Pushing the frontiers of development finance

Creon Butler

Well, hello, everyone. My name is Creon Butler and I’m the Director of the Global Economy and Finance Programme in Chatham House, and it’s my great pleasure to welcome you to this evening’s discussion on the future of development finance with the President of the European Bank for Reconstruction and Development, Odile Renaud-Basso.

And this is a really, I think, important time to consider this question. The demands for public international finance are bigger than ever, and that’s not just to close the enormous climate finance gap in low-income and developing countries, but also to repair the damage caused by the pandemic and get back on track for meeting the SDGs. And while there’s a lot of discussion around using private finance to address the bulk of these needs, it’s clear that in many situations, you need the kind of public finance that the MDBs provide, either on its own, or to actually make that private finance flow.

And we’re also dealing with the fact that the multilateral development banks, though not actually in the case of the EBRD, but many of them are part of an architecture that dates back more than 70 years, to the Second World War. And this, in turn, raises understandable concerns among emerging and low-income countries about the fairness of the present system and their voice in it. And all of this is happening when we have probably the most stressful time in global economic governance, certainly that I can remember, following Russia’s invasion of Ukraine.

Now, we couldn’t have a better person to guide us through these issues than my guest today. Odile Renaud-Basso is, as I say, President of the EBRD and she took that job in November 2020, and I believe is the first woman, not just in the EBRD, but in any multilateral development bank to hold the top position. And before joining the EBRD, Odile was the Director General of the French Treasury, where she led on European and international affairs, trade policies, financial regulation and debt management, among other things. And as is the nature with these jobs, that involved filling a great many roles. So, she was Vice President of the European Economic and Financial Committee, the French Finance Deputy for the G7 and G20, Chair of the Paris Club, and also the French Governor, or Deputy, for the World Bank, EBRD and AFDB. And Odile is a graduate of Sciences Po, and also alumnus of the Ecole Nationale d’Administration. So, Odile, welcome to Chatham House, and thank you for being with us today, especially when it’s such a busy time.

Odile Renaud-Basso

Thank you. Thank you for your invitation.

Creon Butler

So, there’s a great deal to talk about, and I’ll just make a few quick housekeeping points, first of all. Firstly, this event is on the record and it’s being livestreamed and recorded. Odile will have – and I will have a conversation for around 30 minutes or so and then, we’ll come to the audience for Q&A. So, please be thinking of your questions as we have our conversation, and if you – and when we get to the questions, if you have a question in the room, please put your hand up and magically, a microphone will appear from one of my colleagues. Equally, if you are listening online, then I’ll be able to see your questions come up on the screen here.

So, Odile, we’ve talked before coming in about the, sort of, present context for debate on the multilateral development banks, and we saw, coming out of the G20 statement, this call for bigger, better and more effective development banks. So, when you think about the future of development finance and the role of the MDBs, I mean, how do you see that working and what do you think needs to happen in the MDBs, and why do they need to reform in this context?

Odile Renaud-Basso

So, maybe I will start by the why.

Creon Butler

Yes.

Odile Renaud-Basso

Why do they need to reform and why there is this debate? And in a way you already – I mean, in your introduction – you know, introductory remarked – fleshed out with a – I mean, we are in a time with many challenges, getting out of COVID, the Ukraine War, or the War on Ukraine, Russian War on Ukraine, which has a huge impact on, I mean, energy, food prices and so forth. But also the climate dimension, I think that the acceleration of the climate crisis and the difficulty all countries have had to – are having to address and move quickly. And all this has conseq – some consequences on the SDG. You know, there are these objectives of the SDG in – Sustainable Development Goal in 2030. We are very far away, I mean, the – and there’s a pass – it’s moving it backwards rather than making progress, after years of progress.

So, those challenges are huge, there are a lot of assessments around, I mean, what – how much money is needed in order to be able to address that. I’m not sure you can make a lot of calculation and so forth, but what is – it’s clear that there is a need for additional support, and there is a need to increase the effectiveness of the system.

In terms of additional support and be able to bring more resources, the first step has been a lot of work in the context of the G20 with what was called Capital Adequacy Framework, which is an – it was a group who were led by – I mean, of experts of MDBs, looking at the situation, the balance sheet, the risk-taking, the appetite and so forth, and making some recommendations. Since then, there has been a lot of work on – I mean, building on this recommendation, how to better use the balance sheet we have, because I mean, basically all the MDB work is about leveraging.

If I take the example of EBRD, we got capital – paid-in capital, shareholders paid – gave us €6 billion when we were created in 1992/1993, and then, we were – this capital enabled us to finance €180 billions of investment, and with this investment we generate ourself revenue – I mean, profits that we put as a reserve, and that enhance our capacity to invest. So, the leverage is already quite large, and all the MDB model is about this leverage, but we need to explore how to get be – to get – I mean, further, and to use all the margin of manoeuvre while – and there has been a lot of debate about Triple A or not Triple A, but I believe, I mean, at the end of the day, the debate – I mean, the consensus is more that it’s important to keep the Triple A, so a good rating, so as to have cheap – I mean, the best – cost efficient. I mean, and not – I mean, less costly cost of financing as possible, and that to pass it to clients and to – so this is an important part of the model.

So, we are exploring all these margin and the EBRD, you know, was already quite far away in mobilising our capital. Some banks have more margin because they are working more towar – with the governments and therefore the risk level is lower. So, this has unlocked some additional capacity, but it may not – I mean, it’s probably not – it’s likely not to be sufficient, and in our case, it’s clearly – because of the need we have to increase and to take more risk in Ukraine, we will need additional capital, and this has already been acknowledged.

Creon Butler

It’s going to – it – I mean the – when you’re talking about, sort of, leveraging within the MDB – within MDB balance sheet, I mean, ultimately, the lending is guaranteed. So, it’s – it may be, sort of, in actually cashflow terms, leveraged, but it’s still ultimately guaranteed by the shareholders. Isn’t there a difference between that on the one hand, and if you like, taking MDB finance and, sort of, merging it with finance from other sources, such as, you know, the private sector? ‘Cause it seems to me that’s a different type of leveraging if, ultimately, the lending is guaranteed by the shareholders.

