I welcome the Minister for Finance to the House.
Death of Former Members. - European Bank for Reconstruction and Development Bill, 1990: Second Stage.
Question proposed: "That the Bill be now read a Second Time."
Thank you, a Chathaoirligh. The purpose of the Bill is to approve the terms of the agreement establishing the European Bank for Reconstruction and Development and to enable this country to honour the financial and other obligations associated with membership of that bank.
The agreement to set up the new bank had its origins in a French initiative at the end of 1989 which called for a Community response to the dramatic developments then taking place in central and eastern Europe. The initiative was endorsed by the Heads of State and Government of the European Community in December 1989 and the agreement was signed on 29 May last. This was a very short timescale for the negotiation of such an agreement and it is evidence of the degree of co-operation which has been forthcoming in response to the remarkable developments in eastern Europe. While membership of the bank will cover a much broader international spectrum, it will have a special European character because of the scale of European involvement in it.
The whole tenor of East-West relations has been transformed as a result of the far-reaching reforms taking place in central and eastern Europe and the Soviet Union. The changes in central and eastern Europe mean that it is no longer appropriate to think in bloc-to-bloc terms. The newly-emerged democracies — and in particular Czechoslovakia, Poland and Hungary — carry out independent foreign policies which are based on similar premises to those of western European countries such as respect for human rights and for international law, and which reflect their particular national concerns. They are anxious to increase their links with western Europe in general and in particular with the Community, which they see as a powerful support for democracy and for economic reform.
However, it must be acknowledged that the degree of progress in introducing reforms is uneven. For example, Hungary, Poland and Czechoslovakia are most advanced while the situation in Bulgaria, Romania and Yugoslavia requires careful monitoring. The position in the Soviet Union is much more complicated. This is partly because of its size but recent uncertainties surrounding the extent and the pace of the reform process are also a factor.
The Community has been in the vanguard in providing and co-ordinating economic assistance in support of reform in central and eastern Europe. A wide range of measures to assist the transition from command to market-oriented economic structures has been agreed. Priority areas in fields such as agriculture, trade, investment, environment, energy and training have been identified in line with the real needs of these countries and projects are already under way in most of these sectors. In addition, various instruments at EC level have been put in place, for example, European Investment Bank and European Coal and Steel Community loans. In all, assistance to the region, including grants, loans and credits, committed since June 1989 by the major donor countries known as the G24, amounts to the impressive figure of $31 billion. That amount includes the roughly $13 billion of capital for the European Bank for Reconstruction and Development.
The economies of eastern Europe must go through a fundamental process of restructuring from inefficient production and distribution systems, based on central planning, to the market system which we take for granted. It is difficult for us to grasp fully the scale of change that is required when whole nations have been conditioned for the past 50 years to a rigid system of planning that stifled initiative and individual enterprise.
One of the perverse consequences of the economic reforms that are now taking place is that output in these countries will stagnate or decline in the short term due to the impact of the adjustments that are required. New structures and new institutions must be put in place and the changeover to world prices and payment in convertible currencies will put an extra strain on financial resources. The elimination of widespread subsidies, with only partial compensation for consumers, and the threat of unemployment add further to the difficulties that arise. There is also a distinct risk of mounting inflation.
For the longer term, however, the outlook is much more optimistic and economic performance should improve significantly provided these countries adhere to sound economic policies during the process of integration into the free market economy. The early indications are that the authorities in these countries generally understand the importance of this but they will have to withstand pressures as people's expectations are not being realised quickly.
Help is needed from the West during the difficult period of transition and help is being provided in a number of ways. International and European Community institutions are organising assistance and a number of countries have bilateral arrangements for special aid. Much has already been achieved in a very short period. The European Bank for Reconstruction and Development can have a powerful influence on the transition process. There are many projects waiting for assistance and it is most important that no time is lost in providing the necessary resources for the new institution to enable it to fulfil its mandate.
The objective of the bank is to promote private and entrepreneurial activity in those central and eastern European countries which are committed to multi-party democracy, pluralism and market economics and to foster their transition towards open market-oriented economies. The bank will have a broad range of functions. It will provide loans, guarantees and technical assistance, make equity capital investments and underwrite the issue of securities. It may also accept special funds and deploy them in accordance with whatever agreement is reached with the donors of such funds. Its activities will also cover such areas as management education, marketing, training and assistance in setting up the structures which are currently lacking in eastern Europe. These include legal structures to underpin private ownership and financial structures in banking and capital markets.
The bank's financial assistance will be directed towards specific projects. It will not lend to Governments to support programmes of economic adjustment or to finance balance of payments deficits. These will remain areas for the continuing attention of the International Monetary Fund, the World Bank and the Community itself. The main emphasis in the bank's operations will be on the private sector and on State-owned enterprises which are being privatised. The bank's operations will not be confined to the private sector and it will be able to assist the State sector for certain purposes, such as infrastructure, subject to a limit of 40 per cent of its operations both in the individual countries and overall.
Central and eastern European countries meeting the conditions set out in the agreement are eligible for assistance. It is possible that the entitlement of any recipient member to the bank's funds be limited under Article 8 where that member is judged to be implementing policies which are inconsistent with Article 1 of the agreement. Any such limitation would require the support of two-thirds of the Governors representing three-quarters of the total voting power.
The sheer size and potential demand for resources of the USSR raised the question, at an early stage of the negotiations, of the extent of this member's access to the bank's funds. The difficulty was finally resolved by the USSR limiting voluntarily its access to funds over the first three years. The relevant request from the Soviet authorities is reproduced on the last page of the Bill.
The effect of this arrangement is that the USSR will not be able to receive funds from the bank in excess of what it will have already paid in for its shares in the bank over this three year period. The limit on the amount of funds involved is in the order of IR£80 million. In addition, the range of activities qualifying for assistance in the USSR will be more restricted than for other recipients. Any decision at the end of the three year period to widen USSR access will have to command a majority of 85 per cent of the voting power of members.
The initial capital of the bank will be 10,000 million ECU, 3,000 million of which will be paid in and the remainder subject to call. Broadly speaking, this will set a limit of 10,000 million ECU on the bank's operations over the next five years. Of this, 3,000 million will be funded from the paid-in capital of members and the balance of 7,000 million will be borrowed on the international capital markets. It is only in the event of things going drastically wrong that there would be any question of a call on the balance of 7,000 million of members' subscribed capital.
