Trend's excusive interview with Jean Lemierre, the President of the European Bank for Reconstruction and Development (EBRD):
Q: From the results of 2006, what are EBRD's inflation expectations in Azerbaijan, and do you consider the macro-economic situation in the country to be stable?
A: Our end-year inflation expectation for Azerbaijan is 11 per cent.
However, the economy is highly dependent on the energy sector, and it is vulnerable to energy shocks. Economic diversification is essential for long term sustainability. The large increase in oil exports growth and the subsequent increase in domestic demand also related to the continued wage growth continue to exert upward pressure on inflation. At the same time, in the context of massive revenues and high incidence of poverty the design of a long-term expenditure policy is a major challenge for the government.
Q: Previously EBRD announced its intention to expand the spectrum of the Bank's participation in Azerbaijan's information and communication technology sector. The Azerbaijan Ministry of Telecommunications & Information Technology is working intensively on special areas of IT development. What does EBRD propose to do to develop these special areas in Azerbaijan, and at the expense of which of its other projects does EBRD foresee to expand its participation in this area of the economy of the country?
A: The EBRD has indicated that it will support the development of the ITC sector in line with planned reforms to the sector. To date, progress in reform of the ITC sector has been disappointing and the EBRD has not yet seen an acceptable opportunity to participate. Nevertheless the Bank remains ready to invest in the sector. An EBRD investment in any given sector does not come at the expense of any other sector. The only practical constraint to EBRD financing in Azerbaijan at the moment is in identifying projects which meet the EBRD's criteria of commerciality, transparency and good corporate governance.
Q: In your opinion, what areas of Azerbaijan's economy need additional funds from oil export which are accumulated in the State Oil Fund of Azerbaijan? Do you think that Azerbaijan's oil sector needs additional investments from the State?
A: The EBRD's focus in Azerbaijan, as outlined in the Country Strategy for Azerbaijan, is on non-oil and gas sector development, particular in the regions (outside Baku). In particular, the Bank is seeking additional delivery mechanisms for MSME and Trade financings in the regions, as well as focusing on Agribusiness and General Industries. There continues to be scope to move down the value-added chain of the oil and gas sector through investments in the oil service sector, for which regional demand remains strong
Q: The EBRD Board has repeatedly postponed the date of when a credit agreement to install a locomotive depot for Azerbaijan State Railway Company is to be considered. Previously, the date was postponed to 20 March, 2007. In your opinion, is this postponement linked with any organizational issues within the Bank itself or is EBRD still in the process of studying all perspectives in granting credit to Azerbaijan Railways?
A: EBRD considers Azerbaijan's State Railway Company to be a reliable partner to work with and considers the project to be in-line with its mandate of the transition impact.
The project passed final review in January 2006. However, one of the reasons for delay was Azerbaijan Government's subsequent request to reduce the amount of the loan from USD50m to USD30m as the Client, Azerbaijan Dovlet Demir Yolu (ADDY) - a fully integrated State Railway Company, wished to finance some of the new locomotives itself. This meant the project has been delayed in review by the Board of Directors again EBRD considers Azerbaijan's State Railway Company to be a reliable partner to work with and considers the project to be in-line with its mandate of the transition impact. The EBRD financing is expected to assist the Company's reorganisation to enable it to fully meet international standards in terms of financial structure and governance.
The EBRD financing the company has to comply with various requirements (see below), which will facilitate the Company's gradual progression to international standards.
• require that ADDY is transferred to a joint stock company;
• require ADDY to develop and implement a restructuring plan;
• require ADDY to prepare a plan for reducing accounts receivable.
Q: To develop projects in Ukraine, particularly in the field of energy and transport, EBRD has expressed its willingness to increase financing the economy of this country up to в'¬1 bln in 2007. Has EBRD confirmed which projects will be financed at the expense of the Bank, and which areas of the economy, in your opinion, should be developed in the Ukraine at the expense of EBRD in the future?
A: As of today, the 2007 pipeline for Ukraine stands at в'¬EUR 1.5 billion. In particular: Transport в'¬ 40 million, Property &Tourism в'¬250 million, Natural Resources в'¬300 million, Infrastructure в'¬80 million, General Industries в'¬250 million, FI в'¬80 million and Energy в'¬250 million. The Bank and Ukraine are meeting in mid-December 2006 to agree EBRD/Ukraine Programme of Cooperation in the public sector for 2007-2008, which will outline specific projects. The EBRD may co-finance projects in transport, energy and municipal sectors with the EIB. These sectors, as well as energy efficiency initiatives and carbons credits will be among top priorities for the Bank in Ukraine
Q: Kazakhstan is about to participate in the construction of a transnational highway that will link Western Europe with China. Is EBRD willing to take part in the financing of this project?
A: EBRD has indeed been invited by the Government of Kazakhstan to consider financing a portion of this high profile road project. We have confirmed our interest, and are now in discussions with the Kazakh authorities and other IFIs involved in this project. However, it is too early to assess the economic viability of this road, the scope of the project, or indeed, EBRD participation. But we continue to be committed to assist Kazakhstan in improving its infrastructure and have identified the transport sector as one of the key areas for the EBRD to focus on in Kazakhstan in the coming few years.
Q: Which areas of Georgia's economy does EBRD consider to be a priority to develop within the Bank's new Strategy on its activity in this country? Whether that will be a project of a local importance, for example, reprocessing waste or water supply or increasing the efficiency of the energy carriers' transit via the territory of Georgia will be in the focus of everyone's attention?
A: The Bank will concentrate on the following priority areas:
Enhancing energy security and efficiency: considering the importance of the power sector to the overall political, social and economic stability of Georgia and the region. As an example the completion of the rehabilitation of the Enguri II power plant remains a priority for the Bank and the works have already started. Bank will be actively working toward investments supporting renewable energy projects, such as construction of mini-hydro power stations.
Supporting critical municipal and other infrastructure and state-owned enterprises: improving decaying and underinvested physical infrastructure is of high importance, for example Bank plans to invest in improving Adjara Solid Waste process, in rehabilitation of Tbilisi metro and transport system in Batumi. Bank also works with donors such as Millennium Challenge Corporation (MMC) on improving the water supply in the cities such as Tbilisi, Rustavi, Borjomi.
Financing for the enterprise sector Small & Medium Enterprises (SMEs) & Medium and Small Enterprises (MSEs): the Bank provides credit lines to local partner banks for on-lending to small and medium size entrepreneurs in support for development of private businesses. It also uses various other instruments, such as newly introduced Medium-sized Co-financing Facility (MCFF) with local banks and a streamlined Direct Investment Facility (DIF), the new Direct Lending Facility (DLF) and the Trade Facilitation Program (TFP). Additional support will be provided by the Turnaround Management (TAM) and Business Advisory Services (BAS) programs. Strong emphasis on improving the rural areas of the country, through more MSE financing especially in agriculture sector
Expanding the Bank's presence in the financial sector (banking and non-bank microfinance institutions): the Bank will seek new equity investments in local banks to enhance their operations and bring them up to international standards, paying particular attention to issues of transparency and corporate governance and building local capacity. The Bank will also seek to play a role in the development of the non-bank financial sector with a specific focus on leasing, insurance and private pension schemes.
Improving the investment climate in Georgia: the Bank hopes to facilitate the public-private sector dialogue. New funding instruments will continue to be designed and implemented, while cooperating with various donors will remain of high importance. Continue and enhance the policy dialogue with the authorities focusing on the power sector and the development of SMEs and micro-enterprises.