Odile Renaud-Basso

The lending is not guaranteed by shareholders.

Creon Butler

Right.

Odile Renaud-Basso

I mean, in a way we have – so, we have paid-in capital, we have callable capital, which is if we get bankrupt, but the callable capital is lower than our – so, it’s not – we are not fully guaranteed. Hopefully, this will not happen and if there were – if there was something to happen, probably the – but the – I mean, but we are not – so, there is a risk and the rating agencies, that’s why we have ratings, they look at the risk of – attached to our portfolio, the risk that we may have losses, the risk that – so that’s – we are not…

Creon Butler

So, they don’t take account of the call, basically?

Odile Renaud-Basso

They take account of the callable, but not completely.

Creon Butler

Right, okay.

Odile Renaud-Basso

Not 100%, because also there is no – and I think on that it’s a bit tech – I mean, it’s – there is no clear process of when the callable can be triggered and used. So, that’s one of the discussions which is also ongoing, whether this can be sorted out. But of course, there is another way of leveraging which is very important, is the fact that when we finance some project, we want to bring private investors in. And in particular, this is because EBRD has been created with a very strong private sector focus, so the idea is not to lend money to government, even if we do that – we can do that, but with a limited amount.

But the bulk of our activities we need to lend to the private sector. And then, the leverage we have is a bit more indirect, but it’s the fact that we can bring with us some private sector investors, for example, because we are providing them with our very deep knowledge of the country, our access to a different level – I mean, in the countries, the authorities. If there are some challenges, we can have access easier, I mean, more easily to the political level. We also have all our due diligence and assessment of the project, the impact of the project and the force, which in a way, is a guarantee for the investors, and, sort of, affects them all, not legal, but a, sort of, guarantee of the quality of the project, interestingly.

Creon Butler

Yeah, and you know, obviously there’s a range of different things in the Reform agenda. I mean, if you were – you highlighted the need to scale up the finance to, you know, optimise the use of capital and so on. I mean, are there other things you would put as priorities in that Reform agenda? I mean, for example, in the case of some MDBs, the speed with which finance gets out has been highlighted as one issue, but are there particular things that you would highlight in that Reform agenda?

Odile Renaud-Basso

No, I think one of the very important element of the Reform agenda, not on the financing side but more on the way we develop project and – is how we work together as a system. Because I think there is a lot of – it’s a bit of – you know, we all have our mandate, our shareholders, broadly the same but slightly different, not exactly the same weight in different institution, different school. But overall, very often, we are working together in the same country, and I think that finding ways to not com – I mean, not competing. Even competition in a way is not necessary and it may push everybody to be at the best and the most efficient and so forth, so it has some positive effect. But overall it’s also very – I mean, it has a huge cost for the country, the recipient countries. They have to deal with different shareholders, it can – with different MDBs or different – also, you have also bilateral development financial institution. And it’s – so it’s costly for them. It can be – for poor countries with limited initiative capacity, it can be very complex and heavy.

It can also undermine the capacity, for example, if we if we believe that it’s important, in relation with some financing, to promote some reform and to have consistency in what we request, so as to avoid that MDBs or different institutions undermine each other with coming with money, without any condition and so forth. So, that’s – working together is very important, and one area which for me is particularly relevant, is the area of the green transition, because climate transition is something which is hugely complex.

You see in the most advanced countries how tricky it is to plan, to look at the different – I mean, all the dimension of the energy policy, but also the buil – I mean, the efficiency, industrial policy. And so, it has a huge, I mean, huge scope of impact and you need to have – to act on different levels. And it’s very important, if you want to be effective, to have a clear strategy, to have – to assess what is the most cost-efficient, to choose your instruments and so forth. And to do that you need to have MDBs really working together in order to help – I mean, provide support where it’s needed for the country in a consistent manner.

Creon Butler

Do you think this is a, kind of – these are country-level platforms…

Odile Renaud-Basso

Yes.

Creon Butler

…that is the key, or do you think there needs to be, if you like, more of a, kind of, overarching co-ordination?

Odile Renaud-Basso

I think we should do it both level. At – country platform is something which is absolute – I mean, very important and – but to do that you need to have a coun – I mean, the country platform led by the country. I think this is much more efficient. We have a very good example of that on which we worked a lot last year, which is still, I mean, very much ongoing, which is the work done by Egypt, for example, on the energy transition. Where we had – you know, that choose some lead institution to work on energy, water, food, and to develop a, sort of, strategy with the Government, and then you have other MDBs financing. And that, I think, is very effective because you have clear strategy, then comes project, and MDBs can, you know, gang together and work on this plan.

It can be also at the, I mean, more strategic headquarters level. For example, we’ve been promoting and hopefully, now it’s going to be implemented, be launched, to have a common, long-term strategy facility among MDBs in order to have a, sort of, platform with full transparency on what we are doing. Which country we help – we are supporting to do, for example, a long-term strategy in the energy sector, or working in the industrial sector, and share information and have common approach to donors in order to finance all these studies.

Creon Butler

And I mean, you’ve identified the, sort of – one of the unique – well, special features about EBRD when it was founded was its private sector focus. I mean, there are other bits of the MDB system which have a private sector focus, but this was, you know, a pure element of EBRD. When you – and as you rightly say, I mean, the EBRD has led a number of the, kind of, cross-MDB work programmes on things like, you know, the approach to transit – well, to climate change, and has worked on things like transition, well, just transition and so on.

What do you think is the unique contributions that EBRD can be making in this broader effort on climate finance, and how would you highlight the specific things that you think you can do better than everybody else?

Odile Renaud-Basso

I think because of our focus to the – on the private sector, what we are really aiming at – I mean, we have different – I mean, few specificities, if we look at EBRD compared with others. The focus on the private sector, a very strong presence in the ground in each and every country, with a strong team, so boots on the ground, and bringing together financing for projects, but also some policy advisory work.

