Important official co-financing partners were theEuropean Union (Phare) and bilateral institutions orgovernment agencies from Austria, France, Germany(KfW), Japan (JEXIM and OECF), Italy, Netherlands,the Nordic countries (Baltic Investment Special Fund,Finnfund, NEFCO), Switzerland and the USA. Theseinstitutions and agencies co-financed 104 operationsto an amount of ECU 255 million. Official co-financing featured some striking innovations in 1995such as the JEXIM Baltic Credit Line for Latvia andLithuania, investment support for Regional VentureFunds and municipal environmental infrastructureoperations. In addition, it is notable that in 1995many official co-financing partners/donors contributedto the EBRD’s Technical Cooperation Funds

Programme an amount of ECU 124.6 million. Thelargest share of these funds was committed in supportof investment preparation and implementation(see Technical cooperation, page 42).

Sources of co-financing funds 1995 by valueECU million

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------International financial institutions 815Official co-financing 256Commercial: A/B loans/participations 481Other commercial banks 144Export credit direct 41Parallel/ECA guaranteed 129------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Total 1,865------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Co-financing support for private and state sector operations 1995Total EBRD

project cost finance Co-financing Co-financingNumber ECU million ECU million ECU million %

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Private sector 28 2,644 532 934 50Public sector 13 2,238 363 931 50------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Total 41 4,882 895 1,865 100------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

critical infrastructure

support

Export credit direct 2%

Commercial A/Bloans/participations26%

Sources of co-financing funds 1995 by value

Official co-financing14%

Other commercial banks8%

IFIs43%

Parallel/ECA guaranteed 7%

Project evaluation

Project evaluation is the process of assessing the performanceof completed projects and programmes through systematicanalysis of their outputs or outcomes against expected orplanned results, and the evaluation of categories of operationsand patterns of experience. The project evaluation functionserves as an essential mechanism to identify the relativesuccess or failure of the EBRD’s operations in achieving itsobjectives.There are two basic objectives in project evaluation: to ascertainthe results of the EBRD’s portfolio of projects and programmes,both intended and otherwise; and to determine whether therewere significant lessons to be learned from experience in orderto ensure more successful future operations. A well-designedsystem for project evaluation also generates increasedconfidence that the Bank has the means to learn from thestrengths and weaknesses of its completed operations, and ofthose of other international financial institutions.The independence in which project evaluation activities arecarried out, which secures the necessary objectivity andtransparency, is a vital element of the evaluation process. Forthis reason, it is conducted by a separate Project EvaluationDepartment (PED) which is headed by a Vice President whoreports directly to the President. From the EBRD’s inauguration in 1991 until the end of 1995,PED has produced 44 reports. These comprise 27 OperationPerformance Evaluation Review (OPER) reports on private sectorinvestment operations, comprising 100 per cent of operationsready for post-evaluation; 11 evaluations on large technicalcooperation operations; three special studies related totechnical cooperation; and three mid-term evaluations of EBRDoperations. A substantial amount of PED’s staff time isallocated to dissemination of evaluation findings through“lessons learned” workshops for Bank staff.

The outcomes of the 1993 and 1994 AnnualEvaluation Overview Reports (AEORs), as well as theperformance of investment operations evaluatedduring 1995, point towards the portfolio’s increasingquality. Although the findings show a clearimprovement, they are not yet representative for theBank’s portfolio as a whole, since the sample ofevaluated operations (past disbursement stage) is stillsmall compared with the total portfolio size, whichrecently has expanded rapidly.

It is important to note that the performanceclassifications of the evaluated operations are basedon four strategic criteria: the EBRD’s additionality(other financing for the operation is not available onreasonable terms); the operation’s transition impact,including environmental considerations; thecompany/project performance; and the Bank’sinvestment performance. The results therefore reflectthe positive way in which the Bank has fulfilled itsmandate during the early years of its existence.

Apart from ensuring that PED identifies whetherthe EBRD has functioned according to its mandate(accountability), it is essential that the projectevaluation process also generates important lessonsfrom past operations and ascertains that, throughBank-wide dissemination of lessons learned, bankersgain experience from completed operations and makefuture operations better (quality management).

The AEORs mentioned above identified a numberof important thematic lessons which are at the core ofthe lessons learned dissemination process. The qualityof the operations at entry was identified as one of theimportant ingredients for a project’s success. Oncedisbursements are under way on a fatally flawedoperation little can be done to improve the successprospects. It is evident that the Bank’s appraisal andinvestment review effectiveness, especially in theearly review stage where the basic decision is made,is critical for the portfolio’s performance prospects inall core dimensions.



improvingportfolioquality


A large cluster of lessons learned centres aroundissues relating to the quality of project sponsors andcompany management. It is therefore essential tocarry out systematic due diligence to establish sponsorand project company management suitability at theearliest stage of project screening, before an operationis approved. Another thematic lesson is theimportance of avoiding appraisal optimism. Of the 15operations evaluated during 1993-94, close to half fellsubstantially short of reaching appraisal projections.Experience shows that the most critical example ofappraisal optimism is an overestimation of projectedrevenues. An important way to avoid operationallosses from the start of a Bank investment is tomaintain sound monitoring practices. It is essentialthat the Bank staff is transparent and effective insignalling trends and the need for intervention, andtherefore monitoring must be based upon earlytracking of variances of key performance indicatorsfrom the expectations established at appraisal. Asound monitoring practice provides the early warningsignals needed for timely intervention andindependent verification.

Project Evaluation made careful assessments of thetransition impact of Bank investments in its OPERreports and used the findings in the overallperformance rating of each operation. In the 1994AEOR a methodology of immediate and long-termtransition impact scoring was applied to all until-thenevaluated investment operations, using a standard setof transition impact indicators developed by the Officeof the Chief Economist. The outcome of the analysisshows that there is a positive correlation betweencompany performance/project success and transitionimpact. In this respect PED concluded that selectingstrong sponsored projects that are also economicallyviable – taking into account sound banking principles– is the best way to achieve high transition impact.The analysis further revealed that those companieswith sound and committed entrepreneurial sponsors,having experience in similar country operatingenvironments, are likely to adjust quickly to marketsignals and pursue both local downstream marketdevelopment linkages and upstream input scoringlinkages for cost advantages.


The EBRD is required to promote, in all its activities,environmentally sound and sustainable development. In 1995 it implemented this mandate by developing municipal andenvironmental infrastructure and energy efficiency investmentoperations – described in more detail on pages 26 and 27 – by applying environmental due diligence to all its investmentpipeline and technical cooperation operations, and by continuing to promote a range of training, standards and other environment-related technical cooperation initiatives.One of the Bank’s principal environmental contributions isinvestment in operations that are more energy and resourceefficient, less polluting and which generate less waste than thefacilities they replace. Environmental concerns are addressed atall stages of the Bank’s project preparation and approval process.Environmental due diligence requirements vary, depending on thenature of the project, the potential environmental liabilities or risksassociated with past, current or future operations, worker healthand safety considerations, and other related issues. Investigationsare undertaken early to allow time to identify environmentalconcerns, to plan mitigation measures and to estimate costsbefore Board approval. Environmental investigations often highlightproblems and environmental opportunities that requireEnvironmental Action Plans to be drawn up and agreed.Appropriate environmental conditions and covenants, relating tomitigation and enhancement measures and monitoring, areincorporated into loan agreements.

Energy production, transport and utilisation have,historically, created a considerable threat to theenvironment of the region, resulting in impacts fromwaste disposal and atmospheric and waste-waterdischarges at the local, regional and global levels.Investment in modern, efficient energy production andtransmission is central to the EBRD’s energy policy,often in association with the closure of old, grosslypolluting installations. Significant efficiency andenvironmental components were incorporated in eachof the Board-approved energy operations in 1995.These included the Power Sector OperationalEfficiency Improvement Project in Romania, theMoldova Energy Efficiency Project, the TransmissionNetwork Improvement Project in Kyrgyzstan, and thePower Transmission and Distribution Project inAlbania. For example, on the Romanian operation theBank financed the development of an EnvironmentalAction Plan with the objectives of health protectionand compliance with environmental standards. Tohelp the Romanian power plant operators and localenvironmental authorities to monitor and controlharmful emissions and to implement theEnvironmental Action Plan, environmental monitoringequipment was financed within the operation. As partof the same operation, training of plant operators inhealth and safety and in environmental managementwill be provided to the Romanian energy utility.

