Examination of witnesses (Questions 1
- 19)
WEDNESDAY 13 MAY 1998
MS RAYMONDE
DERICHS and MR
MARK KING
Chairman
1. Good morning. Do you wish to make a short
introductory statement to begin?
(Ms Derichs) With pleasure. EBRD and the TACIS
programme of the European Commission. EBRD has an institutional
structural approach on technical co-operation for which we get
funding from the EU TACIS programme. This dates back to 1991 and
the financing is provided from the TACIS programme through a facility
which is called the Bangkok facility, because it was agreed during
the IMF/World Bank meeting in 1991 in Bangkok that there should
be co-operation between EBRD and the Commission on technical assistance.
Since 1996—also the same date when the environmental priority
was established in the TACIS Regulation—we have a decentralised
programme with the Commission. Previously we worked with them
on a project by project basis, very ad hoc, but since 1996
we have an institutionalised programme. We prepare annually indicative
programmes on technical assistance needs, including technical
assistance needs for environmental projects. We present that to
the Commission and we negotiate with them this programme and the
next year's budget. This annual programme is then approved by
TACIS in DG IA in Brussels and also by the 15 Member States in
the TACIS management committee who will all get to see this programme
prepared by EBRD based on our business plans for each country
team and each sector team, including the environmental teams within
the Bank. Based on the business plans and the investment pipeline
in the Bank we establish the needs for TC funding—technical
co-operation funding—to either prepare these investments,
so they are able to be presented to the Board of EBRD, or to implement
these investments. In the brief memorandum we have prepared and
submitted for your attention, we have indicated project preparation
and project implementation are the main users of this TC funding.
Next to that we have some sector and some training work which
we are doing as well with these TC funds.
2. Do you find the procedure for approval
very top-heavy? The fact all 15 Member States have to approve
things?
(Ms Derichs) Yes, they have to endorse the TACIS
decision on the annual programme. I would say that in our negotiations
with the Commission we have now got a more structured approach
for TC funding. Instead of going on an ad hoc basis project
by project, we now get, let us say, an envelope per year with
a certain budget which EBRD can use for preparation or implementation
of its own investments. The Commission has agreed to that, but
on the condition that we would present to them this annual programme
indicating which projects we had in mind in order to avoid duplication
with what they have in their own TACIS country programmes and
to enforce synergy and enhancing of the complementarity of the
two institutions. We have an annual programme of TC that we have
to prepare, starting in October of each year for the budget to
become available for the next year. In certain cases this allows
EBRD to make an indicative programme. Because of the fact that
we are working for at least 60 per cent in the private sector,
our operations are having a project cycle which is often shorter
than a year, and therefore to indicate a year up-front which TC
requirements you need for the next year for particular projects
is sometimes a difficult task to fulfil. Therefore you see sometimes
changes in the indicative programme. Member States will have approved
a certain programme but after that changes can be allowed by DG
IA TACIS to be made to the programme in order to accommodate the
fluctuations during the year because our investments are demand-driven.
Not all investments that we have in the pipeline will materialise,
some investments will move quicker through the pipeline than others.
Therefore, yes, the procedures are different from bilateral donors
with which the Bank is working. Apart from our institutional co-operation
with the European Commission, we have about 50 bilateral donor
agreements in place and they work on a very different basis and
they do not require annual programmes. So in this case, the Commission
is an exception.
3. It makes it a very long process as well,
does it not?
(Ms Derichs) It makes it quite a long process.
It depends on the situation in the particular countries but because
of political situations certain emergency projects can come up
which need quick funding. I think of Bosnia-Hercegovina, obviously,
where we had certain projects— although that is not in the
TACIS programme but is an indication—and for these quick
actions the institutional arrangements with the Commission are
not very suitable.
4. Indeed. Could we concentrate particularly
on the environmental programmes? I know it is fairly recent but
what do you see as the environmental priorities under TACIS? Can
you influence what is a priority and what should be dealt with
first or not?
(Ms Derichs) We, as EBRD, prepare our own programmes
also in the environmental sector, including municipal and environmental
infrastructure, energy efficiency, district heating, et cetera.
