The European Bank for Reconstruction and Development (EBRD) was once a byword for poor investments, lack of clarity, and an idealistic approach to the nitty-gritty of infrastructure development. This has changed, and the EBRD is now one of the better-regarded debt and equity investors in central and eastern Europe. The head of the bank, headquartered in London, is Jean Lemierre, a former French civil servant and member of Europe's monetary committee, who replaced Horst Kohler in July 2000.

The challenge for the bank is to find a rationale for continuation of its mandate now that many of its clients are EU accession countries. The countries of the former Soviet Union are now the prime targets for its activities, and will present it with new corporate governance issues as difficult as any it has previously encountered. Taimur Ahmad spoke to Lemierre to discuss the next tack for the reinvigorated multilateral.

Project Finance: The confirmed EU accession countries no longer need EBRD loans ? and the bank's commitments to the more advanced countries have fallen substantially over the last couple of years. What role can the EBRD play now for the accession countries? Should it really insist on a role?

Lemierre: Our portfolio has grown significantly, partly because of the expertise of our teams. The bank is a tool in the hands of its shareholders, and of the region itself, and it can be used to improve the situation, through the combined action of the public, private and state sectors, both sovereign and sub-sovereign.

What is our role going forward? We have already undertaken a clear shift in our activity from Central Europe towards Russia, Ukraine, Central Asia and the south eastern Europe. At the same time we have a high level of commitment to Central Europe, and for the five next years the strategy is not to increase but to maintain it. Why? These countries are ready to join the EU today. We know that after they join, they will have to adjust their economies significantly. The accession process is a boost to transition, and at the same time increases competition. There is a need for more adjustments, the restructuring of old activities, steel, shipyards, railways, to attract greenfield investment, domestic and foreign investment, to bring in more capital, to increase the capital basis of the medium-sized companies. This last group does not yet exist in Central Europe. So there is a great need in the private and municipal sectors. We are committed to this, and it will mean less bank loans but more equity investment. There are a few privatizations to be supported. Why is it important? The accession process may have an impact on the budgets of these countries, and of the EU.

We must continue to take part in that process of adjustment, and the difficulties that increased competition will bring. Budgetary measures from the EU will partly address this issue. But there is another answer: more investment, private investment, and foreign direct investment, to create new jobs and encourage activities ? that's the challenge we have.

One familiar criticism of the bank is that it has tended to crowd out or even undercut commercial bank deals insofar as the bank has subsidized resources. And some would charge that the bank is simply a competing investment bank, with its subsidized financing. How do you respond to this charge?

It is exactly the contrary. In fact, we make the market possible for the investment banks. There may be a few people who make these remarks but now I'll say in a very clear way that they do not understand the reality. We make the market possible by taking part of the risk. The EBRD is a very clear institution. We are a risk taker. We share the risk with our money, with the money of the shareholders, and with the skills we have. So we take on risk, and we help the commercial banks to divide their risk. We work according to three principles. The first is sound banking, and we are very tough on this. The second is conditionality, which means we don't commit money without clear conditions, and there are entities with whom we will not work because we don't think that their governance is good enough. Third, as I've said, we are strictly additional. This means we never compete. So, in short, we create the market for the private sector, and simply that. In the current market many banks have lost their appetite for risk, but we will take up their market and help them return.

In the wake of financial crises, heavy losses sustained in the past by your bank, and the general mood of investor cynicism, how would you describe EBRD's current risk appetite?

First, we invest only if we think the project is sustainable. We never take the short-term route. Our view is always long-term, based on the soundness of the project. The second point is that we are now ready to increase our exposure to good risks. Today, as we all know, the private sector has lost a lot of its risk appetite. But my message is very clear: we are ready to increase our share of risk. A few years ago times were better. We had reduced our exposure to make more room for the market. Indeed, additionality is exactly this: our preparedness to take on risks that the private sector may be wary of assuming alone.

But at the same time EBRD needs to be profitable, though not necessarily profit maximizing, making reasonable returns on capital while thinking long-term

If you're not profitable you lose money. That is one of the main criticisms one might have made of the bank: that we have in the past financed bad projects and lost money, but as long as we now continue to finance good projects with good sponsors, and through very strong contacts with the private sector, we can continue to make these projects a reality.

One area in which the EBRD has been somewhat of a pioneer is in its effort to support municipal lending in Central and Eastern Europe. What underlies this effort, and how do you envisage its development?

The approach we have on the sub-sovereign loans is very important, since from our point of view mature municipalities are also key to democracy and the market economy. A healthy financial relationship between the state and the municipality is very important. So in many countries we work a lot with states on how to improve and clarify that relationship. We would like to promote good mature municipalities in the region, able to take risk and to be accountable to the people who live there. That is very important to the EBRD. It really comes back to the mandate of the bank: promoting democracy from the bottom up. We are the only institution to have an explicit democratic mandate ? the very article establishing the bank. This is crucial for us, because democracy is crucial. Democracy is transparency, and transparency is the basis of good financing. It is the same concept.

We have a very strong municipal team here. We have many case studies of our various approaches to doing municipal deals. The sub-sovereign loan has become a crucial element of what we do.

That's the reason why, for example, we want to raise Roubles to be able to finance Russian municipalities in local currency as well. Today they are not financed, and they want to improve the basic situation of the people, by improving basic infrastructure. Mature institutions at the local level are as crucial as properly functioning institutions at the central level. That, really, is the vision we have.

Where, both geographically and sectorialy, are the most profitable investments going to be going forward?