The prospective founder membership of the bank and the allocation of its initial share capital are set out in Annex A to the agreement. The main points of interest are as follows. When the agreement was signed there was 42 prospective members of the bank, comprising 40 countries and two institutions, namely, the European Community and the European Investment Bank. The articles of agreement specify that membership is open to European countries, non-European countries, members of the IMF, the European Economic Community and the European Investment Bank.
The European Community holding, if we count the shares of the member states, the Community itself and the European Investment bank, amounts to 51 per cent of the shares of the bank. This does not, however, secure control of the bank in all circumstances as most of the non-routine decisions require majorities of two thirds or over.
The US has the largest individual country share at 10 per cent; other major countries each have 8.5 per cent; the USSR has 6 per cent and the remaining shareholdings vary generally in proportion to a country's resources, with Ireland having 0.3 per cent. The breakdown of share capital between Community member states is broadly on the lines of their shares in the capital of the European Investment Bank.
Since the agreement was signed, the two Germanys have been reunited and the German authorities have indicated that they will not be taking up the shares allocated to the former German Democratic Republic. Germany will, therefore, continue to have the same proportion of shares as the other large Community members. The former GDR shares will remain unallocated for the present and will be available for allocation either to existing founder members or to any new members the bank might decide to admit when it is up and running.
On becoming a member, Ireland will subscribe 3,000 shares. This will represent 0.3 per cent of the bank's total subscribed capital. While the cost of these shares is about 30 million ECU the actual paid-in element will be 9 million ECU or IR£6.9 million at current exchange rates, payable over five years. This will amount to 1.8 million ECU or approximately IR£1.4 million a year and will be paid from the Central Fund.
Payment of our subscription will become due after sufficient members have ratified the agreement to allow for its entry into force and after Ireland has ratified the agreement. It is expected that the agreement will enter into force shortly and a first meeting of Governors is planned for April. Assuming speedy ratification by Ireland, the cost to the Exchequer of IR£1.4 million per annum will arise in each of the years 1991 to 1995. Up to 50 per cent of each instalment of paid-in shares may be made in promissory notes which will be encashed by the bank as needed for its operations. Ireland's maximum liability to the bank will be the unpaid share of its subscribed capital.
The new bank has a number of unique features in relation to other multilateral institutions and I would like to mention a few of these. Its statutes contain express political criteria in relation both to membership and beneficiaries. These cover a commitment to multi-party democracy, the rule of law and human rights. Its activities will span both the public and private sectors and it will have a wide range of instruments at its disposal. It is unusual in having Soviet, eastern European and United States participation as founder members. It has a majority Community, and even bigger majority European, shareholding and its capital is denominated in ECU.
In the course of the negotiations a number of candidates for the location of the bank were put forward, including Dublin. It did not prove possible, however, to get a Community consensus on a single location and the wider negotiating conference eventually decided that the bank's headquarters should be in London.
Overall control of the bank will be exercised by a Board of Governors. Each of the members will appoint a governor, normally the Finance Minister. Governors will meet annually to review progress and decisions on particularly sensitive issues will be reserved for them.
The day-to-day running of the bank will be delegated to the Board of Directors. This board will consist of 23 directors. Eleven will be elected by the Community, its member states and the European Investment Bank. Of the remaining 12, four will be elected by recipient countries of central and eastern Europe, four by other European countries and four by non-European countries. There will be an equivalent number of alternate directors. Ireland will share a directorship and an alternate with Denmark on a rotating basis.
The bank will not be in competition with any of the existing international financial institutions. Rather, it sees itself both as a complement and a catalyst. It will complement the activities of the existing multilateral institutions in undertaking co-financing with them and in concentrating on individual projects where some of the other institutions take a more global approach. It will work in close liaison with, and benefit from the experience of, the European Investment Bank which is also one of its own members. It will co-operate closely with the European Commission which is co-ordinating a broad range of multilateral aid to eastern Europe.
Turning to the Bill itself, section 1 defines various terms and section 2 provides for the approval of the terms of the agreement.
Section 3 contains the financial and other provisions. In particular, subsection (2) provides for the payment out of the Central Fund both of our initial subscription, and of any subsequent subscriptions which might arise if the bank's capital were to be increased and we were to participate in that increase. Subsection (3) provides for the issue of promissory notes. Subsection (4) provides for the disposal of any moneys received under the agreement, for example, under any distribution of net income that might be decided on.
As is customary, the Central Bank will act as depository for the EBRD and subsection (5) makes provision for this. In addition, this subsection also provides that the Central Bank may advance any moneys required for subscription payments. Under subsection (6), the servicing costs associated with any moneys thus advanced will be charged on the Central Fund. Section 4 contains the short title to the Bill and the terms of the EBRD agreement itself are set out in the Schedule to the Bill.
I commend the Bill for the approval of the House.
I welcome the Bill to the House this afternoon, I can assure the Minister of full co-operation in its speedy passage. We have agreed to take all Stages here this afternoon, time permitting.
The Minister has outlined quite comprehensively exactly what is behind this Bill. Its purpose is to allow for ratification, on behalf of our country, of the agreement establishing the European Bank for Reconstruction and Development or the EBRD and also to enable this State to comply with financial and any other obligations of membership of the EBRD.
The Minister has pointed to the major changes in central and eastern Europe, particularly in the past 12 months. Extraordinary changes have taken place in this part of the world. Yesterday's dictatorships have been replaced by today's reborn democracies. The centrally planned economies of communist states, as the Minister said, which stifled initiative and enterprise, have given way to the opportunities and, hopefully, the disciplines of the free market.
The Minister also adverted to the fact that some of the disciplines of converting to the free market may bear heavily on the ordinary people of the countries involved. They may not quite appreciate the sacrifices, and indeed the problems with unemployment and redundancy which would effectively be new problems to them. Those of us who have experienced life in the free world, particularly in what we refer to as the West, have reacted very quickly. Certainly, central and eastern Europe and the Soviet Union are aware of the considerable goodwill that exists in the West to help them in their very difficult task of transfer from a centrally planned economy to the free market type situation.
