European crisis may be on its way out and with more structural reforms the countries in this regions can begun their economic recovery, believes Suma Chakrabarti, President of European Bank for Reconstruction and Development (EBRD), which is the largest financial investor in central Europe to central Asia and the southern and eastern Mediterranean.
Chakrabarti, who has observed European crisis very closely says that next two years will be much better for many European countries, given that they focus not only on fiscal but also structural reforms.
Chakrabarti is visiting India first time after 2007 for exploring investment possibilities with Indian companies in other emerging economies.
"My basic point though is that we are not doing enough with Indian investors, it is only billion dollar over 22 years," Chakrabarti told in an interview with CNBC-TV18. Partnering with Indian companies is not just with an intention of getting investment but also for getting expertise. "We are looking for raising standards," he says. The bank has already partnered with several Indian corporate.
Formed, after fall of Berlin wall to help the communist countries transition into market economies, EBRD has now spread its winds not only in European countries but also in several emerging economies in North Africa. The bank has grown enormously and now has USD 40 billion asset under management.
Below is the verbatim transcript of the interview
Q: Give me an idea of how different is the EBRD from the International Monetary Fund (IMF) or the World Bank?
A: The European Bank for Reconstruction and Development (EBRD) was set up 22 years ago after fall of communism, fall of Berlin Wall to help the transition of Eastern Europe from communism to open market economies. So, unlike the World Bank or Asian Development Bank (ADB), we focus very much on the private sector. So, 80 percent of what we do in terms of new investment is on the private sector. Even the 20 percent that is on the public sector is to try and make the public sector more commercial, more efficient and also quite often for making privatisation or corporate restructuring. So, it is a very private sector focused organisation and very project based.
Q: You look for partnerships for people to put in more capital. I read that since the European crises began you almost doubled your annual investment. So, is there more because you get partners to also put in money?
A: It is roughly at the moment about USD 10.5-12 billion a year. Yes, it is true we went up from 6 to that number, mainly because of the crises, and to try and help those economies survive. We try to attract other investors in. We have a very big catalytic world so for every dollar we put in; we get another USD 2.5 from other investors. Because of our good name people want to come in with us and that is quite powerful catalytic investment.
Q: You put money as debt?
A: We do debt and equity. We do all sorts of financial instruments, most of it is debt but we also have 12 percent of equity at the moment and we can take more.
Q: Do you just bring in money? Do you bring in expertise?
A: We bring expertise as well. That makes us a bit different from a commercial bank or an investment bank.
Q: So you are part private equity, you are part venture capitalist?
A: Yes, and we are partly a public policy organisation. If we are going in with a company, we will not just be worried about a good rate of return, we are worried about making them fit in terms of their energy efficiency also.We might provide some donor funding for energy audits, we might try and get their accounting standards up to International Financial Reporting (IFRS) accounting standard. Their corporate governance should be of world class standards. We put in all of those extras in a way that a commercial bank probably would not focus on.
Q: Where do you raise your money from?
A: Often from shareholders, but in terms of what they call corporation funding. So they have special parts of money like a grant which they want to use for providing loans to these companies, so that they can get high class standards.
Q: How worried are you about the crisis? Lots of people tell us that Europe is now on the way back up. Is it that simple or is it far more complex?
A: It is clearly complex and each country is very different. As a general statement I would say that the crisis is bottoming out in many of our countries. If you look at Eastern Europe I think most countries, nearly all will register positive rates of growth in 2013 after a pretty bad 2012. My expectation is most of them will do even better in 2014 provided they continue to reform both on the fiscal side and structural side.
Q: That is a big condition especially after what we saw happened in Italy. The electorate voted out a man Monti, who was a technocrat, who has really came and helped the country come back to some kind of fiscal stability and brought back people who are possibly largely responsible for the crisis that the country is in. What incentive is there for politicians or reform?
A: The difficulty for all the politicians is that they work on electoral cycles. So they have to put the national interest above the party political interest. The good news from Eastern Europe is many politicians are doing exactly that. They are persevering with fiscal consolidation and also undertaking some difficult structural reforms. We need to see more structural reforms. More improvement in the investment climate, that is for sure, but it is not as if they are avoiding these difficult issues.
This leads to difficult situation. Italy is a classic one at the moment, but if you look at Greece the government there is taking extremely difficult decisions now and it is not going to be popular, but they are sticking with it. Same in Bulgaria, Serbia and various other countries as well, Poland will be another good example and of course the Baltic states which did a lot of this. Italy, I think we have got a major issue there.
Q: Are you worried it could have a domino effect through the rest of Europe?