The industrial, manufacturing and naturalresources sectors present some of the most complexoperations requiring environmental appraisal.Environmental audits and/or assessments areundertaken on such operations to establish the currentenvironmental status of the facilities and to predictthe environmental impacts of the Bank’s potentialfunding. Issues that, typically, have to be addressedinclude compliance with environmental, health andsafety regulations, historical contamination andenvironmental liabilities, and implementation andmonitoring. In 1995 increasing emphasis was placedon the proactive aspects of environmental appraisal,notably the identification of cleaner technology,energy efficiency, resource recovery and wastereduction opportunities. Environmental Action Plansare increasingly required of clients by the Bank toaddress these issues.


Environment

assessing environmentimpact


Environment

In 1995, a loan was approved to upgrade SkodaKovarny, the forge plant subsidiary of Skoda Koncernin the Czech Republic. The key environmental issueidentified during the environmental audit was airemissions from furnaces which use generator gases. A programme has been agreed with the managementto convert the forge from using generator gases tonatural gas. An Environmental Action Plan has beenimplemented to foster cleaner technology principlesand to improve maintenance and worker health andsafety conditions.

Although the Bank’s funds are typically used at anindividual plant, the company requiring finance mayhave more than one facility, and environmental duediligence is usually extended to cover all the assetswhich secure the funding. In a loan to the Plivapharmaceutical company in Croatia, the Bank’s fundswill be used to relocate pharmaceutical productionfrom a metropolitan area to an existing operational sitein a less populated area, reducing atmosphericemissions in the city and relieving traffic congestionassociated with the current plant. In addition to thetwo sites involved in the operation, environmental duediligence was undertaken and action plans wereagreed for the other seven Pliva facilities throughoutthe country.

A number of operations involved existing plants intraditionally highly polluting sectors. The Sepap Stetioperation will finance a programme of investments atan existing pulp and paper mill in the Czech Republic.A chlorine bleaching process will be converted to achlorine-free process. Special attention has been paidto adapting the company’s environmental managementplan to address issues that will arise in the mediumterm, when the Czech Republic will need to harmonisewith EU standards. The Bank has also been workingwith the company to develop an energy efficiencyprogramme. The company’s community interactionprogramme was expanded to inform the local public ofthe modernisation programme and agreedenvironmental protection measures.

A unique operation for the EBRD in 1995 was theco-financing with the World Bank of the containmentand clean-up of a major oil spill in the Komi Republicin Russia. Gross contamination of the Kolva andPechora Rivers during the spring floods wasprevented. The EBRD was instrumental in ensuringnew pipeline construction, and requiring aninternational pipeline inspection component and thecompletion of two new oil-water separation facilitiesbe added to the original clean-up operation.Contained and recovered oil is now being re-injectedinto the new pipeline.

Two gold-mining operations were approved in1995, the Kubaka operation in a remote area of theSiberian Far East, and the Kumtor operation, high inthe Tien Shen mountain range in Kyrgyzstan. TheBank involved international wildlife experts from anenvironmental non-governmental organisation in theKumtor operation to provide an opinion on theadequacy of the studies and the mitigation measuresproposed, and to assist in designing future studies anda monitoring programme.

In the transport sector, environmental appraisalwas carried out on a variety of highway, rail, air, portsand shipping projects. The environmental assessmentcarried out on the Bulgarian Railway Modernisationoperation resulted in the inclusion in the investmentof a component for the completion of a waste-watertreatment plant and the construction of a sedimenttreatment facility in a diesel locomotive workshop.

As a result of the environmental assessmentconducted on the Giurgulesti Oil Imports Terminal inMoldova, mitigation measures related to both theconstruction and operation of the port have beenincluded in the loan agreement to reduce potentialenvironmental impacts. These include oil-waterseparators and a waste-water treatment plant to meetthe effluent quality requirements of Moldova, whichexceed those of most west European countries.


Environment

The Tbilisi Airport Rehabilitation operationinvolved a loan for the refurbishment of theinternational passenger terminal. The environmentalassessment identified the benefits which could beobtained by using new energy efficient technologiesfor lighting, heating and air conditioning, as well asthe use of geothermal energy for airport heating.These components will be incorporated in the project.

In 1995 nearly 40 per cent of the EBRD’sfinancing was intermediated through various financialinstitutions. Such financial intermediaries arerequired to adopt and implement environmentalprocedures similar to those used by the EBRD. TheBank attaches considerable importance to assisting itsfinancial intermediaries to comply with theenvironmental requirements it places upon them. Amajor technical cooperation initiative, funded by EU-Phare and Tacis, continued to help individualfinancial intermediaries adopt and implementenvironmental procedures. Under another technicalcooperation programme, a bankers’ environmentalhandbook has been developed, together with materialsfor the environmental training of bankers. Localconsultants and other specialists have been trained ina number of CIS countries so that they can bettersupport financial intermediaries in identifying andaddressing environmental issues.

Throughout the year the Bank’s environmentalspecialists developed, together with banking teams,innovative approaches to environmental due diligence,including the implementation of environmentalprocedures related to multi-project facilities, massprivatisation and restructuring, equity funding andcorporate lending.

The EBRD continued its programme ofenvironmental technical cooperation work, includingpreparing investors’ guidelines on environmental,health and safety requirements in the CIS countries

and in some of the countries of central and easternEurope, and the development of an environmentalstandards database throughout the EBRD’s region ofoperations. To improve professional expertise in thesector, environmental training was conducted by Bankspecialists and consultants for those working infinancial institutions, for local consultants and otherspecialists in environmental management, and forgovernment officials in environmental impactassessment, including the Ministries of Transport inBelarus, Kazakstan, Russia and Ukraine.

Increasing attention has been paid to securinggrant and “soft” financing to help achieve the EBRD’senvironmental objectives. The work of the ProjectPreparation Committee (PPC), established in 1993 tohelp match donor co-financing for environmentalprojects with the market based financing availablefrom international financial institutions, was endorsedat the meeting of European environment ministers inSofia in October 1995. The secretariat of the PPC islocated at the EBRD. At the Sofia Conference,President de Larosière gave the keynote speech inwhich he summarised the findings of an internationalworking group on environmental financing which waschaired by the EBRD.

The EBRD’s Environmental Advisory Council(ENVAC), a forum of environmental experts from theBank’s countries of operations and OECD countries,continued to advise the President and staff on policyand strategy issues related to the Bank’senvironmental mandate; two formal meetings ofENVAC were held in 1995. Two editions of the Bank’sbulletin Environments in transition were publishedduring the year.


The Nuclear Safety Account (NSA): a multilateral mechanismAt their Munich Summit (6-8 July 1992), the G-7 heads of stateand government offered the countries of the region a multilateralprogramme of action to improve safety in their nuclear powerplants. This was to comprise immediate measures in:operational safety improvements; near-term technical safetyimprovements to plants, based on safety assessments; andenhancement of regulatory regimes. It was also to create thebasis for longer-term safety improvements by considering thescope for replacing less safe plants by the development ofalternative energy sources and the more efficient use of energy;and by examining the potential for upgrading plants of morerecent design.The G-7 advocated setting up a supplementary multilateralmechanism to address immediate operational and technicalsafety improvement measures not covered by bilateralprogrammes, and invited the international community tocontribute to the funding. The G-7 also stated that such amechanism should take account of bilateral funding, beadministered by a steering body of donors on the basis ofconsensus, and be coordinated with and assisted by the G-24and the EBRD.In February 1993, the G-7 officially proposed that the Bank setup a Nuclear Safety Account, to receive contributions by donorcountries to be used for grants for safety projects in the region.The EBRD’s Board approved this proposal and the Rules of theNSA in March 1993. Under these rules, the Bank preparesprojects and submits them for approval to the Assembly ofContributors. More generally, the Bank functions as the administrator of theNSA, provides technical and other services, and regularly liaiseswith the European Commission in its capacity as the G-24secretariat. As of 31 December 1995, 14 countries and theEuropean Commission have made pledges to the NSA in theamount of ECU 193 million: Belgium, Canada, Denmark, Finland,France, Germany, Italy, Japan, Netherlands, Norway, Sweden,Switzerland, United Kingdom and United States of America.Additional contributions to the NSA of ECU 52 million are undernegotiation.

Nuclear Safety Account activities

Priority is given to those reactors presenting a highlevel of risk that can be significantly reduced byshort-term and cost-effective safety improvements,and which are necessary to ensure the continuingnational electricity supply in the region. This meansthat emphasis is put on existing RBMK and VVER440/230 reactors and on the purchase of equipment,as opposed to studies, which a number of donorsalready fund. Agreements are sought with thecountries concerned on conditions for the shutdown ofthe less safe reactors.

