Sir Suma Chakrabarti, president of the European Bank for Reconstruction and Development (EBRD), speaks exclusively to Steve Hoare
If Sir Suma Chakrabarti is to leave a legacy after his term in charge of the EBRD ends in 2020, it will be that his bank has been a model for other development banks in showing how investing in the private sector can not only drive development locally but also help tackle corruption and cronyism by promoting good business practice.
“Fundamentally it comes down to the question of how do you make investments in the developing world commercially viable and developmentally useful,” says Chakrabarti.
He is keen to point out that the EBRD is one of the few multilateral development banks able to boast a net profit, which was up 25 percent to €985 million at the end of 2016. He is particularly proud of this at a time when other development banks are struggling to make money in emerging markets. For Chakrabarti, the answer is often the blending of market-based loans with some grant funding – the EBRD model.
“We have a lot of people coming up to us now and asking how we take this EBRD model further? How do we scale it up, so this business model can be adopted by others?”
He mentions advising on the launch of the Beijing-based multinational development bank (MDB) the Asian Infrastructure Investment Bank (AIIB). EBRD also advised the Inter-American Development Bank on the launch of its private sector arm, the Inter- American Investment Corporation (now IDB Invest).
Indeed, if Chakrabarti is to leave a legacy after his term in charge ends in 2020, it is to consolidate the EBRD’s leadership of the private sector side of development.
“I would like to show we are bringing results – not just through investments but also investments allied with policy changes. If I am to leave a legacy, then that is what it would be,” he adds.
EBRD’s position on the “stage” is a recurring theme of our conversation. During a long career in the development world, Chakrabarti has watched the bank move from being a semi-detached player in the market to centre stage.
This has been driven, in part, by the United Nations’ Sustainable Development Goals set in 2015. Chakrabarti believes the EBRD’s areas of expertise – such as energy efficiency and infrastructure – have moved it to a more pivotal role.
Chakrabarti also mentions the impact of crises such as Ebola and migration that have diverted aid towards humanitarian relief rather than pure development meaning private sector financing of projects has come to the fore.
“To achieve the SDGs we need more private sector financing,” he states. “Well, there are two institutions that are very strong in that area: ourselves and the IFC [International Finance Corporation]. That expertise needs somehow to be scaled up. We are very fortunate in that we have spare capital, so we can scale up.”
International Finance Corporation is one of the few institutions that can match the €9.4 billion that the European Bank for Reconstruction and Development invested in private sector projects in 2016.
While Chakrabarti is proud of the EBRD’s achievements in comparison to its peers, he claims not to see them as rivals. However, he acknowledges that some do.
He highlights incentives and people chasing volume targets as the root of the problem. The finance world is often driven by fear of missing out on your bonus. The fear of missing out if you get the pricing wrong or go too strong on policy conditionality will drive competitive behaviour.
“You need to have a framework which governs the way all the multinationals work together and you eliminate this competitive behaviour,” he says.
Chakrabarti says this is an on-going topic of discussion with other multinational development bank heads. Indeed, he is leading much of the debate as chairman of the informal group of regional development banks (comprising the EBRD, Inter-American Development Bank, Asian Development Bank and African Development Bank) and will, in 2018, chair the broader group of multilateral development banks, (which also includes the World Bank Group, the European Investment Bank, the Asian Infrastructure Investment Bank, New Development Bank and Islamic Development Bank).
“This is one of the big issues we are going to be focusing on,” he says. “There are documents but it is more about behaviours and holding each other to account on those behaviours.”
The top teams at the EBRD and the IFC meet every six months in Washington DC to tackle areas where there have been problems. But these are not one-off collaborations. The banks will talk throughout the year on specific projects to ensure they are not cutting across each other. He makes a secondary point about respecting one another’s areas of expertise.
“Expertise matters,” he continues. “I don’t want to turn EBRD into a public sector-focused institution. I don’t think that’s what we’re strong at.”
That job can be left to the Asian Development Bank or the African Development Bank, which are far more experienced at financing the public sector. But in an area such as energy efficiency, where Chakrabarti believes the EBRD would be regarded as the market leader, he says the Bank could do more.
“After all, [governments] all signed the Paris Agreement on climate change. It is going to be difficult to make those targets by 2030 unless we have more investment in energy efficiency.”
The MDBs are starting to have more conversations looking at how they can differentiate themselves and where they could do more. As an example, Chakrabarti mentions the EBRD’s conversations with the African Development Bank looking at ways to boost private sector lending in sub-Saharan Africa.