We must continue to help and we must continue to influence events because it is very much in the interest of the countries concerned. However, economic stability is as much in our interest as it is in the interest of the states who will be recipients of the funding from the EBRD. Our speedy ratification of this agreement is one tangible way of showing our long term commitment to the countries involved.
The whole concept of the European Bank for Reconstruction and Development is based on the same principle of international multilateral development banks, for example, the World Bank which operates itself in the public sector but its offshoot, the International Finance Corporation, operates in the private sector. Indeed, the World Bank has many regional offshoots which we can look to as template for what we are talking about.
The EBRD is similar in operation and structure but will operate in what has been referred to as the European theatre, with particular emphasis on central and eastern Europe and indeed the Soviet Union. It will be funded according to Annex A in the Bill by the list of countries, a very interesting amalgam of countries. Fifty one per cent of the shareholding will come from the European Community, both the states and two major institutions involved, the Community itself and the European Investment Bank. The two institutions, the European Economic Community and the EIB, will hold 6 per cent of the capital subscription with 30,000 shares each. Forty five per cent of the shares will be held by the rest of the European Community, divided in different proportions among the states. The main economies in Europe seem to have about 8.5 per cent each.
I cannot quite figure out what was the formula for dividing up the shares. I presume somebody sat around a table and hammered out an agreement but it does not seem to reflect GDP or any specific criteria that is apparently obvious at any rate, maybe there is a formula. It would be interesting, if the Minister was in a position when replying to Second Stage, to indicate how the proportion of shares was actually allocated to each of the member states. Perhaps it is not scientific; perhaps it was purely an agreement that took place during the conference in France when this whole concept was being developed.
As the Minister pointed out, the French were the initiators of the idea; the genesis of this development bank came from the French. There will be 42 different participants. One of those still listed in the Bill as a participant is the GDR, the German Democratic Republic. Time has moved on and since the initial concept the unification of Germany means that the GDR is not a separate entity from Germany as such any longer. I understand that the united Germany is not taking up the GDR's 15,500 shares. Perhaps, when the Minister is replying, he could indicate why that is so or what indeed will happen. Will these just be unsubscribed, will these shares not be taken up by anyone and what exactly will be their status?
I understand the reason the united Germany is not taking up the GDR shares is that it would upset the balance of the major economies in Europe having 8.5 per cent each. If Germany, as we now know it, was to take over the responsibility for the GDR subscription they would then have the highest number of shares of any individual country in the Community. Perhaps it is only to prevent that happening that Germany has not taken up the GDR shares. It is an interesting point, if not a major issue, and perhaps the Minister could expand on the thinking behind it.
The decision to give the European Community a majority — they have 51 per cent of the shares — as made by the European Council in December 1989. It is, after all, a European bank even though the members of the bank are drawn from far afield, including the US, South Korea and various other interesting contributors, but mainly it is a European bank. On that assumption and because its genesis was European, and as it is the European Community who are spearheading the whole operation, that is why the majority shareholding is held by the Community. It has been referred to as an inter-governmental agreement plus support from the EIB and the European Economic Community.
Annex A lists the individual members who will subscribe to the initial authorised capital stock. Interestingly, there are only two institutional members. I would like to know from the Minister if there was a deliberate decision taken to confine the number of institutions that could become part of the bank to these two, whether others were looking for membership as well or whether there were only two knocking on the door in terms of taking a shareholding. There is a large number — I believe it is something like 42 — of different members only two of whom are institutional members. Could the Minister expand on that and explain whether the two institutions mentioned in Annex A were the only two interested or whether there were others which were not considered or were refused?
The Minister explained at length the aims of the bank, to facilitate a transition to market-oriented economies and to help the private sector mainly and the public sector to privatise in the recipient countries. This is all dealt with in detail in Article 1 of the agreement which states:
The basic purpose of the bank is to foster the transition towards open market oriented economies and to promote private and entrepreneurial initiative in those central and eastern European countries which are committed to, and are applying the principles of multi-party democracy, pluralism and market economy.
It is straightforward. We all support the aims of the bank. The interesting aspect, — and the Minister referred to this in his speech — is that this is the first time any bank or financial institution has specific political aims as part of its terms of reference. That deserves underlining from our point of view. Article 8 is designed for the Soviet Union to be sure one recipient country would not get the maximum amount of the resources. There are certain conditions and political considerations that must be in operation in each recipient country before funding can be considered. This is the first time this has ever been considered. It is patently obvious to us all why it is an essential consideration in relation to lending from this particular institution.
This will not be a bank involved in concessionary funds. As the Minister said, it will not get involved in underwriting national debts and major structural funding in that sense. It will give technical assistance and take equity in firms. It will lend also, mainly to the private sector. There will be a balance of 60:40 in terms of its lending, private versus public sector, 60 to the private sector, 40 maximum to the public sector, with the main focus on the private sector and the sector in need of privatising which may at this time be part of the public sector but public sector bodies that want to privatise.
The World Bank is also operating and indeed is investing very heavily in central and eastern Europe at this time with an emphasis on public sector investment. This bank will give loans, equity, guarantees, technical assistance of many kinds. That will include feasibility studies, management education, as in the list before us and indeed in the Minister's contribution here this afternoon. It will not be in the business of giving loans for broad sectoral reform. The money will be directed to specific investment projects. It will be more equivalent to the type of funding the European Investment Bank is now involved in and that type of approach rather than the present World Bank approach.
There are discussions ongoing in relation to debt forgiveness and rescheduling of repayments with the IMF at the moment, particularly in relation to Poland. The European Reconstruction and Development Bank will have specific country strategies. This will probably be the most complicated end of its brief because there is a wide variance at this point in the stage of development of the different countries. The Minister said there is almost a two-tier structure there in relation to the stages of development of the recipient countries. He said:
Hungary, Poland and Czechoslovakia are most advanced — this is in relation to the degree of progress in introducing reforms — while the situation in Bulgaria, Romania and Yugoslavia requires careful monitoring.
It is interesting that he considers Poland most advanced. I read an article at the end of December in one of the national newspapers quoting Dr. A.J. O'Reilly and his views of the Heinz Corporation and potential investment in central and and eastern Europe and the Soviet Union. He was quoted as saying a visit to Poland was a traumatic experience even though they have enormous requirements for food products. He stated they were at ground station zero when it came to reform and their transition for a free market. That is one man's personal view. I am not in a position to contradict it or support it.
