[Recorded by Electronic Apparatus]
Thursday, June 8, 1995
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[English]
The Vice-Chair (Mr. Campbell): Welcome to this special joint meeting of the Standing Committee on Finance of the House of Commons and the Foreign Affairs and International Trade Committee of the House of Commons. We have jointly a great interest in international financial institutions.
It's a great pleasure to welcome before us today Jacques de Larosière,
[Translation]
president of the European Bank for Reconstruction and Development. It's a great pleasure for me to have here my former boss, from the days when I was a lawyer at the International Monetary Fund.
[English]
Also, we welcome John Coleman,
[Translation]
Director for Canada and Morocco at the European Bank for Reconstruction and Development.
[English]
Welcome, Mr. Coleman. It's a pleasure to see you again.
Mr. Leblanc and I were members of the Canada-Europe parliamentary delegation which met with you recently in London as part of our oversight of the European Bank. We're pleased to welcome you.
We're going to proceed with some introductory comments from Mr. de Larosière about the state of affairs at the bank at present and the particular challenges facing the bank. Then we'll open it up to questions.
Before we do that, I want to turn to my colleague Mr. Reg Alcock on behalf of the foreign affairs and international trade committee.
The Acting Joint Chair (Mr. Alcock): Thank you, Barry. We here in Canada always defer to the central finance group in all matters, I should say.
I would simply like to add a welcome to you. We have been working very hard in these last six months on the question of the reform of the IFIs, and it is certainly something you know more than a little about. I believe you've been supplied with copies of our report in preparation for the IMF, and I know members of the foreign affairs committee will be very interested in some of your comments on directions these reforms may take.
So we are quite interested in this discussion and we should get on with it.
[Translation]
Mr. Jacques de Larosière (President, European Bank for Reconstruction and Development): Mr. Chairman, ladies and gentlemen, I'm honoured to be with you today.
I also feel very privileged to be able to speak to you and I am, of course, willing to answer any questions members of the committee might have for me, with the help of my friend, John Coleman, who is the Canadian administrator at the bank.
A few introductory comments to prepare the way for your questions. First of all, I am very impressed by the interest that members of your two committees have shown in international financial institutions.
Your efforts are unprecedented. To my knowledge, no other Parliament has undertaken such a deep analysis of the way IFI work and how they might be reformed. At the outset let me say that I am very impressed by the quality of the thinking that has gone into your work. I very much look forward taking part in the discussion based on these documents.
Let me take a few minutes to talk to you about the European Bank for Reconstruction and Development. The bank was established four years ago by the international financial community to assist in the economic transition of central European countries, Eastern European countries and former members of the Soviet Union, and to help them transform their centralized and planned economies into market-based economies, against the dynamic backdrop of the developing pluralistic democracies in these countries.
Our mandate is therefore twofold: it is economic and financial. It is economic in that we help countries establish market-based economies, and political in that we help them set up democratic processes and institutions. All our member countries, including Canada, provide our capital base. We are very happy and proud to have Canada as one of our founding countries.
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Our capital base is 10 billion ECUs, which, at current exchange rates, is the equivalent of about $14 billion U.S. dollars, and we are investing this money in the countries within our operating zone. At present there are 25 of them, from the Czech Republic to Kazakhstan, including all of Eastern Europe, and stretching to the countries of Central Asia and the former Soviet Union.
We provide assistance in a variety of forms. Not only do we make loans, but we sell equity stakes in private business, which is similar to what the World Bank does when it loans money to public institutions and also to the IFC, the International Finance Corporation, when it loans money or invests in equity shares. However we provide all of this from the same window, which is of course more convenient.
Our board of directors has so far approved just over $7 billion U.S. for two projects out of the $14 billion we have. In other words we have in fact committed half of our capital base already.
We believe our role is not only to lend money or invest in equity stakes, but also to attract other partners and investors to share in projects which are co-financed with others.
In fact, 10 billion ECUs or $14 billion U.S. is not really enough for us to play a decisive role in the transition of what are very large economies. From Central Europe to the Eastern part of our field of operation, I would say there are some 400 million people.
If we are to be effective, then we must find partners for joint transactions. The $7 billion that we have committed have in fact led to a total investment of $23 billion. That means that for one dollar or one ECU that we put into a project, two other dollars or ECUs can be added for a total of three. So the multiplying factor is three. It's very important to understand this in order to grasp the catalytic role the bank plays.