The bank makes a certain profit today. And this derives mostly from good risks we took a few years ago in Central Europe. The bank made some strategic investments, which were risky at the time. And we did lose some money. But at the end of the day, we were profitable because on the whole our projects were good. That really characterizes our investments in Central Europe. One major change now in the bank is our eastward focus. The privatization process has not really started properly outside Central Europe. It could start in Romania, and possibly the Balkans, but it is still not a very strong process in the less developed regions. Accordingly, we will focus in the next months and years on stimulating this process, and we will therefore see a decline in the equity investments we make and an increase mainly in our loans and trade financings. I hope that in a few years we will come back to more equity investment ? it marks a new cycle in the life of the bank. And I hope that then we will have a new phase of capital gains.

Russia has taken on a new place of prominence for the EBRD. What activities will the bank focus on in Russia?

Russia has a good rate of growth today, based on high price of natural resources and the steady reform process, as well as a new degree of political stability. It has recovered well from 1998. From our point of view, the time has come to work on sustaining that process. After their recovery, they must now improve the situation, whatever the price of oil. They should do this first and foremost by being efficient in the oil and gas sector, but also by developing a much stronger manufacturing sector.

Today there is a growing domestic market, given revenues from the current price of oil. If you look at consumer goods, cars, foods, and so on, the quality is improving steadily. These types of markets are improving. We're financing more and more retail stores, for example. So production is currently targeted at the growing internal market. The real challenge is to be able to produce for exports. But the situation is improving, and it will be supported by two things. The first is foreign investment. Russia needs FDI. But they also need good domestic investors. So another major challenge for the EBRD in the coming years will be to work more with Russian investors. This is certainly a new development, and the focus will also have to be on the quality of governance of the companies.

The EBRD, as you mentioned, is also setting its sights eastward on Central Asia and the CIS states ? a fact which your next annual meeting in Uzbekistan will no doubt highlight. But the political risks of investing in the region are vast ? how and to what extent are you encouraging private sector investors to enter into a region fraught with instability, dubious long-term prospects, and patchy regard for governance?

That's the reason we were created. Of course, that was also the case ten years ago in, say, Poland. And now that is the case today in Russia and Central Asia. The question is about the main activities of the banks. The first one is money: the division of risk, and risk sharing. The second is our technical know-how, our advice, and our experience. The bank is over a decade old. As I've said we've learned from our mistakes. We now know how to work, with whom to work, and perhaps with whom not to work, we've learned how to create and promote more robust institutions around projects, the right environment for projects to take place. Another key dimension which differentiates the bank is our capacity for political discussion with governments.

Central Asian oil and gas reserves are lucrative assets for many potential regional investors, and of course for the region itself. But what other meaningful investment opportunities can you highlight in the region?

The key question in Kazakhstan, for example, is diversification. First they need better infrastructure, roads, railways, ports, and so on. We are investing in these sectors. Both the country and the major companies need good suppliers, foreign or domestic. This is a very crucial political problem which ultimately requires a very balanced approach to foreign and domestic investment. The creation of sustainable SMEs is also crucial, and right now we are trying to move ahead with SME financings. Clearly the country needs a stronger banking sector, capable of financing the needs of domestic companies and we have invested a lot of money in the banking sector leasing companies, that's exactly what we do to try and provide better financing to new business. So infrastructure, suppliers of big companies, SMEs, services, restaurants, hotels and so on, and providing financing to the banking sector.

The number of financeable private sector projects is quite limited, particularly in the poorer regions of your operation. How problematic is this?

The first point is we try today to avoid asking for sovereign guarantees to finance projects, to limit the burden on state budgets. For example, we have credit lines in Kyrgystan to finance SMEs. We originally had a sovereign guarantee on these credit lines, but I took the decision to withdraw the sovereign guarantee, meaning we take the full risk on our books. Our mandate is to provide support to poor countries, not to put the burden on them. And this allows them more room to borrow money elsewhere. And that's part of what we can do first with the state, second with corporates. We mainly try to finance SMEs and to be focus on a few good projects, where we spend a lot of money to prepare them for commercial financing. There are several good companies in Kyrgystan, for example in the cotton sector. We're also looking closely at the banking sector in Kyrgystan, and we're discussing the first bank privatization there.

Take Moldova, for example, another poor country. There we've been trying to encourage and support the private banks, while trying to ease pressure on the state budget. In the private sector we're providing facilities to the banking sector and to the SME sector, even to finance SMEs in the agricultural area. We've supported the privatization of an electricity company in the capital, operated by Union Fenosa.

How do you see EBRD's role evolving in conjunction with other multilateral and bilateral agencies?

We have a very specific mixed mandate ? public and private. On the public side, we have a very strong focus on sub-sovereign financing and we're one of the multilateral institutions to make loans directly to municipalities, to improve basic infrastructure: drinking water and transport, electricity, heating, and so on. We've launched a municipal finance scheme in the City of St Petersburg, for example. We're also working on many municipalities in Central and Eastern Europe and Russia. I'm hoping that we'll soon be able to raise municipal financing in roubles to avoid foreign exchange risk. So that's a big part our activity.

But the main thrust of our work will always be the private sector. We have a very strong focus on the private sector, but going forward we can act through a wide range of solutions, through public-private partnerships, and other approaches. Often when we work with municipalities the first step is to set up a commercial municipal owned company which then proceed step by step towards a new private sector approach.

We are a project-based institution. We finance projects and we do need other institutions to deal with many other aspects surrounding a project. We do work closely with the World Bank, for example, in financing health, education, judicial reform, among other things. They play a very important role there, and this is crucial. The point of view I maintain is that the EBRD is a focussed institution with a very modern mandate. Remember it was only designed a decade ago. So we are constantly evolving. We have to do what we know how to do best, and not try to do the job of the others. Let me be very clear on this: we do not want to be big. I will not ask for a capital increase from the shareholders. This is not the purpose of the bank. We are streamlined and focussed.