EBRD and emerging Arab democracies
BY AMIRA SALAH-AHMED
London/Cairo: As the European Bank for Reconstruction and Development (EBRD) seeks to extend its mandate to the Southern and Eastern Mediterranean (SEMED) region, many are wary that the bank will carry over its inglorious legacy of broad privatization in Eastern Europe.
In their own defense, EBRD executives say they are ready to do things differently by focusing on “supporting the private sector and SMEs.”
The rhetoric may have changed, but some argue that it is merely a new means to the same end.
The new region eyed by EBRD includes Egypt, Tunisia, Jordan and Morocco; the first two of which witnessed popular uprisings against disenfranchisement stemming mainly from flawed economic reforms undertaken by previous regimes. The most notorious of these being privatization.
Another challenge is these countries’ transition to supposed democracies — on which the plans of the EBRD are pinned — and whether that will pan out as hoped or falter.
In an open letter to the EBRD, the CEE Bankwatch Network, which has been monitoring the bank’s activities for a decade, said, “We believe it is premature to make commitments for EBRD financing for the Mediterranean region when it is by no means clear what kind of governments will follow the recently overthrown regimes of Ben Ali and Hosni Mubarak in Tunisia and Egypt.”
At last month’s annual meeting in London, the EBRD’s board of directors approved the creation of an initial Special Fund, allocating 1 billion euros to foray into “emerging Arab democracies.”
Financed from the bank’s reserves, the Special Fund will allow EBRD to start operations in these countries ahead of full-scale investments to come after the extension of its geographic remake into SEMED is ratified.
Until the first projects are likely to get underway in September, the bank will provide technical assessment and assistance. Simply speaking, it is one way of testing the waters.
Once investments can begin on a larger scale, the focus will be on “private sector development, SME growth, better municipal services, a stable financial sector and improving energy supplies.”
Down the line, EBRD plans to invest up to 2.5 billion euros a year in SEMED.
Suma Chakrabarti, the newly elected president, hailed the EBRD’s democracy advancement mandate (detailed in Article 1) as one of the reasons he signed up for the job.
The looming question, however, is the bank’s measure of democracy.
Admittedly, as one of its executives told a seminar organized by Bankwatch for journalists from the SEMED region, if you set the bar too high, it would be difficult to operate anywhere.
“EBRD does have to make an assessment of advancement to democracy,” said Alan Rousso, the bank’s managing director of stakeholder relations, “How high is the bar? If it’s too high, we would be sidelined and ineffective.”
Instead, the bank will take a calibrated approach. More on that later.
Pragmatically speaking, the statement can be described as honest. But at a time when the so-called ‘Arab Spring’ countries are struggling to put their own house in order, debating the legitimacy of their current rulers and elected parliaments, or busy electing a new president — as is the case with Egypt — it’s not so much about raising the bar as it is about first putting the bar in place.
Egyptian novelist and commentator Ahdaf Soueif was invited to speak on a panel intriguingly titled “Pondering Transitions.” She may have best encapsulated the sentiment of EBRD’s critics when she said: “If the decision was mine, I’d ask all international funding agencies to stay away.”
She continued on to relay the reality of Egypt’s continuing revolution amid an uncertain political landscape.
In the letter, Bankwatch said, “The EBRD has a mandate to work only in countries committed to multiparty democracy and pluralism, and it can in no way be ascertained that new governments in the Mediterranean region will fit this description.”
But the EBRD runs a profitable business. According to outgoing president Thomas Mirrow, the bank recorded a net profit of 173 million euros in 2011 compared to 1.4 billion euros in 2010. The bank’s reserves were 7.0 billion euros at the end of 2011.
With a high level of liquidity and a AAA credit rating, its ability to lend at competitive rates remains a strong selling point, especially for businesses in a region suffering from downgrades, ballooning deficits and falling foreign direct investments.
It’s hard to say no to an EBRD expansion in the region. It wouldn’t exactly be called smart business sense.
Still, it’s even harder for civil society in the region to accept an institution that would promote what critics have dubbed ‘business as usual,’ at such a time of dramatic and sweeping change.
On its part, the bank says it has actively engaged local civil society.