As you know, the bank got off to a bad start, but we have reorganized. The bank was criticized for lavish spending on its own facilities instead of focusing on the countries it is responsible for.
In my view, this criticism was somewhat excessive, but there was some truth to it. We have taken steps to correct this, however, by bringing down our overhead, trimming the size of the bank and imposing frugal standards, which I feel is to be expected from an institution that is financed by taxpayers' money.
Even on transatlantic flights I fly economy class because I feel that when the taxpayer is paying, you have to be as frugal and as careful as possible.
We reduced the bank's overhead by about 10% when I arrived and our budgets no longer increase from year to year. Our annual budget growth has been zero over the past two years.
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Despite that reduction, along with stabilizing our expenditures, we managed to increase last year's operations by more than 70%, which means we made significant productivity gains, since with fewer people, we did a lot more.
I think we can still increase productivity and reduce overhead.
I would like to take this opportunity to tell members of Parliament, who are particularly interested in knowing how we use the funds you authorize, that reducing costs, in my view, is an essential part of my work.
In conclusion, before you ask me questions, I would say we have a very simple strategy that was implemented from the time I started at the bank and that may be of interest to you. Let me give you the core features of what I feel is the bank's real mandate.
I think our bank must have four basic priorities. The first is to develop the private sector. I said we could conduct operations with the public sector, but things can also be done with the private sector. If we really want to play our role in the transition, that is help countries move from a largely state-run economy to a market economy, we must focus on developing private industry.
Consequently, in our bylaws we have a rule stating that at least 60% of our business must be conducted with the private sector and therefore no more than 40% of our transactions can be with the public sector. I am pleased to announce that 73% of our transactions last year were with the private sector. We have therefore exceeded the 60% threshold set by our member countries. So, the first thing is to focus on the private sector.
The second facet we want to develop in the private sector is what is referred to as the local private sector. I emphasize the word «local». Indeed, in a fledgling market economy, there are two ways of going about things. You can make major investments in joint ventures with major capitalist firms to develop natural resources or to take over processing industries. We did that and we feel it is essential to do so. However, if we do only that, we run the risk of forgetting that a market economy is largely based on local businesses, generally medium-sized firms, if not small businesses, and if we just restrict ourselves to big joint ventures with Western firms, we could lose our influence or not have any influence at all on the basic economic fabric that creates jobs and is the very foundation of a market economy. We therefore want to deal with local businesses, both medium and small. That is the second axis.
The third facet is operating procedures. A small or medium-sized business, say Ukranian, Polish or Russian, does not operate in London where the EBRD has its head office. We have no hope of reaching those businesses if we just pay lip service to the local economy. That is why we decided to focus on developing our local presence. That is the fourth aspect of our strategy.
What does local presence mean? First of all, it means having people on site. You have to have people on site who know the local economy, who are able to talk with the country's business leaders, to provide new ideas and to create new partnerships.
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For the past two years, we have therefore focussed more on developing our local offices. We had only 20 people in local offices when I took this position 18 months ago. We now have more than 80 and we are increasing the number systematically.
Not only must you have local offices, but you must also be able to work with local financial institutions, because the banks' clients are the country's small and medium-sized businesses. It is by dealing with the banking system in those countries that we can reach the small business sector. So, this fourth aspect of local presence lead us to develop an entire partnership system with the local banks.
We buy equity shares in local banks in order to be able to work with them. We open lines of credit at local banks, which are then reissued to local borrowers. We make loans to local banks. In Russia, we started 11 regional venture capital funds, which are set up in the provinces that are far from the capitals and are used to buy equity shares in small and medium businesses. In other words, we are regionalizing our activities through local financial institutions.
Our fifth strategy is to be active throughout the zone. At the beginning, the EBRD tended to focus on the more successful countries, countries that are further along in their transformation, such as the Czech Republic, or Poland or Hungary, but we do not want to limit ourselves to those types of countries. We also want to go to the Eastern countries in our field of operation, namely Russia, Ukraine and all the former Soviet Union countries, including Kazakhstan and Turkmenistan, etc., as well as the countries of the Caucasus.
So now we are systematically focussed on all our countries. We now have active operations in 24 of the 35 states in our intervention zone. We are quite sure we will be present in 25 states next year.
Canada is an absolutely essential partner. I'm not saying that because I have the honour of being here in the Canadian Parliament, but rather because the facts speak for themselves.