Nuclear reactors operating in the region suffer a wide range ofsafety deficiencies. In general, priority should be given to thepromotion of a “safety culture” and to all possible improvementsto design and construction. Various types of Soviet-designedreactors have different safety features:VVER Reactors: Pressurised water reactors. The oldest type,VVER 440/230MW, should not be kept in operation in the longterm; the more modern types VVER 440/213MW and VVER1000MW may be upgraded for long-term operation. RBMK Reactors: “Channel-type” reactors whose technology andsafety features are much less well understood by Westernexperts than those of VVER reactors. There are different types,one of which caused the 1986 Chornobyl accident. Most nuclearexperts think that they cannot be improved to standardsacceptable for long-term operation.

Ongoing projects

As of 31 December 1995, projects in Bulgaria,Lithuania and Russia have been approved by theAssembly of Contributors and grant agreements havebeen signed by the interested governments, theutilities and the EBRD:

– an ECU 24 million project for Units 1-4 (VVER440/230s) at Kozloduy Nuclear Power Plant inBulgaria, approved and signed in June 1993, whichis currently being implemented. It includes inparticular: measures for fire protection, in-serviceinspection of critical components, control roomaids for operators, and an emergency feedwatersystem. Completion of the project is expected byDecember 1996. The Bulgarian government iscommitted to shutting down Units 1-2 andsubsequently Units 3-4 when a set of investmentsin the power subsector has been completed.

Nuclear Safety Account


Nuclear Safety Account

– an ECU 33 million project for Ignalina NuclearPower Plant (two RBMK reactors) in Lithuania,approved by the Assembly of Contributors inDecember 1993 and signed in February 1994. Thisproject includes the most urgent and feasibleupgrades, whereas a few important safety concernsmay justify a second-phase project after safety andengineering issues have been further investigated.The scope of the project includes, inter alia, newreactor trip signals, fire protection devices, atraining simulator and environmental monitoringequipment. Completion is expected by end-1997.Ignalina NPP generates about 90 per cent of thecountry’s electricity production. The Lithuanian government has agreed that theoperation of neither of the units at the plant will beprolonged beyond the time when the reactorchannels will have to be changed (i.e. after 15-20years of operation). In addition, it has agreed tosubmit the plant to an in-depth safety analysisunder the supervision of a panel of internationalexperts. Unit 1 will be shut down by mid-1998unless it is relicensed by the Lithuanian SafetyAuthority (VATESI) on the basis of this analysis.The analysis is financed by the NSA in the amountof ECU 7.3 million.

– Agreements were signed in June 1995 between theEBRD and the Government of the RussianFederation, Leningrad NPP, Rosenergoatom (jointlywith the Novovoronezh and Kola NPPs) and theNuclear Safety Authority (Gosatomnadsor). TheRussian government also agreed on a unilateralstatement to ensure indemnification of suppliers.Of the total grant, Leningrad NPP (four RBMKreactors) will receive ECU 30 million, and the jointproject at Novovoronezh and Kola NPPs ECU 45million. These projects are currently beingimplemented and include, in particular: in-serviceinspection equipment, measures for fire protection,environmental monitoring equipment andemergency feedwater systems.

A joint committee was set up to monitor theprogress of the implementation of these agreementsand completion of both projects is expected byend-1997. They will assist Russia in implementingits safety upgrading programmes in the short term;specific support will be given to the Nuclear SafetyAuthority in the form of a grant. A further area ofcooperation is the preparation of a power sectorstrategy. The situation of all VVER 230 and theoldest RBMK nuclear units will be systematicallyre-examined by the Russian authorities to assesstheir safety and the economic need for theircontinued operation at improved levels of safety.Western and Russian experts will cooperate onthese issues.

Future projects

A project for Chornobyl NPP is being prepared as partof the action plan proposed to the Ukrainianauthorities by the G-7 Summit in Naples (8-9 July1994). A related memorandum of understanding wassigned in December 1995 between both parties whichincludes a comprehensive programme of cooperationin order to support the closure of the Chornobyl NPPby the year 2000.

The NSA agreement will address preparation for adecommissioning project as well as immediate short-term safety upgrades at Unit 3 pending closure.


The EBRD’s Technical Cooperation Funds Programme (TCFP) isguided by the operational principles laid down in the Bank’sTechnical Cooperation Policy. This policy was reviewed during1995 in view of the increasing demand for limited technicalcooperation resources. The key message of the policy review isthat the EBRD needs to sharpen the focus of its technicalcooperation programme onto those core activities that directlysupport its operational priorities. The Bank’s technicalcooperation activities will thus be guided by four policyconsiderations:– to develop and maintain a productive investment pipeline– to support project implementation– to build institutional infrastructure directly relevant to the

Bank’s operations– to support a balanced portfolio distribution between the

private and public sectors.

In 1995 the EBRD committed ECU 99.3 millionrelated to 322 technical cooperation operations,compared with ECU 87.6 million in 1994.Disbursements amounted to ECU 57.9 million,compared with ECU 46.4 million in 1994.

By type of activity in 1995 the TCFP supportedproject preparation (54 per cent), projectimplementation (25 per cent), advisory services(18 per cent), training (2 per cent) and sector studies(1 per cent).

During the year the EBRD signed 39 loans andinvestments totalling ECU 705 million that weresupported by technical cooperation operations. Thisrepresents 35 per cent of the value of all loans andinvestments signed during the year.

For the period 1991-95, commitments were ECU312.4 million for 1,177 technical cooperationoperations. Cumulative disbursements amounted toECU 152.7 million. During this period, the TCFPcontributed ECU 84 million to the generation of 115signed projects for which EBRD financing of ECU 3billion was approved. The TCFP has established itselfas a critical element in furthering EBRD investmentand lending operations, thereby enhancing the Bank’stransition impact.

The analysis that follows relates to firmcommitments of financing by the TCFP.

Technical cooperation commitments by sector1

1995 Cumulative 1991-95---------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------

ECU ECUNumber million % Number million %

---------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------SMEs2 55 48.5 49 128 88.5 28Energy 32 6.0 6 176 41.6 13Privatisation 20 10.9 11 94 38.3 12Finance 38 5.0 5 172 34.9 11Transport 30 9.4 9 114 31.0 10Environment 21 5.1 5 104 21.4 7Restructuring 47 7.1 7 110 16.4 5Agribusiness 10 1.8 2 81 16.4 5Telecommunications 17 1.7 2 78 13.1 4Legal 18 1.4 1 51 5.4 2Industry 18 1.1 1 34 2.9 1Tourism 1 <0.1 <1 7 0.9 <1Miscellaneous 15 1.2 1 28 1.7 1---------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------Total 322 99.3 100 1,177 312.4 100---------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------

1 Figures include 7 implementation projects, with a value of ECU 3.1 million,for which payments are managed directly by the European Commission.

2 Some operations earlier classified as Finance have been reclassified asSMEs.

Technical cooperation commitments by recipient country1

1995 Cumulative 1991-95---------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------

ECU ECUNumber million % Number million %

---------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------Russian Federation 56 48.8 49 241 126.8 41Kazakstan 9 9.3 9 28 14.0 4Romania 6 3.5 3 45 12.7 4Ukraine 26 3.0 3 61 10.8 3Hungary 10 3.9 4 49 9.3 3Belarus 2 0.3 <1 37 9.0 3Slovenia 16 0.9 1 56 8.8 3Lithuania 19 1.9 2 48 7.3 2Estonia 25 1.9 2 51 6.9 2Poland 15 0.7 1 48 6.9 2Latvia 19 1.5 2 48 6.8 2Bulgaria 4 0.4 <1 20 5.8 2Albania 7 0.4 <1 50 5.7 2Kyrgyzstan 9 2.2 2 31 5.4 2Slovak Republic 8 0.4 <1 36 4.5 1Czech Republic 4 0.4 <1 22 4.2 1Tajikistan 6 3.8 4 7 4.0 1Uzbekistan 6 1.2 1 19 3.9 1Moldova 10 2.1 2 20 3.8 1FYR Macedonia 11 1.1 1 25 3.2 1Turkmenistan 2 1.3 1 11 2.7 1Croatia 10 1.6 2 14 1.8 1Georgia 6 1.1 1 9 1.7 1Azerbaijan 6 0.7 1 11 1.7 1Armenia 1 <0.1 <1 10 1.2 <1---------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------RegionalBaltic states 6 2.9 3 36 5.6 2Other regional 23 4.1 4 144 38.0 12---------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------Total 322 99.3 100 1,177 312.4 100---------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------

1 Figures include 7 implementation projects, with a value of ECU 3.1 million,for which payments are managed directly by the European Commission.

Technical cooperation

supportingoperational

priorities

Technical cooperation funds

The EBRD’s resource base for technical cooperationcomprises regular Technical Cooperation Fundcontributions, project-specific technical cooperationagreements and Special Fund contributions. Allcontributions by donors are made on a voluntarybasis.

