Explanatory Memorandum to COM(2024)42 - Subscription by the EU to additional shares in the capital of the European Bank for Reconstruction and Development (EBRD) and amending the Agreement establishing the EBRD as regards the extension of the geographic scope of EBRD operations to sub-Saharan Africa and Iraq in a limited and incremental manner, and removing the statutory capital limitation on ordinary operations - Main contents
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| dossier | COM(2024)42 - Subscription by the EU to additional shares in the capital of the European Bank for Reconstruction and Development (EBRD) and ... |
|---|---|
| source | COM(2024)42 |
| date | 22-01-2024 |
1. CONTEXT OF THE PROPOSAL
Reasons for and objectives of the proposal
The European Bank for Reconstruction and Development (EBRD) was founded in 1991 to support the transition towards market-oriented economies in Central and Eastern European countries following the collapse of communist regimes. The European Union, together with the European Investment Bank (EIB) and 40 countries (including all Member States of the Union at that time), were founding members. Currently1 the EBRD is owned by 72 countries, the Union, and the EIB. Following two extensions of its original geographical scope, the EBRD today supports investments in 38 countries of operation2 that are committed to and applying the principles of multiparty democracy, pluralism and market economics, with the aim to develop private and entrepreneurial initiative.3
The proposed Decision is intended to allow the Union to subscribe for additional paid-in shares in the EBRD in the capital increase decided by its Board of Governors on 15 December 2023 to ensure the Bank’s support for resilience and reconstruction in Ukraine beyond 2023, and the continued support in all of its countries of operations in addressing the most pressing transition challenges, aligned with the EBRD’s mandate and strategic direction.
The proposed Decision is also intended to approve amendments to the Agreement establishing the EBRD, which (i) enable the limited and incremental expansion of the geographic scope of the EBRD’s operations to sub-Saharan Africa and Iraq and (ii) remove the statutory capital limitation on ordinary operations and entrust the EBRD Board of Directors to establish and maintain any appropriate limits with respect to capital adequacy metrics.
The proposed Decision authorises the Governor representing the Union in the EBRD to deposit the requisite instrument of subscription of new shares as well as communicate to the EBRD the declaration of acceptance of the above-described amendments to the Agreement establishing the EBRD.
The Union became a member of the EBRD subsequent to Council Decision 90/674/EEC4 of 19 November 1990 on the conclusion of the Agreement establishing the EBRD5. The initial capital of the EBRD was fixed at ECU 10 billion, of which the Union subscribed 3%.
In 1996, the Governors of the EBRD decided to double the authorised capital of the EBRD for which the Union subscribed an additional 30 000 shares of EUR 10 000 each, bringing the subscribed capital by the Union at EUR 600 million6. The Union share in the EBRD total authorised capital was maintained. The subscription of additional shares followed Council Decision 97/135/EC7 adopted on 17 February 1997 providing that "the European Community should subscribe for extra shares as a result of the Decision to double the capital of the EBRD". In 2010, the EBRD decided to increase its authorised capital stock by EUR 10 billion, consisting of 100 000 paid-in shares and 900 000 callable shares in order to maintain enough capital to sustain over the medium term a reasonable level of activity in its countries of operations. The Union accordingly subscribed to additional shares following Decision 1219/2011/EU adopted on 16 November 20118.
During its Annual Governors’ Meeting in Samarkand on 18 May 2023, the EBRD's Board of Governors took three strategic decisions, which will shape the EBRD’s future:
First, the Board of Governors adopted Resolution No. 258, which stipulates that further shareholder support will be needed to enable the EBRD to fulfil its mission in Ukraine by ensuring continuous support beyond 2023. The resolution came in the light of the February 2022 Russia’s war of aggression against Ukraine, supported by the government of Belarus. The EBRD has been the largest institutional investor and committed partner to Ukraine since the Ukrainian independence in August 1991.
Due to its unique mandate and comparative advantages, shareholders have been clear that the EBRD must continue playing a critical part in the international effort - working in close cooperation with the Union and other International Financial Institutions (IFIs) - to support Ukraine’s real economy in wartime and in post-war reconstruction, whilst maintaining its financial strength. The Board of Governors has consequently established support for Ukraine now and in the future as the EBRD’s highest priority.
The Board of Governors have also stated that the EBRD must continue supporting all of its countries of operation. Many of those continue to be negatively affected by the war, including those accepting refugees, and whose economies have been largely dependent on Russia.
The Board of Governors further concluded that paid-in capital is the most efficient form of shareholder support and that it aimed to take a final decision on the amount and timing of the capital increase by the end of 2023. The capital increase is meant to give the EBRD the necessary means to continue supporting Ukraine while protecting its financial strength and AAA-rating. Specifically, this is needed to ensure a sustained level of activity in wartime and high levels of investment in Ukraine’s reconstruction phase.