And if we look at – on climate change, what we are doing, there is a bulk of projects, we are doing a lot of them in the renewable financing. And in renewable, for example, we finance project by project, but we, also, we have been providing a lot of support and involved in a lot – a large number of countries, to design what is the right policy framework if you want to develop renewable capacities and bring in private sector investors that will develop this renewable. And for example, auction framework, we’ve been advising a lot of governments to develop that so that they – and it’s really contributed to bring the price down and is very effective in developing this. I mean, attracting FDI in a country for this renewable, because you have a lot of Developers willing to invest. So, that’s one set of activities.

The other one is working with our clients in the private sector, be it manufacturing clients in the agricultural sector, in the banking sector, to take this climate dimension and their impact, their CO2 emission and so forth, as part of their policies. And, you know, providing support for example to clients to decarbonise their manufacturing processes, or for the bank to develop green credit line for SMEs and, you know, enhancing the awareness and creating incentive for investment in the green sector in all the countries. So, it’s using, you know, the leverage, you know, the connection we have clients to bring this issue as a, sort of, overarching issue in all – in everything we are doing, yeah.

Creon Butler

I mean, I think a lot of people talk about Paris Alignment and I think EBRD is Paris-aligned, and yet, you know, exactly what that means is sometimes quite difficult, you know, to work out in practice. So, when you and EBRD say you’re aligned with the Paris Agreement, what does that actually mean in practice in terms of how you do your operations? And, you know, we were talking earlier about, you know, a specific example of a project that may involve investment in some aspect of the gas industry, how do you determine whether or not that is Paris-aligned or not, as an example?

Odile Renaud-Basso

It’s a tricky question and it’s a – there are a lot of specialists working on that, but, no, in a way the approach is we start – for example, if we do something in renewable, by definition, it’s going to be Paris-aligned. There are some – for some projects it’s much more challenging, for example if we have – if we build a road, or if we finance a district heating project which is based on gas, it’s not so obvious that it’s Paris-aligned. But then, what we need to look is whether the project is consistent with the strategy the country has to reach – I mean, in line with the Paris Agreement. So, it’s not – because it – I mean, Paris Alignment is, sort of, process, we know the obj – the end objective. It doesn’t mean that from – as of today we are not going to issue any CO2, so – but we need to be sure that what is done is really consistent with the strategy of the country and so forth.

And that’s why we also put so much focus on the objectives, the ambition of the country. Sometimes, we can say, well, this project, for example, I mean, in – we finance some district heating in Kazakhstan to – moving out of coal, going to gas, but then we accompany it with and we – with the Gov – we can provide the support, provided that the Government has a clear strategy to move towards – I mean and that – consistent with the Paris Agreement.

We are – so very often this is – this question of Paris Alignment gives us an opportunity to bring together the financing and the strategy in order to be consistent and to reach the objectives of the Paris Agreement. So, it’s not rocket science, so it’s – there is a part of judgement, and it’s progressive progress, but it’s a very important element of our approach now to the project.

Creon Butler

And the, sort of, broader context of the country’s strategy seems to be a really important part of that, is the, you know…

Odile Renaud-Basso

Yes.

Creon Butler

A project that fits into a strategy which is credible in delivering net zero means one thing, whereas a project that doesn’t fit into a strategy might be…

Odile Renaud-Basso

Exactly, but I believe the country doesn’t have an objective, or doesn’t have – it’s already a point – it starts – it’s more difficult. If a country have an objective and that we can be sure, we also look at the fact that the investments we are going to do are not going to be stranded assets. But then you start into this, I mean, technical disc – difficult discussions whether hydrog – you know, for example, I mean, what is hydrogen-compatible and so forth? So, there is a lot – and things can evolve, of course, because technology will evolve, but basically, this is what we are trying to do. It’s – we must not – I mean, this is a big challenge because when you travel in countries which are much less advanced and, you know, for SMEs to be sure that all the financing we did with SMEs are Paris-aligned, I mean, and the awareness of these climate issues is not – I mean, and they may have other priorities, but it’s an important discussion now.

Creon Butler

Now, one of the really important challenges you faced since – well, I mean, actually you’ve been involved in Ukraine for a long time but particularly since February 2022, is the EBRD’s role in financial support for Ukraine, and in a way there are two aspects to it. There’s what you are doing now while the conflict continues, and there’s what you may do in the future, once the conflict stops and then, into the reconstruction. So, could you say a little bit about those two aspects, firstly about what you’re doing now, where I think you have a commitment for 2022/23 to make – to lend three billion, or – I’m not sure if it’s lending, a lot of it – some of it comes from trust funds and so on, having in 2022 – having already committed 1.7 billion? Can you say a little bit about exactly how you see your role relative to the broader provision of support for Ukraine, in the first instance, and then maybe you could just come to the reconstruction bit as a second part.

Odile Renaud-Basso

So, indeed, we’ve been very proactive at the beginning of the war in order to define how we can continue to support Ukraine and what kind of financing will be needed for the country. We were very clear quite early on that, of course, the country needs military support. It needs budget support in order to stabilise and to avoid over-inflation and so forth, but it also needs support for, I mean, the economy to keep going. And the more we maintained – I mean, the economy can continue to function, business activity continues and so forth, the less – I mean, the more it will help with the budget support and to generate taxes and so forth.

So, we focused on this last part. I mean, the other two parts are not our business, but we really focused on the last part, so foc – support to the real economy, and this takes all the kind of support we can do, which is private sector, of course, but the level of investment is relatively – I mean, has been decreasing quite significantly. But there have been a lot of needs for working capital, for example, at the beginning, where companies had difficulties to, I mean, get revenues and so forth, so they needed some liquidity, I mean, working capital to continue to function.

We’ve been doing a lot and – to support the key infrastructure, electricity network, in particular, starting in November when the – October and November when the coun – I mean, the very heavy bombing started on all the electricity infrastructure. We provided a lot of support to the company to invest, to repair, to, I mean, to be able to buy generators needed in order to reconstruct as quickly, I mean, as it was destroyed. And – because if you imagine, the country without electricity cannot fight, I mean it’s impos – so it’s really part of the war – I mean, the support for the war, and did the same with the railway and so forth.