An important element of the 1995 technicalcooperation policy review was the decision by theBoard of Directors to establish an EBRD TechnicalCooperation Special Fund (TCSF). The TCSF wouldbe an untied facility funded through reimbursedtechnical cooperation funds previously allocated toprivate sector operations and/or through direct donorcontributions. In this way the Bank will build a newresource flow for technical cooperation funding thatwould complement its present resources and increaseoperational efficiency.

In 1995, the EBRD signed eight new TechnicalCooperation Fund Agreements with bilateral donors,bringing the total to 43. In addition 14 existingTechnical Cooperation Funds were replenished and6 project-specific technical cooperation agreementswere signed in 1995. Total grant resources fortechnical cooperation increased during 1995 by ECU124.6 million to ECU 387.9 million. This representsan increase of 47.3 per cent compared with 1994.



Technical Cooperation Fund AgreementsAt 31 December 1995

Amount Date of including ECU

initial replenishments equivalentDonor Agreement Currency (million) (million)

-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------1991Norway (Environment and Energy) 16 Apr NOK 27.60 3.41Japan 5 July JPY 6,518.00 49.33USA 30 July USD 1.15 0.89France (Foreign Affairs) 1 Aug FRF 17.50 2.79Sweden 13 Aug SEK 40.00 4.69Taipei China 16 Sept USD 15.00 11.69European Union1 15 Oct ECU 130.07 130.07Netherlands 20 Nov NLG 16.68 8.11United Kingdom2 25 Nov GBP 3.75 4.53Luxembourg 26 Nov ECU 0.70 0.70Austria 31 Dec USD 5.00 3.90-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------1992Finland 13 Jan FIM 15.50 2.78Canada 24 Jan CAD 7.70 4.40France (Treasury) 26 Mar FRF 20.46 3.26Switzerland 31 Mar CHF 7.50 5.09Israel 14 Apr ILS 1.04 0.26Italy 14 Apr ITL 9,000.00 4.43Italy (Central European Initiative) 14 Apr ITL 16,000.00 7.88Turkey 17 June TRL 10,000.00 0.13Denmark 1 July ECU 3.10 3.10New Zealand 10 July NZD 0.33 0.17Spain 21 July ESP 201.35 1.29Portugal 20 Oct PTE 80.00 0.42Iceland 3 Dec ECU 0.20 0.20Germany 11 Dec DEM 10.00 5.45-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------1993Republic of Korea 25 Apr USD 0.60 0.47Norway (General) 27 Apr ECU 1.00 1.00Ireland 17 Sept ECU 0.33 0.33-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------1994United Kingdom-B3 14 Mar GBP 1.25 1.51United Kingdom-C4 25 Mar GBP 1.60 1.94USA (Evergreen) 3 June USD 2.92 2.28Finland, Norway, Sweden

(RVF for North West Russia) 5 July USD 20.00 15.59Belgium 27 Sept BEF 30.00 0.80USA (RVF for Lower Volga Region) 29 Sept USD 20.00 15.59Flanders 9 Nov ECU 0.40 0.40-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------1995France (RVF for Southern Russia) 28 Feb FRF 120.00 19.11Wallonia 16 Mar BEF 15.00 0.40Greece 4 Apr GRD 59.00 0.19Italy (RVF for Western Russia) 6 June USD 20.00 15.59Netherlands (Dutch Environment) 22 June NLG 0.40 0.19European Union (TAM Phare Regional) 26 June ECU 5.90 5.90Denmark, Finland, Iceland, Norway,

Sweden (TAM Nordic Council) 22 Sept DKK 4.00 0.56Germany (KfW) 27 Sept DEM 13.00 7.08-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Total of Technical Cooperation Funds 347.90-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Technical Cooperation Funds replenished since the initial Agreement.1 The Agreement amount has been amended by the EBRD to reflect the annual revision of the

facility by the EU. Included in the Agreement is ECU 3.1 million representing funds assigned toimplementation projects.

2 The activities of the UK Fund are in the Russian Federation.3 The activities of the UK-B Fund are in the countries of the CIS, excluding the Russian

Federation.4 The activities of the UK-C Fund are in Albania, Bulgaria, Czech Republic, FYR Macedonia,

Hungary, Poland, Romania, Slovak Republic and Slovenia.

Technical cooperation commitments 1991-95 by type of activity

Advisory services 19%

Project preparation 55%

Sector studies 2%

Training 6%Project implementation 18%


Regional Venture FundsThe table opposite lists all technical cooperation agreements that the EBRDmanages directly and for which it has received contributions. Additional RegionalVenture Funds are not administered by the EBRD: these are recorded as officialco-financing (see pages 21 and 33).


Amount Date of including ECU

initial replenishments equivalentAgreement Currency (million) (million)

-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Special FundsBaltic Technical Assistance

Special Fund1 14 Apr 1992 ECU 8.49 8.49Russia Small Business

Technical Cooperation Special Fund 18 Oct 1993 ECU 9.23 9.23-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Project-specific funds 22.28 22.28-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Total of Technical Cooperation Funds 347.90Total of Special Funds 17.72Total of project-specific funds 22.28-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Total of all technical cooperation agreements 387.90-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

1 At the option of EBRD, income of ECU 3.49 million derived from the investment of theresources of the Baltic Investment Special Fund was transferred in June 1995 to the BalticTechnical Assistance Special Fund to supplement the resources of the Fund.

Introduction

The EBRD’s portfolio of committed loans and equityinvestments increased by ECU 2.0 billion in 1995.The financial results for the year were higher thanprojected at ECU 82.9 million before provisions andECU 7.5 million after provisions. This is a verysatisfactory outcome, particularly in view of themarked increase in total reserves and the provisionsestablished for costs related to work on theHeadquarters building in preparation for furthersubletting.

The results include the first significantcontributions from the Bank’s equity portfolio, withECU 5.8 million of dividend income and ECU37.9 million profit arising from the sale of shareinvestments. With gross income from Bankingoperations, which includes loan interest and feeincome, again more than doubling over the previousyear, the contribution of Banking operations to the EBRD’s total income has now reached over 35 per cent.

The remaining income is derived from treasuryinvestment activities which, in uncertain marketconditions during most of the year, generated areliable flow of income and exceeded performancebenchmarks.

As a result of continued tight budget discipline,cost saving initiatives and successful efforts toincrease cost recovery, administrative expenses atECU 136.8 million were well below approved budgetand less than 2 per cent higher than in 1994. Thissmall increase over 1994 is primarily due to accrualsrelating to work on the Headquarters building prior tofurther subletting.

Depreciation in 1995 was, however, at ECU21.5 million, more than double the 1994 charge. Thisincrease was primarily due to a one-off charge relatingto making more efficient use of the Headquartersbuilding, together with bringing all depreciationperiods onto a consistent, more conservative basis.

Provisions of ECU 75.4 million, which reflect arefinement during the year of the Bank’s provisioningpolicy, have been made against general portfolio risksand include, where required, specific loss provisions.The increase over 1994 has two causes: theacceleration in the underlying operations portfolio ofboth commitments and disbursements, and the need torecognise prudently the still immature nature of theloan and equity portfolios and the high-risk nature ofmany of the Bank’s operations.

Banking operations

During the year 110 commitments for a value of ECU2.0 billion were signed, compared with 88 in 1994 fora value of ECU 1.6 billion at 1995 year-end exchangerates. This brought cumulative commitments at year-end 1995, net of repayments, to ECU 5.7 billion. Ofthese cumulative commitments the equity portfolioaccounted for over 13 per cent. Seven RegionalVenture Fund framework agreements were signedduring the year for a total value of ECU 163.7 millionas part of the early stage equity programme.

Project disbursements during the year were 72 percent greater than in 1994, with the total of outstandingdisbursements at year-end reaching almost ECU 2.1billion compared with ECU 1.1 billion at the end of1994. The disbursed and outstanding portfoliocomprises ECU 490.8 million of equity investments,ECU 1.6 billion of loans and ECU 8.2 million ofproject-related debt securities.

During the year ECU 157 million was receivedfrom loan repayments and equity disposals, indicatinga successful start to the Bank’s policy of revolving itsportfolio.

Gross income from Banking operations again morethan doubled during the year to reach a total of ECU168.5 million. Of this, ECU 43.7 million wasgenerated from the Bank’s equity portfolio throughdividends of ECU 5.8 million and profit on the sale ofshares of ECU 37.9 million. The strong growth in theunderlying operations portfolio is reflected in theincreases in fee and commission income and the morethan doubling of loan interest, as shown in thefollowing table. The yield on the average loanoutstandings (excluding fee and commission incomewhich relates primarily to signing of projects) was 8.4per cent and the return on average equity outstandingswas 9.9 per cent.

