Grzybowski:
By : Roseanne Gerin
Since 1991, the European Bank for Reconstruction and Development (EBRD) has fostered the development of open-market economies and promoted private-sector business initiatives in the 26 countries throughout Central and Eastern Europe and Russia in which it operates. The bank is owned by 58 member countries, including Poland, as well as the European Union (EU) and the European Investment Bank (EIB). The EBRD has been one of the largest private foreign investors in Poland for the past nine years and has supplied equity and loans totaling more than o1.4 billion in direct investments and about o5.6 billion in the mobilization of additional investments. In light of the country's rapid strides toward the development of a market economy, the EBRD continues to finance projects aimed at economic restructuring, help Poland meet EU accession criteria and advise on the privatization of state companies. The WBJ's Roseanne Gerin spoke with Irene Grzybowski, the EBRD's country director for Poland. The following is an edited version of their conversation.
Q: Where does the bank get the money to finance projects?
A: The money comes from member capital, from the original capital that was contributed when the bank was started, and from a second contribution of capital that was made about two years ago. The base capital of the bank is about $20 billion, and for our activity that is sufficient. The money hopefully regenerates itself for the ideas that we are supporting (in) development and privatization, but we're doing that only in projects that are commercially viable. We don't go into a project thinking that we're going to lose money. If it's a debt transaction then we'll get the debt principal proceeds plus an appropriate rate of interest back on our investment.
Q: In the EBRD's view, is Poland still an emerging market or is it more of a converging or pre-accession market economy?
A: I don't know the fine distinction between all those particular terms, not being an economist myself. Certainly we view Poland as a pre-accession country, and I think that until Poland becomes a member of the EU one can still look at it as an emerging market with some of the problems one would find in an emerging market.
Q: What does the EBRD see as the remaining problems that would still define Poland as an emerging market?
A: I don't know if you can characterize them necessarily as remaining problems, certainly there are still developmental issues that have to be overcome. Poland needs to bring itself in line with market practices that one typically finds in the EU in developed countries, so there's still a certain element of central government that needs to be devolved into the respective entities that should be responsible for it (the market). There's still a substantial amount of privatization that needs to occur. There's still a number of state sectors that have not been privatized at all and are a substantial strain on the budget deficit.
Q: So if Poland is in this in-between stage of emerging and pre-accession markets, to what degree is the EBRD still needed as an investor to finance projects?
A: Initially, when the bank began its activities in Poland it was to support private investment initiatives and to help mobilize capital to support foreign direct investment. In our early investments we were very involved in co-financing foreign-sponsored joint ventures, which were really the initial kind of activities that one saw here, and that was largely through the form of debt financing. When it became apparent that international financial institutions were increasing their level of comfort at doing this, and as the health of the domestic financial institutions and their capacity to provide financing on reasonable terms and conditions improved, then we moved to a large extent to providing equity financing. At that time there continued to be a gap particularly in projects of the size that we look at, which are typically $30 million and above projects. So we try to constantly change and evolve what we are doing by looking at what's going on in the marketplace.
Q: What is the EBRD's investment strategy in Poland now?
A: It is largely to focus on issues that help Poland meet pre-accession criteria or the accession criteria, (that is) filling the gaps for financing or stimulating financing in those areas that are critically important for Poland. Agriculture, (for example), if we can be creative enough and find enough ways to do it on the basis of a commercially viable and private-oriented approach. (Also), infrastructure, environment, municipal infrastructure, urban transport, wastewater management, solid waste management and district heating companies. And then on the corporate side, we make necessary capital available to allow Polish companies to grow and develop on a competitive basis.
Q: How has foreign investment from organizations, such as the EBRD, boosted Poland's economic growth and transition during the past decade?
A: With respect to the EBRD's involvement, we've done roughly 76 projects in Poland to date, and the amount of capital that we've committed to these projects fluctuates because of exchange rates to the euro, but it's roughly o1.5 billion. We typically will only take up to 30% of a total project's cost or 30% of the capital structure of a company that we invest in, so one has to expect that we mobilize substantial amounts of capital to accompany our investment. There have been statistics done by the bank that suggest that our activity has mobilized additional capital and investment of somewhere in the vicinity of o5 billion. So now if you look at total foreign direct investment in Poland, the EBRD is among one of the largest financial investors not strategic, of course but financial investors, and that speaks for itself. If you look at total investment last year, it was $38 billion. And if the total EBRD projects involved some $5 billion, one could say that one out of every five or six dollars involved EBRD co-financing of some sort.
