Transcripts

2005 Financial results press conference, Wednesday 8 March 2006

STEVEN KAEMPFER: Good morning. I am Steven Kaempfer; I have had a chance to meet you all and shake your hands. The purpose of our gathering here this morning is to give you a short presentation on the annual results of the EBRD for 2005. I hope you have already had an opportunity to look at the press release to that effect, but we shall certainly look at it together, and I am here to answer any questions you may wish to raise in this connection. It might be helpful if I say a few words by way of introduction on the year 2005.

The first thing to say is that the year 2005 was a very strong year for the region in which the EBRD operates. Looking at economic growth for the region as a whole, it was a very strong result, which we estimate to have been 5.3 per cent, slightly down from the figure of 2004 but still very well above the global average of about 4 per cent. Growth was in evidence throughout the region, and we believe that this year we could see a similar result for the region as a whole. At the same time, confidence in the region has grown.  Some of that shows up in the very strong foreign direct investment figures that were in evidence in 2005. Looking at total FDI for the region, we believe it will have topped US$ 50 billion, which in euro terms, the currency we use here for financial reporting purposes, is €42 billion, a record figure. A large portion of that went to the most advanced of the transition economies but a very considerable portion went to the less advanced transition economies and to Russia. In Russia for the first time in a few years the FDI figure was a net positive, so a net capital inflow. That has been very good for the region. 

Growing confidence has also been expressed by the credit assessors of many countries in the region. Many countries have tackled inflation well. A number of countries have been able to bring their interest rates down, thus improving the economic backdrop for their nations, and quite a few countries had upgradings in 2005 of their credit standings, some – most notably Russia – to investment grade. There has thus been a strong rate of progress in the economic performance of the region compared with only a few years ago. At the same time, not only has investment flowed into direct investments but also into capital markets, with some of the bigger stock markets in the region having a very strong performance in 2005.

That has provided a very positive backdrop for EBRD activities in 2005, a few highlights of which I shall now outline before taking any questions you may wish to raise.

The first point is that, as the press release indicates, we have indeed done more transactions in terms of new projects and invested more money than in any previous year, with a total of over 150 projects and a total value of EBRD commitments to those projects of €4.3 billion, slightly ahead of last year’s figure of €4.1 billion. This extends a progression over the past few years which shows that the Bank has been operating quite well in the €3.5 billion to €4 billion plus range of annual new commitments. 

The second important point to underline is the quality of our experience last year. You know that our Bank is a transition bank. The mandate of the EBRD is to maximise our impact on the process of transition to full market economy in our region. We therefore look very closely at our projects to assess their impact potential on this process, and it was gratifying to see that a very high percentage, 85 per cent or so, of our projects were considered to have the potential of making a good or very good to excellent impact. 

Now that we are doing so many projects each year, and that number is rising, we have a growing portfolio of existing projects, which means that we pay a lot of attention to making sure that their quality is sustained throughout the time they remain in our portfolio. There, too, we have had a good experience. We have been able to improve projects while they have been, and are, under our management, working with project clients. At the same time we have seen very low impairment of projects – and, as you know, in this Bank we are in the business of taking risk. Looking at business activities, we have a treasury portfolio that is somewhere between AA and AAA, but the portfolio of investments and loans we make to projects in our countries of operation is more like a B+ credit equivalent rating. It has therefore been gratifying to see that all of this went well last year. 

We have also continued to attract a lot of co-financing from other parties, such as commercial banks, export credit agencies and other international financial institutions. We have been well supported by donors, who continue to support the preparation and implementation of projects. Now, after 15 years or so of existence, the amount of money that the EBRD has committed on a cumulative basis – some of which has been repaid, some of which is no longer outstanding – tops €30 billion and total project value is €95 billion. For every euro we have put in, some three euros or so of project value has been generated.

It has been a year of high-quality economic and monetary performance in the region and a year of high-quality performance at the Bank. We have been pleased to be able to do this throughout our region while implementing the clear strategic direction of the Bank, which is to move with the markets and to move ahead of the markets so that we are additional to what the market can provide without the EBRD; this means that we have increasingly been moving east and south in our region. You might note, if you look at the €4.3 billion of projects last year, that some 84 per cent of those projects were in the less advanced transition economies and in Russia. We have also continued to build-up a good pipeline, so that, looking forward, we believe we shall continue to be able to generate considerable new business activity.

Those are a few comments on the business climate in which we have been operating and on the business we have been generating at the Bank. 