“That’s the spirit of cooperation and mutual support that I would like to see more of.”
A long journey
That spirit of cooperation and mutual support across boundaries is something Chakrabarti has fostered throughout his career.
“The story would have to start after University when I went to work in Botswana on a fellowship,” he begins.
He was sent to work on “development issues” in Botswana’s Ministry of Transport and Communications, which translated mainly into working on infrastructure projects.
“From early on I was a big believer in infrastructure playing a big role in development,” he says.
The other big influence at the time on Chakrabarti was the economic success of Botswana compared to many other countries in sub-Saharan Africa. It showed him the importance of strong institutions and what he says would nowadays be called “good government”.
From his work with the UK’s Overseas Development Agency via secondments with the IMF and World Bank, through to spells at the UK Treasury, Ministry of Justice and Department for International Development (DfID), these influences have solidified.
“When I was appointed permanent secretary of DfID in 2002, economics, infrastructure and good governance of institutions formed the bedrock of my thought process about development,” says Chakrabarti.
He feels that those things were neglected as the development focus around the time of the Millennium Development Goals necessarily switched to subjects with social outcomes such as primary school education and basic healthcare.
This led to a very state-based approach to development because healthcare and primary school education tend to require state intervention. In turn, this led to a greater focus on grant aid rather than lending.
“Health and education outcomes are not very commercially viable but they are obviously very economically beneficial,” says Chakrabarti. “The important thing about the SDGs is that they bring in the hard economic areas such as energy as well as governance.”
“I think that finally, perhaps for the first time, we have a set of goals, which really encompasses the whole development experience. It has been quite a long journey for all of us in our thinking. But it’s good to see the infrastructure/energy side, as well as the social goals and the governance and institutions side, all together in the sustainable development goals.”
The future of globalisation
Chakrabarti’s own journey has taken him from birth in West Bengal, India to Oxford, England at the age of five, where his father was studying a doctorate. He has travelled far and wide since then but has lived in Oxford for almost 20 years with his wife, a Japanese Oxford University management professor, and family.
As such, he could almost be described as a poster-child for globalisation. It has even been used as a brush with which to tar him, which tickles him greatly, but globalisation has had a rough ride recently. The election of Donald Trump in the US and the Brexit vote in the UK are just two outcomes that have been interpreted as part of a growing backlash against globalisation.
“For me, globalisation is a process not an outcome,” he says. “That’s why I focus on the Sustainable Development Goals. By 2030 there is a set of targets, which needs to be met, not just by us but by the governments that signed up to them. There are many ways to get to those targets. The process of globalisation will be one of them. But that process did not, in my view, put enough emphasis on the inclusion aspects.”
“EBRD is the bank that believes in free markets but we also, during the last three or four years, put greater emphasis on gender and inclusion – on trying to get entrepreneurs into the marketplace, who would have been neglected if we had not intervened directly in the process of globalisation.”
He gives the example of female entrepreneurs in rural Turkey who could not get access to finance.
“If that situation is left to itself, it is not going to get fixed by the market. So you have to work hard to convince the market that there is a commercial opportunity.”
In this instance, the EBRD convinced local banks to base loans on revenue streams rather than collateral, because collateral was property and property was in the husband’s name. The Bank now has Women in Business programmes in 16 of its countries of operation. A similar focus on SMEs aims at bringing young people into employment. These things have not traditionally been the bread and butter of MDBs but Chakrabarti argues that the EBRD has helped change this perception.
Many of the initiatives have been executed by encouraging local banks to increase access to microfinance.
“You want to build the local banking system,” acknowledges Chakrabarti. “If you want long -term development, EBRD and other development banks shouldn’t exist because the job is being done by the local banking system.”
One of the more controversial parts of the EBRD’s activities has been its dealings with regimes, which are perceived as undemocratic or corrupt. Is there a risk that Western democracies estrange others by trying too hard to convince them that their economic and political model is the correct one?
“We’re not terrifically culturally sensitive,” he laughs. “There are many different models and approaches but I am also a believer in universal human rights. There are some things we would like to see adopted everywhere, but it also has to be understood to be a bit of a journey in different places.”
He says that people often misunderstand the EBRD’s mandate. Its mandate is not to finance democracy. Its mandate states that it is committed to the principles of multi-party democracy and political pluralism.
It analyses governments’ commitment to these principles and has a 14-point criteria to assess them. Then it is up to the EBRD’s shareholders to decide the optimum amount of engagement with that country.