These projects are prepared separately from TACIS's own programmes,
in that TACIS will receive from us our programmes and then will
check them against their own country programmes and their own
priorities to see if there is any contradiction there or any duplication
there. EBRD as an institution is not reviewing TACIS sector strategy
for the environment; we do not have a vote in that respect. The
other way around is the case because, of course, we have a board
director from the Commission in EBRD and he will review the municipal
and environmental infrastructure sector strategy, and he will
get feedback on this from the Commission services and ask them
for comments.[1]
The other way round is not the case. It can be the case on an
operational level but not at a formal level. So at an operational
level, our operation leaders in the Bank responsible for preparation
and implementation of investments will have relationships with
their counterparts in the TACIS programme, and during these discussions
they can influence certain projects for the task manager for TACIS
to take on board, but there is no formal mechanism to influence
the process.
Lord Mackie of Benshie
5. You say you negotiate with the Commission,
does that mean you negotiate with TACIS and with PHARE and with
different bodies, or do you negotiate with someone in the Commission
who acts for all these bodies?
(Ms Derichs) No, it starts at a working level
and then it goes up higher. So we start with my counterpart for
the management of the Bangkok facility to discuss the funding
from the TACIS programme for EBRD. They have somebody in TACIS
and somebody in PHARE who is responsible for handling these funds
and transferring them to EBRD. With these people I will negotiate
first. They will go back to their country teams and their sector
teams to discuss if the project we have presented in the environmental
sector, for instance, is relevant for their own programme or duplicating
their own programme. If there is a complicated project, they might
want the advice of the Environmental DG, DG XI, in the Commission.
The Deputy Director General of DG IA, both for PHARE and TACIS
will sign off on it and then it will be presented to the Member
States for endorsement.
Lord Ponsonby of Shulbrede
6. How would you deal with an emergency
situation? I am particularly thinking of oil pipeline spills,
which have happened in the former Soviet Union. I understand the
EBRD has financed at very short notice the remedies to that problem.
How do you deal with emergencies?
(Ms Derichs) We have the opportunity with TACIS
to present to them on an ad hoc basis when there is justification,
like an emergency, additional projects which were not originally
in the annual programme we prepared the year before. The approval
process, depending on which team and which sector is responsible,
can be quick or not quick. Usually when there is an emergency
like the one you described and we need substantial TC funding,
then the Bank has unfortunately only two donors on whom we can
rely because of the large size of the TC funding required for
such an action. Most bilateral donors with whom we have TC funds
have quite small facilities. Only the EU as well as Japan have
EBRD trust funds and facilities which are substantial enough to
absorb substantial TC funding requests. So we have the opportunity
to come with ad hoc requests, we have to justify these,
and these do not have to go back to the management committee or
the Member States to vote on, these can be handled internally
in DG IA. That speeds up the process substantially because these
requests do not have to be translated into 15 languages, et cetera.
So in that sense those can be accommodated, although we should
stick with emergency actions within 15 to 20 per cent of the total
envelope awarded to us for a year, the annual allocation. So we
do not come back to them every month with an emergency and do
a programme which is totally different from the one which was
originally approved. As I say, in a margin of 15 to 20 per cent
we can shift to other projects and present them on an ad hoc
basis.
Lord Elis-Thomas
7. We are particularly interested, of course,
in the fact that the 1996 Regulation for TACIS does identify the
environment as a priority area for the first time. How do you
see this being realised in practice? We note, of course, you have
an obligation to make sure the full range of your activities are
environmentally sound and sustainable development and similarly
with your financial intermediaries. How does this process work?
How do you achieve these objectives?
(Ms Derichs) EBRD has to implement its environmental
mandate and we have two ways of doing that. First of all, through
the environmental projects and energy efficiency projects, and
secondly through environmental due diligence of all the investments
which EBRD is undertaking, as well as environmental due diligence
of all the technical co-operation operations that EBRD is undertaking.
