Select Committee on European Communities Minutes of Evidence

Examination of witnesses (Questions 1 - 19)




  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.


  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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