Income from banking operations1995 1994

ECU 000 ECU 000-------------------------------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------Interest from loans 90,898 42,043Dividend income from shares 5,773 1,486Fee and commission income 33,938 26,137Profit on sale of share investments 37,895 339-------------------------------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------

168,504 70,005-------------------------------------------------------------------------------------------------------------------------------------------------------------------- ------------------------------Average loans outstanding (ECU billion) 1.1 0.5Average equity outstandings (ECU billion) 0.4 0.3-------------------------------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------


Financial results

Portfolio development

31 D

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2

30 J

un 9

3

31 D

ec 9

3

30 J

un 9

4

31 D

ec 9

4

30 J

un 9

5

31De

c95

6

4

2

0

Signed commitments

Outstanding

Banking20%

Analysis of gross income 1994-95

Treasury80%

1994

Treasury64%

Banking36%

1995

ECU billion


Financial results

Treasury investments

The EBRD’s treasury investments increased duringthe year by ECU 0.8 billion, or 19 per cent, to ECU5.3 billion. This was due to use of capital receipts andretained liquidity generated from borrowings, prior toproject disbursements. See also Treasury activitydisclosures on page 47.

The investment strategy is to focus on protection ofthe Bank’s investments while taking advantage ofmarket opportunities. Performance has beeninfluenced by the fact that duration has been keptshort because of continuing market uncertainties.There was, however, some lengthening of durationduring the second half of the year in view of declininginterest rates (see graph). The overall portfolio returnscontinue to exceed benchmarks.

At year-end, 11 per cent or ECU 580 million of theEBRD’s total treasury investments were managed byexternal asset managers. These funds are placed withindependent managers who are required to complywith the same Investment Guidelines as the Bankapplies to its internally managed funds. The externallymanaged funds comprise portfolios of ECU 358million of ECU-denominated securities; ECU 214million of US dollar short duration mortgage-backedsecurities and ECU 8 million in a US dollar fixed-income arbitrage fund.

The total investments managed by the Bank’streasury generated over ECU 300 million of income,representing an increase of more than 8 per cent over1994. The accounting presentation of the Bank’streasury results, as summarised in the table below,differentiates between interest income and realised/unrealised gains and losses arising from debtsecurities. The full year income of over ECU 300million is therefore stated after taking account of adownward adjustment in the value of debt securities ofECU 10.6 million.

Income from treasury investments1995 1994

ECU 000 ECU 000-------------------------------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------Interest earned from debt securities and

short-term money market instruments 310,632 289,797Realised/unrealised losses arising

from debt securities (10,546) (12,947)-------------------------------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------

300,086 276,850-------------------------------------------------------------------------------------------------------------------------------------------------------------------- ------------------------------Average assets outstanding (ECU billion) 5.305 4.559-------------------------------------------------------------------------------------------------------------------------------------------------------------------- ------------------------------

Funding

Capital

Following the receipt during the year of ECU569 million, which included the fifth and finalinstalment of the initial capital contribution, the totalcapital received at year-end in cash and promissorynotes reached ECU 2.8 billion.

The amount of capital payments and promissorynote encashments overdue at year-end from a total of12 members was ECU 100.7 million, whichrepresented less than 4 per cent of the paid-in capital.Subsequent to the year-end the United States ofAmerica has appropriated funds to reduce its overduepayments by ECU 60 million in two stages in 1996and 1997.

Borrowings

The EBRD borrows funds to provide a strong level ofliquidity which allows flexibility in deciding the mostappropriate time to access the capital markets. Toensure it has adequate funds available the Bankdevelops borrowing capacity and market access inadvance of actual funding needs. Through extensiveuse of swaps the Bank transforms floating rateliabilities into the required currencies and maturities.This integrated approach then allows the Bankmaximum flexibility and cost effectiveness in itsfunding programmes.

Under its approved borrowing programme for 1995the Bank raised ECU 1.2 billion through 30 fundingtransactions in seven currencies. These had anaverage maturity of 9.1 years at an average cost ofLibor less 34.3 basis points. This activity represents asubstantial increase over 1994 in the number of

Portfolio duration and interest rates

31 M

ar 9

4

30 J

un 9

4

30 S

ep 9

4

31 D

ec 9

4

31 M

ar 9

5

30 J

un 9

5

30 S

ep 9

5

31 D

ec 9

5

0.6

0.4

0.2

0.0

9%

8.5%

8%

7.5%

7%

6.5%

6%

5.5%

5%

4.5%

Duration

10Y ECU

3M ECU


Financial results

transactions in new markets and the overall maturity,which more than doubled that achieved in 1994.

As part of its borrowing programme the EBRDcontinues to pursue a programme of repurchase andearly redemption where this will lower the overall costof funds. In 1995 this amounted to ECU 178 million(1994: ECU 144 million) generating a net gain of ECU1.7 million.

At year-end the Bank’s outstanding medium- andlong-term debt amounted to ECU 3.8 billionequivalent in 17 currencies, with an average life tomaturity of 5.7 years and an average after-swap cost ofLibor less 36 basis points.

Expenses

The EBRD’s administrative costs for the year werecomfortably below the approved budget and, afterproviding for costs related to the Headquartersbuilding, were only marginally above those of 1994.

The major cost-saving initiatives started in 1994continued in 1995 with further positive results fromcost-recovery programmes and the subletting of partsof the Headquarters building. The Bank continues todemonstrate the benefits of applying tight budgetdiscipline and efficient cost controls.

The depreciation charge for the year increased in1995 to ECU 21.5 million, compared with ECU 11million in 1994. This increase resulted from one-offprudential measures to recognise the costs related tothe reconfiguration of the Headquarters buildingwhich will provide for more effective and efficient useof the space. This includes the accelerateddepreciation of assets no longer having any materialeconomic value. Consistent with this the depreciationperiods for all assets other than leaseholdimprovements have been standardised at two and fouryears as applicable.

Provisions

During the year the EBRD conducted a comprehensivereview of its provisioning policy. As a result the basisof calculating general provisions was refined. They arenow calculated on a risk-based approach for non-sovereign risk assets. An independent credit-riskrating system is in operation, designed to recognise therelative risk inherent in individual operations and, atthe time of approving the operation, to assign a riskrating class to each of them on the basis of a compositecountry and risk rating. The ongoing portfolio reviewprocess requires that a formal monitoring report isprepared for each individual operation at least twice ayear, during which, if appropriate, adjustments to thecredit rating are made.

Provisioning is now applied in two steps: an initialamount of 50 per cent of the total provision is made atthe time of commitment and the remaining 50 per centat disbursement. The previous version of the policywas based on provisions being made at disbursementonly and hence the refined policy represents a moreprudent approach. In addition, the policy nowrequires that a provision against general portfolio risksis also made against the total portfolio of grosscommitments, net of repayments.

The credit-risk ratings assigned to individualoperations use a 10-point scale and can range fromlow risk (1) to high risk (10). It is expected that Bankoperations will normally be rated between 4 and 7.

The weighted average overall risk rating of theBank’s portfolio at year-end 1995, at 5.32, had notmoved significantly from the 1994 year-end average of5.31. The apparent stability of credit-risk rating of theportfolio does not necessarily reflect unchangedconditions as this indicator is the composite result ofseveral underlying trends. These include someincrease in the rating due to the growing share ofoperations in countries in the early and intermediatestages of transition, a rising share of operations withlocal partners, and more equity investments, in linewith the Bank’s operational priorities. This increasewas to a large extent offset by improvements in theexisting portfolio of operations.


Financial results

The Bank’s policy of making specific provisions ona case-by-case basis continues. When applied toshare investments these provisions represent anestimate of the permanent diminution in the value ofthe investment. At year-end there were 10 specificprovisions for a total of ECU 14.2 million,representing a net increase of ECU 4.9 million duringthe year.

The application of the refined policy produced aprovisioning charge for the year of ECU 71.4 millionto which an additional ECU 4 million was added as aprudential measure, giving a total charge for the yearof ECU 75.4 million. This was done in view of thelack of experience with the portfolio and theconsequent lack of a fully developed portfolioperformance track record. The increase in the chargefrom ECU 23.9 million in 1994 represents theunderlying growth in the operations portfolio(including in particular early-stage equity projects)and the significant build-up in the general portfoliorisk provisions.

The charge for the year resulted in total cumulativeprovisions doubling from ECU 72.6 million to ECU145.4 million. In the balance sheet presentation thetotal provisions comprise ECU 62 million as adeduction from operational assets and ECU 83.4million as General Portfolio Risks included inliabilities.

Outlook for 1996

The EBRD remains committed to implementing itsoperational priorities and achieving its productivityobjectives, particularly in the short and medium term.In 1996 a gradual shift of the Bank’s strategy towardsthe implementation of wholesale operations isexpected.

