Development Banks Eye Private Projects

MADRID -- Both the European Bank for Reconstruction and Development and the U.S. Export Import Bank are radically shifting their focus from lending to sovereign governments to private sector projects, officials said Friday.


President Jacques de Larosiere said the European Bank for Reconstruction and Development, or EBRD, set up by Western governments three years ago to help the transition of former communist countries to a market economy, would direct 70 percent of its $2.2 billion of lending this year to the private sector.


Addressing the World Economic Development Congress in Madrid, de Larosiere urged Western businessmen to set up joint ventures in Eastern Europe and the former Soviet Union.


"That is where the potential for direct foreign investment lies," he said, urging Western firms to take advantage of the opportunities offered by massive privatization programs in the formerly communist states. "Now is the time to move into those markets. They are going to become a very important part of the world economy."


De Larosiere said that besides financing joint ventures with loans and equity participation, the EBRD was focusing on aid to small and medium sized businesses within the former communist countries.


The most effective way of doing this was by helping local banks to improve their management and financial structure and then channel credit through them to local entrepreneurs, he said. To that end, the EBRD announced this week that it would take a 14 percent stake in Tokobank, one of Russia's leading commercial banks.


The EBRD's statutes demand that at least 60 percent of its loans go directly to the private sector and de Larosiere said the bank was close to reaching this target. About 58 percent of the $5.5 billion of funding approved so far had been channeled into the private sector.


Kenneth Brody, president of Exim Bank, told the congress that his bank had also placed an emphasis on the private sector, specifically on financing trade deals in former communist and Third World nations. "Two years ago the bulk of our activity -- well over 95 percent -- was with sovereign governments," he said. "This year over one-half of our activity is with the private sector in the developing countries and that private activity is growing."


During the Russian-U.S. summit in Washington this week, for example, Exim Bank signed nearly $1 billion in loan guarantees mainly for privatized Russian oil companies.


Brody, who became head of the U.S. government trade financing organization in the spring, said the Exim Bank previously bought credit insurance to cover doubtful loans, adding up to 550 basis points to the interest rate.


Nowadays it directly assesses credit risks with the help of ratings agencies such as Moody's and Standard & Poors and writes the risk factor into the pricing of each credit, he said. Brody stressed that this was a more flexible system that led to cheaper credit costs.


Brody said that besides redirecting the focus of Exim bank lending, he had tried to make the bank more responsive to clients and give it a new customer service mentality. He said the most important development in the world economy today was the rapidly increasing share of developing countries in global output.


"Forty years ago the developing world was but a blip on the economic radar screen. Today, including the countries of the former Soviet Union, the developing world accounts for about one-half of global production," he said. "The developing world is where the action is and where the action is likely to be for the rest of our lifetime."