Q: During the past decade, which projects in Poland have been the most successful for the EBRD?
A: Rather than naming individual projects that have been particularly successful, maybe it's more important to reflect on a few projects that were very notable because one can look at success in a number of ways, (such as) transition impact and profitability.
Q: How are you defining success in this case?
A: A combination of both (transition impact and profitability) because our mandate requires, for example, that all projects should be commercially viable and have a high transition impact. (The mandate also requires) that we should be additional, meaning not crowding out other financial intermediaries on the same terms and conditions. Next, all our projects require adherence to EU environmental standards. I could start with one of the bank's very early investments in Poland, which was an investment alongside (Italian auto manufacturer) Fiat. At that time the Fiat group had some difficulty convincing domestic financial institutions to accompany it on the acquisition of a local car-manufacturing company. The EBRD provided financing at that time, which led to subsequent and substantial follow-on investments, and was one of the initial transactions that paved the way for the development of the automotive sector. If you look at the amazing amount of investment that has occurred since then, we're quite pleased that we were involved with Fiat in those early days. Other important investments that the bank was involved in were with financial institutions. If we look back, we were involved in many banks, (such as) Bank Przemyslowo-Handlowy (BPH), Wielkopolski Bank Kredytowy (WBK), just to name two, and they've been extremely successful.
Q: Which EBRD projects during the past decade have been the least successful?
A: Certainly the bank has made mistakes as every investor does, particularly in markets like this. I wouldn't call them least successful. I would probably call them the most difficult or most challenging, and I would say that some of our equity investments in difficult sectors like agriculture have been extremely challenging for us.
Q: Why?
A: Because of the competitiveness in many of these areas. The market has moved so quickly, and the level of expertise and technical support that these companies require are so large that it's difficult for a financial investor like the EBRD alone to entirely support the whole needs of these companies.
Q: Could you go into more detail?
A: The agribusiness sector is a very difficult and very complex sector that requires substantial reform at all levels. These are companies that have extremely big challenges in trying to reform the way supplies are taken on, and to reform distribution as well as their internal organization, because they're former state-owned companies that require a completely different embracing of the culture. And while we think that management has made extremely good efforts at doing that, everything is at a cost. The amounts of technical experience and technical support that they need are really beyond a simple financial investor to necessarily support. While we've tried to bring in good corporate governance, tried to support management in the decision-making process and tried to bring to them examples of best industry standards, unfortunately it has not been sufficient.
Q: The ones that still need more investment are not only agriculture, but also infrastructure, the environment and urban transport.
A: And the energy industry, certainly. But we hear from the government there's going to be a substantial amount of privatization this year, which should be a stimulant for investment. The steel sector, of course, which is a critical sector for Poland because of (its) high levels of employment and because of the need for Polish steel to be competitive with European steel producers. The coal industry, which we've all heard about for the last decade, is critically important because of the high cost of production, the overcapacity and high labor levels. (In) the chemical industry, the largest chemical manufacturers are still owned by the state and haven't started restructuring yet.
Q: Does the EBRD have plans to provide financing to these industries once they are privatized?
A: We're prepared to invest in these industries alongside strategic investors or at the time of privatization to help those strategic investors, either to facilitate the privatization or to facilitate what could be massive sums of investment that are going to be required after the companies are privatized. We have attempted separately to stimulate privatization and investment. We invested in Stalexport a couple of years ago. I'm hoping to facilitate and stimulate good investment activity and restructuring of that entity. And we'll continue to do so with the rest of the steel industry, but provided that it can be done on a commercially viable basis and provided that there are solid investment strategies with the entity that's being privatized.
Q: Are there any sectors or industries in Poland in which the EBRD does not invest?
A: As a standard guideline, the EBRD does not invest in alcohol or spirits production, tobacco product manufacturing or gambling.