If the Minister is saying effectively that Poland with Hungary and Czechoslovakia are in the fast lane in terms of their progress, and international business enterpreneurs reckon that they are at ground station zero. I really do not know how much work there is to be done on Romania, Bulgaria and Yugoslavia. It paints a very bleak picture of the enormous job that has to be done. The bank will require strategies for individual countries and they will have to consider the ability of each country to repay.
I mentioned the Polish situation broadly. My facts come from an article by Helen Shaw which I read in The Irish Times on 18 February. She wrote a very interesting article on the Polish moves to a market economy and highlighted aspects of the progress they are making there that perhaps we might not have been very aware of. Perhaps Doctor A.J. O'Reilly was unaware of them too when he stated that Poland was at ground station zero when it came to progress and to the transfer from a centrally planned economy to the free market. The Finance Minister — Mr. Balcerowicz — is credited with being the intellectual force behind the economic reform programme in Poland at the moment. He has been named European economic politician of 1990. I hope, behind that title, hangs a man of true genius because that is what is needed. Each of the recipient nations will need a Balcerowicz to sort their problems out, apparently. Although the Polish public are now facing high food prices, unemployment and redundancy, which are all new to them, at least they no longer have major food shortages or major queues for basic foodstuffs. Their problem now is their inability to pay rather than availability. Inflation is still at about 5 per cent per month there and industrial production has fallen sharply as unemployment has risen. Their biggest problem has been the lack of foreign investment to help them in privatising. Privatisation of Poland's 7,000 State companies is an urgent priority of the Government. A new privatisation ministry has been established. I presume it will be this Minister who will have the task of drawing up the Polish strategy and of liaising with the bank we are lending our imprimatur to here today.
The central problem for Poland, as for many other emerging democracies, is attracting foreign investment. There are over 3,000 companies with foreign capital registered in Poland at the moment, with foreign equity of around $400 million, but only 1 per cent of the ventures registered involved investments of over $3 million; so there are lots of small amounts of money going here, there and yonder but there is no major investment programme. One of the big disincentives up to now has been the restrictions on transferring their profits out of Poland once they have invested in the companies.
Where are our socialist friends?
Rest assured that they will probably appear at some stage of the afternoon.
A new foreign investment law is now set to address the situation. Having referred to Poland's attempts to change their situation I would love to know from the Minister if other recipient countries will have the same difficulty in relation to the repatriation of profits and dividends, etc. as Poland have had or would have had if they did not change the law. In other words, are there disincentives to investment in the other central and eastern countries as there appears to have been in Poland up to now, albeit for small once off very risky-type investments? For major investments you must have peace of mind in the donor company, or in the bank involved, to ensure that any profits can be repatriated if and when necessary.
There is a Mr. Piotrowski in Poland who is President of the Foreign Investment Agency; apparently that is modelling itself along the lines of the IDA. Maybe I flatter it by saying that, or maybe I flatter the IDA, I do not know because I do not really know what the structure is. They have been liaising with the IDA and have, if you like, plagiarised — and I mean that in the best sense of the word — a lot of the practices of the IDA in terms of attracting investment and in giving incentives to invest. Indeed, the IDA, if you like, have been the role model for the Foreign Investment Agency in Poland. The Foreign Investment Agency see the new legislation as a major breakthrough. It would be possible now with the change in law to repatriate all profits, dividends and capital gains and to liquidate investment immediately. From the point of view of substantial investors it is a real incentive. Those are the views of Mr. Piotrowski. The new law will provide guarantees against potential losses in the event of nationalisation or expropriation and unsuccessful ventures can be liquidated immediately. Apparently the three-year tax holiday for investors in Poland is being abolished but it will be replaced by other incentives which, according to Mr. Piotrowski, will be more equitable.
The attraction of foreign investors through joint ventures is still the main emphasis for the Polish Foreign Investment Agency but they are beginning to explore green field investment projects generally. The legal procedure for setting up a joint venture is also being eased. There were fairly cumbersome legal procedures in Poland for getting into a joint venture and, with the exception of the strategic sectors of energy and defence, foreign companies will be allowed to create joint ventures with private Polish firms from now on without seeking the permission of the Foreign Investment Agency. Up to now, they needed permission and it was a fairly bureaucratic procedure to get it.
Already in Poland there are big names like ICI, Coca Cola and Hyundai testing the water. Coca Cola registered a Polish subsidiary in mid-January of this year while the British firm of Pilkington announced a $140 million investment in a glassworks last December. The Japanese corporations Sony and Mitsubishi, Johnson and Johnson and Proctor and Gamble all have investment projects in the pipeline for Poland. I wonder why the Heinz Corporation take such a bleak view of investment in Poland even though there is a huge need in Poland for food products. Maybe they will change their minds too.
The Polish admit that it is proving very difficult to create a competitive market despite the gains there. It is a painful process and the ordinary people, as the Minister pointed out in his speech, did not realise how painful the transition would be from the centrally-planned economy to the free market. That apparently is the Polish situation. While my information comes mainly from Helen Shaw's research on Poland, I would be interested to hear from the Minister what the comparable problems and structures are in the other recipient countries. If those are the problems in Poland, what is the situation in Hungary and in Czechoslovakia which are considered, along with Poland, most advanced in terms of their progress in introducing reforms? Indeed, if that level of problems exists in the countries that are advanced along the trial of reform, what problems face this European bank in Bulgaria, Romania and Yugoslavia? A few details in relation to the present obstacles to investment and free trade in these countries would be very interesting particularly if we can compare them with countries of which we know a little more.
The European Investment Bank is very heavily involved in eastern Europe, in transportation, rail, electricity and communications projects generally. If we can top up our commitment towards helping these nations transfer to a market economy with this specific move today I think it would underline our commitment to them and our promise of help in the very difficult job before them.
I mentioned Article 8 briefly. This deals specifically with the requirements of the Soviet Union. It is included to ensure that no one recipient state would be in a position to garner too much funding at the expense of the other states. The extent of the problems in the Soviet Union and the extent of the reform job to be done there is hard for us as a small state to comprehend. We as a nation are giving 0.3 per cent in terms of shares. For all of our willingness to help on the assumption that the political conditions will continue to be met in the Soviet Union, one must ensure that we give as much as possible to the Soviet Union but not at the expense of the other central and eastern European countries.