As far as the implementation of the environmental priorities in
the TACIS Regulation is concerned, if we look at the funding we
have used from TACIS for environmental projects, for instance
for financial intermediaries, we have worked out a new system
of utilisation of TACIS funding which can be very efficient and
very effective. We have installed so-called framework contracts
which are awarded through public tendering, and under these framework
contracts environmental firms are awarded a contract. They often
are in a consortium with other firms as well who have different
sorts of expertise like financial expertise on top of the environmental
expertise which is needed. On an ad hoc basis for a particular
assignment we can draw down on this framework contract. When we
have, for instance, a board approved investment with a financial
intermediary and it is decided that this financial intermediary
needs a specific training programme to adhere to the environmental
procedures that the Bank requires financial intermediaries to
adhere to in their sub-lending. Perhaps I can ask Mark King here
to elaborate a little on that. He actually is the man responsible
within the Bank for the financial institutions intermediary framework
contracts for the environment and he works directly on monitoring
these particular contracts.
(Mr King) To date we have trained roughly 100
financial institutions throughout the CIS and CEE countries. Generally,
the framework contracts run along the following course. The consultants
are selected on a competitive basis within the framework contracts.
We usually maintain at least two contracts per region, PHARE and
TACIS, to keep a competitive edge on the consultants. Once we
have chosen the consultants, the first task is to undertake an
institutional analysis of the financial institution and see exactly
how environment fits into the investment or the loan decision-making
process. Then, in conjunction with the senior staff of the financial
institution and with ourselves, the consultants tailor the Bank's
FI environmental procedures to fit exactly into the decision-making
process within the financial institution. They prepare background
materials, training materials, guidance notes which are translated
into the local language, and they carry out a few training programmes
including site visits to clients of the financial institution.
Usually the training takes place over an extended period of three
or four months and after the training the financial institution
has six months to a year help-line assistance from the consultant
from their home office, and thereafter of course the environmental
staff of EBRD provide any further assistance to them.
8. Thank you, you have given us a very helpful
indication of how the process operates. Are you able to operate
more pro-actively in identifying priorities for national environmental
action plans similar to the involvement of the World Bank in assisting
their clients? Are there ways in which those activities could
be involved in the development of a broad investment strategy
for the Bank?
(Ms Derichs) There is a difference between the
World Bank and EBRD regarding the national environmental action
programmes. We work hand-in-hand with the World Bank but the policy
dialogue as such will be left to the World Bank. EBRD is monitoring
the national environmental action programmes. We sent out questionnaires
last year to the relevant institutions and authorities in the
recipient countries to ask them questions like information on
four instruments—the existence of environmental funds which
are established in many of the countries to channel the money
collected in fees and fines to which we refer in the memorandum
as well; the provision of taxes and penalties of financial incentives
for energy and resource efficiency; ways for pollutant reduction,
what have they done in this regard; and the use of clean technology.
These questionnaires were then sent back to EBRD and on that basis
we tried to make an assessment as to what stage and level each
country was at in implementing their national environmental action
plans. Summaries of these findings were then translated, so to
speak, into a section of the yearly transition report which is
prepared by EBRD, and in the 1997 report you will find an over-view
of each of the countries with the findings based on the questionnaires
which were returned to EBRD in monitoring the national environmental
action programmes. So we monitor but we are not directly involved
in establishing the national environmental action programme like
the World Bank is, but we have a dialogue with the World Bank
on the issue.
Chairman
9. Is that report in the public domain?
Is that a published report?
(Mr King) The transition report, yes.
Lord Mackie of Benshie
10. After all this preparation and you have
found they know what they are doing and you have trained them
and have consultants and so on, will you then lend them a chunk
of money to do the job?
(Mr King) The training comes after we have agreed
on the financing with a financial institution. Generally what
happens is that before a project with a financial institution
is considered by our board, we agree with the financial institution
that they will adhere to our environmental requirements. Once
we have that firm commitment from them, we take the project to
the board and thereafter they receive the environmental training,
if they want it. A few have their own environmental specialists
already and they do not need training.
Lord Hughes of Woodside
11. Do they have to have the money first?
(Mr King) They do not have to have the money first,
it depends on the structure of the deal. In some situations, credit
lines for example, the money is dispersed as particular loans
arise. The loans are presented to the EBRD for financing and the
EBRD will provide finance if the loans are satisfactory. In other
cases, the money is disbursed upon signing the agreement with
the financial institution. So it very much depends on the structure
of the financing.
