Friday 17 February 2006

Distribution beyond Dayton

Restructuring the electricity sector in BiH

In the aftermath of war, it was a feat in itself to restore the basic functioning of public utilities such as electricity in Bosnia and Herzegovina (BiH). The initial surge in aid grants has restored electricity production to 84 per cent of its pre-war levels. In this sense the 1996 Dayton Accords have yielded a peace dividend.

The transition challenge however requires that the electricity market become commercially viable, especially at distribution level. It has been largely influenced by the post-war settlement, with three Elektroprivredas (electrical distribution companies) organising distribution in the two entities that constitute BiH.

Although BiH produces a small quantity of electricity for export, domestic demand is growing rapidly with the revival of heavy industry. The hydro and thermal energy generated in BiH has satisfied demand up to a point, but trends suggest that BiH may soon become a net energy importer. As Ukraine recently learned quite starkly, the priority of preserving energy is keenly felt by all energy importers.

Efficiency through integration
Although the Dayton accords were an immense achievement, there is now a sense that the economy must further develop along principles established at the state level, focusing on gains in efficiency through integration. Laurent Chabrier, OL of the BiH electricity distribution deal, emphasises that "we have been dealing with the consequences of the 1996 peace settlement for the past ten years. There is now a need to build on the tremendous success of Dayton by setting foundations for sustainable growth."

As such, the recent deal to provide BiH with €55 million to promote energy efficiency in distribution networks is a necessary step to make the three Elektroprivredas commercially sustainable. The restructuring and corporatisation of the distribution sector constitutes the first phase of the Power IV project, which was kick-started by a EUR 100,000 grant by the Greek Government. In the long term, this will set the stage for eventual privatisation of the electricity distribution sector, in the second phase of the project.

The deal's funding will thus be used for supplying and installing new metering equipment and protective cables, as well as for the rehabilitation of electrical substations. Peter Reiniger, Business Group Director for Energy, highlighted the help the loan will provide for upgrading a part of the country's network which has until now been operating with very minimal investment.

The standardisation of the equipment in the three state-owned distribution companies will take place in conjunction with their corporatisation. Laurent is enthusiastic that "the EBRD will be providing these funds through the BiH state. This will support coordinated development and restructuring of the three Elektroprivredas, which will bring huge gains in efficiency." Indeed the restructuring will streamline the management and operation of the entire electricity sector in BiH and introduce further market disciplines into this public-sector utility.

Distributing power, but also praise
Although the deal itself does not carry environmental hazards or benefits per se, the cooperation between the Power and Energy unit and the Environment department was seamless. Laurent is full of praise for Rada Olbina, Principal Environmental Specialist in charge of assessing the project, her personal involvement and enthusiasm. "The mix of high expectations and personal responsibility that she embodies is truly rewarding to work with. She took a keen interest, as with all her projects, in getting to know the people involved in the deal."

Josip Polic, Associate Banker in the Sarajevo RO, also took a leading role in the deal and feels that the team worked together very efficiently. "Laurent never gives up! He has unbelievable creativity and a great sense of humour, both of which he often used for the benefit of the project." The organic relationship between the RO, Environment and Power and Energy departments continues a successful history of investment by the Bank, totalling 43 projects worth €500 million in BiH.

Contact: Alex Gordy

Friday 3 February 2006

Small loans for small businesses: the combination for development

The Group for Small Business is moving towards more flexible financing, promoting best practice in Kazakhstan

Small is beautiful: the developmental impact of EBRD loans is never as keenly felt as when it comes to providing finance for the smallest of enterprises and entrepreneurs. This forms part of the rationale behind the Bank's new strategic direction toward funding smaller projects in the aftermath of the International Year of Micro-finance (2005).

In the Central Asian Republic of Kazakhstan there has been a flurry of activity under the umbrella of the third phase of the Kazakhstan Small Business Programme (KSBPIII). This phase, worth $100 million, is focused on stimulating the smallest enterprises in rural and agricultural areas, bridging the gap between Kazakh banks and non-bank microfinance institutions and entrepreneurs.

Although Kazakhstan has achieved the Millennium Development Goal of halving income poverty, there remains much room for expansion of micro-credit funding in rural and agricultural areas. In this context, the Group for Small Business (GSB) employed a strategy involving two different sectors: a micro-finance bank and a non-banking micro-finance organisation.

The Alliance of small loans and a flexible approach
The incorporation of Alliance Bank into KSBPIII, with an EBRD loan of $5 million, will help it to continue expanding whilst focusing on smaller loans and a more rapid and malleable strategy. Maria Teresa Zappia, Principal Banker for GSB, emphasises that Alliance wishes to take advantage of some new financial instruments, such as the "express micro loan" of up to $5000, which can be quickly disbursed and requires no fixed asset (such as real estate) as collateral.

Having grown rapidly and consistently in the recent past to become the fifth largest bank in Kazakhstan in terms of assets, Alliance now wishes to expand at the lower, more flexible end of the scale. Although Maria Teresa recognises that the term has often been used in the past, she sees in such strategies a true example of "pushing the boundaries of banking" by bringing into the picture previously "non-bankable" clients.

The winning combination of aid finance and market loans
The second project in this two-pronged strategy is the deal with the Kazakh Loan Fund (KLF), a non-banking microfinance organisation. KLF's guiding principle is to improve the living conditions of the Kazakh community through a sustained support of their clients, who receive loans worth on average less than $1,000. The need for supporting micro-credit organisations is especially acute in light of a recent UNDP finding that a mere 2% of Kazakh poor have access to micro-finance.

The EBRD has recognised this need and, in line with its new strategic direction, has moved to support smaller local institutions directly. "We are making EBRD loans accessible to smaller institutions that would previously have shied away from what they see as the intimidating bureaucracy involved in such loans." Maria Teresa remarks that "this direct loan to KLF essentially cuts through many of the intermediaries."

Originally set up with USAID financing, KLF has become commercially viable and is now receiving a loan at market rates from the EBRD. The history of KLF thus combines grant financing from an aid agency (USAID) with market lending from an international financial institution as the EBRD.

Innovating with local currency loans
Another remarkable point about the loan to KLF, worth $2 million, is the fact that it will be provided in the local currency, the Kazakh tenge (KZT). This first micro-credit financing in KZT helps organisations like KLF, which can only make micro-loans in the local currency in accordance with the law. Maria Teresa is excited at the prospects opened up by the deal, explaining that "this local currency loan truly is a watershed in Kazakh financial history. It represents a favourable judgement on KZT's recent stability."

This unprecedented agreement was made possible thanks to cooperation with the Treasury. Although not the first local currency loan organised by Treasury, the provision of this credit line symbolises a close cooperation between Treasury and the GSB. Nuala Whelan, Client Risk Adviser in Treasury, points out that "the strong relationship between GSB and Treasury greatly assisted the transaction process which helped to make this deal possible." Nuala emphasises the importance of local currency lending as it stimulates and encourages the development of capital markets.

The EBRD, being a well-respected institution, does not merely provide these funds as direct support for Micro and Small Enterprises, although the diversification of the Kazakh economy away from natural resource extraction is important in itself. The effect of such a high-profile loan also provides a clear signal to other long-term investors keen to take a stake in the blossoming micro-credit industry.

These two projects not only exemplify a new approach towards banking, combining flexibility and smaller loan amounts. The KLF deal especially benefited from the close cooperation between two Bank departments, Treasury and the GSB. This effective teamwork has fostered new ways of financing development.

Contact: Alex Gordy