EBRD's Organisational Transformation in Turbulent Times

Lessons from MOPAN’s Assessment of EBRD for MDB Reform and Beyond.

By Erika Maclaughlin

MOPAN has recently completed its first assessment of the European Bank for Reconstruction and Development (EBRD). Overall, the assessment confirms the continued relevance of EBRD’s mandate and highlights its leadership on global issues such as climate change. It documents the progress it has achieved in strengthening key functions such as risk management and private capital mobilisation. These achievements have occurred amidst EBRD’s efforts to adapt its activities to an increasingly complex operating environment and reinforce delivery of its comparative advantage. At the same time, the assessment highlights emerging challenges for EBRD’s future trajectory, including the need to better demonstrate its contribution to transition results through investment, knowledge and advice.

EBRD has implemented transformational changes in a challenging global context. This includes global and regional crises that have yielded innovations, highlighted pain points and driven further reform. This article presents the highlights of EBRD’s transformation journey, identifies its ongoing challenges and poses relevant lessons for broader MDB reform.??

Adapting to an evolving development landscape – Building a more effective and efficient EBRD.?

The EBRD is unique among Multilateral Development Banks (MDBs). It was established in 1991 to support post-Communist Central and Eastern Europe and the Soviet Union to transition to a market economy. Transition involves fostering the governance, structural, policy, legal and market structures that promote private investment and entrepreneurial initiatives.? EBRD’s transition mandate envisions a focus on policy dialogue and reform that promotes an enabling environment for investment – an area where other MDBs are now seeking to become increasingly active. EBRD is the only MDB that works with both the public and private sectors with a focus on private sector operations. It provides support to governments and private sector clients in a wide range of sectors and areas through its financial products, policy dialogue, advisory services and technical cooperation.?

MOPAN’s assessment has coincided with a period of intense change. In 2017, EBRD revised its transition concept, reflecting the increasing complexity of transition challenges. Following initial gains in supporting competitive market structures and investment-enabling policies, progress in driving transition and elevating living standards had slowed. Continued progress required more attention to systemic challenges, including social, institutional, environmental and human capital-related barriers to transition. In keeping with this more complex context, EBRD now frames its operations around six qualities that reflect an ideal market economy: competitive, well-governed, resilient, inclusive, green and integrated.??

When EBRD was established, it expected to deliver its mandate within 10-15 years of operations. On the contrary, demand for its support has grown steadily, with its portfolio growing by more than 25% since 2018 alone. Its mandate has remained relevant beyond its original geographic scope, with successful expansion to new markets in the Southern and Eastern Mediterranean region. In Egypt, for example, EBRD leads the energy component of the Nexus for Food, Water and Energy, a country-led platform driving net-zero transition and adaptation. In 2023, EBRD’s Governors agreed to expand operations further to selected countries in Sub-Sharan Africa and Iraq based on this growing demand for EBRD’s support.??

In light of its expanding operations, EBRD has undertaken an ambitious reform programme, updating its systems and processes to reflect a more mature organisation. These reforms have required carefully managed investment and change initiatives, implemented amidst the backdrop of the COVID-19 pandemic and the war in Ukraine. EBRD’s response to these emergencies has been agile and substantial – it was the first MDB to release a COVID-19 response package, providing EUR 12.3 billion in support to its clients to preserve transition and economic activity during the pandemic.?

As Ukraine’s largest institutional investor, EBRD has also more than doubled its support to Ukraine throughout the course of the war. Responding to the conflict has contributed to increased financial risks across EBRD’s portfolio, necessitating closer partnerships with donors. In 2023, EBRD agreed a EUR 4 billion paid-in capital increase with its Governors to enable ongoing support during the war and subsequent reconstruction while preserving its capital position in the medium-term. However, the overall trajectory of this crisis and the scope of implications for EBRD’s operations remain somewhat uncertain over the longer-term.??

Strengths and Achievements from EBRD’s Transformation.?

