EBRD Update on Regional Private Sector Initiatives

1. Background

The European Bank for Reconstruction and Development (EBRD) was given a mandate to co-ordinate the international community's efforts to promote economic development and regional integration in South Eastern Europe through Private Sector Development. To this end a paper was presented to the March Funding Conference entitled "International Financial Institutions; Regional Private Sector Initiatives in South Eastern Europe". The paper describes ten specific Regional Initiatives which have been selected through a process of consultation among the IFIs as having the most immediate impact. Most of the initiatives are based on existing operations or proven models which can be extended from one country to another. The paper indicated a need for bilateral donor grant co-finance and technical assistance for "Quick Start" extension or implementation of these initiatives of EURO 104 million.

Private Sector Development under Working Table II attracted total pledges of EURO 356 million at the Funding Conference held on March 29/30 2000. Out of this amount EURO253 million was pledged by the IFI's themselves including the World Bank Group, EBRD, the European Commission and the Council of Europe Development Bank (CEDB). Bilateral donor grant co-finance and technical assistance pledges totalled EURO102 million effectively meeting the identified target for the "Quick Start" programme.

The text below briefly summarises the implementation status of Regional Private Sector Initiatives. Additional funds are required to maintain and expand these programmes particularly those that face growing demand. In addition, recent events in FRY pose the question of how to extend successful initiatives to FRY now that it is a member of the Stability Pact and seeking membership in the IFI's .

2. Implementation Status

The definition, negotiation and signing of firm commitments by IFIs and Donor's to the specific initiatives and the actual utilisation of funds by beneficiaries in each of the countries of the region is described below. It is encouraging to note that the more advanced and well-defined initiatives are already having an impact on the ground including especially the EBRD's Trade Facilitation Programme and the IFC's South Eastern Europe Development (SEED). It can be seen from the discussion below that the Stability Pact has had a very definite impact by generating incremental resources to the operations and programmes managed by the IFIs and a higher concessional element. The following provides the amount committed (both signed and firmly indicated) to each of the initiatives.

Regional Initiatives	Lead Agency	IFI Funding (EUROmm)		Donor Funding (EUROmm)		Totals (EUROmm)
		Committed	Firm Indication	Committed	Firm Indication	Total IFI's	Total Donors
1. Trade Facilitation Programmes	EBRD	58	6	6.7	2.0	64	8.7
2. Trade Insurance Programmes	WB	30	15		10	45	10.0
3. IFC South Eastern Development (SEED)	IFC	5.5		17.8	14.0	5.5	31.8
4. Small Equity Funds	EBRD	7.8	6.7	13.6	9	14.5	22.6
5. Micro-Enterprise Banks1	EBRD	3.3	9.4	29.8	5	12.7	34.8
6. Contractor Credit Support	USAID/EBRD			0.2	0.6		0.8
7. Bank Restructuring	EBRD			0.8			0.8
8. EBRD/EU SME Finance Facility2	EU/EBRD	8	30	2.5	12	38	14.5
9. Political Risk Guarantee	MIGA	To be determined
GRAND TOTAL		112.6	67.1	71.4	52.6	179.7	124

1. Includes EURO11 million committed in 2000 and EURO 5.5 million expected in 2001 from EBRD/US SME facility (from total facility of $ 50 million over 5 years)
2. Facility is for all accession countries: Reported figures are for existing and expected commitments in Romania and Bulgaria

Please note that original RPSI number 7 Credit Guarantee Pilot did not attract grant funding and have been dropped from the table.

Key points to notice are as follows:

1. The implementation of the EBRD's Trade Facilitation Programme exceeds original expectations in terms of limits negotiated with participating banks in the region (EURO 58 million signed by end December 2000). Actual utilisation by the banks for trade transactions has increased from EURO19 million to EURO 30.0 million between October and December 2000. The bulk of demand for this facility has been in FYR Macedonia with strong growth expected in Bosnia Herzegovina. The programme continues to be most in demand where country risk is perceived to be high. Because of the short-term nature of most guarantees, the actual trade volume supported by the programme is up to four times as large as the agreed limits. However, the target for donor support of EURO20 million to this programme has not yet been met which could affect the ability to fully meet demand particularly as and when the programme in introduced into FRY.