I will turn now to what that means in terms of financial results, which is, after all, what we are reporting here today. You will have seen that the Bank had very substantial profits last year. We are announcing a net profit, after provisions and cost allocations, of €1.5 billion, which reflects some of the matters I have been referring to. A strong driver of these results has been strong equity markets, which have enabled the Bank, in a number of projects where its role is complete, to do what it normally does, namely to exit in order to recycle the capital invested into new risk taking. We have exited, in whole or in part, from a number of projects where the role of the Bank was complete, and this has generated very good realised profits for the Bank.

In addition, a couple of other features are reflected in these numbers, mainly related to the fact that we now also reflect unrealised gains on so-called associate investments in our profit and loss account. These have exhibited considerable unrealised gains that also made a contribution of about €366 million or so to the P&L last year.

Finally, staying abreast of best practice application of international financial reporting standards, we have updated, as we normally do every year, our provisioning policy for loans and at the same time, because we now fair value all our equities, maintained no provisions on them any longer because fair value incorporates an assessment of likely or possible future impairment. Our provisions now cover solely the loan portfolio. The combination of these factors led to a net release of provisions in the P&L last year. Taking all these factors into account, we could say that the realised profit element of the results was €1 billion, and on top of that unrealised profits and the provision release have added a further €0.5 billion. You are probably very familiar with this from financial results elsewhere, because this goes with fair-value accounting and IFRS, but I say this to underline also that when unrealised gains are recognised, as they now are by most financial institutions under IFRS, it also means that there can be greater fluctuation and volatility year to year than before, so we too expect this to be the case.

These strong financial results have been highly welcome to the Bank. They are very good for the region because they enable us to continue to strengthen the capital base of the Bank and therefore enable the Bank to continue to take high risks and the higher risks associated with going further east and south, into more challenging and more difficult projects, and sometimes smaller projects. We do quite a number of smaller projects, and a larger number of them than we have done in the past. We expect that trend to continue, but we shall remain ready to do the larger ones where appropriate and where the Bank is additional and makes a real impact on the transition process, but in all cases being a real risk-taker. From that point of view, this is welcome and will strengthen the Bank.

That is also reflected in the reserves of the Bank, which have grown quite strongly, from €1.7 billion last year to €4.7 billion at the end of 2005.  Half of that is the €1.5 billion profit for the year that I mentioned and the other half reflects unrealised gains, mainly on equity investments, which are not taken to the P&L because they are not associates. That combination of factors has also led to a strengthening of the reserves and therefore of the Bank's total equity base, and all of this goes towards the capacity to continue to take more risk and undertake many new projects as we move east and south.

That is what I wanted to say to you by way of introduction. I shall have pleasure in taking your questions.

PAUL HANNON (Dow Jones): The share of your investments in the private sector fell by 10 percentage points over the year. Is that an inevitable consequence of the move south and east, and is that going to continue? I know you remain well above the 60 per cent threshold that is mandated, but is that the way that things will head in the years to come? 

STEVEN KAEMPFER: Thank you, that is a good observation. As you know, the specificity of the EBRD is that, while it is strongly focused on the private sector, it is also active in the public sector. That is because, for the business environments in the countries in which we finance projects, there needs to be a functioning state environment that, with infrastructure and other tools, enables the business sector to function properly. We shall therefore always be engaged in the public sector, both with projects and in policy dialogue with the governments of our countries.

The exact percentage in any particular year may have something to do with moving east and south but has more to do with the specific make up of the projects in a given year. As you know, project financing has quite a long cycle, and therefore that make up will never be the same from year to year.  Some years there will be more public infrastructure than in other years. It depends how soon certain projects come to fruition. I would not necessarily read a trend in there. Certainly by moving east and south we are moving into countries where some public infrastructure, and sometimes quite big public infrastructure, needs to be tackled. At the same time, we do a lot of private sector projects, but some of them are smaller. One probably needs not only to look at the make-up of the euro value but also at what number of projects are in one sector and what number are in the other. I think you will find that our private sector involvement remains very high, and I believe that that will continue to be the case. As you know, in the founding constitution of the Bank the objective was set that at least 60 per cent of what the Bank does should be in the private sector, and we are well above that. To complete my answer to your question, looking back on the last couple of years, in 2004 we probably had a relatively lower percentage of our project make-up in infrastructure projects, whereas in 2005 we had a higher percentage, and that influences this ratio to the extent that some of these are, of course, in the public sector.