EBRD has made important progress in embedding its new transition concept into its organisational strategy, operations and its approach to measuring results. The six transition qualities are cascaded from corporate priorities to country strategies and individual investments, linked together by a standard set of indicators. The transition qualities guide the selection and development of EBRD’s operations, ensuring their relevance. In line with its unique mandate, EBRD has also sought to better integrate policy dialogue into its operations and results measurement, promoting responsiveness to countries’ needs and improving coherence across its portfolio. As MDBs embrace their role in promoting policy reforms that enable investment, EBRD’s experience provides some useful insights.?

In renewing its strategic architecture, EBRD has established cross-cutting priorities, demonstrating leadership in key areas like gender equality and Green Economy Transition. The proportion of operations that address gender-related outcomes increased six-fold over the assessment period. This support has since been expanded to encompass a focus on Equality of Opportunity, supporting human capital development and addressing persistent, multidimensional drivers of inequality. The proportion of “green operations” and green finance has also increased considerably. EBRD is also leading efforts to demonstrate climate results, scaling up Monitoring, Reporting and Verification and helping countries develop and enhance their Long-Term Strategies.?

Important progress has been achieved in enhancing private capital mobilisation – a critical aspect of MDBs’ comparative advantage and essential to scaling up finance for the SDGs. Whereas MDBs typically harmonise their operational approaches, they tend to “compete rather than collaborate” in scaling up private capital mobilisation. Their varied experience and achievements can yield valuable lessons. Following the introduction of its Mobilisation Approach, EBRD’s private capital mobilisation increased by more than 150%. Particularly notable is the progress achieved in leveraging partnerships with donors, insurance providers and institutional investors. These partnerships have helped scale up instruments that allow EBRD to manage its risk exposure and invest in more challenging contexts, including through unfunded risk participations and non-payment insurance.? Other MDBs have tried to increase the use of these instruments with more limited success.??

Opportunities for Further Transformation and Geographic Expansion?

EBRD’s areas of weakness and opportunity reflect the need to continue embedding and maturing its ongoing transformation. Although it has embedded its new transition concept in its results measurement systems, EBRD needs to enhance how it measures contribution to sustainable transition outcomes in its countries of operation. Whereas its operations demonstrate strong alignment to its country strategies and objectives, there remain opportunities to more clearly demonstrate how EBRD is making a difference in line with its mandate, “moving the needle” for transition in countries.??

Until recently, this challenge was further exacerbated by gaps in EBRD’s results management systems. As the scale of operations increased steadily, it became challenging to implement systematic performance assessments for mature operations and provide a comprehensive picture of institutional performance. Five years after a critical external review, EBRD has now designed and piloted a good practice self-evaluation system that is complemented by impact evaluation and learning reviews. It is now embarking on broader implementation. Efforts to support operational learning and knowledge flow are still nascent, with room to better balance supply-focused tools with demand-focused accountability structures and incentives that are critical for embedding learning into EBRD’s culture.?

EBRD’s planning and budgeting system has enabled implementation of critical reforms on a relatively flat administrative budget. This system allocates new resources and staff positions to strategic functions incrementally while requiring that these increases be offset by efficiencies where possible. However, this system may not provide the flexibility needed to allocate staff with the right skills and in sufficient numbers to build a robust portfolio and promote successful operations as EBRD enters into riskier markets. Clear principles and assumptions are needed around the up-front costs of entering into new markets that are essential for driving pipeline growth and yielding financial reflows back to the organisation. Growing a robust and performing portfolio in challenging markets takes time and involves higher risk. Assumptions need to be clear, tested and adjusted based on experience.

EBRD and Beyond: Lessons for MDB reform and the Sustainable Development Agenda?

MOPAN’s assessment of EBRD yields broader lessons for MDBs navigating a period of reform and other organisations seeking to adapt to an increasingly complex development context.?

Balancing the need for evolution, financial control and organisational resilience.?