So, key infrastructure, to keep them, and facilitate – for example, with the railway, we focused on – a lot with the connection with Romania, for – with all these issues of exports of grain and other products to – without – I mean, with the challenges around the Black Sea and so the capacity for the countries to continue to export. And with the banking sector to finance the private sector. So, this has been very much what we’ve been doing, and it’s – in a way, there is no – it’s already a bit of reconstruction because, I mean, a lot of things that – I mean, to repair in a very – I mean, as quickly as possible, the destruction that has been started, we are also working with municipalities for rebuilding some of the key infrastructure.

Creon Butler

And as a financial institution, you know, where there is this ongoing conflict, and clearly, all kinds of risks that financial institutions don’t typically have to deal with, I mean, how do you – I mean, somebody said if you’re administering grant funds that’s one issue, but if you’re actually lending money…

Odile Renaud-Basso

So – yeah. No, so I typically – yeah.

Creon Butler

…how do you manage that?

Odile Renaud-Basso

So, we are very clear, we ask for risk-sharing with our shareholders. So, we said we are going to be able to continue to finance, and we were – so at the beginning, we ask for 80% of coverage of the risk. We realised it will be very challenging for our shareholders, so we were quite bold in saying, “Okay, we are going to take half of the risk on our balance sheet, but we need guarantees for the rest.” And we got a lot of support from shareholders, US, UK, Germany, France, Netherlands, Norway and so forth, in order to share the risk with us, which was very important for – in view of rating agencies and so forth. And also to be able – because indeed, for a bank – you know, at the begin – the few – first few days, you – I mean, you ask yourself, it’s really a war of the bank to finance, you don’t know what – whether what you will finance will be destroyed next day.

And so, that’s – but this worked very well, and I think that this was well understood, and now we are moving – in order to be able to continue to do that and to prepare for the reconstruction, we are moving towards capital increase. So, we showed, and I think we convinced, our shareholders that the best way to be able to – for the bank to continue to be very active in Ukraine was to have capital increase, because then, it’s a buffer, we can – and then we can take more risk without guarantees.

The nature of what we are going to do and – is, you know – so, regarding questions – the nature of what we are going to do in Ukraine in the reconstruction phase will change. It’s a sort of cont – I see that as a sort of continuum, but of course, we hope that – I mean, first of all, I mean, there will be some areas, I mean, liberated areas, where we – it would make sense, and the nature of the investment will be very different because it’s really rebuilding. And we also hope that there will be a lot of investment attracted from abroad in order to be able to, I mean, to grow – to – for this country to grow again.

So, it’s – but it’s already – you know, we are in the phase where we’re already looking at infrastructures and, you know, there will be some bridge, some railway, some electricity, so it’s not like we are going to change completely the nature more to move toward – and hopefully, we will also see more investment from the private sector, because now it’s a bit of standstill.

Creon Butler

Yeah. I mean, there are, sort of, World Bank figures, I think the last one in March I saw was, you know, over 400 billion reconstruction cost for Ukraine, which is – you know, that’s more than double Ukraine’s current GDP. And people like Larry Summers and so on have pointed to the fact that during the Marshall Plan and the reconstruction after the Fir – after the Second World War, you know, the actual amount of finance that was provided externally was, you know, of the order of 3%, five – to 5%, whatever.

So, this – you know, if anything like that amount of money is provided to Ukraine it’s going to be a completely different world. So, how is this going to look? I mean, is it actually going to be a much smaller amount of money over a period of time? You know, particularly, you know, if the conflict has stopped, Ukraine is on an EU accession track, the reforms that are necessary, the policies that are necessary, are in place, and therefore, actually it has a very strong private sector growth potential. Or do you actually see – think that the actual volumes of finance that are going to be needed are of a completely different nature to what we saw after the Second World War, relative to GDP?

Odile Renaud-Basso

It’s difficult to say. The World Bank, I think, estimate is the best we have, but I think it’s very – first of all, it’s very evolving. It’s very – it will depend very much on what are the scenarios, when it comes, and so forth. So, I don’t think that – I mean, what is important to acknowledge is that there will be a need for support for a long time. It’s also important to acknowledge that Ukraine is a country – the level of support received by the country now is absolutely extraordinary. In particular, when you think about the budget support, which is provided in order to help the country financing its budget deficit, you know, current expenditure, pension and so forth, it’s huge, huh, it’s sev – I mean, billions…

Creon Butler

Every month, basically.

Odile Renaud-Basso

Every month, five billion a month, basically.

Creon Butler

Yeah, yeah.

Odile Renaud-Basso

So that’s – and that’s quite exceptional. I don’t see any example in the past of a country in a war which have received so much of – support and it has helped to stabilise the economy. There had been a big shock at the beginning, and now, it’s more or less stable, at the lower level, but of course, we are thinking a lot about the absorption capacity in Ukraine in the reconstruction. And it’s clear that even – I mean, in the World Bank assessment, part of it is to be financed by the private sector, private investors coming in and so forth. That will take a bit of time, I think, to build back the confidence and – but what is clear is that there is a need to step up the manage – I mean, the absorption capacity if – I mean, in order to be able to really address the reconstruction needs, and to – in terms of infrastructure, housing and so forth. A lot of the cost is also related to demining, I mean, it’s very expensive and we see how difficult it’s been in the…

Creon Butler

And what role do you think the, kind of, EU accession track will play within this?

Odile Renaud-Basso

It will be – that’s going to be extremely important in driving the reform agenda, I think, because there is – and it’s – I mean, taking – the EU are key and so forth. It’s a huge endeavour, so it’s a – and there is such a big commitment and I think willingness, strategic commitment from Ukraine to join the EU, that this will be a driving force in the transformation of the country. We already see it in the, you know, in the conditions that have been put for Ukraine to start negotiation. This has triggered quite a lot of reform. Implementing the IMF programme will be important, and so forth. But I really believe that this will be an important, I mean, driver, a bit as that what we’ve seen in countries like Poland, I mean, Eastern European countries in the – you know, which really gradua – I mean, transformed themselves very quickly in the context of the EU accession process.