The Bank’s commitment to pursuing a manageablegrowth strategy to meet increasing demand in itscountries of operations will result in a furthersignificant increase in its portfolio. The need toprovide prudentially for unforeseen risks in theoperations portfolio and to build the Bank’s reservestakes priority over the reporting of net profits. A profitafter provisions is therefore currently not projected.

Treasury activity disclosures

IntroductionIn its financial reporting policy the EBRD aims to reflect bestindustry practice. In this context it is particularly committed tocontinuing enhanced disclosure and transparency of its treasuryactivities with specific reference to its use of derivatives.

Principles of investment managementThe EBRD’s Financial Policies define and govern its overalltreasury investment management approach, which is furtherclarified in the Treasury Investment Authority and the TreasuryInvestment Guidelines. A comprehensive review of theInvestment Authority and Guidelines during the year confirmed anumber of fundamental investment and control principles:– It is recognised that in current financial markets the amount

of risk involved in any investment is not necessarilyproportional to the amount of cash invested. The Bank’scontrol mechanisms are therefore designed to measureagainst defined limits the total risk of each individualtransaction.

– Where possible the Bank’s investment and funding activitiesare carried out in order to achieve, to the greatest extentpossible, adequate liquidity, as measured by portfolio maturityprofiles and a minimisation of currency risks. The generalpolicy is also to minimise interest rate risks although limitsexist for the purpose of taking strategic investment positions.

– The Bank’s current method of measuring interest rate risk isbased on duration and the present value of a basis point shiftin rates. As this does not adequately capture all aspects ofportfolio interest rate risk - especially curve, spread andvolatility - a “Value at Risk” methodology is to be progressivelyimplemented.

– There will be complete internal and external transparency ofpolicies and their implementation, together with full disclosureof details of all transactions. Further control is provided by thedaily independent reporting of risk exposure and financialresults of investment activity.

– An independent risk management and control function, report-ing to the Vice President, Finance, is a fundamental part ofthe control framework together with a regular annual review ofthe risk management programme by the Audit Committee ofthe Board of Directors.

The eligibility of all investments, including derivatives, isdetermined on the basis of underlying risk rather than thestructure or legal form of a transaction. Limits established bythe Guidelines only allow investment in AAA-rated instrumentsissued by corporates, AA-rated for sovereign risks and A-ratedfor banks up to a maturity of three months. The counterpartyrisk will only be accepted on the basis of independent creditanalysis. The principal amount of any financing repurchaseactivity must be adequately collateralised and protected againstcurrency and interest rate risks.


Financial results

Use of derivativesIn the normal course of business, funds are invested so thatrisks and exposures are limited wherever possible. Derivativesare used extensively to manage the Bank’s exposure to interestand exchange rate risks in conjunction with its asset andliability management activities. In addition, derivatives arecarefully used as part of the Bank’s investment managementfor the purpose of strategic investment position taking. The objective of this disclosure is to provide information on twoimportant categories of risk involved in the use of derivatives:counterparty risk and market risk.Derivative instruments are considered to include contracts oragreements whose value is derived from one or more underlyingfinancial instruments or indices. They include swaps, forwardrate agreements, futures, options and combinations thereof;and affect the Bank’s interest income, fee and commissionincome, results from financial operations, and other assets andliabilities. Derivatives contracts are expressed in terms ofnotional principal although the real risk is only a smallpercentage of this amount. This percentage depends mainly onthe relationship between the exchange or interest rate agreedwith the counterparty when the transaction was entered intoand the current market rate.The use of these instruments allows timely adjustments to bemade to the portfolio to anticipate and react to marketconditions, together with the management and hedging ofinterest and currency exposures. Care is taken to ensure thathedging structures allow flexibility to react to changes in marketconditions.The nominal principal amounts of off balance sheettransactions outstanding at year-end totalled ECU 17.7 billion(1994: ECU 15.4 billion). In the unlikely event of non-performance by its counterparties, the Bank had, in respect ofthese transactions, a risk-adjusted exposure at year-end of ECU558 million. This amount represents the cost of replacing, atmarket rates, all outstanding agreements and contracts.However, the Bank’s stringent independent control system andcredit policies minimise the risk of such non-performance bycounterparties, almost all of which have a minimum AA creditrating. Of the total outstandings, 92 per cent or ECU 16.3 billion(1994: ECU 13.2 billion) were in place for hedging purposes.The remaining 8 per cent, which comprised interest ratecontracts (primarily futures), represented strategic investmentpositions that are subject to market risk. This is fully accountedfor in the marked to market valuation.

Full details, expressed as notional principal amounts, are setout in the following table:

Off balance sheet financial instrumentsStrategic

investmentECU million Hedging positions Total-------------------------------------------------------------------------------------------------------------------------------------------------------------------- ----------------------------Exchange rate contractsSwaps 3,879 – 3,879Forwards 924 – 924Options 713 – 713

-------------------------------------------------------------------------------------------------------------------------------------------------------------------- ----------------------------5,516 – 5,516

-------------------------------------------------------------------------------------------------------------------------------------------------------------------- ----------------------------Interest rate contractsSwaps 5,729 – 5,729Options 1,370 34 1,404Futures 3,728 1,276 5,004

-------------------------------------------------------------------------------------------------------------------------------------------------------------------- ----------------------------10,827 1,310 12,137

-------------------------------------------------------------------------------------------------------------------------------------------------------------------- ----------------------------Total 16,343 1,310 17,653-------------------------------------------------------------------------------------------------------------------------------------------------------------------- ------------------------------

Risk managementIn the area of treasury controls and risk management the EBRDobserves the G-30 recommendations as a measure of industrybest practice. The Bank complies fully with all recommendationsrelevant to end-users. Although the Bank is an end-user, albeit asophisticated one, it has a continuing commitment to complywith recommendations relating to securities houses and marketmakers.The organisation of the Bank’s treasury risk management isbased on the principle of segregation of responsibilities inaccordance with industry best practice, with separate unitshaving responsibility for dealing, revaluation, settlement andmonitoring/reporting.In addition to these line management controls an Asset andLiability Management Committee acts as the Bank’s riskcommittee, considering broader policy issues and specifictransactions which constitute precedents in the interpretationand application of the Authority and Guidelines. Regularreporting to the Board of Directors of all aspects of treasuryactivities is achieved through the Audit Committee and theFinancial and Operations Policy Committee. Both of these areformal committees of the Board and consider treasuryperformance on a quarterly basis.During the year an independent Risk Control Unit wasestablished reporting directly to the Vice President, Finance withresponsibility to ensure that all relevant risks are subject tolimits and controls, to ensure compliance with those limits andto prepare risk reports for management.


Regional Venture FundsThe table opposite lists all technical cooperation agreements that the EBRDmanages directly and for which it has received contributions. Additional RegionalVenture Funds are not administered by the EBRD: these are recorded as officialco-financing (see pages 21 and 33).


AmountDate of including ECU

initial replenishments equivalentAgreement Currency (million) (million)

-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Special FundsBaltic Technical Assistance

Special Fund1 14 Apr 1992 ECU 8.49 8.49Russia Small Business

Technical Cooperation Special Fund 18 Oct 1993 ECU 9.23 9.23-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Project-specific funds 22.28 22.28-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Total of Technical Cooperation Funds 347.90Total of Special Funds 17.72Total of project-specific funds 22.28-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Total of all technical cooperation agreements 387.90-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

1 At the option of EBRD, income of ECU 3.49 million derived from the investment of theresources of the Baltic Investment Special Fund was transferred in June 1995 to the BalticTechnical Assistance Special Fund to supplement the resources of the Fund.

Introduction

The EBRD’s portfolio of committed loans and equityinvestments increased by ECU 2.0 billion in 1995.The financial results for the year were higher thanprojected at ECU 82.9 million before provisions andECU 7.5 million after provisions. This is a verysatisfactory outcome, particularly in view of themarked increase in total reserves and the provisionsestablished for costs related to work on theHeadquarters building in preparation for furthersubletting.

The results include the first significantcontributions from the Bank’s equity portfolio, withECU 5.8 million of dividend income and ECU37.9 million profit arising from the sale of shareinvestments. With gross income from Bankingoperations, which includes loan interest and feeincome, again more than doubling over the previousyear, the contribution of Banking operations to the EBRD’s total income has now reached over 35 per cent.

The remaining income is derived from treasuryinvestment activities which, in uncertain marketconditions during most of the year, generated areliable flow of income and exceeded performancebenchmarks.

As a result of continued tight budget discipline,cost saving initiatives and successful efforts toincrease cost recovery, administrative expenses atECU 136.8 million were well below approved budgetand less than 2 per cent higher than in 1994. Thissmall increase over 1994 is primarily due to accrualsrelating to work on the Headquarters building prior tofurther subletting.