PAUL HANNON (Dow Jones): My second question concerns the size of your reserves. How does that affect your borrowing, your need to raise funds on the capital markets, outside of the move to fund in local currencies? Is there any suggestion from shareholders at this stage that some of the paid-in capital should be returned?

STEVEN KAEMPFER: We fund in the international capital markets in order to create appropriate liabilities with which to match our assets, so we shall always be a borrower. In addition, we pursue very cautious liquidity policies and make sure that we have plenty of capacity in treasury liquidity to tackle the next few years’ net cash requirements of our projects and to make sure that we can appropriately service our existing debt and meet our near-term project disbursement obligations. We therefore have a very cautious liquidity policy which supports a continued borrowing programme that will carry on in 2006 as before. Indeed, as you observed, we are also increasingly engaged in local currencies and in the development of local-currency capital markets, about which I can say a few words later on, if you wish. That is another important contribution that we make to the transition process of markets but also to our capacity to make loans and finance projects where local currency is either required by regulation or economically sensible to undertake.

With regard to the capital of the Bank, the real use of this capital and the build-up of reserves, especially when they are realised reserves, is to be able to underpin the risk taking, and that is the thrust of where the Bank's activity will go in terms of using this continuing strengthening of its financial resources.

GERD ZITTZELBERGER (Suddeutsche Zeitung): How big would your net profit be if you were to report according to the former accounting rules?

STEVEN KAEMPFER: The simple way to approach this is to say that you should look at what I refer to as the realised element of the profit before unrealised gains on these associates and before the release of some provisions following an update of our provisioning policy. That is the €1 billion figure I mentioned.

GERD ZITTZELBERGER (Suddeutsche Zeitung): I am sorry to ask a stupid question. I do not understand the reserves increase. It is more than the profit increase by far. What is the reason for that?

STEVEN KAEMPFER: Non-associates are share investments in which we own less than 20 per cent. They are fair-valued directly through the reserves of the Bank. 

GERD ZITTZELBERGER (Suddeutsche Zeitung): Non-associates?

STEVEN KAEMPFER: Yes, non-associates. An associate is a company in which the investment is 20 per cent or more; a non-associate is a company in which the investment is below 20 per cent. Associates are fair-valued through the profit and loss account. Non-associates, where the investment is below 20 per cent, are fair valued directly through the reserves. The reserves exhibit two phenomena. One is the profit for the year, which is €1.5 billion, and the other is the €1.5 billion of that €3 billion increase in reserves which reflects unrealised gains on non-associate share investments.

GERD ZITTZELBERGER (Suddeutsche Zeitung): Your true profit would be €3 billion?

STEVEN KAEMPFER: Not really. What you asked me earlier was what our true profit would be if we had reported the figures as we did last year. In that case, one would have looked only at realised gains. The aspiration is that unrealised gains can be translated into realised gains, and then they really strengthen the capital base.

GERD ZITTZELBERGER (Suddeutsche Zeitung): What is the figure for net disbursements in 2005 and in 2004? You gave us the figure for gross disbursements. Is a figure available for net disbursements?

STEVEN KAEMPFER: I am sure there are figures on net disbursements but I do not have them in front of me here. We look, of course, at gross disbursements, because that is where we bring new projects into play and where the activity and the impact on the transition process of the new projects is dealt with. Net disbursements, which reflect reflows of the Bank, have to do with normal scheduled repayments and with prepayments, and, at times of market liquidity, particularly with liquid markets like we have at the moment, one has less disbursement and one can have more reflows because there is more choice of sources of capital for borrowers. We look at gross disbursements as our real benchmark of activity. If you look at the figures, you can see that our gross disbursements were lower in 2005, at €2.1 billion, than the year before. They were probably exceptionally large the year before. This year they reflect the fact that there were some exceptionally large disbursements in the final quarter of 2004 and the fact that there was a lot of market liquidity in 2005.

GERD ZITTZELBERGER (Suddeutsche Zeitung): There is a chronic gap between commitments and disbursements, but this gap has not often been as big as it was in 2005. I do not believe it is only a question of liquidity. Are there other reasons?