You have a 3.44% share in our capital, but you have a role in the EBRD that is far more important than your equity stake. You have, in fact, established a multifaceted relationship with the bank. Some projects were developed by Canadian firms, funded by the bank, and are of particular interest. During the question and answer period Mr. Coleman will be able to name some of the specific projects that involve Canadian firms in the areas of natural resources, oil, paper, and minerals.
There is a huge gold mine project in Kirghizistan, for which an international syndicate is being set up, with the involvement of a Canadian firm. We have airport infrastructure projects. Those are all operations we are currently developing with Canadian firms. I can quote a figure that is not yet public knowledge. We now have in our pipeline - in other words all the projects that are brewing, being negotiated or developed by the bank - nearly 1 billion dollars' worth of activity with Canadian firms.
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The Canadian participation in what I refer to as the leverage, or the catalysis which results in the generation of three dollars of project money for every dollar put in by the EBRD, is significant. More and more Canadian firms are becoming increasingly active in this area. This is only natural, given the strength of Canadian technology, the importance of the Canadian economy in the entire resource sector, a preferred sector for many of our countries, and also given the cultural, historical and ethnic ties which serve to link Canadians with countries in our zone of operations. As an example, there is the Ukraine, an extremely important country both for the EBRD and Canada, since nearly one million people of Ukrainian origin are now living in Canada. All of this means that we are developing quite a special and positive relationship with Canada and I must say that it is a pleasure to be able to work with Canada. For example, we are now in the final stages of a project that is in this pipeline. The objective of this project is to set up an EBRD venture capital fund in the Ukraine that will, using Canadian funds, and with technical assistance in the order of $10 million Canadian dollars to be provided by the Canadian authorities, invest in small and medium-sized privately owned Ukrainian businesses at the local level. We often have to include a technical assistance component when financing these projects to capitalize start-up operations. It is not enough to simply make money available to these companies. We must ensure that they are properly managed. And this is why we often have a need for technical assistance. We are trying to develop the ties we already have with Canada in that way. Moreover, many Canadians work for the EBRD, through our local representation offices, and I am very proud of this co-operation.
I am now available to answer any questions that you may have. I did not talk about the business climate that exists in these countries, which obviously depends upon their degree of development and their political and economic situation. I would be happy to answer any of your questions, including more technical questions with respect to structure and the reform of international financial institutions. Thank you for listening to me.
[English]
The Acting Joint Chair (Mr. Alcock): We have a lengthy list of people who wish to ask questions. Before we move to them, Mr. Coleman, do you have anything you wish to add?
Mr. John Coleman (Director for Canada and Morocco, European Bank of Reconstruction and Development): No, I think I'll wait for the questions.
[Translation]
Mr. Leblanc (Longueuil): At the end of your presentation, you talked about the reform of international financial institutions. We here in the Foreign Affairs Committee have been talking about this issue for some time now, particularly in preparation for the G-7 Summit which will soon be taking place. When I was in London, visiting your bank, last January, we discussed this topic briefly. We wondered why the decision was taken to create a new bank instead of opening up a type of World Bank branch in an effort to reduce overhead, duplication in the area of research and everything else down the line, everything that a bank needs to operate. We wondered why a new bank was created rather than a new component of the World Bank, for instance. That is my first question.
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Secondly, will Canada have any guarantees as far as the economic spin-offs of its investments are concerned? Who can assure us that Canada will see equitable returns on its investments?
Mr. de Larosière: Shall I respond case by case?
Mr. Leblanc: Yes, if you would.
Mr. de Larosière: In answer to your first question, we created this bank because we felt that the transition problems of a centralized and planned economy moving towards a market economy were entirely different from those encountered by the World Bank in its work with developing countries. I feel that we made the right decision, although I must say that I too asked these very same questions when I realized that we were creating a new bank.
The more I delve into this problem of economic transition, the more I believe that this is very specialized work. Transition is something that is completely different from funding infrastructure development programs in countries such as Chile or Bolivia. It is very different because you must create both the legal framework and the attitude that will result in an entrepreneurial economy and you have to look after the financing aspect.
Of course, we could have set up a separate division of the World Bank, but I feel that we did a good thing when we set up a specialized institution because the work is extremely specialized. I can assure you that we do not duplicate the work done by the World Bank. When we feel that the World Bank is better suited for a project than we are, we leave it to the World Bank. I think that Mr. Campbell could tell you that I have been in close enough contact with the attitudes and nature of the Bretton Woods institutions, a sector in which I spent nine years, that I would never intrude or compete in this type of thing.