Q: What are some of the biggest concerns of the EBRD as a foreign investor in Poland?
A: Overall, our biggest concern is whether the government can maintain its focus and pace on being accepted into the EU and on adopting legislation that will promote the continued privatization and development of this economy. We really applaud the government for what it has accomplished over the last 10 years. The important thing is not to lose focus of what needs to be done and to implement it quickly.
Q: How does the EBRD determine which projects to finance in Poland?
A: The first thing we have to do is constantly keep in mind our mandate to promote private enterprise, market-oriented activity. Within that (mandate) there are four basic tenets that each project should have. Those can be of varying degrees, but at the end of the day, they need to add up. First, (the project) must have a transition impact that it promotes good economic development through a demonstration effect, employment, restructuring, or upward and downward linkages, introduces new competitive standards, leads to the reshaping of an industry or the development of an industry. Second, that the project is commercially viable. Our goal is not to subsidize projects, but to provide pricing that undercuts the marketplace. The (third) element is that the projects embrace EU environmental standards. And last, that we should be additional; in other words, that we should not crowd out other financial intermediaries, but should try to supplement (their investment activities).
Q: Once you have a project that meets these four points, do you make loans directly to the business or industry?
A: (This is) the easiest way to characterize it: if it's going to be debt financing, it's done on much of the same basis and approach that a commercial bank would undertake; and if it's going to be an equity investment, it's done very much on the same approach that a venture capital or equity-finance vehicle would undertake. We have an internal approval process that we have to go through for the commercial viability and profitability (criteria) of the project, but (it) also ensures that these other three mandate criteria are met. Then we provide financing depending on what the project is.
Q: How much money does the EBRD plan to invest in Poland this year?
A: We will look to invest some $200 million-$300 million annually over the next couple of years, which is more or less on average with the amount that we've invested. If you look at the size of the infrastructure needs in Poland alone you can easily see where that level of investment would be generated.
Q: What form will the investments take?
A: We think a substantial amount will be in loans as we increase our infrastructure activity more because that (investment) will be in the form of lending money to municipalities and to infrastructure entities. We hope to be involved in stimulating the privatization of Polish State Railways (PKP), for example. But we will continue to seek important projects that will allow us to invest equity either to stimulate privatization or competitive growth.
Q: Which sectors are currently receiving the most money?
A: Financial institutions. It (has been) a combination of our financing of domestic Polish institutions banks largely combined with the investments that we've made in the venture capital industry in Poland. The next sector is manufacturing, and that has a number of different elements to it, including building products where we have a majority in the cement industry and have provided financing to at least two large players in the cement industry. Also in building products (we've invested in) the chipboard and glass manufacturing industries. We also put a fairly significant amount of financing into the property and real estate areas.
Q: Can you name or describe the three biggest projects that the EBRD is financing in Poland now?
A: Two of the largest monetary investments that we've done were our investment in Telekomunikacja Polska (TPSA), which was about a $75 million direct investment in the company, and a direct-equity investment in Bank Pekao which was around $90 million. What's probably more important is to focus on some of the meaningful things that we're trying to do this year or had done last year, such as the MWiK Project (the Water Supply and Sewage Company of Bydgoszcz). At the end of last year, we put together a project that provides $21 million of financing from us. The total project cost is o56 million. We would like to see projects like this replicated in many municipalities.
Q: How is the EBRD attracting further investment to Poland?
A: Through supporting the privatization process and making funds available for that purpose. Making funds available to restructure industries. We are very much involved in discussions and dialogue with the government on the privatization of the energy sector (and) on the privatization and restructuring of the railways. These have been ongoing discussions with the government for the last several years. From a policy dialogue standpoint, it's a constant component of what we're doing.
Q: After Poland becomes a full member of the EU, will the EBRD decrease its investment activities in Poland or stop them altogether?
A: This is a question that has been constantly evaluated by the bank internally, and it's an important question. I think what we will do is let the Polish government and the market decide whether our presence is necessary. But this is something that the bank reevaluates every year exactly what its presence should entail and whether the presence will be necessary or not. If the local community and the government conclusively decide that there is no more room for the EBRD, maybe we'll minimize and start to reduce the level of activity. But I think the market largely determines these things.