As noted above, EBRD has overhauled and modernised its operational processes, organisational structure, IT infrastructure and HR all while maintaining a relatively flat administrative budget. This is no small achievement. Embracing the need for ongoing and long-term evolution, EBRD has also sought to “future-proof” the organisation through built-in review processes and the establishment of a Transformation Office. EBRD’s experience provides an example for other organisations to follow in implementing challenging investment programmes that enable better leveraging of technology to deliver results.??

However, tight control of the reform programme and budget has come with trade-offs. EBRD’s crisis response, though agile and innovative, has placed pressure on staff and new processes. Budget control has kept the organisation lean; however, existing staff have faced heightened delivery pressures while reforms for greater efficiency and modernisation are still in progress. Some new strategies have been unfunded and country offices report that resource allocation has not kept pace with expected delivery. Organisations and their members must strike a balance between delivery, evolution and efficiency on one hand, and ensuring organisational resilience, preparedness and sustainability on the other.??

Cultivating robust risk management practices for an evolving development context.?

Increasingly, MOPAN members are seeking to promote a stronger risk management culture within the organisations they fund. As organisations seek to scale up operations in challenging contexts, enhanced management of financial and non-financial risks will be essential for delivering sustainable results. EBRD’s experience provides a demonstration case for cultivating a robust risk management function through iterative reform, review and adjustment.??

At the outset of the assessment period, EBRD’s operational risk culture was deemed “ineffective” and a serious reform initiative was launched. It sought to strengthen its policy frameworks for risk, identify a robust governance structure and clarify roles and responsibility across the organisation, identifying multiple “lines of defence.” Ongoing engagement with internal audit has helped embed a risk management culture, identifying the next steps needed to institutionalise key practices and set the “tone from the top,” underscoring that risk management is everyone’s responsibility.??

Positioning knowledge as a strategic asset for results.?

Beyond financing, delivering knowledge is a vital part of MDBs’ comparative advantage. Knowledge is central to EBRD’s transition mandate, providing the evidence to support key policy reforms. Furthermore, countries are increasingly seeking advice from MDBs to adopt new technologies in the fight against climate change. The private sector’s role in development is expanding thanks to new financing instruments and public-private partnerships. Knowledge that supports the uptake of technology and good practices is also increasingly important for delivering non-financial additionality*, especially in more advanced markets where the private sector can access finance more easily on favourable terms. Countries increasingly rely on MDBs to deliver knowledge and transaction advice, in addition to finance, to engage the private sector and implement impactful projects.?

Like most MDBs, EBRD struggles to capture operational learning and demonstrate how knowledge and advice contributes to sustainable development and transition results. MDBs have emphasised financial additionality, whereas systems and incentives for demonstrating non-financial additionality remain underdeveloped. An emerging lesson across MOPAN assessments is the need for a clear and deliberate organisational approach in demonstrating the critical value addition of knowledge work, including for the realisation of expected non-financial additionality.??

Client-facing knowledge needs to be treated like a strategic asset, including through a specific strategic and governance framework, a tailored results management process and institutional incentives to seek out and apply lessons. Understanding how knowledge work adds value also requires closer and ongoing engagement with clients to understand their needs and identify how knowledge is consumed and used. These steps are critical for the EBRD, as well as other MDBs, to optimise delivery on their comparative advantage, working across the public and private sector to catalyse investments that support and accelerate the Sustainable Development Agenda.?

We invite you to read our full assessment of EBRD, available on our website as of October 1st. This report is part of our series of assessments and knowledge work across MDBs, contributing to a more coherent and effective multilateral system and cross-cutting lessons for MDB Reform.??

*MDB private sector operations are required to demonstrate additionality. Ultimately MDBs should seek to finance deals that would not move forward without their engagement and which are likely to yield development results and help open markets, including “demonstration examples” that promote additional investment. Financial additionality is a minimum requirement, ensuring that MDBs do not crowd out commercial sources of finance. This includes enabling financing close through improved lending terms, enhanced structuring and/or drawing in other investors. Non-financial additionality involves other non-financial benefits, including enhanced development results, technology transfer, management of political risks and contribution to private sector development. MDBs apply a harmonised approach to promote additionality in their operations.??