I have a very simple principle: we don't have enough money or time to compete with each other. If another financial institution is better suited, then let it do the work. If we, on the other hand, are in a better position, then we should do the work. In the 18 or 19 months that I have been with the bank, I have never run into any jurisdictional conflicts with these organizations.
Obviously, when you create a bank such as ours, there are overhead costs.
My challenge is to ensure that the productivity of the bank is sufficient, so that its overhead does not consume too much of the return we are asking from our borrowers. That is my challenge. Over the past two years, I have been trying to reduce overhead costs and to increase our in-house productivity so that we can play an active role in these countries without costing too much. And of course, we must make sure that we balance our books.
Although some work still lies ahead, I am pleased to report to you that over the past two years we have balanced our books and generated enough money to create a provision for bad loans, and there will one day be loans that will make that reserve fund necessary. We are getting rid of waste using every available means. But there is no duplication. Moreover, I am now absolutely convinced that it would have been a mistake to have created a separate division of the World Bank for the following reason: when you are dealing with an economy in transition, you have to be able to view your funding in dynamic terms.
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What happens? Very often, you begin with a public entity, because in the history of the transition, everything was public, and there is a movement towards the private sector through the phenomenon of privatization. If you have a World Bank type of instrument, that is one which can lend only to public entities - as is the case with the World Bank - and if you have an affiliate or subsidiary, which is a different institution, and which can deal with the private sector, you cannot achieve the necessary internal dynamism.
Let me give you an example of what I mean. The EBRD was involved in the privatization of telecommunications in Hungary. At the outset, telecommunications were entirely in the public sector. You had a classic government entity, the type with which the World Bank deals. What did we do? We loaned money to this public entity for a project which was to lead gradually, over the years, first to partial privatization, then to more significant privatization of the telecommunications sector. How did we proceed? We provided a loan to the telecommunications entity, but it was a subordinated loan, which could be converted into equity, at the time of privatization. The beauty of this project was that it enabled us to follow the transition process, which is something a World Bank operation cannot do. So I think it is preferable to have a specific instrument to use during the transition process.
Now, is there any guarantee of spin-offs, if Canada were to participate? No, there is no legal guarantee of spin-offs.
What I would say, and the facts are there to back me up, is that there are positive consequences. If I look at all the private operations, which now account for 70% of our transactions, those that have been completed and those that are in the pipeline, or in negotiation, I find that Canada represents six, seven or eight percent of our volume, with an interest of 3.44%. A six, seven or eight percent share in our volume, in light of the 3.44% capital contribution, means that the spin-offs for Canada are twice as high as its equity share. In the case of public contracts for which there is a public call for tender, Canada is a little over its contribution. So I cannot give you any guarantees.
[English]
The Acting Joint Chair (Mr. Alcock): Excuse me, Mr. de Larosière. I understand you have another meeting shortly, and we have quite a list of members who -
Mr. de Larosière: We've got half an hour.
The Acting Joint Chair (Mr. Alcock): Okay. We have at least that many questions.
Keith, you could ask your question and then we will continue.
Mr. Martin (Esquimalt - Juan de Fuca): Thank you, Mr. de Larosière, for coming to speak to us today.
Sir, do you put conditionality on your lending practices to recipient groups that you are getting? What kind of controls do you enact to ensure that those moneys go to where they are supposed to go?
I have another quick question. Are you engaged in areas of countries that are potentially in conflict or that have been in conflict, such as in Nagorno-Karabakh, or do the banks stay away from areas like that?
Mr. de Larosière: Yes, of course, we have conditionality attached to our operations. That conditionality is very diverse.
First, we have one element of conditionality that governs the whole idea, and it is that we will only participate in the financing of a project if it makes good sense economically and financially. We have that written in our articles. We must be governed by sound banking principles. In other words, if a project does not generate the stream of income that makes it repayable, we will not participate in it.
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When we negotiate a project - and that's where the conditionality comes in - for instance the tariff conditions, if it's a public entity or a public utility, or the conditions pertaining to the exportation, freedom of exports if it's an export-oriented project, or the management conditions of the company - we see to it that those conditions are conducive to making the project viable. We also have a more, perhaps, generally based conditionality in the sense that in some cases we will ask the country to de-monopolize a public conglomerate with whom we are working because we feel that it would be more consistent with our market-oriented aims and like things.