Depreciation in 1995 was, however, at ECU21.5 million, more than double the 1994 charge. Thisincrease was primarily due to a one-off charge relatingto making more efficient use of the Headquartersbuilding, together with bringing all depreciationperiods onto a consistent, more conservative basis.

Provisions of ECU 75.4 million, which reflect arefinement during the year of the Bank’s provisioningpolicy, have been made against general portfolio risksand include, where required, specific loss provisions.The increase over 1994 has two causes: theacceleration in the underlying operations portfolio ofboth commitments and disbursements, and the need torecognise prudently the still immature nature of theloan and equity portfolios and the high-risk nature ofmany of the Bank’s operations.

Banking operations

During the year 110 commitments for a value of ECU2.0 billion were signed, compared with 88 in 1994 fora value of ECU 1.6 billion at 1995 year-end exchangerates. This brought cumulative commitments at year-end 1995, net of repayments, to ECU 5.7 billion. Ofthese cumulative commitments the equity portfolioaccounted for over 13 per cent. Seven RegionalVenture Fund framework agreements were signedduring the year for a total value of ECU 163.7 millionas part of the early stage equity programme.

Project disbursements during the year were 72 percent greater than in 1994, with the total of outstandingdisbursements at year-end reaching almost ECU 2.1billion compared with ECU 1.1 billion at the end of1994. The disbursed and outstanding portfoliocomprises ECU 490.8 million of equity investments,ECU 1.6 billion of loans and ECU 8.2 million ofproject-related debt securities.

During the year ECU 157 million was receivedfrom loan repayments and equity disposals, indicatinga successful start to the Bank’s policy of revolving itsportfolio.

Gross income from Banking operations again morethan doubled during the year to reach a total of ECU168.5 million. Of this, ECU 43.7 million wasgenerated from the Bank’s equity portfolio throughdividends of ECU 5.8 million and profit on the sale ofshares of ECU 37.9 million. The strong growth in theunderlying operations portfolio is reflected in theincreases in fee and commission income and the morethan doubling of loan interest, as shown in thefollowing table. The yield on the average loanoutstandings (excluding fee and commission incomewhich relates primarily to signing of projects) was 8.4per cent and the return on average equity outstandingswas 9.9 per cent.

Income from banking operations1995 1994

ECU 000 ECU 000-------------------------------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------Interest from loans 90,898 42,043Dividend income from shares 5,773 1,486Fee and commission income 33,938 26,137Profit on sale of share investments 37,895 339-------------------------------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------

168,504 70,005-------------------------------------------------------------------------------------------------------------------------------------------------------------------- ------------------------------Average loans outstanding (ECU billion) 1.1 0.5Average equity outstandings (ECU billion) 0.4 0.3-------------------------------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------


Financial results

Portfolio development

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Signed commitments

Outstanding

Banking20%

Analysis of gross income 1994-95

Treasury80%

1994

Treasury64%

Banking36%

1995

ECU billion


Financial results

Treasury investments

The EBRD’s treasury investments increased duringthe year by ECU 0.8 billion, or 19 per cent, to ECU5.3 billion. This was due to use of capital receipts andretained liquidity generated from borrowings, prior toproject disbursements. See also Treasury activitydisclosures on page 47.

The investment strategy is to focus on protection ofthe Bank’s investments while taking advantage ofmarket opportunities. Performance has beeninfluenced by the fact that duration has been keptshort because of continuing market uncertainties.There was, however, some lengthening of durationduring the second half of the year in view of declininginterest rates (see graph). The overall portfolio returnscontinue to exceed benchmarks.

At year-end, 11 per cent or ECU 580 million of theEBRD’s total treasury investments were managed byexternal asset managers. These funds are placed withindependent managers who are required to complywith the same Investment Guidelines as the Bankapplies to its internally managed funds. The externallymanaged funds comprise portfolios of ECU 358million of ECU-denominated securities; ECU 214million of US dollar short duration mortgage-backedsecurities and ECU 8 million in a US dollar fixed-income arbitrage fund.

The total investments managed by the Bank’streasury generated over ECU 300 million of income,representing an increase of more than 8 per cent over1994. The accounting presentation of the Bank’streasury results, as summarised in the table below,differentiates between interest income and realised/unrealised gains and losses arising from debtsecurities. The full year income of over ECU 300million is therefore stated after taking account of adownward adjustment in the value of debt securities ofECU 10.6 million.

Income from treasury investments1995 1994

ECU 000 ECU 000-------------------------------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------Interest earned from debt securities and

short-term money market instruments 310,632 289,797Realised/unrealised losses arising

from debt securities (10,546) (12,947)-------------------------------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------

300,086 276,850-------------------------------------------------------------------------------------------------------------------------------------------------------------------- ------------------------------Average assets outstanding (ECU billion) 5.305 4.559-------------------------------------------------------------------------------------------------------------------------------------------------------------------- ------------------------------

Funding

Capital

Following the receipt during the year of ECU569 million, which included the fifth and finalinstalment of the initial capital contribution, the totalcapital received at year-end in cash and promissorynotes reached ECU 2.8 billion.

The amount of capital payments and promissorynote encashments overdue at year-end from a total of12 members was ECU 100.7 million, whichrepresented less than 4 per cent of the paid-in capital.Subsequent to the year-end the United States ofAmerica has appropriated funds to reduce its overduepayments by ECU 60 million in two stages in 1996and 1997.

Borrowings

The EBRD borrows funds to provide a strong level ofliquidity which allows flexibility in deciding the mostappropriate time to access the capital markets. Toensure it has adequate funds available the Bankdevelops borrowing capacity and market access inadvance of actual funding needs. Through extensiveuse of swaps the Bank transforms floating rateliabilities into the required currencies and maturities.This integrated approach then allows the Bankmaximum flexibility and cost effectiveness in itsfunding programmes.

Under its approved borrowing programme for 1995the Bank raised ECU 1.2 billion through 30 fundingtransactions in seven currencies. These had anaverage maturity of 9.1 years at an average cost ofLibor less 34.3 basis points. This activity represents asubstantial increase over 1994 in the number of

Portfolio duration and interest rates

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0.6

0.4

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9%

8.5%

8%

7.5%

7%

6.5%

6%

5.5%

5%

4.5%

Duration

10Y ECU

3M ECU


Financial results

transactions in new markets and the overall maturity,which more than doubled that achieved in 1994.

As part of its borrowing programme the EBRDcontinues to pursue a programme of repurchase andearly redemption where this will lower the overall costof funds. In 1995 this amounted to ECU 178 million(1994: ECU 144 million) generating a net gain of ECU1.7 million.

At year-end the Bank’s outstanding medium- andlong-term debt amounted to ECU 3.8 billionequivalent in 17 currencies, with an average life tomaturity of 5.7 years and an average after-swap cost ofLibor less 36 basis points.

Expenses

The EBRD’s administrative costs for the year werecomfortably below the approved budget and, afterproviding for costs related to the Headquartersbuilding, were only marginally above those of 1994.

The major cost-saving initiatives started in 1994continued in 1995 with further positive results fromcost-recovery programmes and the subletting of partsof the Headquarters building. The Bank continues todemonstrate the benefits of applying tight budgetdiscipline and efficient cost controls.

The depreciation charge for the year increased in1995 to ECU 21.5 million, compared with ECU 11million in 1994. This increase resulted from one-offprudential measures to recognise the costs related tothe reconfiguration of the Headquarters buildingwhich will provide for more effective and efficient useof the space. This includes the accelerateddepreciation of assets no longer having any materialeconomic value. Consistent with this the depreciationperiods for all assets other than leaseholdimprovements have been standardised at two and fouryears as applicable.

Provisions

During the year the EBRD conducted a comprehensivereview of its provisioning policy. As a result the basisof calculating general provisions was refined. They arenow calculated on a risk-based approach for non-sovereign risk assets. An independent credit-riskrating system is in operation, designed to recognise therelative risk inherent in individual operations and, atthe time of approving the operation, to assign a riskrating class to each of them on the basis of a compositecountry and risk rating. The ongoing portfolio reviewprocess requires that a formal monitoring report isprepared for each individual operation at least twice ayear, during which, if appropriate, adjustments to thecredit rating are made.

Provisioning is now applied in two steps: an initialamount of 50 per cent of the total provision is made atthe time of commitment and the remaining 50 per centat disbursement. The previous version of the policywas based on provisions being made at disbursementonly and hence the refined policy represents a moreprudent approach. In addition, the policy nowrequires that a provision against general portfolio risksis also made against the total portfolio of grosscommitments, net of repayments.