STEVEN KAEMPFER: If you look at the evolution of the portfolio of commitments and the operating assets that have actually been disbursed against this, I think you will see that it has typically been fluctuating around the 60 per cent plus mark, and that reflects mainly the fact that many projects have a very long implementation period. Especially when they are in infrastructure, and so on, they disburse over a very long period, so you would typically expect there to be quite a gap in a project-financing institution, which is what the EBRD is, between the level of the operating assets, the disbursed assets, at any point in time and the level of its committed assets, which is what we call the portfolio. That gap is typically around that sort of level and we expect it will probably stay for quite a while at around those levels.  In any one year, it depends a little on the make-up of the product mix. For instance, equity projects typically disburse more quickly. If there is more infrastructure volume, they typically disburse more slowly. Sometimes, as one moves into a more challenging regulatory environment, it takes longer to have implementation of some of the conditions precedent for disbursement in terms of regulatory developments and other forms of governance that may be attached to the conditions of the project. It can vary a little. You are right, you can spot differences year on year. However, I think the trend is around what I have just indicated.

CARL MORTISHEAD (The Times): I was wondering at what stage you would cease lending to the advanced transition countries. How much of your portfolio is going to countries like the Czech Republic and Hungary, which hardly come under the category of transition any longer? Are there any such countries that you are not lending to, or that you are ceasing to lend to?

STEVEN KAEMPFER: No. We have been active in all the countries, and that remains the case today. As you may have seen, the volume we do in the most advanced of the transition countries has been steadily declining, reflecting the greater reach of markets to providing the financing solutions and needs of projects in those countries. When the markets reach out by themselves, the need for intervention by the EBRD recedes. If you look at the volume we have been doing in the advanced countries, a few years ago we did €1.5 billion or more a year; the year before last we did about €1 billion; last year we did €700 million. The trend is really a reflection of the changes in the markets. This, in a very natural way, declines. Indeed, the Bank is strongly moving east and moving south. As I mentioned earlier, 84 per cent of the flow of new projects last year was in those less advanced transition economies.

We remain active in a number of sectors, in particular, especially in support for the development of the market economy at grass roots, small and medium sized enterprises and micro enterprises; also in providing infrastructure financing solutions, especially at sub-sovereign level, the level of municipalities; and also in the provision of risk capital, including equity and other forms of high-risk capital, where the markets do not yet reach out without EBRD being present, although those occasions are reducing in number.

CARL MORTISHEAD (The Times): At what stage do you think you will be able to say that these are no longer transition economies? When does transition end?

STEVEN KAEMPFER: For the EBRD the driver is the market. You know that the mandate of the EBRD is to foster and promote this transition process provided it is additional to what the market could provide by way of financing solutions without EBRD's participation, and therefore the markets tell us in a very clear way when we are still needed. We think that we shall probably see a further decline in volume in the advanced countries this year. Our projections are that it will probably be somewhere between €500 million and €600 million. When markets can do everything, there will obviously no longer be a need for the EBRD to provide financing. I think the markets will tell us clearly.

CARL MORTISHEAD (The Times): How much lending to the energy sector do you expect to do in the coming years, in particular in Russia, where there are some quite large energy projects ongoing and likely to emerge in the next few years?

STEVEN KAEMPFER: Do you have any particular project in mind?

CARL MORTISHEAD (The Times): I do not have any particular project in mind. I was thinking of Sakhalin, obviously, but one has the distinct impression that Gazprom and other major Russian enterprises will be looking for funding for major energy projects, and I expect the European Union would like to see them do that. I was wondering what sort of role the EBRD is likely to play in that.

STEVEN KAEMPFER: I will make a couple of comments. The first one is that our focus, if you look at the overall sphere of energy, has been strongly on the power sector, a sector where there is a lot to do, a lot of modernising of infrastructure. 

Looking at 2005, the overall engagement in the energy sector was €700 million, which includes both natural resources and power. We have a growing focus on the power sector and a growing focus on energy efficiency, which we believe is very important in our region, as it is elsewhere, and on financing investment in upgrading facilities or in new facilities that permit a reduction in the use of energy. 

A good example of that is a project we did last year, a follow-up project to one we did the year before, in Bulgaria, where we provided €50 million of energy efficiency credit lines through the local banking system. In 2004 we did it to the corporate sector; in 2005 we did a similar programme for the residential household sector in order to invest in energy saving equipment, bearing in mind that the per capita use of energy in Bulgaria is about twice that in the rest of Europe, so there is a lot of scope for reducing the need and the demand for energy. 

We are increasingly focusing, not just there but throughout the region, on our capacity in all our projects to attach an energy-saving feature where appropriate, feasible and practicable. We expect to considerably step up our activity in this field, and to work with donors to help us do so. This is one of the clear objectives we set ourselves in the update of our energy policy.