What controls do we have on the accomplishments, on meeting those conditions? Those controls are very effective. We don't pay things before they happen. We pay when the project is actually unfolding. These are projects that consist in building plants and in providing services. We pay - and this is a systematic rule - whilst we verify that the bricks and cement, the materials that are included in the project, are eventually shipped and produced and on the site.
So it's not as if we are throwing balance of payments money to a vague entity. We are financing a project that is on a site and that we are verifying.
We abstain from entering into regions where there is an open conflict.
[Translation]
Mr. Patry (Pierrefonds - Dollard): Welcome, Mr. de Larosière.
In responding to Mr. Martin's comments, you stressed that projects must make good economic sense in order to be accepted. I have two questions for you. Does the EBRD insist on demilitarization and respect for human rights as essential conditions for loans in countries where there is a high potential for internal conflict? That's my first question.
Mr. de Larosière: Our regulations provide that we must check that the countries to which we lend money are making progress in the area of pluralistic democracy, and thus in the area of human rights. To do this, we have teams of specialists on human rights and political conditions within the countries. These specialists work in co-operation with other organizations which have the same objective, such as the Council of Europe, the United Nations and the Organization for Security and Co-operation in Europe. We compare notes with these bodies. We carry out our missions on-site.
Once a year, our board reviews the strategy of each country. We raise the issue among ourselves and with our directors, who represent the member countries. We ask whether there has been any progress toward, or movement away from, pluralistic democracy. We ask whether we should sound the alarm or perhaps even stop our loans? We conduct this review systematically.
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So far, we have not stopped lending to countries whose human rights performance does not meet our expectations, but we have taken a number of very serious steps, which, in some cases, have led to the release of political prisoners. I don't talk a great deal about these measures, because the more I do, the less they tend to be effective.
Mr. Patry: I'd like to hear your comments on a very specific point about the way in which your bank handles its mandate. I am referring to environmental considerations in the projects you finance. I'm thinking of the completion of the nuclear plant in Slovakia, 90% of which was built by the Soviets. Given the problem you've had in Slovakia, what is your policy on energy, particularly nuclear energy?
Mr. de Larosière: You have referred to the so-called Bohunice project, in Slovakia. As you said, this Soviet-type nuclear plant was virtually 90% completed. The idea we were working on with the Slovak government was to complete the plant with some safety improvements, which would have made it comparable to the standards for nuclear plants in the OECD industrialized community. As you know, this process has been underway for two years. We have been very much involved with Électricité de France and some German firms. In the end, the Slovak government asked that we withdraw the project from the agenda of the board of directors' meeting that was to have examined it. For the time being, the project has been suspended. We are not dealing with it at the moment.
Our policy in this regard is very clear and is set out in a general policy statement of the EBRD on energy matters. The document states that we can intervene in projects involving nuclear energy if they do not meet two criteria. The first concerns safety. That is the major issue. If we have the slightest doubt about the safety of these projects, we will not get involved. So safety is our first criterion. The second is economic in nature. We ask ourselves whether it makes sense to finance a nuclear project rather than one involving gas or traditional thermal power. We will only get involved if these two criteria of safety and economic considerations are met to our satisfaction. I would add that in the case of the project in Slovakia that you mentioned, these two criteria were clearly at the very heart of the project. Moreover, one of our conditions was that this project would entail the closing of another nuclear power plant in Slovakia that was much less safe. So that was an important consideration.
This policy is still in place, but we're not involved in any other nuclear projects at the moment.
Mr. Patry: Thank you, Mr. Chairman.
[English]
The Vice-Chair (Mr. Campbell): Mr. Regan.
Mr. Regan (Halifax West): I didn't have a question.
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The Vice-Chair (Mr. Campbell): Senator De Bané.
[Translation]
Senator De Bané (De la Vallière): I was hesitant about asking Mr. de Larosière a question.
Many economists and development experts say that of all the factors that influence economic development, the most important may be people's attitudes. Could you explain how we get Eastern European countries, not only those that were behind the iron curtain as of 1945, but also those that were part of the Soviet Union since 1917, which have never known a market economy, to understand how a free market system works? How do we get them to understand that it's not up to the government to decide whether you buy a particular product, but rather that they must do market studies and develop products that meet clients' needs, do marketing studies, and so on, in other words everything that is part of the free market economy and the attitude that underlies it?
