Editor’s Note:

While most of our work’s focus has been on the World Bank and the IMF, there are
many other influential public lending institutions, including a large subset of regional
development banks. These banks wield great influence in their particular regions and
often work in close cooperation with the IMF and the World Bank, including joint
funding of programs and policy conversion. In addition, these regional development
banks share many of the same undemocratic and unaccountable decision-making
processes that characterize the IFIs. The regional development banks are quietly
making decisions that drastically affect the lives of people in much of the world. In
this issue of Economic Justice News, we are profiling two of these banks – the African
Development Bank and the European Bank for Reconstruction and Development. While
they are not as well-known as their counterparts, the Asian and Inter-American
Development Banks, they should not be forgotten in the development equation.

Established in 1991, the European Bank for Reconstruction and Development (EBRD) is the youngest of the regional development banks. It is, perhaps, also the least known but probably the most flamboyant: in the first two years of its operation the EBRD spent $360 million on decorating its offices, almost twice the amount it lent to client countries.

The EBRD was set up by the Western European powers in order to support free- market reforms and policies in the countries of Central and Eastern Europe and the former Soviet Union. It has an explicitly political mandate in that it focuses exclusively on countries which are “committed to … applying the principles of multiparty democracy, pluralism and market economies.” This means that political concerns are of the “utmost importance when making loan decisions.”

The focus on democratic values may be admirable, but it is questionable whether a public financial institution is the appropriate forum for advocating human rights and democracy. How does the EBRD intend to balance politics and governance with profits and shareholders’ economic interests? In addition, the insistence on “free markets” and “market economies” as conditions for EBRD loans serves as a substantial incentive for governments to make sure their economic policies meet the prescriptions of neo-liberal economics. This virtual prohibition on borrowing countries using tariffs, subsidies, or price controls is also political, and ensures access and flexibility for foreign businesses.

The EBRD is now the largest single investor in the region; it has funded over 800 large projects and committed more than $27 billion in 27 countries. It works closely with other International Financial Institutions (IFIs) such as the World Bank and the IMF to bolster the private sector in its client countries. EBRD funding to borrowing countries comes in the form of loans, guarantees and equity investments for the banking industry, businesses and infrastructure projects.

While its main focus of operation is private sector development (well over 70% of its operating budget), the EBRD also provides some funding for the public sector, mainly for the privatization and restructuring of public institutions. In order for a project to receive funding from the EBRD, it must be located in one of the 27 countries of operation and must have good prospects of being profitable; it must benefit the local community and comply with the EBRD’s environmental standards. Moreover, a large amount of financing must come from a project sponsor other than the EBRD.

Ownership and Decision Making

Like the other IFIs, such as the World Bank, the EBRD apportions voting power through weighted voting shares which grant the most votes to the largest contributors (which may come from anywhere in the world). But unlike most similar institutions, not all of the EBRD’s shareholders are national governments: other international institutions are allowed substantial representation and direct influence over the Bank’s decisions.

The EBRD is owned by 60 shareholding country members, the European Community (EC) and the European Investment Bank (EIB). The EIB is an institution that, on its own, lends out more money than the World Bank each year.5 Each of the 62 shareholders is represented by a governor on the Board of Governors, which meets annually to decide the overall policies of the Bank. Typically, the governors will be a member’s minister of finance or equivalent. The Board of Governors then elects a President and a Board of Directors, which is a 23-seat body that manages the day- to-day operations of the bank. In effect, the Board of Directors is the main decision- making body, due largely to the fact that it meets more frequently than the Board of Governors. On the Board of Directors, the biggest shareholders have individual representation, whereas the rest – including all of the borrowing country members – are aggregated into voting groups.

As in the World Bank and the International Monetary Fund, a members’ voting power in the EBRD is defined by its number of shares, however, EBRD members are not each given a set of basic votes. Instead, EBRD voting is based exclusively on capital contribution. The United States, despite being a non-regional member, is the largest shareholder and therefore also enjoys the most voting power with a 10% voting right. Japan, Germany, the United Kingdom, France and Italy each have an 8.6% voting right, while, for comparison, the Czech Republic, Hungary, Slovakia and Croatia have a combined voting percentage of just 2.46%. This means that, in effect, borrowing countries have little actual influence over EBRD decisions, whereas non- regional members may be highly influential in framing Bank policies.