In the general sphere of energy, last year about €500 million of that €700 million was in the power sector, where there has been a lot to do.

If I can broaden my answer to include an element of capital market financing, which Paul Hannon was asking about earlier, an example is a financing we did at the end of last year for Mosenergo, the Russian power company that is part of the UES system, in order to update equipment and make it more efficient. 

That was interesting for a variety of reasons, one of which addresses part of your question, but another interesting feature is that the loan was made entirely in roubles, which was a reflection of the fact that we have the capacity to fund ourselves in roubles. Last year, we made a considerable advance in this area in what was a really important transaction – we were the first international issuer of bonds in the domestic rouble bond market; in fact, also the first issuer of floating rate notes. The issue was accompanied by the introduction of a new money market index, which we helped formulate.

GERD ZITTZELBERGER (Suddeutsche Zeitung): Was it a bond or was it a floating rate note?

STEVEN KAEMPFER: It was a floating rate note, but with a five-year maturity.  It represented and was done at a new money market index which we helped formulate in Russia, which is called the Moscow Prime Offered Rate, or MosPrime, a new, transparent rate that is visible on screens. We issued our bonds last year with a floating rate set at three-month MosPrime and we are making our loans at a margin over MosPrime. We have made progress both in funding in roubles and in making project loans in roubles. This is the case for example with the current Mosenergo project financing, which is a syndicated transaction, so other banks are joining us – this is still in progress at the moment – in forming a syndicate for this lending operation.

ALEXANDER SMOTROV (RIA Novosti): I would like to ask you to say a bit more about borrowings in local currencies. The President, Jean Lemierre, said in January that rouble bonds were very successful and the Bank is considering similar loans in Romania and Kazakhstan. Can you tell us a little more?

STEVEN KAEMPFER: The first thing to say perhaps is that we certainly plan to come back to the rouble bond market for more bond market funding of our project financing needs, for which we see considerable demand looking forward.

Where possible and where there is financing capacity, we are open to providing loans in local currency. That is indeed the case in both of the countries that you mention. One of the projects we did last year, which was designed to meet infrastructure needs in Romania, was a sizeable project, €145 million, to build and maintain the so-called Constanta bypass in Romania. A portion of this was specifically to provide relief for the effects of flood damage in Romania last year, and that portion was made available in local currency.  This obviously made sense, because investments had to be made locally and had nothing to do with import or export or creating revenue abroad. It was roughly €50 million, about a third of the project. 

We shall be looking carefully at other opportunities to do this. We are working with local banks. In due course, when demand is big enough, we shall look at capital markets, and therefore capital market refinancing solutions for some of these needs. It is an important element of what we do, both for the funding and denomination of our project financing activities, but also especially for the broadening and deepening of capital markets, which are essential in order to finance the real economy in our countries of operation.

SUJATA RAO (Reuters): Russia accounts for more than a quarter of your business. I was just wondering, with the situation today of petrol dollars flowing into Russia, do they really need that much of your money? Secondly, obviously, your mandate in promoting the market economy has been pretty successful. I was just wondering how you evaluate your track record on promoting democracy as well, especially in the former Soviet Union.

STEVEN KAEMPFER: Russia is going through a very substantial transformation process, some of which has to do with the price of oil and the strengthening of the fiscal situation and the consequent strengthening of the monetary reserves of the country. This will enable the country to continue its transformation. 

One of the real challenges for sustaining this, of course, is to diversify economic progress beyond the oil and gas sector, and that is the attention span of EBRD. There are challenges and opportunities throughout the economy for us to work with local and international investors to fund projects in Russia.  

We have been working with many small and medium sized banks, and making loans or equity investments in them, especially in the regions of Russia, which are beginning to exhibit follow-up economic growth and where a lot of work still needs to be done in order to foster the transition process.

We continue to work very strongly – I am sure there are some statistics in the hand-out you have had but we can give you some figures if you wish – to finance small and medium sized enterprises in Russia, which have been a thriving and successful part of our activities in Russia. There continue to be substantial needs at a time when it is evident in Russia that there is a growing small and medium sized enterprise sector and a growing middle class sector. 

So the needs in Russia are diversification of the economy, financing of new enterprises, moving into the regions, strengthening the financial systems, and substantial needs to upgrade infrastructure. 