The credit-risk ratings assigned to individualoperations use a 10-point scale and can range fromlow risk (1) to high risk (10). It is expected that Bankoperations will normally be rated between 4 and 7.

The weighted average overall risk rating of theBank’s portfolio at year-end 1995, at 5.32, had notmoved significantly from the 1994 year-end average of5.31. The apparent stability of credit-risk rating of theportfolio does not necessarily reflect unchangedconditions as this indicator is the composite result ofseveral underlying trends. These include someincrease in the rating due to the growing share ofoperations in countries in the early and intermediatestages of transition, a rising share of operations withlocal partners, and more equity investments, in linewith the Bank’s operational priorities. This increasewas to a large extent offset by improvements in theexisting portfolio of operations.


Financial results

The Bank’s policy of making specific provisions ona case-by-case basis continues. When applied toshare investments these provisions represent anestimate of the permanent diminution in the value ofthe investment. At year-end there were 10 specificprovisions for a total of ECU 14.2 million,representing a net increase of ECU 4.9 million duringthe year.

The application of the refined policy produced aprovisioning charge for the year of ECU 71.4 millionto which an additional ECU 4 million was added as aprudential measure, giving a total charge for the yearof ECU 75.4 million. This was done in view of thelack of experience with the portfolio and theconsequent lack of a fully developed portfolioperformance track record. The increase in the chargefrom ECU 23.9 million in 1994 represents theunderlying growth in the operations portfolio(including in particular early-stage equity projects)and the significant build-up in the general portfoliorisk provisions.

The charge for the year resulted in total cumulativeprovisions doubling from ECU 72.6 million to ECU145.4 million. In the balance sheet presentation thetotal provisions comprise ECU 62 million as adeduction from operational assets and ECU 83.4million as General Portfolio Risks included inliabilities.

Outlook for 1996

The EBRD remains committed to implementing itsoperational priorities and achieving its productivityobjectives, particularly in the short and medium term.In 1996 a gradual shift of the Bank’s strategy towardsthe implementation of wholesale operations isexpected.

The Bank’s commitment to pursuing a manageablegrowth strategy to meet increasing demand in itscountries of operations will result in a furthersignificant increase in its portfolio. The need toprovide prudentially for unforeseen risks in theoperations portfolio and to build the Bank’s reservestakes priority over the reporting of net profits. A profitafter provisions is therefore currently not projected.

Treasury activity disclosures

IntroductionIn its financial reporting policy the EBRD aims to reflect bestindustry practice. In this context it is particularly committed tocontinuing enhanced disclosure and transparency of its treasuryactivities with specific reference to its use of derivatives.

Principles of investment managementThe EBRD’s Financial Policies define and govern its overalltreasury investment management approach, which is furtherclarified in the Treasury Investment Authority and the TreasuryInvestment Guidelines. A comprehensive review of theInvestment Authority and Guidelines during the year confirmed anumber of fundamental investment and control principles:– It is recognised that in current financial markets the amount

of risk involved in any investment is not necessarilyproportional to the amount of cash invested. The Bank’scontrol mechanisms are therefore designed to measureagainst defined limits the total risk of each individualtransaction.

– Where possible the Bank’s investment and funding activitiesare carried out in order to achieve, to the greatest extentpossible, adequate liquidity, as measured by portfolio maturityprofiles and a minimisation of currency risks. The generalpolicy is also to minimise interest rate risks although limitsexist for the purpose of taking strategic investment positions.

– The Bank’s current method of measuring interest rate risk isbased on duration and the present value of a basis point shiftin rates. As this does not adequately capture all aspects ofportfolio interest rate risk - especially curve, spread andvolatility - a “Value at Risk” methodology is to be progressivelyimplemented.

– There will be complete internal and external transparency ofpolicies and their implementation, together with full disclosureof details of all transactions. Further control is provided by thedaily independent reporting of risk exposure and financialresults of investment activity.

– An independent risk management and control function, report-ing to the Vice President, Finance, is a fundamental part ofthe control framework together with a regular annual review ofthe risk management programme by the Audit Committee ofthe Board of Directors.

The eligibility of all investments, including derivatives, isdetermined on the basis of underlying risk rather than thestructure or legal form of a transaction. Limits established bythe Guidelines only allow investment in AAA-rated instrumentsissued by corporates, AA-rated for sovereign risks and A-ratedfor banks up to a maturity of three months. The counterpartyrisk will only be accepted on the basis of independent creditanalysis. The principal amount of any financing repurchaseactivity must be adequately collateralised and protected againstcurrency and interest rate risks.


Financial results

Use of derivativesIn the normal course of business, funds are invested so thatrisks and exposures are limited wherever possible. Derivativesare used extensively to manage the Bank’s exposure to interestand exchange rate risks in conjunction with its asset andliability management activities. In addition, derivatives arecarefully used as part of the Bank’s investment managementfor the purpose of strategic investment position taking. The objective of this disclosure is to provide information on twoimportant categories of risk involved in the use of derivatives:counterparty risk and market risk.Derivative instruments are considered to include contracts oragreements whose value is derived from one or more underlyingfinancial instruments or indices. They include swaps, forwardrate agreements, futures, options and combinations thereof;and affect the Bank’s interest income, fee and commissionincome, results from financial operations, and other assets andliabilities. Derivatives contracts are expressed in terms ofnotional principal although the real risk is only a smallpercentage of this amount. This percentage depends mainly onthe relationship between the exchange or interest rate agreedwith the counterparty when the transaction was entered intoand the current market rate.The use of these instruments allows timely adjustments to bemade to the portfolio to anticipate and react to marketconditions, together with the management and hedging ofinterest and currency exposures. Care is taken to ensure thathedging structures allow flexibility to react to changes in marketconditions.The nominal principal amounts of off balance sheettransactions outstanding at year-end totalled ECU 17.7 billion(1994: ECU 15.4 billion). In the unlikely event of non-performance by its counterparties, the Bank had, in respect ofthese transactions, a risk-adjusted exposure at year-end of ECU558 million. This amount represents the cost of replacing, atmarket rates, all outstanding agreements and contracts.However, the Bank’s stringent independent control system andcredit policies minimise the risk of such non-performance bycounterparties, almost all of which have a minimum AA creditrating.Of the total outstandings, 92 per cent or ECU 16.3 billion(1994: ECU 13.2 billion) were in place for hedging purposes.The remaining 8 per cent, which comprised interest ratecontracts (primarily futures), represented strategic investmentpositions that are subject to market risk. This is fully accountedfor in the marked to market valuation.

Full details, expressed as notional principal amounts, are setout in the following table:

Off balance sheet financial instrumentsStrategic

investmentECU million Hedging positions Total-------------------------------------------------------------------------------------------------------------------------------------------------------------------- ----------------------------Exchange rate contractsSwaps 3,879 – 3,879Forwards 924 – 924Options 713 – 713

-------------------------------------------------------------------------------------------------------------------------------------------------------------------- ----------------------------5,516 – 5,516

-------------------------------------------------------------------------------------------------------------------------------------------------------------------- ----------------------------Interest rate contractsSwaps 5,729 – 5,729Options 1,370 34 1,404Futures 3,728 1,276 5,004

-------------------------------------------------------------------------------------------------------------------------------------------------------------------- ----------------------------10,827 1,310 12,137

-------------------------------------------------------------------------------------------------------------------------------------------------------------------- ----------------------------Total 16,343 1,310 17,653-------------------------------------------------------------------------------------------------------------------------------------------------------------------- ------------------------------

Risk managementIn the area of treasury controls and risk management the EBRDobserves the G-30 recommendations as a measure of industrybest practice. The Bank complies fully with all recommendationsrelevant to end-users. Although the Bank is an end-user, albeit asophisticated one, it has a continuing commitment to complywith recommendations relating to securities houses and marketmakers.The organisation of the Bank’s treasury risk management isbased on the principle of segregation of responsibilities inaccordance with industry best practice, with separate unitshaving responsibility for dealing, revaluation, settlement andmonitoring/reporting.In addition to these line management controls an Asset andLiability Management Committee acts as the Bank’s riskcommittee, considering broader policy issues and specifictransactions which constitute precedents in the interpretationand application of the Authority and Guidelines. Regularreporting to the Board of Directors of all aspects of treasuryactivities is achieved through the Audit Committee and theFinancial and Operations Policy Committee. Both of these areformal committees of the Board and consider treasuryperformance on a quarterly basis.During the year an independent Risk Control Unit wasestablished reporting directly to the Vice President, Finance withresponsibility to ensure that all relevant risks are subject tolimits and controls, to ensure compliance with those limits andto prepare risk reports for management.

annual report 19952 european bank for reconstruction and development highlights financial results...

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