We must register our concern at recent moves in the Soviet Union. Only a year ago we were rejoicing at the positive political fallout at the ending of the Cold War and we were hailing President Gorbachev's contribution to the ending of German partition and indeed the emergence of the post-Communist states of central and eastern Europe. This contribution was enormous. It is amazing how, in one year, the situation has changed for him. It is strange on the international scene but more so on the domestic scene. One can only look with increasing concern at developments within the Soviet Union.
While there was a tremendous positive political fallout at the ending of the Cold War, there is a deepening economic and political crisis in the Soviet Union which has profound implications for us in the West and for all the post-Communist states and for their relationship with the European Economic Community.
One can be thankful for the harmonious reunification of Germany and for the prospect of a relatively painless integration into the European Community of the new Germany. There will be problems. West Germany is in a position to bear most of the costs involved. The Community will have to help but, relatively speaking, its integration into the Community will be painless when one measures it against the extent of the job to be done in the rest of central and eastern Europe and against the enormous economic and political difficulties that become more and more apparent in the Soviet Union as time goes on.
The political conditions to which the Minister referred and are mentioned briefly are unique and are worth underlining. They are very necessary given the specific job that this bank will have to do. We can only hope that money will not be refused for any project in any of the central and eastern European countries nor, indeed, in the Soviet Union because of lack of fulfilment of the political conditions. There may be a question mark in relation to democratic procedures, or in relation to human rights' violations or some interference with the transfer to a free market economy. Let us hope that they do not arise. If the political conditions are never breached, progress will continue as we would expect and wish in the recipient countries.
The Minister mentioned that the headquarters of the bank is to be located in London.
I thought it might be Cork.
I will not even bother mentioning Wexford at this stage but I thought that the Financial Services Centre might have had a look in. Apparently it was suggested. I would like to know from the Minister to what extent the viability of locating this bank in the Financial Services Centre was investigated and why it was turned down. We would like to know. It would have been a tremendous boost for our new Financial Services Centre if we could have caught a big fish like this. There are logistical reasons perhaps that it could not be there. I do not know but we would love to have the reasons it was not considered on the record from the Minister.
The Minister explained the method by which capital will be subscribed and, indeed, our net commitment which will be £1.4 million over five years. It is a modest contribution and one we give very willingly, given the enormity of the terms of reference and the job to be done by the bank. Last September there was a debate in the House of Commons. We have moved quickly in this instance unlike our record on the ratification of many other matters from Europe which have been sitting on desks gathering dust in various Departments, or with the Parliamentary Draftsman. The agreement was only signed in May 1990; it is not quite 12 months ago. I understand and support the reasons. Let it be a reminder of how we can move when the will is there to do so.
The United States was being offered 8.5 per cent along with France and Germany and other major economies in Europe. They requested 10 per cent and have now got it if my facts are correct. Could we have an explanation for this? What are the implications? Perhaps there are none. Obviously those drafting the original breakdown of the shares reckoned that 8.5 per cent was the proportion that would be due to the US, but now they have requested and got 10 per cent. Has another nation taken a smaller share holding as a result or was there a proportion of shares unallocated at the time? I would like to know the implications, if there are any, of the increase from 8.5 per cent to 10 per cent of the US shareholding.
The US is now the largest single shareholder even though the European Community has a majority of 51 per cent. The Minister referred to the Soviet Union's agreement to voluntarily limit their call on the bank. Article 8 (4) (i) allows for this — any potential recipient country may request that the bank provide access to its resources for limited purposes over a period of three years, etc., page 10 of the Bill refers to this.
There is a very interesting letter here from Mr. Victor Gerashchenko who is Head of the Soviet Delegation present at the Conference on the Establishment of the European Bank for Reconstruction and Development. He wrote to the chairman, it is on page 42 of the Bill, and I quote:
I would like to inform you that my Government is prepared to limit its access to the Bank's resources pursuant to paragraph 4 of Article 8 of the Articles of Agreement of the Bank for a period of three years starting from the entering into force of the Articles of Agreement of the Bank.
Also in that letter Mr. Gerashchenko said:
Certain difficulties largely stem from fears of a number of countries that due to the size of its economy the Soviet Union may become the principal recipient of credits of the Bank and therefore will narrow its capacity to extend aid to other Central and Eastern European countries.
Mr. Gerashchenko is accepting fully the concerns and needs for Article 8 to be included in the Bill. I think the assurances indicate that the Soviet Union understands fully the principle of the establishment of the bank and indeed will not make unnecessary or undue demands which could limit the bank's ability to aid other central and eastern European countries.
I would like the Minister to develop his views of what the position would be in relation to the Baltic states if their present quest for independence is achieved in the near future. It is, perhaps, more relevant in some states where they are making a virulent effort to acquire independence, than in others. I understand that this Bill and, indeed, the bank's terms of reference only deal with the Soviet Union and with central and eastern Europe and that the Baltic states per se are not considered in any of the present situations. If the agreement had to be amended in some way, what would be the procedure? Would it be the responsibility of each national parliament of the individual donor countries to amend the agreement, or would it be a matter of a European amendment or the governors of the bank amending the agreement as each governor will represent each member state?
The Governors will be the Ministers for Finance of each state, if I recall our Minister's reference to this a short while ago. Will it be the governors who have the amending power, or what will be the procedure for the amending of the agreement, if and when the Baltic states attain independence? If they do not attain independence, there will be major implications for the Soviet Union's ability to call on funds for this bank because it would appear that the only way the Baltic states will not attain independence will be if some of the political considerations that are pertinent to this Bill are not met by the Soviet Union. These include the use of procedures or methods to quell problems in the Baltic states which are anti-democratic in any way and failure to accept the results of referenda and other parliamentary procedures that may be used to give expression to the views of the people in these states. It is interesting to consider the development of the Baltic states and how it would impinge on the ability of this bank to fund the Soviet Union and how, if ever, the Baltic states would be able to become recipient countries in relation to this Bill themselves.