An example that springs to mind is our contribution last year to quite a visible project in St Petersburg, the Southwest Wastewater project, which very significantly reduced the amount of wastewater that goes into the Neva River in St Petersburg, ends up in the Gulf of Finland, and is therefore a pollutant for both the St Petersburg population and the countries around the Gulf. That is a strong project which obviously also has a strong environmental character.

There are other projects of an environmental kind which involve also the provision of infrastructure, including roads and power, that will attract and need a lot of work by institutions such as ours, and public-private partnership structures, which are in their early development in Russia. We think there will continue to be a lot to do, especially, of course, in a variety of general industrial activities, working with sponsors at home and abroad in order to foster this process of economic diversification and therefore the sustainability of the increased economic strength of Russia. 

Another example that springs to mind in this area is a project we did last year with Toyota Motor Company of Japan, which decided to set up a car manufacturing plant in Russia. The plant was established in St Petersburg, and we are a 20 per cent equity partner with Toyota in their Russia subsidiary.

These are some examples of real needs and real opportunities for EBRD intervention to help these sectors further and to share risk with investors.

On your second question, of course, we regularly appraise progress in this area, and it is an aspect of the Bank’s mandate to which we pay close attention. I think you probably know there are a number of countries where, specifically in consideration of this area, the Bank now focuses its activities exclusively on the private sector. Turkmenistan is one, Belarus is another, and in Uzbekistan we have come to the same conclusion. We do not abandon what we have, but looking forward, we focus on projects in the private sector, staying engaged, especially at the grass roots, because that is an important element of potential progress that continues to deserve financial involvement by an institution such as EBRD.

PAUL HANNON (Dow Jones): Could you give me an overview of the evolution of your equity portfolio in the advanced countries? I am trying to get a sense of how much has been released in terms of gains on those investments for investment further east and south, what the total value of the portfolio is now, and if you can make a rough guess about at what point you would be exiting. Obviously, if you could come up with a transfer of resources from those early investments to south and east over this decade, that would be an interesting “guesstimate” to have and would demonstrate how your strategy is working out.

STEVEN KAEMPFER: That is a good question, Paul. I do not have these numbers to hand but I am sure we can give you some afterwards - I just do not have them here in front of me. Perhaps I can answer the gist of your question, which is that yes, we have been exiting from a number of equity investments where our role has been completed. Some of these have been particularly strong in the advanced transition economies where, once the role is complete, then is a question of financial management and an opportunity to create appropriate exits. That process has been going on, which is why in the press statement we refer to the fact that some of the realised gains have been achieved in some of the more advanced transition countries.

In terms of where the portfolio as a whole is located at the moment, which is the other part of your question, I think I am right in saying from memory that if you look at the portfolio of equity assets today, it is moving towards being about the same in the rest of the region as it is in the advanced transition countries, which means that the shift that you are referring to is very much in progress, and I would expect it to continue, in line with the general shift of the Bank, moving east and moving south.

PAUL HANNON (Dow Jones): How much do you make out of lending money to borrowers as opposed to making and holding equity investments in companies over the longer term? How much is your loan portfolio generating? An associated question: €1.5 billion sounds like a lot. A lot of headlines were generated by the fact that HSBC managed to make £11.8 billion last year – that is sterling, obviously – but you, a much smaller organisation, are getting close to 10 per cent of that. Is there any argument for privatising this operation? Is that something that you expect, that results like this would attract the attention of shareholders to that sort of idea during the annual review?

STEVEN KAEMPFER: Taking the last part of your question first, these results are strongly welcomed by shareholders for the reason that I mentioned at the outset, which is that they further strengthen the capital base of the Bank, and therefore further strengthen the capacity of the Bank to take the risks the shareholders want us to take, moving east and moving south into sometimes more challenging, longer duration, smaller projects, in more difficult business environments, which is very much the mandate of this Bank. The strengthening of the risk-bearing capacity can only foster this in a very positive manner. This is highly welcomed by the shareholders.

In terms of the return on the loan portfolio, I do not know whether you recall having looked at our annual financial report of last year. You will see in the annual report for this year, which will come out at the time of the Annual Meeting in May, when the full financial report is available, the breakdown of the results of the Bank between Banking and Treasury and between loans and equity returns, and from there you can see that the interest income from loans is very clearly delineated. Indeed, for the year just ended the net interest income from loans just tops €400 million – that is revenue, of course. That probably answers your question. Lingering a little on the question you asked about the risk-bearing capacity, the size of the profits, and all the rest, of course, profits are what was achieved looking backwards, what one could call the rear view mirror, and the use of it is through the front window in the plans that lie ahead, which, as I mentioned, foresee very considerable continued and deepened risk-taking east and south. That includes, incidentally, also a very considerable engagement in the equity of projects as we move east and south. In short, this is very welcome and it is very good for the region.