Accordingly, on 15 December 2023 the Board of Governors adopted Resolution No. 265,9 which authorises the EBRD to increase its number of shares by 400 000 new shares priced at EUR 10 000 each, totalling EUR 4 billion, with an effective date of 31 December 2024.
The Union’s participation in the capital increase will ensure that the Union maintains its 3% direct share of the total subscribed capital of the EBRD. The EIB (3%) and the Member States individually (EU27, ca. 48.4%) are also shareholders in the EBRD, which currently give the Union a combined majority shareholding of 54.4%.
The Union will be able to subscribe in a proportional manner for 12 102 new shares, each share having a par value of EUR 10 000 increasing the number of paid-in shares of the Union to 102 146. The shares would be paid for over five years in equal instalments.
Contents
| Existing no. of Shares | No. of new shares | No. of shares after capital increase | Amount in EUR of new paid-in capital | Amount in EUR of each payment instalment |
| 90 044 | 12 102 | 102 146 | 121 020 000 | 24 204 000 |
Second, in May 2023 the Board of Governors decided in Resolution No. 25910 to proceed with a limited and incremental expansion to sub-Saharan Africa and Iraq, by amending the geographical scope of EBRD operations, which is defined in Article 1 of the Agreement establishing the EBRD. The report of the EBRD Board of Directors to the Board of Governors concluded that the EBRD’s mandate and business model would fit most appropriately in six countries in sub-Saharan Africa, namely Benin, Côte d'Ivoire, Ghana, Kenya, Nigeria, and Senegal, with the first investments envisaged to take place from 2025 onwards, subject to these countries applying for the EBRD’s membership and country of operation status and subsequent approval thereof by the EBRD Board of Governors. The decision reflects the growing economic links between the EBRD’s current countries of operations and sub-Saharan Africa and Iraq and its potential for developing the private sector in those economies in line with Bank’s transition mandate. This is all the more important due to the destabilizing role played by Russia in the region.
The analysis performed by the EBRD confirms that a limited and incremental expansion to the above mentioned six countries in sub-Saharan Africa and Iraq will not 1) impair its ability to support its existing countries of operations, 2) compromise its triple-A credit rating, or 3) lead to a request for additional capital contributions. Moreover, such a limited and incremental expansion of the geographic scope of its operations will be enabled through an amendment of Article 1 of the Agreement establishing the EBRD. The Board of Governors has been clear that the implementation of the expansion must be carried out in a way that will not dilute the focus of the EBRD in supporting its existing countries of operation, including Ukraine and other countries affected by Russia’s war.
Under the terms of the resolution adopted, any applications for recipient country status will be considered after the ratification and entry into force of the relevant amendment to Article 1 of the Agreement establishing the EBRD.11 All applications received will be assessed in accordance with the EBRD’s established governance procedures.
The EBRD does not envisage making any investments in these countries before 2025.
Third, in line with the G20 Capital Adequacy Framework Review recommendations, the Board of Governors in May 2023 decided in Resolution No. 26012 to remove from Article 12.1 of the Agreement establishing the EBRD the statutory capital limitation on ordinary operations and to delegate to the Board of Directors all aspects of the EBRD’s capital adequacy framework.13 This paves the way for more flexible and dynamic capital management, while ensuring continuous control of the main capital metrics by shareholders.
Article 12.1 of the Agreement establishing the EBRD currently places a formal limitation on the nominal value of the ordinary capital obligations that the EBRD can assume. This provision is similar to that found in the foundational documents of other Multilateral Development Banks (MDBs).
However, over the past decade, shareholders have attached increasing importance to MDBs being innovative in the use of their capital, with the objective to use their capital capacity in an optimal way and to be in a position to maximise their impact. The latest and most comprehensive set of proposals to support this goal was put forward by the G20 Independent Review of MDB’s Capital Adequacy Frameworks. This Review made wide-ranging recommendations, which the EBRD and its Board of Governors have carefully considered. Notably, the Review recommended that MDBs should relocate specific numeric leverage targets – such as that set out under Article 12.1 – from MDB statutes to their capital adequacy frameworks. Taking this action would increase flexibility by enabling the EBRD to make necessary future adjustments to the targets without the need to amend its basic documents.
• Consistency with existing policy provisions in the policy area
The Union partnership with the EBRD is stronger than ever. The EBRD is involved in implementation of the Union budget under indirect management (grants, financial instruments, and budgetary guarantees) thus supporting the achievement of policy objectives of the EU Multiannual Financial Framework. EBRD is also a key contributor to Global Gateway implementation. The Union accounts for 40 % of total donor funds since the EBRD’s inception, thus being the largest donor to the Bank. In 2022, the Union contributed to the EBRD’s support for its countries of operation by providing EUR 998 million of donor funding and guarantees to support joint priorities, inside and outside the Union.