A: I don’t see that happening as yet. There are elections in various countries which have taken place already, some are to come. I don’t see that domino effect happening yet. Italy does matter, it is a big economy so what we now need to see is whether the parties are going to come together, form some sort of national government, form some credible plans because Monty did do a lot of good in his government. Or whether they need to have another election may be in a few months time just to resolve this issue, this impasse.
Q: Growth or austerity that is something that Finance Ministers grapple with all over the world, we have had our FM grapple with that, we had Moody's just downgrade Britain just a week ago because apparently they felt that there wasn’t enough being done for growth. What is your view here?
A: My view here is this is a false tradeoff, you got to do both. It is very difficult to avoid some measure of fiscal consolidation, given the size of the fiscal deficits in many of these countries. One can argue about the pace of that in a situation like this, but it is difficult to argue that you shouldn't tackle it. In Eastern Europe the countries are really doing that.
Now at the same time they do need to improve the investment climate. If you take Eastern Europe, 2014 is likely to be a year when the global economy is expected to recover a little. Many of those economies in Eastern Europe are quite small, they are very unlikely to be able to recover of their own free will and they need the global economy to recover. So they need to take advantage of the recovery to attract new investment into their countries both domestic and foreign investment. To do that they have to reform on the structural side as well not just the fiscal side. That is hard but you have to do the two together.
Q: Why are you in India? How many Indian companies have you partnered with in Europe and any in North Africa?
A: Quite a number so far in Eastern Europe and mainly in Russia. We have had about a billion dollars worth of partnerships with Indian companies over the years.
Q: So it is a billion dollar partnership that Indian company putting in?
A: EBRD is putting two third and one third is by Indian companies and they have been with very successful companies like Tata, Tata Beverages, we had a good tie-up with them in Russia. SREI, they have got an investment in Russia which we are also working on with them.
Q: What you look for when you approach Indian companies. Is it just money or is it some kind of expertise that they bring in operating in a low economy market?
A: We are looking for raising standards. We are going to use this investment, try and raise the standards in the sector, in the country that we might operate in. So, we look very much to try and use the project for extra value add as I talked about earlier and both with Tata or SREI that is what we are getting; I think with Jindal Steel and Power Limited in Georgia, we are investing in a steel mill there. That is a very successful investment.
My basic point though is that we are not doing enough with Indian investors, if it is a only billion dollar over 22 years, considering size of Indian economy, the size of private sector and given the regions we are working in.
Q: Why would an Indian company would invest with you when they have a large market at home so what is the incentive for them?
A: I think the finance minister has been absolutely right to say that the only way the Indian current account deficit can be fix is by a big increase in exports. So, export drive is necessary. Indian companies are now world-class in many ways. Why invest with us? because we know the regions that they do not know as well.
We know this country is very old, established on the ground, we have our own country officers. Moreover we are highly successful. We have only 3 percent non-performing loan ratio given the risk we are taking in the countries we are in that is enormously successful. So, basically if you invest with us in the Indian company, you are likely to get a very high and safe return on your investment.
Q: When you talked about exports, so is it that the country that you invest in, are you looking at them as market for Indian companies or sources of manufacture for Indian companies?
A: It can be either but the investment has to take place in those countries for it to be eligible for EBRD, but it can be either. We have discussed either opportunity with various investors. So, places like Russia, places like turkey, Egypt in the longer term. These are very exciting, large economies where attractive returns can be made over the longer term. You can have large scale investment from these Indian companies. So, I think there is plenty of opportunity there and there is quite an excitement I feel for a number of these companies, particularly when they realise actually going in with EBRD is quite an interesting way for them to make sure they get a good return.
Q: You have been meeting with Chief Executive Officers (CEO) of Indian companies who you have hopefully been trying to get invest with the European Bank for Reconstruction and Development (EBRD). What are they telling you about the economy? What we have had the Finance Minister worried about is that Indian companies have not restarted the investment cycle in India. What is holding them back and how optimistic are they?
A: I think it has got a mixed picture. Often many of the larger companies we have talked about have not got a problem in terms of investing in the domestic economy. They are doing pretty well. The issue is actually with more medium scale companies from what I hear. They say that the investment rate in India has fallen as the Finance Minister has pointed out for a number of reasons. If you look at the World Bank's 'Doing Business Survey', India is still stuck in at 132nd in the survey.
So it is not doing as well as Turkey, China or even Russia for a number of well-known reasons to an Indian who wants to invest. Starting up a new company is quite difficult in India. There are lots of bureaucratic hurdles. Enforcing contracts can be quite difficult. Getting a construction permit can be very difficult and the infrastructure. On the infrastructure the Finance Minister did have some very good things to say in the Budget. He knows that is a crucial issue going forward. But these are obstacles which make it difficult to get the investment rate up very quickly, but they were issues that he has always been committed to tackling and I think he will.