“Corruption is the classic issue in developing countries,” continues Chakrabarti. “Where there are problems, we take it up with them. Sometimes, we do that rather publicly but usually we have private conversations with governments about how best to tackle corruption.”
In February 2013, the EBRD president was in Ukraine and the situation was getting so bad that he was forced to appear on television and tell them that the Bank would not put up with the government continuing to extort local businesses.
That has led to some major changes, which the EBRD helped to design, including the creation of a business Ombudsman in Kiev, to whom companies could complain about petty mid-level corruption.
Human rights is another issue when the EBRD can play a policy role.
“If you want to build a good market economy, you need standards that will attract investors from around the world. Investors will look at things other than just economic opportunities. Politics matters.” When he joined the Bank in 2012, Chakrabarti felt that policy was an area in which the EBRD could be more active. He has spent the past five years trying to marry the Bank’s financial expertise with policy advice. This extends beyond corruption and human rights to more directly business-related topics such as energy tariff reform.
“We are more assertive on policy issues than we were in the past,” he states. “Politics is different. Even among democracies, there are many different democratic systems. The US system is not the same as the UK system. When we have these conversations we have to be alive and aware of criticisms of our own systems as well sometimes. It’s not a counsel of perfection. It is what can be done to improve, given your existing system.”
Chakrabarti shrugs off a suggestion that these are difficult conversations, citing his experience visiting government leaders during his time as permanent secretary of DfID.
“Where it is difficult, as it was in Ukraine under the Yanukovych regime, was where it was quite clear that personal and group interest was more important than the national interest. Now we have a government that is trying very hard because they see that what is in the national interest is also in their own personal and political interest.”
The role of China
Another country trying hard, in different ways, is China. China recently became an EBRD shareholder, contributed to the equity participation fund and, in time Chakrabarti hopes, will become a good grant donor.
“We think it is very good news that China is a member of EBRD,” says Chakrabarti. “It’s good for us to have the world’s second largest economy as a member. It’s good for the Chinese because they can look at a model of development, which is pioneered by the EBRD, and is quite interesting for them for their own development banks. It’s good for our countries of operations along the Belt & Road.”
EBRD is doing more in Central Asia than ever before. There has been a huge increase in the Bank’s investment in the region during the past few years. Including Mongolia, investment has risen 190 percent from €470 million in 2011 to €1.37 billion in 2016, of which a record €1.05 billion was in Kazakhstan.
“It is one of our poorest regions and it is probably one of the hardest places to get the private sector motoring. Working with China on Belt & Road initiatives will help.”
He highlights the Bank’s first co-financing effort with the AIIB on the $55 million motorway from Tajikistan’s capital Dushanbe to Uzbekistan.
“It is good to have the Belt & Road initiatives to focus on this region, which has been rather neglected,” says Chakrabarti.
Chakrabarti describes the relationship with Uzbekistan as previously being in “deep freeze” but he was heartened by the progress of the new regime, when he visited in March this year.
He met Uzbekistan President Shavkat Mirziyoyev and members of his government but, equally important to his due diligence, he met diplomatic representatives, local businessmen and civil society members. All his conversations suggested a government committed to reform. For now, the EBRD’s staff in the country are working out of their homes but a new office is expected some time this autumn.
“Scaling up” is one of Chakrabarti’s catchphrases. Since being appointed EBRD president, the Bank has opened in Jordan, Tunisia, Morocco, Egypt, Kosovo, Cyprus, Greece and Lebanon. This is how Chakrabarti’s spell in charge will be remembered.
Uzbekistan will follow and the Bank is about to start lending in Gaza and West Bank. He says he is surprised how easy it has been to find investable projects there. He estimates the public sector accounts for around 90 percent of loans from multilateral and bilateral donors in West Bank and Gaza, with the IFC the only player in the private sector. So there is plenty of room for the EBRD to contribute.
For Chakrabarti, the toughest task will be making sure money is spent where it is expected to be spent. This is a recurring theme in any terrain affected by conflict.
“But that is what we should be doing not running away from difficult issues,” comments Chakrabarti.
Covering a region that stretches from Casablanca to Vladivostok will throw up plenty of difficult issues but on the evidence of his career thus far, it is clear that Chakrabarti will not be running away from any of them.
“We have a duty to use our strength as an institution to bring focus to issues such as what makes a good investment climate. That cuts to the heart of trying to create a great private sector.”