EBRD Track Record

During its 14 years of operation, the EBRD has been involved in a number of controversial and environmentally-damaging projects, despite the fact that the EBRD has a pro-active environmental mandate. Perhaps most notably, it is the only development bank involved in the funding of nuclear power plants. In 2000, the EBRD gave a preliminary approval, with a number of conditions attached, to a $215 million loan to complete two nuclear reactors in Ukraine (the K2 and R2 reactors). However, the Ukrainian government’s inability – or reluctance – to meet EBRD conditions has sidelined the project in 2001. When the proposals for the K2 and R2 nuclear reactors were being considered, the EBRD initially chose to ignore the significant opposition of the Ukrainian public. It also dismissed an expert panel survey which argued that the reactors would not be the most economically viable option for Ukraine. Instead, the EBRD had a new survey done that was more in tune with what the EBRD wanted to hear. On July 6, 2004 the EBRD approved a new $42 million loan, and the project has now been given a second chance.

The EBRD was also involved in plans to finance the completion of the Mochovce nuclear plant in Slovakia. However, opposition within the EBRD, especially from Slovakia’s neighbor Austria, Denmark, the Netherlands, Luxemburg, Norway and Portugal, as well as civil society opposition has meant that the EBRD and the Slovakian government have been unable to come to a final agreement on a loan. Eventually, the Slovakian government backed out, opting instead to look to Russia and Skoda Praha to finance the plant.

Charges have also been raised that the EBRD has failed to spur any significant entrepreneurship in smaller and medium-sized firms, instead choosing to focus on large ‘smokestack’ industries. It has funded a number of oil projects, such as pipelines and off-shore oil wells, which may potentially cause harm to the natural environment by increasing the extraction of fossil fuels, and damaging wildlife habitats. A study done by CEE Bankwatch shows that even though the EBRD is funding projects that do contribute to reductions in greenhouse gas emissions, by far the largest amount of funding is going into so-called ‘negative’ projects, which include all investments into the extraction of fossil fuels, oil and gas pipeline construction, and construction of new power plants using fossil fuels and waste incinerators.

Since the EBRD is mainly engaged in large-scale projects, its operations directly affect a large number of people in the local communities. Still, the EBRD has a notoriously bad record of public participation. Public access to information on EBRD projects is seen more as a privilege than a right. Often, information is published too late in the project cycle for the local community to participate fully. In fact, according to an evaluation done by Bank Information Center in 2003, the EBRD is “far less transparent than the World Bank Group.”

The EBRD has begun to listen to critical voices and demands from the international community, by, for instance, agreeing to set up an Independent Recourse Mechanism (IRM), which allows affected peoples to appeal against decisions made by the EBRD. The decision to set up the IRM was made based on sustained pressure from nongovernmental organizations, which eventually led to demands from the G-7 governments and the Council of Europe that such a mechanism was needed at the EBRD. The IRM was to be fully functional by November, 2003, but it is yet to accept any complaints from civil society. Time will tell how effective this mechanism will be.

The EBRD’s continued engagement in a number of controversial projects and its lack of transparency paints a picture of a very influential and secretive bureaucracy that needs to be constantly monitored if global economic justice is to be achieved. CEE Bankwatch and Bank Information Center are two organizations that have taken up the task of monitoring the EBRD in the attempt to improve the institutions’ transparency, accountability and lending policies. Together with other civil society groups, especially environmental organizations, CEE Bankwatch actively and regularly pressures the EBRD to meet the demands of local communities. An obvious target of NGO pressure is the EBRD’s internal operations that essentially are based on a “money is power” system that gives little voice to borrowing countries and a great deal of influence to non-regional members. The hypocrisy in having such a system while insisting that its borrowing countries apply the principles of multiparty democracy and pluralism should be obvious to most, even the staunchest EBRD supporter. Unfortunately, such hypocrisy is a common trait in the workings of the neo-liberal economic system.