Creon Butler

So, one final question before we move to the audience. Obviously, the EBRD was founded with this particular focus on accession countries, I mean on the transition countries, some of which are accession countries. But since then, its scope has broadened and, you know, there is potential for it to keep broadening. How do you see the strategy for the EBRD in the longer term in – both in terms of, sort of, area of operations, the type of countries where you can have most impact, particularly with your, kind of – the expertise you developed in, you know, helping develop the private sector and so on? I mean, what – as – if we were looking over time, what’s your vision for how the EBRD will evolve, you know, say, over the next ten years or so?

Odile Renaud-Basso

So, what’s interesting in the EBRD story is that we really started from post-Soviet Union, former Communist countries in Eastern Europe, with – I mean, to, step-by-step, some new countries of operation, enlargement, always with a logic which is, basically, the broad European neighbourhood. So, we started to expand in Turkey, but also in the context of the Arab Spring in North Mediterranean countries – South Mediterranean countries, sorry, Morocco, Tunisia, Egypt, Libya, possibly. And now our shareholders have after – there had been quite some long discussion about the question of EBRD intervening in some Sub-Saharan African countries, and now we have an agreement and the clear decision to move ahead and to start enlarging to these countries for the need to join as a member.

We are changing our article of agreement to be able to do that, and then we will start investing in six Sub-Saharan African countries, just basically, below Sahel. So, it’s – I mean, we have pre-identified some countries, and the object – I think the idea is that these countries are very – I mean, and the future of African Continent is very important for stability of Europe. We see all the debate about migration and the security issues in this part of the world. And we can contribute, because of our specific focus, experience, in some small countries, transition countries and so forth, we can contribute in developing, in particular, the private sector, facilitating the green transition and so forth.

So, I think that has been acknowledged and this is now agreed, and we will – so this will be an incremental process, step-by-step we are going, but now the, I mean, direction is clear. I don’t expect – I mean, I don’t think that we should go worldwide.

Creon Butler

No.

Odile Renaud-Basso

I think that the logic of the European neighbourhood and, you know, what is relevant from – you know, to ensure that where we intervene it – I mean, this geographical notion is relevant for us.

Creon Butler

I mean, you talked earlier about the need for co-ordination, and you’ve been on the board of the AFDB. So, obviously, as you’re moving into sub-Saharan Africa there’s a question of how you would work with the AFDB, which is, you know, a strong institution in many respects. so…

Odile Renaud-Basso

They were very happy – yeah, the AFDB, African Development Bank, they were very interested in partnering with us because they have a much stronger public sector focus. So, they work a lot with government infrastructure, so it’s very complementary and I think we can work together on that.

Creon Butler

Yeah, okay, brilliant. Right, well, what I’d like to do is get some questions from the audience. So, if you could put up your hands, what we might do is take one or two at a time, but first of all, the gentleman right at the back.

Member

Hi, Ian [inaudible – 35:18] Capital. A question about private sector financing for Ukraine and SMEs. Ukrainian investors released data showing that the average financing need from SMEs there is under €1 million, and I’m wondering, in terms of ticket size and having the impact, how you’re going to deal with that granularity problem.

Creon Butler

Just let’s see if there are any other questions, as well, at the moment. There’s one from a gentleman around here. So, perhaps we take two at a go.

Antônio Sampaio

Thank you. Antônio Sampaio from the Global Initiative Against Transnational Organized Crime. My question is about the importance you see in municipalities and local governments, you’ve mentioned it quickly, given the level of urban warfare and destruction concentrated in cities. What – I wonder if you could give us a little bit of an idea of what proportion of engagement or finance you are doing with local governments and agencies, as opposed to national governance or private sector, things like that. And just a quick second question, corruption, how do you see the risks and how you’re managing that, or your views on that?

Creon Butler

Okay, thanks. Would you like to take those two? So, on ticket size and then…

Odile Renaud-Basso

Yes, very good question, very good question. On the ticket size, what we are doing is for the small tickets, like – working through the financial institutions, through the banks. And for example, for Ukraine we’ve developed a system of risk-sharing where we cover part of the risk. So, they provide the financing because they are liquid and they do not need liquidity, but we will cover the risk if there are – if they have some losses. So, that’s our way, and we do that in a very large number of countries, but this – I mean – and with this particular scheme in Ukraine, but this is the best way, I mean, because for us, it doesn’t make sense, one million, it’s too small.

We do however – for SMEs we have something which is quite specific to the EBRD. It’s not lending, but it’s providing some advisory support for SMEs through its grants, and we finance Consultants for the – for SMEs, to – I mean, stra – for strategic advice or human resources advice. In Ukraine we are doing that quite a lot on force – I mean, on labour force, because, I mean, of the – I mean, situation where they are – I mean, a lot of people have gone to the military and so forth, so how they can deal with that.

For local municipalities, in terms of size, now it’s relatively limited. The bulk of our financing, and indeed, it’s going to be at least three billion for the two years, the bulk of it is through state-owned enterprise in the energy sector. So, I mean, electricity, gas, but also railway and – but we are starting to work with the municipalities. It’s – and the – but it’s still relatively small in terms of size. And for that, the challenge is that in some municipalities lending is – in particular, when – in liberated territories and so forth, lending there is not an option. They need grants, and so we need to find the grant resources to be able to do that.

Corruption, it’s a key issue. We’ve been – I mean, it’s an issue well-known and we’ve been – we are very – we have strong, sort of, integrity checks and we know very well the country. So, we have a lot of – I mean, we focus a lot on that, we are very, very careful. Something we’ve been doing, and which is absolutely key, is to work for example, with SOEs on improving corporate management, corporate governance, in order to fight against corruption. And this is part of the conditions we attach to our financing, very often.