Q: One of the issues that he had right up there was the possibility of a downgrade. Downgrade from investment to junk. How serious would have that been? If it had happened would you still be interested in the country? We know that Britain just got a downgrade, but that just brought it up on par with other countries in Western Europe and with America. If India were to be move from investment to junk how serious would that have been?
A: I do not think it is a good thing, but at the same time for EBRD the sort of companies we want to invest in, their ratings will matter a lot for us. No ratings are very solid indeed. So we would not be worried about that. I think what the Finance Minister did in terms of modest fiscal consolidation has been warmly welcomed by Moody's and I am not surprised, because I think in the political context a year away from election that has been quite a brave thing to do. So I think Moody's have got it right in terms of their judgement on that.
Q: You have for the last three-four years moved to North Africa. Was that going beyond your mandate? Does European in the EBRD suggest the realm of where you will invest or does it suggest just the base of where you are from?
A: Yes, the E was very much about where we were investing, because our shareholders, the governments, the owners, 66 of them include the United States which is largest shareholder and Japan, Korea, Australia, Turkey, Mexico, a lot of non-European shareholders as well. But it was initially about Eastern Europe hence the E very much in it. But it was always thought that because we have been quite successful with the transition in Eastern Europe. Then we had some value-add in Post-Arab Spring with the political and economic transition in North Africa and that is why we were chosen by the shareholders to move there as well.
Q: Will that mean you could move further into South Africa? That can be a land of huge opportunity in the future.
A: Yes, I think Sub-Saharan Africa is a land of the great opportunity but it is not on our radar.
Q: What is the outlook for North Africa? Why should Indian companies come there?
A: Even in bad times, even in difficult global economic situation like this year, we expect the four countries that we were in- Morocco, Tunisia, Egypt and Jordon to grow at about just over 4 percent this year. We expect Morocco to grow over 5 percent this year. So growth is there. Investment opportunities are there and Indian companies have been in that region for a long, long time. India however ranks only eleventh in those four countries in terms of Foreign Direct Investment (FDI), so surprisingly low given it is not very far away distance-wise. Many of the countries are known and I think what we can do again a bit like in Eastern Europe is give comfort to Indian companies wanting to go there. Egypt is seen by many Indian companies as a future, Turkey once it gets over the political situations that it is going through right now.
Q: What is the comfort they are looking for? What are the risks that they fear?
A: The risk that they fear is the rules of the game will get changed. That is what any company fears. You go in on the basis of certain rules, certain policies that the government is going to pursue and then you wake up one morning and you find that the government has simply decided to move the goalpost and then your investment is worthless. So that is the thing. They need consistency and stability in the framework of investment.
Q: How are you confident that the four countries that you invested in are moving on the path to consistency?
A: What we found is that we have a very strong pipeline of projects in the private sector in all four countries. Of course many of the private sector projects do not depend on government action at all. Now some do of course. So there are some difficult choices in a place like Egypt about what the power sector tariffs might look like, that would of course affect whether we can do more in the power sector. But there are plenty of other projects in the Egyptian economy which have nothing to do with the government policy decisions. Those are safe and I think it is worth Indian companies trying to get a toehold now in the Egyptian or Moroccan economy while things are changing, while people are being a bit cautious and coming with EBRD because with us the money is safe.
Q: Are Indian companies showing any sign of interest?
A: Yes they are. One of the things that I found on this visit is the large Indian corporate need scale, firstly in terms of investment, they also need to piggyback on our local knowledge because we have teams on the ground in all of these countries. With that sort of tie-up I think we can actually help them in a way to feel comfortable about going into these economies.
Q: What sectors do you think Indian companies can really provide the expertise and reap those benefits?
A: I think it is a wide range. I think some of the obvious sectors Indian companies could make a major investment in are petrochemicals, agricultural equipment, IT sector, steel and leasing. So there is a range of sectors. Fortunately most of the Indian corporate that I have talked to are already very diversified, so they have options in a number of different sectors. We also have the same range of expertise with sectors.
Q: Do governments in these countries that you invest in view you with less suspicion then they would another private sector company or do they view you with suspicion on ideology?
A: They do not really view us without ideological bent. If you look at our work in Eastern Europe, Turkey, Mongolia and former Soviet Union we were seen very much as on the side of the change and that is important for any international institution to be seen as the friend of change. This is same in the Arab Spring. We were not there prior to the Arab Spring. So in a way we are not associated, we do not have the baggage of having been there before. So we are very much associated at the moment in the public mind, political mind as agents of change.
Q: That will help your partners as well if they come in with you?
A: Yes absolutely. That sort of rubs off in a way.