CARL MORTISHEAD (The Times): Going back to the energy question, I understand you focused on the question of power, but you have indicated that there will be a growing move east into Russia. You talked about small businesses and lending and so on. What, if anything, will be the oil and gas component of lending going forward and what is the status at the moment?

STEVEN KAEMPFER: The status at the moment is in my report to you on what we did last year. That is the current status.

CARL MORTISHEAD (The Times): You said €500 million.

STEVEN KAEMPFER: There was €500 million on power, €200 million in the natural resource sector itself.

CARL MORTISHEAD (The Times): What do you mean by “natural resource”?

STEVEN KAEMPFER:  Oil and gas, and some mining.

CARL MORTISHEAD (The Times): Is that mainly Sakhalin?

STEVEN KAEMPFER:  No. No financing decision has been taken on Sakhalin.

CARL MORTISHEAD (The Times): When are you going to make that decision?

STEVEN KAEMPFER:  As you know, at the moment there is a public consultation process going on, which will be conducted in the coming months, both here and in the region. There will be several hearings in Sakhalin and Moscow, and one in Japan, really to gauge the reaction of the people affected by the project, its impact on them and their lives. We shall take stock of that project in light of what we hear during those consultations, which will take place between now and the end of April, and then we shall need to consider in a prudent and careful way what, if any, our role will be.

CARL MORTISHEAD (The Times): You cannot give me a date for that decision?

STEVEN KAEMPFER:  No.

CARL MORTISHEAD (The Times): My question really is more of a policy one: do you want to be in what you call natural resources, the oil and gas sector in Russia, or anywhere else for that matter? This is a commodity that is hugely profitable and which banks seem to be falling over themselves to lend to.

STEVEN KAEMPFER:  I cannot comment about other banks, but certainly the markets are active in this sector. As might have been implied in my earlier words and also in the experience of the Bank, in our practice our strong focus is on the environmental impact of such projects and their viability from an environmental point of view. That is why in the case of the project we have just talked about we are closely focused on this, conducting these consultations in order to understand well. 

It is an important part of the transition process of our countries. This is an important sector for some of these countries. They all need to be able to develop it. If the market can do it without the Bank, that is absolutely fine, but if the market wishes the Bank to play a role, and governments wish the Bank to play a role in structuring, making sure that the sector is capable of attracting the market finance you are referring to, that it is appropriately structured and has the right governance environment for the sector, that is an important part of the transition process, to which the Bank should therefore pay attention. This applies not only to Russia, but to the whole region where countries have a presence in this sector.

The Bank’s focus is particularly on the environmental impact, but it is also increasingly, looking forward, on helping reduce demand for energy by participating in projects that promote energy efficiency, or promoting enhanced energy efficiency in the existing project flow of the Bank.

CARL MORTISHEAD (The Times): What you are saying is that in other sectors, for example, your role is clearly in stepping into areas where the private sector capital markets are not active, but in the energy sector, where the private sector capital markets are extremely active, you are prepared to enter into it for political reasons.

STEVEN KAEMPFER:  No. I will phrase my answer more clearly. The EBRD’s additionality in its practice comes from the wish of market participants to have EBRD as part of the project, and their readiness to finance projects if the EBRD participates. In some cases, the market is very happy to finance projects without EBRD involvement, in which case there is no need for the role of the Bank. This is what we talked about earlier when you asked me about some other countries. But in this case if there is a market need for EBRD, or a wish by the market for EBRD to play a role or to complement the role of the market, EBRD is ready to play a role. 

This is a general response, including the energy sector. If there are improvements to be made, and the market is expecting or desiring those, and they make sense in the areas of, for instance governance, environmental aspects, transparency of the sector, the predictability of the governance environment, the whole structuring of the sector – the power sector in Russia would be an example – there is clear added value the Bank can give to the market place to make the market comfortable in fulfilling its role.

SUJATA RAO (Reuters): I have one more question about the local markets. I was just wondering if you could give any estimates of what your issuance is likely to be in local markets this year compared with 2005.