2. IFC South Eastern Europe Development (SEED) has started operations with an office in Sarajevo opened in July 2000 to provide technical and capacity building assistance directly to small businesses, domestic financial institutions and business associations. Additionally, the facility will be working closely with the World Bank, domestic governments and others in the international community to bring about improvements in the business enabling environment. A staff of about 25 is in place and initial funding has been fully secured with commitments from donors to provide further funding for a period of five years. Local offices are also established in Tirana, Banja Luka and Skopje. Initial "mapping" of the needs for technical assistance by local small businesses and an assessment of the their operational environment has been completed for two countries. A number of projects are under development in the agribusiness and tourism sector for financing through IFI SME Programmes. Close co-ordination has been initiated between the SEED and local offices of the EBRD, World Bank and other IFIs and bilateral support groups. (See also Annex I)

3. Micro-enterprise Banks (MEBs) are now established in Bosnia Herzegovina, Kosovo, Albania, and are under preparation in FYR Macedonia and Romania. MEB Kosovo has successfully supported the recovery of small business and has provided basic banking and payments services. Direct bilateral donor support now totals EURO14 million which is a significant sum for small loan programmes. In addition a portion of the US/EBRD SME Facility (out of a total of USD 50 million over a five year period) will also benefit MEBs as well as existing local banks with an SME client base. Commitments have already been made to intermediaries in Kosovo, Albania and Bulgaria. A micro-bank as well as direct support for other small private banks lending to micro enterprises are being considered in FRY

4. Small equity funds have attracted donor support totalling EURO 22 million. The Albanian Reconstruction Equity Fund ($14 million) with substantial support from Italy has expanded its operations into Kosovo ($5 million). Depending on whether FRY is likely to attract sufficient private equity finance it may not need donor support for this purpose.

5. Contractor Credit Support and Bank Restructuring are under implementation with technical assistance funds. A consultant is reviewing the local contracting and building materials market and the availability of local finance and will design a programme to support the ability of local contractors to participate in the major infrastructure projects planned under the Stability Pact. Individual banks are being identified which require institutional and financial restructuring ahead of privatisation with a first candidate likely in Albania although the needs will also be great in FRY.

6. MIGA Political Risk Guarantee The Agency has been actively supporting Southeastern Europe regional private sector initiatives. While the Agency's first priority in the region is the establishment of a donor funded and MIGA administered political risk guarantee trust fund for Kosovo, MIGA is also pursuing other political risk insurance initiatives in SEE. They include: (i) the administration of the EU funded political risk guarantee trust fund in Bosnia-Herzegovina; (ii) creating a regional grant supported fund to issue political risk guarantees to develop SMEs activities; and (iii) in light of the recent changes in the Federal Republic of Yugoslavia, and within the framework of the World Bank approach to assist FRY, MIGA is exploring ways in which it could support a regional post conflict facility which would facilitate the flow of private sector financing for the reconstruction effort of the country. (See also Annex II)

   MIGA has not yet officially requested funding for these initiatives (except for the EU trust fund for Bosnia and Herzegovina which is up and running). Over the past year, It has focused its efforts on project identification/market analysis to justify adequate funding from the donors. At the same time it has also engaged into meetings/discussions with the donor community. While firm commitments have not yet been established, some donors have indicated a strong support towards funding MIGA initiatives for the region.

7. World Bank Trade Guarantee programmes are being expanded using existing institutions established by the World Bank in Bosnia Herzegovina and Albania. Total funding for these programmes is EURO20 million. In addition the success of these programmes has encouraged the establishment of a similar institution in FYR Macedonia with WB funds of about EURO10 million. Donor support has not yet been identified and additional pledges are welcome.

3. Conclusion

In conclusion, the EBRD is encouraged by the support given to Regional Private Sector Initiatives and looks forward to extending this experience to FRY which has been approved as a member in EBRD. In particular its own programmes in the areas of Trade Facilitation and SME and Micro Lending can be expanded as planned with the donor support identified. Each of the identified programmes would benefit from additional donor support as the Stability Pact implementation moves from "Quick Start" to "Near Term" projects and as similar programmes and products are considered for FRY. It should be recalled that "Near Term" needs for the same initiatives (which would effectively extend their operations beyond March 2001) were estimated to be EURO127 million but are likely to be greater now that FRY is a member of the Stability Pact.

The donor community is urged to review its commitments to Private Sector Development in the region and to consider additional support to Regional Private Sector Initiatives identified by the IFIs particularly where they coincide with bilateral objectives for assistance to FRY. The EBRD is committed to its role as co-ordinator of Private Sector Development programmes under the Stability Pact and looks forward to continued excellent collaboration with the other IFIs and the bilateral donor community.

Annex I

Stability Pact Meeting

Working Table II

Regional Private Sector Initiative

Update on South Eastern Europe Development (SEED) programme

Compared to the full funding targets of 33.6 million US for five years, nearly 21 million US is fully commited at this time to the South Eastern Europe Development (SEED) programme. Donors have indicated their willingness to provide additional funding should SEED's work expand into FRY. Analysis of this situation is underway and a proposal will be made to SEED donors in the first quarter of 2001.

SEED is fully established at its headquarters in Sarajevo which is home to the general director, Mariann Kurtz and four international team leaders:

• Alexander Paine, Investment Services
• Dennis Long, Environment and Engineering
• Jane McNeil, Financial Management
• Hans Shrader, Private Sector Development

Some 25 local professionals and administrative staff complete the headquarters compliment. SEED also operates an office in Banja Luka with one representative of the Investment Services team.

