The European Bank for Reconstruction and Development: Financing and Cooperation during Transition

Preparations for the European Bank for Reconstruction and Development took place amid upheaval in Eastern Europe's political and economic order. In 1989, French presidential adviser Jacques Attali proposed to François Mitterrand a bank that would connect Eastern and Western Europe through project financing. Mitterrand publicly promoted the idea at the European Parliament in October, and the Strasbourg European Council agreed to establish it in December. Negotiations subsequently brought in countries outside Europe, producing a European-led institution with membership across continents.

The founding agreement was signed in Paris on 29 May 1990 and entered into force on 28 March 1991. The bank held its inauguration in London on 15 April, with Attali as its first President. Signature, entry into force and opening were three separate stages. The year 1991 marked the transformation of these arrangements into a continuously operating institution.

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The agreement did not confine the bank to a one-way channel for Western European assistance to Eastern Europe. Article 3 allowed European countries, non-European members of the International Monetary Fund, the European Economic Community and the European Investment Bank to join. The subscribers listed in the annex included countries such as the United States, Japan, the Soviet Union, Poland and Hungary. Potential recipients themselves therefore participated in financing and governance.

Article 1 defined the bank's purpose as supporting the transition of Central and Eastern Europe towards open market economies and promoting private enterprise. Eligible countries had to be committed to and applying the principles of multiparty democracy, pluralism and market economics. Article 2 brought small and medium-sized enterprises, capital markets, technical assistance, related infrastructure and sustainable development within its operations. Lending decisions were thus linked from the outset to institutional transition, rather than merely supplementing a country's government revenue.

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The original agreement authorized capital of 10 billion European Currency Units, divided into one million shares of 10,000 units each. Subscriptions were divided into 30 percent paid-in and 70 percent callable capital. The paid-in portion was payable in five instalments, while callable capital could be called only when needed for the bank to meet its own liabilities. Authorized capital was therefore not cash already available on opening day and immediately usable in full for lending. The bank could also borrow on capital markets and maintain its resources through loan repayments and investment income.

International commitments required domestic measures. Spain's Law 24/1991 authorized subscription to 34,000 shares, of which 10,200 were paid-in and 23,800 callable, with payments handled by the Bank of Spain. That bank was also designated as the depository for the EBRD's peseta funds and other assets in Spain. This arrangement translated treaty-based shareholder obligations into parliamentary authorization and responsibilities for a specific paying institution.

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The original agreement vested authority in a Board of Governors, with each member appointing one Governor and one alternate. A Board of Directors oversaw daily business, while the President headed the staff and chaired the Board of Directors. Initially there were 23 directorships, with representation for the European Community side as well as Central and Eastern European recipient countries, other European countries and non-European countries. Voting power depended on subscribed shares, rather than one vote per country.

This division of responsibilities extended to project appraisal. Applicants had to submit adequate proposals; after staff study, the President presented a written report and recommendation to the Directors. The agreement required sound banking principles and diversification of investment risks. The bank was not to intervene where applicants could obtain sufficient financing elsewhere on reasonable terms. It was also to cooperate with institutions such as the World Bank system, providing complementary finance and expertise.

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On 25 June 1991, the bank approved its first loan: US$50 million to Wielkopolski Bank Kredytowy (WBK) in Poznań, Poland, for on-lending to heating enterprises. Parallel financing with the World Bank supported modernization of heating systems, energy savings and reduced pollution. The project illustrated infrastructure investment implemented through a local financial institution.

In September that year, the bank approved a loan of 10 million Deutsche Marks to the Hungarian packaging enterprise Petőfi Nyomda to expand production and improve product quality. In December, it approved a US$3 million equity investment in the Hungarian office-automation company Microsystem. First-year technical assistance also included restructuring the textile industry in Łódź and preparation for a wastewater-treatment project in Gdańsk, combining finance with preliminary capacity-building.

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The founding agreement permitted loans, equity investments, guarantees and technical assistance. It did not require every recipient to have completed privatization when financed. State-owned enterprises operating competitively and moving towards the market, enterprises transferring to private ownership, and infrastructure serving the private economy could all potentially receive funding. In determining whether a state enterprise operated competitively, the agreement required independent management, exposure to competition and application of bankruptcy law.

The bank imposed a 40 percent ceiling on public-sector commitments and specified calculation methods for the first two years and subsequent years. There were explicit classification exceptions for loans to financial intermediaries for on-lending to the private sector and investments in enterprises implementing privatization. Compliance with the private-sector orientation therefore depended on project purposes and institutional conditions. Periodic reviews of country operations and publication of audited annual reports were institutional arrangements for turning these political and economic objectives into activities that could be scrutinized.

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