STEVEN KAEMPFER:  Our borrowing programme in the international markets for this coming year will be very similar to 2005, i.e. somewhere between €1.5 2 billion, which is a typical size of our borrowing programme in international markets. In addition, we anticipate a programme of borrowings in local capital markets, which could be as high as €500 million in the coming year.  It depends slightly on the need on the project side and the opportunities in the market place. Much of the emphasis of this in 2006 will probably be in Russia.

SUJATA RAO (Reuters): How much was it in 2005?

STEVEN KAEMPFER:  In 2005 our main activity was the €5 billion rouble bond we did in May. That was the main focus of the capital markets programme in 2005.

GERD ZITTZELBERGER (Suddeutsche Zeitung): You have some impressive figures.  Nobody is in doubt about the huge need for capital in your target countries.  We see you now have a lot of capital. Why is there not a better match between demand and supply?

STEVEN KAEMPFER:  Could you clarify your question, please?

GERD ZITTZELBERGER (Suddeutsche Zeitung): There are huge needs for capital in the eastern countries, and you have a lot of capital. Could you tell me firstly what is your tier one ratio and secondly, why do you not lend or invest more money in these countries?

STEVEN KAEMPFER:  The answer is we do. As I mentioned at the outset, over time we have committed some €30 billion, a project value of nearly €100 billion. We expect our annual volumes to continue to be quite strong and to make a very full use of our capital over the coming years. I certainly expect, with the continuity of our annual new business programme, as we did last year and in previous years, and as we expect to do this year, we shall continue to use the capital in a sound way, in a way that meets the needs of the countries, but always focusing on those projects where the Bank makes the highest impact on the transition process. 

There are, of course, many projects in our countries of operation which can be financed entirely without the Bank’s intervention by the capital markets. Our focus is on the ones where the markets do not reach and where therefore EBRD, being present at the vanguard of where the market does not yet reach, can make a real difference. 

We have capital and reserves, and our financial policies are to use them fully but prudently, and the projections we have for the coming years are that, with continued enhancement of our risk-bearing capacity and continued flow of new business, at the same time as being engaged long-term in our existing portfolio – after all, these are long-dated projects and a lot of our capital is tied up in those – we shall have very full use of our capital.

GERD ZITTZELBERGER (Suddeutsche Zeitung): Could you tell me the tier one ratio? Are there bottlenecks in the staff of the Bank?

STEVEN KAEMPFER:  Are those connected questions? Are there bottlenecks in the staff? You may be right.

GERD ZITTZELBERGER: In my view, there are some bottlenecks. You are doing a lot of projects, but I think you have enough capital to do more. I want to know why you do not do more projects. Is it because of staff shortage or a shortage of capital? That is why I ask the question about the tier one ratio.

STEVEN KAEMPFER:  We are certainly not capital-short. We have adequate capital to do all our business. As you can see from these numbers, especially from the point of view of their impact on the transition process, we capture a maximum harvest of the projects where we can make a real difference on the transition process, which is why, as you will have seen, so many of these have a very high rating for what we think will be their potential impact on the transition. Then we focus, once they are in, on making sure it happens during their life. So we need to spend a lot of our people’s time on both generating new business and on making sure that once the business is in, it delivers. At the same time, we need to project in accordance with our financial policies, which are to make sure that the EBRD itself is a sustainable institution, to make sure that within those constraints we fully use our capital and our reserves in order to do new projects.

If we look ahead over the next four or five years, our projected flow of new business and involvement with the existing portfolio suggests that we shall fully use our capital. This Bank is a very cautiously financed institution, like other IFIs, other international project-financing institutions, and therefore we have, from that point of view, a healthy ratio under any form of capital adequacy, whether it is under Basel or any other form that you wish to see and that the bond markets look at when they buy our AAA bonds.

GERD ZITTZELBERGER (Suddeutsche Zeitung): I guess your tier one ratio is about 20 per cent or so?

STEVEN KAEMPFER:  I do not have any specific number in my mind. As you know, we are not regulated by a financial regulator, as a supra-national institution, but it is comfortable to take the specific and high risks that the EBRD takes in its countries with what I described to you as effectively in our countries of operation a single B plus portfolio of projects, many of which are equity investments which are particularly high-risk.

GERD ZITTZELBERGER (Suddeutsche Zeitung): Thank you.

STEVEN KAEMPFER:  Are there any more questions? If not, thank you very much for your attendance. If you have any follow-up questions or wish to know anything further on reflection, please feel free to call and speak to our Communications Department. They will be very happy to help you, or I will if you wish.