(Ms Derichs) But it is true that only financial
institutions and financial intermediaries will be trained with
whom EBRD has envisaged a loan or an equity and this will be made
available from EBRD capital.
Lord Elis-Thomas
12. Can I ask about the memorandum of understanding
between the Commission, the Bank and the World Bank in relation
to the pre-accession process of the CEE countries? Is this a model
you would consider applying to TACIS areas? In other words, I
am trying to compare the PHARE and TACIS processes to see what
extent a similar process might be operational.
(Ms Derichs) It is actually quite recently we
have negotiated or agreed with the Commission and the World Bank
on a structure for co-financing. You could say this was signed
in December 1997, agreed between the three institutions. EIB is
not directly involved, they have not signed the memorandum of
understanding, but they will be involved because of being already
integrated into the European Union as a European Union institution
as well. You could compare it with the fact we had an agreement
with the Commission for technical co-operation that was signed
in 1996, and now we have an agreement with the Commission, but
only with the PHARE countries of operation, for co-financing,
meaning that PHARE in the accession countries can make funding
available for not only technical co-operation but also for investment,
for joint financing or parallel financing with EBRD mainly in
the field of large infrastructure—transport, energy efficiency,
municipal and environmental infrastructure et cetera. The co-financing
agreement reached with the Commission is particularly geared to
accession countries and to the requirements that the accession
countries have to meet in order to meet the acquis communautaire
as expressed in Agenda 2000 and the opinions of the Member States.
They have identified where the governments of the ten accession
countries lack the investments which need to be undertaken in
order to up-grade their standards to EU standards, harmonisation
in laws, harmonisation in pollution emissions—there are
so many different standards which are laid down in the acquis
that they have to meet. This requirement of the accession countries
to meet the acquis communautaire is in itself an accelerator
in generating demand for investment from these countries. We will
not see that happen very quickly in TACIS. In the TACIS countries
I would say that the environmental awareness is probably at a
much lower level than in the accession countries who are forced
to look at their environmental issues because of the accession
process. Availability in the PHARE countries of resources to address
these issues is higher than for the TACIS countries. You would
also say that probably in the TACIS countries the institutional
capacity to absorb all this is less than in the accession countries
who are much more advanced obviously. It is difficult though to
generalise. I think as regards a blueprint model, if TACIS could
make funding available for investments, we could use certain aspects
of the blueprint agreement reached with PHARE for accession countries
also to establish co-financing agreements for TACIS countries,
because we think in specifically early and medium stage transition
countries it would be very helpful for EBRD to have grant funding
or soft term financing available from the Commission to blend
in with EBRD commercial money in order to be able to address environmental
issues which are not at a high priority on the list in these countries
and for which they otherwise would never demand EBRD to step into
certain projects. If we can get Commission money for environmental
investments in infrastructure in TACIS countries, district heating
issues, waste water treatment, et cetera, we think there will
be scope for co-operation there. It will be different from the
accession countries because there are different requirements and
the process is driven in a different way, but co-financing for
investments with the TACIS countries would be a development that
would be encouraged by EBRD.
13. We are obviously at the beginning of
our study but if in the course of our study we came to that conclusion
and made a recommendation on those lines, in the light of evidence,
that would be helpful to you?
(Ms Derichs) That would be helpful to us. At the
moment there is not much scope for real co-financing with TACIS.
They can provide technical assistance funding, which they do in
certain cases under their bilateral country programmes, to give
a big chunk of technical co-operation funding, for instance, for
the Turkmenistan Turkmenbashi Port development, but if we could
get investment financing for certain components for installations
in that port to finance these in parallel with EBRD's project
components, that could be quite helpful.
(Mr King) For the small and medium enterprise
sector, it would be particularly useful. We often find when we
are visiting small companies, discussing environmental problems,
they are fully aware they are causing a great deal of pollution
but, as they say, it is much cheaper for them to continue paying
fees and penalties than invest in the infrastructure.
Chairman: At least
they are paying fees and penalties, when we went to Romania a
few years ago to look at the PHARE programme there was no system
for paying fees and penalties. However, we must press on.
