Aggressive tax planning, protectionist policies, and geopolitical tensions are but a few of the looming challenges facing one of the world’s most important banks, writes Bob McMullan.
The work of the European Bank for Reconstruction and Development (EBRD) garners less mainstream attention than other international institutions such as the World Bank or International Monetary Fund, but its role is becoming increasingly important. However, it is an institution facing a number of emerging challenges requiring leadership from member countries such as Australia in order to surmount them.
Australia’s membership of the EBRD has always been a contested space. Why did we join in the first place? Should the organisation be wound up now that it has fulfilled its original mandate? If not should Australia withdraw?
There was a legitimate debate around these questions, but it is time to move on. The rest of the world already has. The US is no longer interested in this type of existential navel-gazing (although who knows what will happen if Donald Trump becomes President). China has just become a member and India is considering doing the same. It would be a strange time to choose to leave. And, of course, unlike other Multilateral Development Banks, there is no recurrent cost to the Australian budget. The EBRD has been self-financing since its inception.
If Australia is to remain a member, which I assume it will given that both sides of politics have been actively engaged in it over the last five years, there are some important policy questions that will need to be addressed.
The first relates to the current “Board guidance” to management which means the EBRD cannot do new business in Russia as a consequence of its aggression against the Ukraine. A corollary of this is the decision for the EBRD to increase its lending to Ukraine in the face of heightened risks to those investments.
I supported both these positions as a Board member at the Bank, and I am quite confident that Australia will continue to do so until the circumstances on the ground change.
However, these positions have consequences for other policies which Australia has supported within the EBRD.
Most particularly, stopping profitable business in Russia and undertaking risky business in Ukraine puts pressure on the EBRD’s profitability, which is relied on to fund its operations without the need for shareholder contributions.
Therefore, we will have to reconsider our passion for the countries of Central Europe and the Baltic states to graduate from the status of “countries of operation”. This would mean the EBRD would no longer actively invest in those countries although it would continue to hold a large portfolio of investments for many years. Graduating these countries remains important but may need to become a medium-term goal as we rely on them to generate profitable investment opportunities.
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Another issue which involves our national interest relates to investment in coal. Of course, in a time of climate change, most emphasis should be on the transition away from hydrocarbons. But for some of the countries in which the EBRD invests, such as Serbia, the short-term option is to increase the efficiency of coal use and move away from the more carbon emission-intensive material lignite. However, many EBRD shareholders have a blanket policy of opposition to investments in coal. This can lead to irrational conclusions and Australia is one of the few countries prepared to make the case for allowing investment in lower emission hydrocarbons during the transition. If there was a genuine carbon price we could rely on that as a driver of rational decision-making but in the absence of such a market mechanism, we will have to rely on case by case analysis and advocacy.
A more obvious issue of continuing concern to Australia is that of protectionism in general, and agricultural protectionism in particular. Ensuring EBRD investments do not encourage protectionist policies is both an important matter of principle and a World Trade Organization priority for Australia. In Turkey and the Ukraine, among others, the EBRD has been investing behind tariff and other protective barriers. I took it upon myself to campaign on the Board to change this practice, with some success. However, it will be important to continue to campaign around these issues to improve the policy and practice in this area.
The ERBD also faced some very complex emerging issues that are beyond its capacity to resolve, but they have to make decisions about them. That means Australia’s Board member needs to be involved in the decision-making.
An example of this is the aggressive tax planning involved in almost all private equity transactions. Private equity investments are very important to the mandate of the EBRD. Leaving behind a viable private equity industry is one of the ways it can replace itself after graduating a country of operation. However, virtually every private equity transaction passes through a tax haven such as the British Virgin Islands (BVI) or the Cayman Islands. The choice is no private equity or no BVI! I have been in favour of investing in private equity despite the challenges while encouraging global efforts to close down tax havens. This is, however, going to be a continuing challenge unless a global solution is found.
The last pressing issue is the future access of North Korea to EBRD resources. The regime in Pyongyang will collapse one day. It is impossible to predict exactly when. But when it does our friends in South Korea will look to us to support them in arguing that the remit of the EBRD should be extended to the Democratic People’s Republic of Korea. And we should be ready to do so quickly. It will matter for the stability of the region, and it is important to one of our best friends in the region.