SEED is officially opening its office in Skopje, FYR Macedonia on Jan. 23, 2001 with two staff and recruitment efforts underway. SEED also maintains in office in Tirana with two staff and has an office in Prishtina available for visiting missions.

Project Implementation:

SEED has sponsored an agribusiness sector assessment in BiH which has resulted in three potential integrator projects (fruit and vegetable processing, dairy processing and poultry production) for development and investment. SEED's Investment Team is currently working with four companies in BiH, two companies in Macedonia, and is designig a technial assistance program for a number of hotels on the southern coast of Albania in the city of Saranda. SEED's has also prepared two companies for investment by the WB-EU Credit line in Kosovo, investment decisions are pending with the ICU.

SEED has conducted a seminar for entrepreneurs in Kosovo on how to access credit lines and begun a needs assessment for managerial development training with firms in BiH in conjuction with the Bled School of Management from Bled, Slovenia. SEED has also sponsored the legal foundation of four business associations in BiH and provided for Technical Assistance to representatives of six associations on membership management, financing and advocacy roles of Associations. This assistance was provided by the Canadian Manufacturers Association.

SEED also participated in a recent E-Business Conference in FYR Macedonia. This event began in SEED's exploration of work with the FYR Macedonian government and private sector actors regarding the development of an on-line portal for business registration and SME services. SEED is in the development phase of an Internet-based SME toolkit designed to provide localized information, notices, and services for entrepreneurs.

Finally across the entire SEED region, we are exploring an Environment Impact Assessment for the herbal sector and have conducted the first multi-donor working group meeting on the development of this sector.

Annex II

Stability Pact Meeting

Working Table II

Regional Private Sector Initiative

Update on MIGA's initiatives

MIGA is fully committed to support the Stability Pact countries in South East Europe with its political risk insurance program, including through the development of special initiatives tailored to the specific needs of the region.

The Agency has been actively supporting Southeastern Europe regional private sector initiatives. While the Agency's first priority in the region is the establishment of a donor funded and MIGA administered political risk guarantee trust fund for Kosovo, MIGA is also pursuing other political risk insurance initiatives in SEE. They include: (i) the administration of the EU funded political risk guarantee trust fund in Bosnia-Herzegovina; (ii) creating a regional grant supported fund to issue political risk guarantees to develop SMEs activities; and (iii) in light of the recent changes in the Federal Republic of Yugoslavia, and within the framework of the World Bank approach to assist FRY, MIGA is exploring ways in which it could support a regional post conflict facility which would facilitate the flow of private sector financing for the reconstruction effort of the country.

MIGA has not yet officially requested funding for these initiatives (except for the EU trust fund for Bosnia and Herzegovina which is up and running). Over the past year, It has focused its efforts on project identification/market analysis to justify adequate funding from the donors. At the same time it has also engaged into meetings/discussions with the donor community. While firm commitments have not yet been established, some donors have indicated a strong support towards funding MIGA initiatives for the region.

There is a clear need for political risk guarantees in the region, which will help facilitate (i) the implementation of the IFC Balkan enterprise Facility, (ii) the operation and financing of Micro-enterprise Banks, (iii) the operation and financing of small equity funds, and (iv) support the World Bank Trade Guarantee Program. This demand is evidenced not only by MIGA's experience in other parts of the world, but also by the amount of inquiries and registered applications for MIGA coverage in the stability pact countries.

As of December 31, 2000, total potential demand (registered preliminary applications) for MIGA's coverage is in excess of US$4 billion, for a total project cost of US$5 billion. The demand is distributed in the following MIGA sector teams: 46 percent in agriculture, manufacturing and services; 7 percent in the financial sector, 45 percent in infrastructure, and one percent in telecommunications. A significant amount of those is in support of SME related activities. The highest demand for coverage in the following countries: Albania, Bosnia and Herzegovina, Bulgaria, Romania, the Federal Republic of Yugoslavia (including Kosovo, Montenegro and Serbia). Other less active countries include Croatia, Former Yugoslav Republic of Macedonia, Moldova, and Slovenia.

While MIGA can meet part of the demand with its standard products, it would maximize its impact by answering the specific needs of the region in terms of SME, and post conflict related private sector financing, through the establishment of donor funded political risk guarantee funds. MIGA's experience has also revealed that a MIGA guarantee can have a significant leverage effect in terms of private sector financing: a US$1 MIGA guarantee supported by a US$1 fund, can help generate on average from US$1.2 to US$5 of private sector financing.

MIGA plans to official seek donor support within the next two months for Kosovo, a regional SME facility, and possibly for a post conflict FRY facility.