The president-elect of the Bank at the moment is Mr. Jacques Attali. He is the president-designate, to give him his correct title and I assume that he will be ratified or elected by the governors at this first meeting. He will be obliged to base his recruiting and staffing for the bank on as wide a geographical representation as possible. I take it then that, apart from our governor representing the Central Bank and the Irish people on it, there will be opportunities for many Irish people in the financial world to gain experience in this particular bank.
At the moment there is an interim team operating pending the ratification of the agreement in all the different countries and the actual establishment of the bank. They are negotiating the headquarters' agreement which appears to be for London. They are looking at different projects in eastern Europe so that there will not be an undue lead-in time in terms of actual help with funding of projects. Once the agreement has been ratified they will be ready to issue money towards projects once the green light has been given. At the moment we have one person on secondment from the Department of Finance working with the interim team, but it would be interesting if the Minister could indicate to us how, in fact, the staffing on as wide a geographical representation as possible will be implemented.
I fully support the Bill before us. This Bill will ratify the establishment of the European Bank for Reconstruction and Development and I welcome Ireland's participation. In one year, since the ending of the Cold War, we have gone from a euphoric situation in relation to political implications to one of deep concern regarding the economic problems that accompany transferring from the centrally-planned economies of central and eastern Europe and of the Soviet Union to a free market situation. We can help them by ensuring that there is foreign investment available to make this transfer as smooth and as easy as possible. It is in our interest that the transfer should not be bumpy or difficult because if the economic impact upon the recipient countries is such that the ramifications and the ripples from these countries are felt throughout the developed world, and throughout OECD countries, we, along with the other countries in the West, will suffer enormously. For both selfish and unselfish reasons we wholeheartedly welcome the Minister's contribution here today and will be supporting this Bill.
I too welcome the Bill and the Minister to the House. I am delighted, particularly, at the part played by the Government in the negotiations which took place mainly during the Irish Presidency of the Community. The fact that the agreement was reached between a broadly-based worldwide group of members is also significant. Obviously, compromises were necessary along the way, but the agreement reached bears witness to the willingness of all the parties concerned to meet half-way and must also augur well for the people of Europe, a Europe that will be based on mutual understanding and reconciliation.
In terms of overall expenditure, the amount of money involved from Ireland's point of view could be said to be negligible. With regard to the Minister's speech, I understand we will be spending something like 0.3 per cent of the total cost and that that works out at £1.4 million per year over a five year period. This certainly could not be regarded as excessive or significant given our overall spending in the recent budget. What are significant, however, are the dramatic changes that have taken place in eastern and central Europe since 1989. How pleasant it is that we no longer need to think in bloc-to-bloc terms and how pleasant to note the emergence of democracies in Czechoslovakia, in Poland and in Hungary. What is more significant still is the fact that their foreign policies are based on similar premises to those of Western Europe, which are founded on a respect for human rights, something we have been calling for many decades.
It is also pleasing that these countries are anxious to increase their links with Western Europe, which they evidently see as a powerful support for their own democracy and also for economic reform. One must also be aware of the uneven degree of progress in introducing reform. Again, the Minister in his speech has instanced Bulgaria, Romania and Yugoslavia and said that they require particular and careful monitoring. Given the recent events the position is more precarious still in the Soviet Union.
Some of the Members of the Dáil referred to this in their debate and I agree with Senator Doyle regarding the example of the Polish experience. If Poland was regarded as a leading light in the emergence from eastern Europe, it begs the question of what the situation is like with the others? Some of the Members in the Dáil were concerned about the progress towards democracy and human rights. What would be the position of the bank relative to a return to centralised control? The entitlement of a recipient member to bank funds is limited under Article 8 where the member is judged to be implementing policies which are inconsistent with Article 1 of the agreement. It states: "Where such limitation exists it would require the support of two-thirds of the Governors representing three-quarters of the total power". One can safely assume, therefore, that the basis on which any such judgment would be made would also take account of the sentiments expressed in the preamble, particularly with regard to human rights.
Transition for many of these countries, from a command economy to a market economy is extremely painful. Yet some economists, for example, in Poland, have described themselves as being like a lab mouse going through an experiment in social and democratic change. Senator Doyle has described fully the Balcerowicz programme which has had a certain success in Poland in that it has kept away hyper inflation. It has given a certain stability and buying power. Since that happened the number of unemployed has risen from an artificial zero to one million people. Senator Doyle pointed out that privatisation has been particularly slow and that they are having a massive problem in paying back their foreign debt. She mentioned the fact that there were 7,000 State companies waiting to be privatised or become involved in joint ventures. She also mentioned that of 3,000 companies 1 per cent have investments of over £3 million from foreign-based concerns. She pointed out that the disincentive to investors is the restriction on the transfer of profits. They are changing that law to ensure that the disincentives are removed and that tax exemptions are put in place to make it attractive for outside investors.
That article is proof of the major difficulties of an emerging democratic, open economy such as Poland. On the one hand there is the euphoria of freedom, getting away from centralised rule, and on the other the expectations of people living in the country. Now they know what stagnation is all about. They have experienced widespread unemployment. They have seen the elimination of subsidies with only partial compensation for consumers. That brought a dramatic end to their euphoria. The problem for any incoming Government is that since people's expectations are not realised, they must withstand more and more pressure from the people.
Senator Doyle, while mentioning Poland, wondered how badly matters were in other economies. The position of Bulgaria was referred to in the Dáil. There is a complete scarcity of petrol and the economy is shattered, living standards have fallen and there is enormous need for reconstruction there. The Romanian situation is well known to all of us. There must be a genuine fear that there might be a reversal to the old centralised position if a glimmer of hope is not seen in the not-too-distant future. Support is needed from the West during this transition period. I was glad to hear the Minister state that G24 assistance to the region which includes grants, loans and credits, committed since June 1989 amounts to an impressive figure of £31 billion.
The European Bank for Reconstruction and Development can have a powerful influence on the transition process. Given the objective of the bank to promote entrepreneurial activity, it is of interest to note the other functions of the bank in that financial assistance will be directed to specific projects and some would be of immediate interest to us. Having moved away from bureaucratic and central planning, the concept of what people need, what those with a choice can buy and how it is packaged will loom large for them. Managerial, marketing and distribution skills must be in short supply and if that is the case, then our experience with Aer Rianta in Moscow must stand us in good stead. There we have a company offering a professional service, integrating extremely well with the community, showing a good profit and showing Ireland in the best possible light. We could not have better word of mouth advertising in an eastern European context. There is the fear that as we are a small nation, or what one would call small fish in a big pond, we may lose out on some of these projects and contracts. Can the Minister give an assurance that there will be open advertising of projects and open and free tendering, with no favours out of court, for any projects undertaken by the bank?