In 2022 alone, the Union and EBRD signed important forward-looking agreements, such as the Financial Framework Partnership Agreement, the InvestEU Guarantee Agreement and two Guarantee Agreements under the European Fund for Sustainable Development Plus (EFSD+). When implementing EU funds the EBRD should continue adhere to the rules and procedures as laid down in the Financial Regulation.14
The EBRD has been the largest institutional investor in Ukraine and has supported the country’s transition to a sustainable market economy for the past thirty years. Following the Russia’s war of aggression against Ukraine, the EBRD has worked closely with the Union and other international partners, such as the IMF, to promote common objectives in Ukraine. The scale of the support needed in the long run in Ukraine makes efficient and effective coordination with the other players, including the MDBs and IFIs, essential to maximise the impact of finite resources. The common goals are provided by the commitment of the Government of Ukraine to restoring and maintaining macroeconomic stability and progressing towards membership of the Union.
In this context the Union objectives regarding the EBRD are: (i) at least maintaining its voting share at the current level, in order to continue realising EU policy priorities in Ukraine, as well other EBRD countries of operation; (ii) amending the Agreement establishing the EBRD to a) extend the EBRD’s geographical scope, in a limited and incremental way, to certain countries in sub-Saharan Africa and Iraq; and b) to remove the statutory capital limitation on ordinary operations and delegate to the Board of Directors all aspects of the EBRD’s capital adequacy framework, in line with the G20 Independent Review recommendations, to allow for a flexible and dynamic capital management, while ensuring continuous control of the main capital metrics by shareholders.
• Consistency with other Union policies
The EBRD was established with a mandate to “foster transition towards open market-oriented economies and to promote private and entrepreneurial initiative in the countries committed to applying the principles of multilateral democracy, pluralism and market economics” across Central and Eastern Europe, Central Asia, since 2006 in Mongolia and, since 2012, the southern and eastern Mediterranean region. The EBRD generally applies and promotes Union standards and policies in its operations. Through its projects, the EBRD uses policy dialogue and the application of conditionalities (e.g., transition impact, corporate governance standards, procurement, environmental standards, etc.) to meet Union requirements in areas such as environmental and social policies.
The EBRD’s response to Russia’s war of aggression against Ukraine has been strong and in line with the Union policy, as the Bank quickly announced a comprehensive package targeting the deployment of EUR 3 billion of investment in 2022-23 in support of Ukraine.15 The EBRD’s response has also comprised significant support for the Bank’s other countries of operation affected by the war through its resilience and livelihood framework. The EBRD is an active participant in the Steering Committee of the Donor Coordination Platform, which is comprised of senior officials from Ukraine, the G7 and the Union. This Platform coordinates financing for Ukraine's immediate needs as well as for its economic recovery and reconstruction efforts. Participating in the paid-in capital increase of the EBRD is the most effective and efficient instrument to provide the greatest leverage and a stable basis for the EBRD’s continued investment in Ukraine.
In candidate countries, the EBRD’s pursuit of transition objectives dovetails well with the goal of progressing towards accession to the Union. The Commission’s preliminary analysis of Ukraine’s status as a candidate country for membership of the Union shows that significant reform will be needed across the board to bring Ukraine in line with the Union standards. The efforts of the EBRD – and the conditionalities which will surround that effort – will be consistent with successfully attaining these reforms in order to support Ukraine’s membership objectives.
2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY
• Legal basis
The EBRD’s capital was increased twice before, in 1996 and in 2011.16 The Union subscribed to additional capital on both occasions according to its share in the capital.
Following the entry into force of the Treaty on the Functioning of the European Union (TFEU), the 2011 decision to participate in the capital increase was taken by co-decision with Article 212 TFEU as legal basis which provides for the Union to carrying out economic, financial, and technical cooperation measures, in particular assistance with third countries.
Decision 602/2012/EU on the amendment of the Agreement establishing the EBRD to allow for the expansion of EBRD operations into the Southern and Eastern Mediterranean region was also based on Article 212 TFEU.
Considering the above precedents and that the purpose of the capital increase is to allow the EBRD to support the resilience and reconstruction of Ukraine, it seems appropriate to base the proposed Decision on Article 212 TFEU, including the ancillary amendment of Article 12.1.
• Subsidiarity (for non-exclusive competence)
The proposed Decision pertains to the Union’s direct membership of and shareholding in the EBRD.
• Proportionality
Not applicable
• Choice of the instrument
The purpose can only be achieved through a Decision by the Council and the Parliament.