For example, we are financing the road agency, which is not the reconstruction agency, and we’ve developed a full plan on fight against corruption in the agency. We did that in the past with other companies, and the electricity company for example, and one of the more – I mean, things which made me proud of the bank is when the CEO told me that the work we had done in order to improve the management and the transparency in the fight against corruption in the company has helped them dramatically in the – their activity in the war, being able to be very agile and so forth.

So, it never means that it’s 100% proof, you know, it’s – but this is one of the key, I mean, key focus we have. We’ve been – I mean, reform of the judicial system and so forth, is not our direct – but we’ve been supporting, also, a lot – we support the reform agenda.

Creon Butler

Just on the corruption point, the World Bank has a programme which is really looking to civil society and the, sort of, involvement of civil society, particularly in climate finance, to try and – effectively, to minimise the corruption risk. I think the concern with climate finance is there’s going to be an awful lot of it, it has to happen very fast and it’s in parts of the world with weak governments. So, I just wondered if there’s any specific perspectives or comments you’d like to make about, kind of, corruption risk in relation to the climate finance space.

Odile Renaud-Basso

Not specifically, because in a way, I mean, it’s – there are risks, but there are risks everywhere, and sometimes you have more risk in, you know, all state-owned company with a, sort of, you know, protected area and so forth. So, I’m not – so for us, it’s an across-the-board issue and – which is – which remain – and – but working with CSOs it is also a very good way to understand where are the challenges, I mean, in terms of legal framework, effic – effectiveness of the legal system, judicial system and so forth and so on.

Creon Butler

Great, okay, other questions. So, we have a gentleman at the back there, gentleman at the front, and I have one question online. So, let’s take those two and then, we’ll move over there. So, gentleman at the back first.

Humman

Thank you. My name is Humman, I’m doing my PhD on financial crime by Russians in the EU. My question is, to what extent do you follow the investments that you have done in the former USSR countries? As I checked, you have investments in Turkmenistan and other former USSR. Also, I want to know how do you do due diligence and background check that – where you have invested the money, and what will happ – what happened to the money? Thank you.

Creon Butler

Thank you, and then, gentleman at the front here.

David Clark

My name is David Clark, I’m former staff member of the European Investment Bank.

Creon Butler

I’m sorry, there’s a mic, if you want to take the mic. Sorry, just on your…

David Clark

Sorry, I’ll start again. Yes, formerly with the European Investment Bank. One of the issues on multilateral lending is currency of lending. Lending dollars to a lot of the developing countries is high risk for the borrowers, and I know EBRD did a lot of work in Russia, which it’s probably put on ice for the time being, but to what extent have you been able to develop local currency lending facilities in the countries you operate in?

Creon Butler

And I have a question online, if I could add, which is, we talked earlier about collaboration with other MDBs, but there’s a specific question about the new Development Bank and the AIIB. So, what is your experience so far of collaboration with those institutions or what the potential collaboration might be? So, if you could take those three, that’d be great.

Odile Renaud-Basso

So, financial crime in – and corruption and transparency, so due diligence is really based on – I mean, we have specialised services on integrity. And there are – we are checking all the – we have people on the ground, so knowing, also, clients and being able to gather information, then we have this integrity – dedicated teams in headquarters. And then, we can – when we have question mark, doubts, when there are some rumours and so forth, we can have, you know, con – spec – dedicated Consultants from the private sector to really focus and make a detailed investigation.

So, that’s, I mean, quite – it’s not – it can never be completely waterproof but it’s quite serious, I think, and we are doing – you know, it’s also now enlarging, it’s taking more and more of the, I mean, focus with KYC to – like in all the banks, but KYC sanction, but also all the, I mean, business links and so forth. And now, we are also looking very sorely in exposure to Russia, because we do not want indirectly to, you know, support – I mean, provide financing for Russia. The – and we are – I mean, we have loans which are – which have governance, governance and conditions for disbursement. We have open procurement processes that we manage with our own board when we work with the public sector and so forth. So, we have a whole set of processes that are there to protect against these kind of issues.

On – so, local currency, we – indeed, that’s a key feature of the bank, which is to really work on the development of local currency to be able – so on two sides, I would say. First of all, extend funding as much as we can in local currency. So, we work a lot with – at the local level, in order to be – either access – I mean, to have access to the currency, yeah, and be able to lend in this currency. But we are also developing, and it’s our Treasurer, working a lot with the – what is – I mean, the monetary authorities or the financial authorities in how – what do you need in terms of local market, local regulation and so forth, in order to develop more capacities, not only for us, but for all the players and so forth, to finance in local currency?

And we’ve been quite successful. I think 30% of our financing is in local currency, and we believe it’s an important – I mean, very – because it protects against, I mean, the mismatch of exposure and so forth is, I mean, a big problem in a number of countries, and when you have [inaudible – 45:55] and so forth. So, this is one very important policy work we are doing and a priority for the bank, yeah, and we are willing to, I mean, develop this with other ban – I mean the other MDBs.

And – so, the new Development – we work quite a lot with AIB, because AIB, they have a model – so we have been doing some co-investment. They have model where they have a very small staff. It’s a very slim bank, but – and they are ready, willing to do some co-financing with existing MDBs and rely completely on our processes, prepar – project preparation, integrity check and so forth. So, that’s – and we’ve been doing quite a lot of – I mean, some – a number of projects with them.

When they’re intervening – because they, for example, intervene in Central Asia, and they tend – a bit now in Europe also, so – but mainly I would say in Central Asia I think. New Development Bank, very much a more limited corporation, it’s more recent. It’s – the countries in which they intervene are not very – I mean, because Brazil, India, South Africa, we are not intervening there. So, they are – I mean, we do not have really – so they are part of the group of MDBs where we have some joint working together and so forth. So, they’re part of the MDB family, but we do not really have concrete co-operation with them now.