Baroness Wilcox
14. I would like to ask two or three questions
around potential contractors. I might say that so far I have learnt
a great deal from you, so I thank you for that. It is possible
you have covered a couple of these questions already but I want
to reassure myself in my mind that that is what I heard. Can I
ask you first, what is your view of the effectiveness of the various
parts of the selection process for TACIS projects submitted by
potential contractors? Could you tell me how effective you think
the various parts of that are.
(Ms Derichs) I think the process has improved
vis-a-vis the previous ad hoc situation. I can give you
a little bit of a picture of how it went in the past and how it
goes at present, so you can see the differences between the past
and the present. By "present" I mean the situation from
November 1996 onwards. In the past we submitted a project to the
Commission, they had to look at the terms of reference, they had
to look at the budget break-down, they gave an indicative approval,
then we had to go back to them when a short list was established.
After obtaining approval from them for the short list we had to
go back to them for the selection memorandum. When we had evaluated
the proposals of the consultants and selected the potential contractor
and we wanted to award a contract, we had to go back to the Commission
and they had to review everything and make sure it was all in
line with the EU TACIS procedure. Ultimately, when they found
everything was in order and we could award a contract, the contract
had to be sent back to the Commission so they could check that
everything in the contract was in order. So there were four or
five stages which needed to be approved by the Commission and
every time that took about two months; the whole project cycle
could take up to nine or ten months before you had final approval
and a contract for the contractors. In the present state they
have delegated these responsibilities to EBRD as long as we adhere
to certain agreed procedures. All these checks are now internally
done in the Bank, the responsibility for compliance with the procedures
is with the Bank, and we are audited annually by the Commission
as well as by the Court of Auditors to see whether we have done
everything in line with the agreed procedures. For the contractors
I think that means they will see after a tender has been launched
by EBRD that the selection process has been speeded up and a contract
can be awarded almost immediately after the selection panel has
come to a conclusion on who would be the winning tenderer, so
to speak. Nevertheless, having said that and having indicated
that certain procedures have increased in efficiency and effectiveness,
there are still certain issues that perhaps I would like to draw
attention to and that we are thinking to discuss still with the
authorities in DG IA in TACIS. First of all, I would like to point
out that the short list that we have to issue before we can launch
a tender has to have a minimum of seven companies. That is the
number that was agreed in the procedures with TACIS. That is quite
a substantial number. Secondly, I would like to point out that
there are caps on fee levels, especially for local consultants.
We find these fee levels allowed by TACIS to be paid for local
consultants are becoming more and more of an issue because environmental
specialists, even if they are local specialists, are upgrading
their fee levels over time and we have a feeling that TACIS's
fee level ceilings have not kept in line with that, so we have
the impression that we cannot use in that aspect the best available
resources because of the capped ceilings.
(Mr King) To give an example, the TACIS rate I
believe now for a local expert is something like 150 Ecu per day,
whereas an environmental specialist worth their salt in Moscow
these days would be commanding up to 650 Ecu, 700 Ecu a day.
15. That is a terrific difference. Obviously
as things develop we can always improve upon them, but the idea
of trying to find seven in what is a specialist field must be
very difficult. If I was a local contractor I would want to link
up with another company which was not local, but never mind.
(Ms Derichs) We can do that. Seven companies on
the short list does not mean necessarily that you will receive
seven bids, because they can link up. They can allow up to three
companies on the short list to link up and make one bid, as a
consortium bid.
16. So that is allowable?
(Ms Derichs) That is allowable, but still if we
issue a procurement notice in EBRD's publication, Procurement
Opportunities, in order to announce that a project is coming
up and we would like to see expressions of interest from companies
who would like to be short listed for a particular technical co-operation
project, depending on the sector, sometimes we get 40 to 60 expressions
of interest and out of these, let us say, 15 to 20 are really
qualified technically, so then it is not that difficult to select
seven out of these qualified companies to be put on the short
list. Of course, if all the seven are bidding separately and we
get seven different bids, the chances of winning the contract
will be reduced substantially. It is getting in that respect for
consultancy companies probably perhaps a deterrent to bid because
they think when you have seven on the short list there is not
so much chance to be awarded the contract, and if there are only
three you have much more chance obviously.