Founded in 1991 after the fall of the Soviet Union, EBRD was crafted to foster a transition to democracy and market economy. The EU’s 27 countries have a 62.7 percent stake, while the US is the largest single shareholder at 10 percent. Egypt and Morocco are founding shareholders while Tunisia and Jordan joined in late 2011.
After 20 years in business, Rousso said, EBRD was at a crossroads. “Before the financial crisis hit Europe, before the Arab awakening, there was talk of going out of business,” but instead, the bank decided to expand based on lessons learned.
To do so, the bank needed to amend Article 1 of its mandate which details the purpose of the bank and its geographic remit, to allow it to carry out its purpose in SEMED. Since Article 1 needs ratification from 100 percent of the shareholders, it is an ongoing process that the bank is hoping to complete by 2013.
In the meantime, two interim amendments were made.
In the first phase, EBRD operates in SEMED via cooperation funds, which entail 5 million euros worth of technical assistance in the form of grants, not loans.
In phase two, the bank can start investing through its Special Fund of 1 billion euros, which comes out of its own reserves, until Article 1 is ratified. Further down the line, phase three will mean the SEMED countries become fully operational.
Essentially, the two biggest developments of 2011 gave the bank a new lease on life. While battling through the Eurozone crisis at home, uprisings in the Arab world caused a dent on the economy and a funding void fit for the biggest international financing institutions (IFIs) to fill.
But the EBRD repeatedly stresses that it is not like other IFIs.
Firstly, it does not make balance of payment lending. “Other banks lend to governments, EBRD works directly with private sector (SMEs),” said Rousso, adding that it is the only IFI with a political aspect to its mandate.
In Egypt’s case, Rousso said, if the transition “process gets derailed, if elections are postponed and SCAF decides to re-impose martial law, then [operations] would be reassessed.”
It takes what is described as a calibrated strategic approach if a country does not meet the bank’s criteria: the more you do to advance towards democracy, the more investments you get from the bank.
“Belarus and Turkministan fall under the calibrated fund category. …Gross human rights violations can scratch a whole operation, like in Uzbekistan,” Rousso said.
The bank operates based on three pillars: sound banking principles (no soft-lending), additionality (investing in projects that wouldn’t happen without EBRD so as not to crowd out other investments) and advancing transition to market economy.
The bank also has an environmental mandate that technically prioritizes sustainability, although its shortcoming in this scope is one of the main sources of criticism by Bankwatch. Perhaps the most unique aspect is its ability to lend in local currency.
From its experience, the bank says it has learned that the “private sector doesn’t always get everything right.”
“We wouldn’t identify ourselves with Mubarak-era policies. Egypt will be setting its own policy orientations,” Rousso said. The bank, he added, “can’t force privatization to happen. We can do them in the right way — we’ve seen that it can be done incorrectly.”
Not everyone thinks the EBRD has learned enough from its past. Petr Hlobil of Bankwatch said the “major framework they are offering North Africa is the same” as past approaches.
EBRD’s ideology was that free markets equaled democracy, he said, thus encouraging the move towards privatization. “They achieved privatization of almost everything … before the framework for democracy was in place,” Hlobil added.
The proposed focus on public private partnership models in North Africa are also criticized for having proven ineffective in the past.
Bankwatch points out that the bank does not have indicators which look at development — despite its name — because “historically, they didn’t need it … and the simple definition was moving from centralization to private.”
That’s in addition to the bank’s emphasis on energy efficiency and decentralization of renewable energy, which are long-term projects, but to whose benefit, Bankwatch asks.
There’s also fear over the bank’s influence on the countries’ legal framework. As for its planned support for SMEs, he argues, these “funds tend to get stuck in the intermediary phase. They don’t track lending to private sector … where it ends up and the effect it has.”
More broadly, Hlobil claims, the “expansion into North Africa is not EBRD; it is a G8 plan to address political interests. Expansion was quickly approved … it is a big political driver.”
In its letter, Bankwatch challenges, “Until the bank has a much clearer and more proven idea of how to promote a transition that does not only deliver a developed private sector, but also socially just and environmentally sustainable societies, it is extremely unwise for the EBRD to move into a completely different region of the world.” –The Egypt Monocle