I wish to congratulate the IDI. Senator Doyle referred to the IDA and the Polish connection. IDI is an associate company of the IDA in that it is tied up with Coras Tráchtála and SFADCo. The three groups came together to form the IDA. Originally in the seventies, it was put together to play a role in developing countries particularly with Africa in mind. It is now appropriate, in the light of the professionalism available in the IDA, Coras Tráchtála and SFADCo, that it would play a role in the emerging democracies that are gearing themselves towards a market economy.
The other question which arises is how to address the issue of privatisation in these countries. In the Dáil the gradual process or, as Deputy Dukes termed it, "the big bang" theory was referred to. Eastern and central European countries should be guided in respect of the need to export. If we were to look for a lesson we would have to look at Taiwan and Korea. If one looks towards an export-oriented market, one must be competitive and efficient. The likelihood is that by reason of being able to sell one's product abroad, by definition, one must have an efficient economy on the home front. The experience in Ireland, and indeed in their own countries, shows that the principle of price supports, which in many instances in the past led to inefficiency and wide scale job losses, should be avoided at all costs. The development in Taiwan has been achieved with scant regard for the environment. In that country GNP stands for garbage, noise and pollution. While significant economic progress has been made they have major difficulties with regard to their environment.
Senator Doyle spoke of the bank in the context of a political first, but we now have an environmental first, in Article 2.1 the bank is obliged to promote environmentally sound industry. This is the first time an international bank was given a clear mandate under its charter with regard to the protection and restoration of the environment. We have many examples of dead lakes and effluent being pumped into rivers. In many instances, the deterioration has reached such alarming proportions that even the most basic necessities, such as uncontaminated drinking water, can no longer be taken for granted, and that is not to mention the word "air" at all. Given that 40 per cent of public projects can be funded by the bank, is it the Government's intention to emphasise this Article in regard to environmental standards? Given our Green Presidency, I exhort the Minister to ensure that this Article readily invoked. ISO 9000 is internationally recognised. Is it the intention of the bank when giving aid to the private sector to ensure that international standards are achieved by the private sectors operating there?
There have been suggestions of sophisticated rip-offs. With regard to the negotiations on loans, is there any room for investment protection agreements within those contracts? Will the Minister elaborate on the interest rates that are likely to be charged by the bank and also comment on the total banking sector in eastern Europe and how he feels this would need to be improved?
I recommend the Bill to the House.
I do not think anyone could object in principle to this proposal. Those of us who highlighted the abuses of human rights in countries like Romania when it was unfashionable and when many of the Governments of western Europe were making a hero out of the tyrant there, and giving him awards in the name of left wing politics, were painfully aware of the outrages that were being carried out in the name of socialism. We cannot but be delighted with the collapse of that appalling sacrilege to the good name of left wing politics generally which was the system of bureaucratic dictatorships in eastern Europe.
There are lots of other examples.
I am surprised to see Senator Conroy disagree with me on that issue. He never ceases to amaze me. The fact that I stand up to speak provokes him to interrupt me.
It is a fascinating inconsistency.
The record of my views on eastern Europe is clear and long established. It goes back a long time. Long before the suppression of Solidarity in Poland I was under no illusion about the nature of the system in eastern Europe, and I have not been since. It is important to remember that what characterises a State is not the name it gives itself. After all, East Germany called itself the German Democratic Republic and nobody suggested that the collapse of that state represented a collapse of democracy. We know what democracy is. What characterised all those States was a dictatorship based on the interests of a privileged few, which operated on the basis of protecting the interests of the privileged few.
You cannot have any experiment in public ownership, control or planning of an economy which is based on secrecy because that means that democracy cannot extend into the areas from which it is currently excluded, particularly in areas of economic activity, anymore than in the long term you can have successful, vibrant democracy without considerable public accountability by those who control wealth and power in a society. Therefore, let us not get involved in too much empty rhetoric about eastern Europe. The collapse of dictatorships in eastern Europe is to be welcomed. Indeed, the degree to which these dictatorships were nothing more than repressive shells dressed up in meaningless rhetoric is well illustrated by the emergence of problems that were claimed to have been solved, for example, problems of nationality, minorities, religion, etc. These issues will need to be addressed both by the rich countries who will be participants in the new arrangement and also by the client states — to use an unhappy but, nevertheless, true phrase — who will hope to benefit from this new arrangement. What is undoubtedly true is that eastern Europe will need an enormous amount of support.
I was amused by the Minister's speech, not that there was anything wrong with it in principle, but there are certain phrases that could not but be interpreted with a certain degree of irony. There is a phrase "a whole nation conditioned to a rigid system of planning that stifled initiative on individual enterprise". Coming from the head of the Irish Department of Finance which maintains a level of centralised Stalinist bureaucratic control over every activity in every patch of the nation, that is a bit rich. We have the most centralised system of political administration in the whole of the western democracies.
Synonymous.
That is exactly what is wrong with us. Unaccountable bureaucracy is dictatorship by another name. Public ownership and secretive bureaucracy are not synonymous and never were. What we have is bureaucratic secrecy with the quite willing acceptance by many of our political leaders because it enables them to exercise a degree of patronage. What we need is open democracy decentralised to the maximum possible extent. I do not mean unaccountable power in the hands of people who control large amounts of money. I mean accountable democracy, I mean the old-fashioned Roman Catholic principle of subsidiarity: that things can be done best at the lowest possible level of decision-making by those who are most directly affected by the decisions that are taken. Contrary to what we should have learned from eastern Europe, our country is moving in the opposite direction. We are increasing centralised power. We are among the most frighteningly centralised countries in Europe.