I'm wondering whether it's enough to make capital available to these countries. Must we not also send them people to teach them about the free market economy, which is diametrically opposed to centrally planned economies? To what extent could your bank help retired business leaders from western countries, who have a wealth of experience and knowledge, spend a few months in Eastern European countries to teach them how to do a market study, how to set up a project, and so on? It must be an extraordinary task to go about changing people's attitudes, if this is in fact the most important factor in economic development.
Mr. de Larosière: I would like to thank Mr. De Bané for his question, because I think it is absolutely crucial. People are the key ingredient in any society or business. Thus, it is extremely important that attitudes and approaches evolve with the projects that are under way. I have a number of points on the subject, but I will be very brief, because the subject is huge.
I agree with what you've said, and I think that technical assistance is not just an adjunct, something that is added to a company's financial assistance. I think it plays an absolutely key role in our efficiency. In this respect, I would like to thank the Government of Canada and Parliament for the technical assistance they provide to the EBRD. Canada's Technical Assistance Program has a component involving joing efforts with the EBRD, because some projects require technical assistance in order to work. I must say that the technical assistance program with Canada is working very well.
You said that these countries were not accustomed to a market economy, because in the past their mindset had been different. How can we change people's attitudes? I think we must start by establishing financial discipline within firms. That is the crux of the issue. In the past, bankruptcy was impossible, because the system was completely self-sufficient. The system was self-financing. Now, the fact that businesses cannot get funding from the central bank or the government makes them uncertain about their future. This in turn creates some concern about the need to balance one's books and about disappearing from the market.
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That comes first. All we can do to direct these countries towards fewer subsidies, fewer deficiency grants for businesses, is to establish the conditions for this financial discipline.
Secondly, privatization and competition, which go hand in hand, drive the development of entrepreneurship. In a monopoly, there is no entrepreneurship because you know you are alone in producing goods. When there is competition, you have to defend yourself. So you have to do market studies; you have to consult the consumers to ensure that they are likely to buy the product, etc.
I agree with your thinking that both technical assistance and training for economic officers are at the heart of the issue. You mentioned volunteers. Your comment is very true. If we could use the services of people who have retired from industry and built up considerable experience, both from a commercial and industrial point of view, I'm sure we would obtain significant results. I was happy this morning, because there is an organization in Canada... I was at the Board of Trade in Toronto this morning, and then I met with members of this organization of Canadian volunteers. They told me: ``You know, we are working with you; we did some work together in Poland.'' So I fully agree with moving in that direction. I'm also in favor of helping the young people who will be the business leaders of tomorrow in these up-and-coming countries in Europe or in Canada, the United States or Japan, to acquire to the art of management. We even run a rather innovative project at the bank which was challenged to a certain extent by some of my colleagues on the board of directors - we did, however, get the majority to accept it. The project consist in lending money to young ``entrepreneurs'' so that they can study in Western management schools. They pay their tuition fees back later. It is a big risk, and we were told that we were not in that business, but in the end, the majority accepted it, and now I'm happy to see that my Canadian friends would like York University, for example, to be a possible candidate for these loans. So there is a lot to be done.
Mr. Paré (Louis-Hébert): I would like to go a little further than Mr. Patry in his questioning. Do you make a distinction between economic growth and sustainable development? Are you concerned with sustainable development? We have all heard horrifying reports on the state of the environment in Eastern countries.
Mr. de Larosière: Yes, absolutely. I fully agree. It is not a question of carrying out one-time operations that are satisfactory in terms of the project, but profoundly alter the environment, because these operations would have no future. So sustainable development operations are a must. I can assure you that we are probably the only international organization that systematically asks itself this question. Each time I go to the board of directors with a project, the regulations are there to guide me, and they force me to explain and answer the following question: Does the project contribute to the quality of the environment or to its deterioration? I do not get approval if I'm unable to answer this question. How do I respond? Within the bank, I have an independent unit, independent because if it were dependent, I could influence it. The unit does environmental assessments. We accept projects only to the extent that we can ensure that they are environmentally acceptable or friendly.
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There are two ways of doing that. Either you undertake an industrial project, let's say a pulp and paper mill, or an automotive plant, and you ensure that it is as environmentally sound as possible; or, you adopt a more dynamic and proactive approach whereby you launch environmental projects, in areas such as water improvement or water treatment, etc. We are now doing more and more proactive environmental projects. There's a magnificent example in Tallin, Estonia, where the water treatment authority was twinned with that of Finland and made into one joint operation. This EBRD-financed project will result in a considerable improvement for water treatment and use in Estonia. We are going to do this more and more systematically.
