May 21, 2007
hp-413

Dep Asst Sec Peel's Remarks at EBRD Annual Meeting

I am pleased to be in Kazan for the 16^th Annual Meeting of the EBRD.  On behalf of Secretary Paulson, I would like to thank our hosts from the Russian Federation and the Republic of Tatarstan, the City of Kazan, Minister Gref, President Lemierre and Bank staff for their hard work in making this event possible. 

We meet at a time of strong global and regional growth.  Russia is experiencing solid economic growth fueled in part by high commodity prices, but also strong investment.  Natural resource driven growth in Central Asia is helping many countries address broader development challenges.  And the countries of the Caucuses, benefiting from a benign global economy, are pushing forward economic reforms leading to solid private sector led growth.  While the countries of Southeastern Europe continue to address long-standing tensions, their economies are rebounding strongly.  This has created a positive environment in which the Bank can and should become more active in accelerating reforms and promoting greater transition impact.

The new EU member states have benefited from an improved economic outlook.  Here, EBRD's role is essentially over and has been supplanted by the private sector that the Bank successfully supported for over a decade.  We join all other shareholders in celebrating the fact that the EBRD has met its transition mandate in these countries and has set a timetable for its exit under last year's Capital Resources Review (CRR).  We particularly congratulate the Czech Republic for becoming the first EU member country to complete its graduation as a "country of operation" and join others as a donor to the EBRD.

The EBRD's unique mission as a temporary and transitional multilateral institution requires it to continually reassess where transition needs and opportunities still exist and to engage only when and where the private sector cannot or will not.  Unlike a commercial bank, the EBRD can be judged as being more successful the more the need for its business declines.

The new CRR made clear that the EBRD must step up to the challenge dictated by its transition mandate and refocus its efforts on more risky environments where it is most needed.  We therefore welcome the increased business volume in Ukraine and the opening of an additional resident office.  We urge the Bank to do more on the ground in the Early Transition Countries and the Western Balkans.

The Bank's activities here in Russia represent a microcosm of the Bank's remaining areas of operation.  As the Russian portfolio has grown in both absolute and relative terms – now approaching half of all EBRD new lending – the Bank must take extra care to achieve only positive transition impact and only catalyze, and never compete with, the private sector.

Over the past year, the Bank greatly exceeded the lending volume we approved last year in the CRR.  While a private sector financial institution would be congratulated for such results, we are concerned about the EBRD's apparent willingness to finance sponsors with ready access to the financial markets.  A stricter application of additionality and transition impact standards would result in a level of operation more consistent with what Governors approved last year.  

The EBRD also needs to avoid operations that could damage its reputation and credibility.  The institution must be beyond reproach and stand as a model for countries and companies that receive its support.  To avoid some of the troubling operations brought to the Board in the past year, the Office of the Chief Compliance Officer should receive a greater budget, more independence, and increased oversight of potential projects.

In terms of corporate governance, we continue to be concerned about the huge cost of funding the Bank's Board of Directors, now running at $20 million, or 6% of the Bank's total administrative costs.  In past years we have encouraged streamlining the Board, but it may be time to look at an idea being considered at other institutions:  a non-resident Board.  Governors should examine the Board's operations to ensure that they reflect the same level of efficiency and value for money that we expect from the broader institution. 

We commend the EBRD for recent improvements in its anti-corruption policies, particularly its adoption of the harmonized definitions of fraud and corruption.  We further commend the Bank, which does most of its business with the private sector, for its commitment to develop a strong private sector sanctioning mechanism.  We note that the Bank, for the first time, debarred a company for corrupt behavior.

The United States was deeply disappointed in this year's process for reviewing allocation of net income. The Bank's charter dictates that once reserves exceed a specified threshold, as it did for the first time last year, a full review of options be presented for consideration.  This did not occur.  We expect detailed analysis that allows shareholders to make well-reasoned and prudent decisions on allocation of net income.  A proper process should establish a framework and tools for dealing with future challenges such as:

• expanding operations in the Early Transition Countries;
• enhancing the Bank's technical assistance,  and
•  paying a dividend to shareholders. 

We have called in the past for consideration of a dividend.  This would provide a positive demonstration effect for current and potential regional investors, make clear that this is a region where the private sector can profitably invest, and create discipline in the institution's management for results. 

While we were dissatisfied with this year's outcome and voted accordingly, we hope that other shareholders will join us in urging management to follow an improved process for 2007 net income, as required by the charter.  In this regard, we applaud management's decision to move the timetable for discussion forward so we can have a complete and balanced review of this issue.  

In conclusion, we encourage management to implement the guiding principles of the Bank's operations as spelled out in CRR3 to which we remain fully committed, namely:

• more rapid implementation of its strategy to shift operations south and east;
• strict adherence to the principles of transition impact and additionality, rather than the expansion of business volume;
• renewed efforts to improve its integrity due diligence on potential clients; and
• manage the Bank's business over the balance of the CRR3 period to the levels approved by Governors.

By fully implementing these principles, the Bank will better serve the needs of all its members.  We remain confident that EBRD has the skills and resources to make this happen.

Thank you.