17. I was going to ask how much time and
what sort of resources you think a potential contractor needs
to invest before hand. I am beginning to get a picture in my mind
of some very big, very professional bidders who are really learning
how to cope with this system very well indeed and it might be
excluding some of the smaller bidders from taking part. I wonder
if that is how you see it developing?
(Ms Derichs) It depends. I think first of all
there is sufficient attention in order to make the public aware
that a project is going to be tendered, and we always call for
expressions of interest for projects financed from the EU TACIS
fund. It depends on the complexity of the assignment and the value
of the assignment, I would say. Consultancy firms have a minimum
of 40 days to prepare for a tender, they will probably put one
or two people on it to prepare the bids and, if necessary, to
visit the project site or talk to the recipient institution, or
come to EBRD to request more information. Those are costs which
are involved which are not reimbursed by EBRD, not even if they
win the contract. So these are up-front costs made by consultancy
companies in order to prepare for a bid. They have to put in man-days,
they have to put in out-of-pocket expenses, and once they are
short listed and they are submitting a bid, there can be additional
costs for instance for translating the bids into the language
of the recipient institution. We often require that the recipient
institution takes responsibility for awarding the contract because
of conflict of interest and legal issues associated with implementation,
for instance, and not all the recipient institutions have the
capability in-house of English speakers who can evaluate offers
in that language, so often we require the offer is actually prepared
in two languages—English, Russian or whatever is the requirement
of the recipient institution. These are additional costs as well.
There is another aspect which I would like to point out when the
consultancy firms have to prepare for their expressions of interest,
and that is they have to indicate in their offers certainly the
CVs of the experts they are going to use. One of the requirements
of EU TACIS is that the experts that are proposed have EU nationality
or have the nationality of one of the TACIS recipient countries.
Many of the companies that are bidding for projects with EBRD
have international staff and have nationals of non-EU on their
company staff. That makes it more difficult for them to put forward
bids because they have to first of all look at their staff and
eliminate virtually everybody who is a non-EU national, and they
can then eliminate perhaps very qualified consultants who are
working for the EU company who are not of EU nationality as experts,
which can be a hinderance for certain companies, I would imagine.
Lord Ponsonby of Shulbrede
18. I wanted to back up the tenor of your
question, Lady Wilcox. It does seem to me that the bidding procedures
themselves are very much working against smaller consultancies.
The larger companies that can do the same thing again and again
for different types of projects are the ones which I would have
thought were the most successful in winning the bids. I wonder
whether you have analysed the smaller consultancies which have
failed and have not re-submitted bids for other projects because
they basically thought it was too much work for not enough chance
of reward? I wonder if you have gone back to those smaller consultancies
or companies to ask them what their criticisms of your procedures
are?
(Ms Derichs) I would not comment on your finding
that the procedures are a hindrance for small companies to submit
bids. Small companies can, as well as big companies make clear,
through an expression of interest, that they are interested in
short listing and if they are short listed they can join up with
larger companies to increase their chances of winning the contract.
(Mr King) I would not say it is a big problem,
as an ex-consultant myself. I do not think it is a substantial
cost that needs put off small companies from making bids.
Lord Hughes of Woodside
19. Is there any trend of big companies
not exactly cornering the market but groups of companies which
appear to win contracts time after time in terms of size?
(Mr King) There are certain companies which dominate
the market, usually the big ones like Coopers & Lybrand, or
Environmental Resources Management and Dames & Moore in the
environmental sector for example. I think that is a reflection
of (a) the quality of their work and (b) the size of these companies.
Many of these companies employ thousands of people and are spread
all over the world, so one would expect them to have the lion's
share of consultancy work. Nevertheless, we do try to diversify
as much as possible because if a consultant is being employed
by the same client for quite a long period of time, they can get
complacent and rather costly, so we like to keep them competitive
by sharing the work around as much as possible.
1 The EU Director on the EBRD Board (as all EBRD Directors)
has the opportunity to review Operational Policy Papers for the
various sectors in which the EBRD operates, including Municipal
and Environmental Infrastructure, and projects including those
pertaining to environmental matters, and express the views of
the Commission to the Board. Back
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