3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS
• Stakeholder consultations
Between 2021-2023, the EBRD undertook an in-depth analysis on its future strategic direction. EBRD shareholders (which include, among others, all Member States, the EIB and the Commission representing the Union) have been actively involved in the process. In this framework, the EBRD carried out an analysis of capital enhancement options, based on its internal capital needs, the maintenance of its Triple-A credit rating, as well as the effective and efficient use of shareholders' capital. The current decision on the EBRD capital increase, the expansion of operations to sub-Saharan Africa and Iraq and the removal of the capital utilisation as a statutory limit, reflects in-depth analysis, discussions and negotiations among the EBRD's shareholders.
• Collection and use of expertise
The EBRD Board of Governors has reviewed the evolution of the EBRD’s work in Ukraine regularly since the start of the war. A series of reports by the EBRD’s Board of Directors have assessed the role which the EBRD can play both in sustaining Ukraine’s resilience in wartime and stepping up to significantly support reconstruction over the long term, while ensuring its continuous support to all of its countries of operation. These reports have examined the potential nature and scale of the EBRD’s activity, bearing in mind its particular institutional and operational strengths, its distinctive position in Ukraine and the work of others in support of the country. The reports have also systematically considered what shareholder measures might be needed to enable Ukraine to be best supported by the EBRD. This work resulted in the approval by the Board of Governors of Resolution No. 258 on EBRD’s Support for Resilience and Reconstruction in Ukraine of 18 May 2023, which instructed the EBRD Board of Directors to develop a concrete proposal for a paid-in capital increase for approval before the end of 2023.
In May 2022, the Board of Governors approved Resolution No. 248 entitled “Toward a Limited and Incremental Expansion of the Geographic Scope of the EBRD’s Operations to sub-Saharan Africa and Iraq”. The Resolution, which was based on an in-depth assessment of the EBRD’s potential value added in the region and the capital and financial impact on the EBRD of a limited and incremental expansion, approved, in principle, a limited and incremental expansion of the geographic scope of the EBRD’s operations to sub-Saharan Africa and Iraq.
The Board of Directors subsequently reassessed the capital and financial implications of a limited and incremental expansion to sub-Saharan Africa and Iraq, in the context of the overall assessment of the EBRD’s financial standing. The reassessment showed that within the period of the current Strategic and Capital Framework until 2025 and thereafter until the end of 2030, the impact of any expansion on the EBRD’s capital position would be limited and would not, in itself, impair the EBRD’s ability to support its existing countries of operations, jeopardise the EBRD’s triple-A credit rating or lead to a need for another capital increase.
The main reason for amending Article 12.1 of the Agreement establishing the EBRD to remove the statutory capital limit is to relocate nominal capital utilisation limits to the capital adequacy framework, managed at the level of the Board of Directors, in order to increase efficiency and flexibility in the use of the EBRD ’s capital. As the G20 Independent Review of MDB’s Capital Adequacy Frameworks recognised, in the long run there is the risk that the nominal statutory limit will become a binding constraint, which could prevent the EBRD from supporting its recipient countries even where additional risk-bearing capacity is available. The EBRD analysis has showed that the theoretical maximum level of operating assets which could be reached under the Capital Adequacy Framework was higher than under the nominal ratio. Removing the statutory limit and allowing the Board of Directors to consider the appropriate levels of nominal capital utilisation as part of its capital adequacy framework policies would allow a holistic assessment of the EBRD’s capital position to guide its lending activities.
• Impact assessment
Against the background laid out in the previous two sections, in accordance with the proportionality principle and past practice, the Commission has not developed a formal impact assessment.
• Fundamental rights
The proposal has no consequences for the protection of fundamental rights.
4. BUDGETARY IMPLICATIONS
The Union share in the EBRD subscribed capital equals to ca 3.03%, hence the Union would increase its subscribed capital by EUR 121 020 000, in the form of paid-in shares priced at EUR 10 000 per share. EBRD members can subscribe, on or before 30 June 2025, or such subsequent date not later than 31 December 2025 as the Board of Directors may determine on or before 30 June 2025.
The first instalment shall be paid by each member of the EBRD by the later of (i) 30 April 2025; or (ii) 60 days after its instrument of subscription has become effective. The remaining four instalments shall be paid by 30 April 2026; 30 April 2027; 30 April 2028 and 30 April 2029, respectively.
This initiative requires the use of the unallocated margin under Heading 6, or the use of the special instruments as defined in the MFF Regulation. This will be determined at the time of establishment of the Commission’s proposal for Draft Budget 2025 and subject to negotiations between Council and European Parliament.
The amendments to the Agreement Establishing the EBRD have no implications on the Union budget.
5. OTHER ELEMENTS
• Implementation plans and monitoring, evaluation and reporting arrangements
The Governor of the EBRD representing the Union reports annually to the Parliament and the Council on:
- the promotion of the EU's objectives;
- the use of EBRD capital;
- measures to ensure transparency of EBRD operations via financial intermediaries;
- the EBRD's contributions to risk-taking and effectiveness in leveraging additional financing from the private sector;
- cooperation between the EIB and the EBRD outside the Union.