Creon Butler

If I can just come back to the local currency finance point, because this is, potentially, really important in terms of future climate risk, you know. In a way, if you have your outstanding debts in local currency, you may be able to protect yourself from some elements of climate shocks, and EBRD is, you know, doing well. There are other MDBs who are much less advanced in terms of using local currency finance, and there are organisations like TCX who’ve been campaigning for MDBs to do more in this space. And also, there’s been a proposal that there should be one, sort of, global insurer to enable the MDBs to do more local currency finance and then, sort of, lay off the risk with this central body. I think TCX would argue that they’ve shown over a period of time that they’ve managed to manage those risks very effectively, while preserving their capital.

So, I just wondered if, given your experience and advanced situation, whether you think there’s a need for a broader initiative, if you like, covering the whole MDB system on local currency finance?

Odile Renaud-Basso

I’m not – I mean, I think this deserves reflection. I’m not – I think it’s – what is more important is to focus on the capacity of the – I mean, develop access to local currency in the local markets. So, in a way, it’s also the management of the savings, the money – all this is a possibility to have access to derivatives and so forth, which would have a longer – it’s not only, you know, to cover – the key issue, I think, is not to cover the MDB risk. It’s, I think, to really develop the local market so that companies and the private sector locally can finance in local currency. But we are not – I mean, we are open to explore all options there.

Creon Butler

Yeah. Good, let’s have some more questions. So, I – a lady, yes, please. Lady here, and then we’ll go to the gentleman on the left there.

Lilia Caiado Couto

Thank you. I’m Lilia Caiado Couto, I work here at Chatham House at the Global Economy and Finance Programme. So, on climate finance, you mentioned the Capital Adequacy Review, among other things, and one thing that we tend to discuss a lot in here is the need for more public finance for climate action, especially in country – in indebted countries, where MDBs are in a better position to lend. So, my question is, basically, do you think there is room to increase shareholder capital in MDBs, and for example, do you think there is any scope to channel some of the unused SDRs of the IMF for this purpose?

And a subsequent question on the same space is, when you discussed Paris Alignment, sometimes countries’ strategies or their NDC targets are not exactly aligned with the main goal of the Paris Agreement, that is, the two degrees Celsius by the end of the century compared to pre-industrial levels. So, do you think there’s room for the MDBs to push so that countries have, or adopt, bolder targets that are actually aligned when their strategies are not actually Paris-aligned? Thank you.

Creon Butler

Thank you very much, and then, the gentlemen here on the side over there, who’s been very patient.

Richard Lee-Smith

Hello, Richard Lee-Smith from BSI. I wondered if you could talk about the impact and – of geostrategic rivalry on your operations and your strategy, how you respond to that, and your, sort of, analysis of the future. Thanks.

Creon Butler

And there’s one gentleman there on the – at the back. Yes, thank you very much.

Alex Lehmann

Hi. What would be your wish or…?

Creon Butler

Just say who you are. I know who you are, but…

Alex Lehmann

Yeah, Alex Lehmann from Bruegel in Brussels. So, how does EBRD fit in with the EU’s Global Gateway programme, and what would be your advice or your wish to the next leader of the EIB in that regard?

Creon Butler

Thank you very much. Yes.

Odile Renaud-Basso

So, on the first question, whether there is room. I mean, to increase the – there is a case for – I mentioned we were in the discussion for capital increase. There – I mean, of course if you have more money, if you have more – I mean, the – if the bank have more capital, they can leverage more and they can lend more, and this would be – but we should not – it’s also important to underline that in – I mean, the climate agenda is not only about financing, but you also need to have projects. And currently, you know, it’s – and the projects, they come if you have the right policies, if you have the right degrees of ambition from the Government. If you have – for example, if you have tax on carbon, then you have – I mean, the projects – you know, it can come – I mean, you would have much more projects because then, you need it to invest in order to – so, it’s not only – I mean, money is one important dimension and you need to have financing and so forth.

But it’s also the other part of the equation, which is very important, have the capacity to have project preparation, have the capacity to – and the right policies in place in order to attract investors that will be – that will drive climate change. Because, basically, it’s not only public investment that will drive the policy to deal with climate change, it’s also private investment and so forth.

And in the money, you have issues of quality, because lending is something, but you also need some grant financing subsidies, I mean, really soft money, to, for example, all do all the policy preparation, project preparation and so forth. So, all this is – it’s not – I mean, there is no one single fix, but it’s a, sort of, global effort that will be needed there.

And as far as the – our role to – I mean, in relation with the country’s ambition, yes, we are doing that al – every day. You know, when we visit some coun – I mean, and we negotiate, we discuss, with some project we are going to say, “Okay, we can do this, but you really need to enhance the – your objective, or accelerate the objective for net zero, or have a target for getting out of coal,” and so forth. So, it’s really part – enhancing the level of ambition and the awareness of it is really part of our job. And, you know – or to convince countries to adhere to Methane Pledge, you know, this meth – to reduce methane emission, to see how we can help them to identify where – what are the sources and to what – it’s really part of our policy work.

And very often, if we have a project which is, you know, I mean, maybe, I mean, challenging in terms of Paris Alignment or maybe int – not a greener project, or if we have this – we can use that as a leverage also to convince a country to move a step forward in terms of its policy engagement and so forth. So, it’s a conversation we have all the time now.

The impact of geostrategic rivalry, it’s very – we, I mean, we feel it and we see it for us. I mean, the obvious thing was the War on Ukraine. So, Russia is a member of – I mean, is a shareholder. We had a decision in the days after the beginning of the war to formally suspend all the new financing to Russia and Belarus. So, this was a decision taken by our governance. Of course, Russia was – weren’t happy, and now we have a board, and we have this very important support to Ukraine with a very, I mean, important risk taken by the boar – the bank to support Ukraine, which has been adopted by the – I mean, is supported by our shareholders, but Russia and Belarus. So, we see that.

On the – I mean – and another example is on trade tension, where we see some – I mean, it may have an impact on the way we can deal with the different countries. So, this is something which has an impact directly on – I mean, it’s a challenge from multilateral institution because it’s, you know, it’s, I mean, an environment where you have more, I mean, more tension and more – I mean, it’s – hmmm.