We have also carried out many projects on energy efficiency and reducing the cost of energy, which is a way of answering your question on the sustainability of growth. The more energy you save - and God knows, there is a phenomenal amount of energy wasted in many of these countries - the more you can avoid repolluting the atmosphere.
Mr. Bertrand (Pontiac - Gatineau - Labelle): I have two short questions to ask Mr. de Larosière. First of all, I'm interested in knowing what you are losing on loans granted to developing countries.
Secondly, you said that the bank had undergone financial difficulty prior to your arrival. I have also heard of steps you took to get the bank back on track, such as reducing overhead and the size of the bank. What measures did you put in place to ensure you would not face the same financial problems later on?
Mr. de Larosière: On your first question, we have lost practically nothing on our loans. I can count on one hand the number of operations that are in difficulty out of the 240 under way. Those are very good results. I'm not exaggerating my satisfaction for a very simple reason: we are at the beginning of our financial life and many projects have a five-year grace period. As we are in our fourth year, it would be pointless for me not to look at what will happen in the fifth year and beyond.
There are operations that do not have a five-year grace period. Some of the operations have been fully repaid, because that is how varied our financial products are. I'm happy to see that the problematic operations are few and far between. We are, I might add, extremely vigilant; we set aside generous amounts as provisions for losses on bad debts and for all private sector operations. We systematically set aside 5% of our loans, 8% of our equity participation and 20% of our equity participation for very high-risk operations. So we do provisioning for the future. To date, it has all gone very well.
The initial financial difficulties will no longer be an issue, because we have taken steps to ensure that they won't recur. We have budgets that are monitored and others that I, personally, along with the board, follow closely. So the bank's book are balanced. Obviously, were we to change our attitude, we could fall back into the red, but we won't change our attitude.
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Our real challenge is to increase our productivity. Everything hinges upon that. I am now working with the board of directors on operational procedures which will enable us to work more often with private sector partners. This would mean that we could distribute responsibilities and save on overhead costs. To make things easier, much of the technical work could be done by the industrial partner. We wouldn't have to do this same work over and we could share both the business and political risks so as to protect the interests of the bank while reducing our costs.
I am a strong believer in an idea which I refer to as the bank-industry partnership, which consists in developping a wholesale approach with industrial groups that plan to carry out a series of projects in these regions. You can then secure a line of credit or a line of capital in advance for these programs, credit which is activated as soon as the projects get under way. By securing a line of credit ahead of time, we can reduce the individual work of bankers on each of these projects. This is a very attractive option for projects whose unit value is relatively small - approximately 10 million dollars - and that we cannot finance and still hope to make money and develop productivity. These wholesale and partnership approaches are now being developped.
By working in this manner, I feel that we will be able to continue to make gains in productivity and to improve the quality of the bank's profit and loss ratio. I am very confident about the way that this bank operates. Moreover, if I were not confident, I would tell you so. When I came to the bank two years ago, I was not confident and I said so. Now, I feel that we have got the operational side under control. We still have a lot to do to reduce overhead costs, and you can trust me: I will continue to work on that.
[English]
The Acting Joint Chair (Mr. Alcock): Thank you. I think we're out of time now. I believe we have another meeting in a few minutes with our boss, but we do want to thank you and Mr. Coleman very much for coming. As you can see from the attendance, it's an issue that we're very interested in, and we're looking at what will be the outcome of the Halifax summit and what that's going to mean for the international financial institutions in coming years. We very much appreciate the time.
Mr. de Larosière: Thank you very much, indeed. I most appreciate the honour you have provided me with to answer your questions and to make my points. I was most impressed by the number and the pertinence of the questions. I never had that experience before, and I thank you deeply.
[Translation]
The Vice-Chair (Mr. Campbell): We were very pleased to welcome you here. It is obvious that the bank plays a very important role in the reconstruction and development that goes on in your zone of operation.
[English]
It's also a particular personal pleasure for me to meet you again and to make sure that I safely see my former boss through to his meeting with my present boss.
So we'll end there. It was a pleasure. Thank you very much, Mr. de Larosière and Mr. Coleman.
Mr. de Larosière: Thank you very much.
The Vice-Chair (Mr. Campbell): The meeting is adjourned.