For the EBRD, because of our capital structure and because we have both a majority of EU shareholders, plus a G7 majority, it’s very – I mean, they seem quite different from what you see in IMF and World Bank, where you have a much more global shareholder structure.

Creon Butler

And there was a question about working with the EIB and the next President of the EIB.

Odile Renaud-Basso

So – ah, yes, and Global Gateway.

Creon Butler

Yeah, Global Gateway.

Odile Renaud-Basso

So, Global Gateway I think is a very important initiative, but what is important now is delivery, because it’s, I mean, an implementation of project and so forth. So – and there we are keen to, because we work a lot with the EU and we receive a lot of funding from the EU and so forth, to participate. We are a active player in the Global Gateway, also, because it relates countries in which we are very active, like Central Asian countries, where we are the most important financial institution. With Europe and – so, we are active in the discussion and really willing to cooperate with the EIB on how to co-finance some project, because it’s very often very important investment. So, co-financing makes a lot of sense.

Creon Butler

Thanks so much. So, we’re almost out of time. So, we have space, probably, for one or two questions. So, lady here, gentleman here, and I have one online, as well. So, lady here.

Nataliya Katser-Buchkovska

Good evening, everyone. I’m Nataliya Katser-Buchkovska, I’m former Member of Ukrainian Parliament, and now I lead Ukrainian Sustainable Fund. So, the question is – thank you for this conversation, quite important one. The question is, while war is ongoing and we actually have a huge uncertainty when it would stop and end, so during this period of time we need to increase our resilience. Not to wait until war end and then start to rebuild Ukraine. So, now there is many, many initiatives, businesses, ener – especially in energy, are ongoing and they are, for sure, facing the lack of finance, grant support for insurance. So, my question is as to whether it’s possible to accelerate, to provide some special financial instruments for private sector to work now, not waiting until war end?

Creon Butler

Thank you very much. Gentleman here, at the front.

Timothy Modu

My name is Timothy Modu, a Chatham House member, and I also work for organiser in course, CIDA Advisory. Just to say thank you to hear the fact that you are branching out a bit to sub-Sahara Africa. It’s a music to my ears, and particularly on the products. Some of the products that have already been talked about here is critical. It’s on the PPI project preparation side of thing – PPP project preparation, it’s crucial. On the domestic market, capital market development, really essential, and finally, on the local currency bor – products. Those three will unlock the potential step, ‘cause Europe depends – will depend significantly in future on gas supply from Nigeria to Algeria. It’s critical strategy for Europe energy strategy. If you don’t come down there, there could well be – it will be too expensive for Europe. So, there is need to come there, because Europe needs Africa, as well. That’s it.

Creon Butler

Thank you very much. I also actually have a related question online, which is about – where the gentleman here notes that “a number of Sub-Saharan African countries are below investment grade.” And his question is, “Well, how will you” – and I don’t know whether this group of six – I imagine the group of six, potentially, does include some of those, “How will you engage in those countries? Is it through, you know, the traditional ways you’ve lent in other existing members of the EBRD, or are you going to use other techniques?” He also asks about guarantees and so on. So, in those countries which may have a poorer credit rating than you’re used to, I’m not sure, what – do you see a different, kind of, engagement to what you’ve done in your existing members?

Odile Renaud-Basso

So, on Ukraine resilience, indeed, I mean, our objective is really not to wait for the war to be stopped. We have some constraints because of this – the risk absorption capacity we have and the need to get some guarantees for the time being. So, that limits our capacity to finance, but we are doing – and we are ex – I mean, we are doing as much as we can in support of the private sector, but also, trying to develop new things. War instruments, for example. We’ve been working, and we are working on a pilot, in order to bring back private sector in the insurance, to insure logistics in Ukraine, because now it’s bec – it’s extremely costly and then the insurance have left and the cost of insurance is extremely – I mean, doesn’t exist or is very expensive. And they have – and you need for, you know, logistics trucks transporting goods, transporting people and so forth, and this is an impediment for business and so forth.

So, we are working with some donor support and with insurance companies in order to launch this. Hopefully, it will – we already have a, sort of, framework, but we really need to work on the detail to have this operational, and we are, I mean, definitely not waiting the end of the war. What we are – we see for demand, for exam – quite a lot of demand, for example, is for some companies to relocate, to rebuild some infrastructure that have been destroyed, or for, I mean, ensuring that they have – I mean, they’re relocating part of their activity to the West when some of it may be destroyed in the occupied territories and so forth.

On Africa, it was more a comment. I agree with you that Europe needs Africa, and so, I agree with you that it’s a very important priority for – globally and from a European perspective, yeah. And the last question…

Creon Butler

It’s, sort of – whether there’s a…

Odile Renaud-Basso

Different – yeah, no, wait, so…

Creon Butler

…different, sort of, type of engagement in the – in your new, kind of, areas of operation in Africa.

Odile Renaud-Basso

So, it will – I think it’s not – it will be not completely different, but of course, it will be adjusted to the needs of your country. For example, I expect that it would be smaller projects, with – so the fact that it’s not investment grade is – I mean, it’s – we do a lot of activities in countries which are not investment grade. So, that’s part of our business, but what will be – I expect quite a lot of demand, for example, for the advisory activity we have, for the capacity to invest in smaller project, so we will adjust. It may be, also, different from one country to another. We will adapt to the need and that’s one thing that is a, I mean, an asset for the EBRD, is really the capacity of adjustment to the country-specific situation and specific needs, while keeping an overall, you know – sort of, the same kind of approach, but adapted to the country.

Creon Butler

Alright, thank you. Well, unfortunately, I’m afraid we’re out of time. So, I’d like to thank the audience for your questions. But Odile, above all, can I thank you for spending this hour with us, for your tremendous range of answers and for answering our questions so frankly? And I just have to say, I mean it is an amazingly important role that you play, and the EBRD plays, and we wish you all the best in the future. So, thank you very much.

Odile Renaud-Basso

Thank you, all [applause].