You have the ridiculous situation in the city where I live that if the corporation want to put two yellow lines on a street they need the permission of the Minister for the Environment and the head of the Garda both of whom are based in Dublin. When you have a simple proposal to deal with the crossing of a river and whether it should be a bridge or a tunnel and you presume there is some level of expertise in Dublin that can deal with a technical problem like that, you are running into bureaucracy gone mad. When one realises the resistance Ministers for Finance of various political persuasions have put up against truly participative structures for developing, for example, a national plan based on real regional devolution, on real power and decision-making in the regions, it is a bit rich to hear a Minister for Finance giving sanctimonious lectures about centralised bureaucracy to other countries.
There is a certain irony about the Minister's speech when he spoke about the structures and institutions that must be put in place to deal with, among other things, the change-over to world prices, the elimination of widespread subsidies, etc. given the howls of pain that have come from our largest industry, agriculture, because somebody suggested they should move in the direction of world prices and that certain subsidies should be eliminated. There is a certain irony in suggesting that the idea of avoiding world prices for products and subsidising production is somehow an exclusive characteristic of the decaying bureaucracies of eastern Europe. It is a bit rich. It seems that when these things fail and do not reward your own they become unacceptable but when you have a system, as in the Common Agricultural Policy, of precisely that, of denying the existence of markets and of world market prices and of meaningless subsidies which do not do much good for ordinary producers but make certain people enormously rich, you ignore it and pretend it is somehow different. There is an enormous irony in the way fingers are pointed at other failed systems without lessons being drawn from them that would be relevant to our own problems, particularly in the area of the Common Agricultural Policy.
I am glad Senator O'Keeffe mentioned the role of the bank in insisting that environmentally friendly industries should be set up. It is a matter of regret that the Minister in his speech did not advert to the environmental disaster that prevails all over eastern Europe and which will not be changed simply by an aspiration to have future industries made environmentally friendly. There is an environmental rescue job to be done in the countries of eastern Europe on a scale that is without precedent. I could not offer an estimate as to the cost. I do not know if anybody knows the scale of the cost that will be involved in rescuing it or whether it is physically, scientifically or biologically possible to rehabilitate the environment of eastern Europe. Other than a reference to some infrastructural investment, it seems that most fundamental of requirements — the restructuring of the environment in eastern Europe — is still being left more to aspiration than to reality.
One of the most fundamental needs in eastern Europe is the restoration of half decent environmental qualities. Water, air, land, etc. have been destroyed. The environment was not destroyed because of some sort of Stalinist socialism; it was destroyed because of secrecy and of what was being made. It is as true of large bureaucracies in this part of the world as it is of large bureaucracies in that part of the world. What destroys and conflicts with the interests of ordinary people is secrecy and non-accountability. Whether it happens in the name of socialism, State security or democracy, it is always wrong and inimical to the interests of ordinary people.
There is only one way to run a successful democracy, that is with the maximum possible degree of openness. That should be defined independent of the Executive and independent of bureaucracies. It is an issue that must be resolved in the people's favour which is why, not so many years ago, I endeavoured to introduce legislation in this House dealing with freedom of information. We had an interesting debate on it and we were given nice promises but the Bill was defeated and the Government forgot about the issue because Governments are not very keen on freedom of information. Governments in Britain are not very keen on freedom of information nor are they in the United States but they had so many scandals that Congress imposed freedom of information legislation on the Executive because of public concern. If we had the scale of freedom of information of a country like the United States with far more to lose in terms of open government, many of our politicians and those in senior administrative positions would be profoundly unhappy with the amount of information at the disposal of the public on a range of issues.
The most profound lesson to be learned from eastern Europe is that democracy is a superior system to any other; that however limited, inadequate and incomplete our system of democracy may be — and I regard it as a very incomplete system because of the exclusion of huge areas of power from any proper public accountability — it is a superior system to any other which restricts the freedom we have, particularly the freedom to choose a government, a freedom that is fundamental. It is not sufficient but it is a far better system than any other that has been tried. I have never attempted to say anything different; it is a fundamental principle of mine. I resent institutions whether they be in the State or in the ecclesiastical area which deny the superiority of democracy over any other system of rule. I believe in democracy. I believe people are by far the best judges of what is good for themselves and for the country. No expert is better at that than ordinary people. An expert can advise people and they can make the decisions that are best. It should be left to them. That is why I believe in decentralisation.
I am a little unhappy about the slightly tub-thumping ideological tone of this legislation. There is no superiority or virtue in privatisation. As any simple accountancy-based analysis of privatisation will tell you, if a company is profitable then the price at which it should be privatised should mean that there would be no net benefit to the State from privatising it as opposed to not privatising it. Unless you believe there are inherent efficiencies in privatisation, which in my view is as much an ideological judgment as it is a demonstrable fact, then the price you should sell at should be the price which is based on future profitability. If future profitability is already guaranteed or reasonably to be expected, then all you are doing is sacrificing future profitability for an immediate sale. That suggests that, in the long term, the State would be no better off from selling a profitable State enterprise than it would be if it did not. It would simply be getting money one way rather than the other.
There was a fairly detailed study done for one of the consultancies on the question of privatisation. Their conclusion was that there would be net benefit. What has happened in most countries is that privatisation is done on the cheap so that the actual sale is well below the real market value in order to entice investors. That is not realising assets for the State, that is selling assets on the cheap because the real value is the value based on potential profitability. That is what should result in the market valuation of the share capital of a country. Senator Conroy would know far more about this than I, particularly about the good days and the bad days of certain companies and the way the market assesses them. The share value of a company is based on the market's assessments of either its existing or potential profits. If the price at which a State company is sold off is based on that, then there is no net gain for the State. The assumption is that a level of efficiency will emerge from it, and that may well be true.
I have no desire to have a State monopoly in the production of any consumer goods, from televisions to vacuum cleaners. I have no reason to believe there is any reason the State should have a monopoly, or indeed a controlling interest, in the production of white goods or any other of the vast array of consumer goods. I believe that in the area of those with the capacity to manipulate powerful resources or limited resources like land, money and wealth, the role of the State is of far greater importance than the market itself because the interests of those who operate in the money market do not coincide with the interests of those who are victimised by the money market in the way that the interests of consumers will almost inevitably benefit from free competition in the consumer goods market place. In this country where we have had successful State enterprise and where, if the market continues the way it is at present, it is likely that we will end up with only one airline serving the country in 12 months' time and that airline will be State owned. If Ryanair's unfortunate position continues and if British Midland choose to leave, we will be left with only Aer Lingus.
It is a bit of an ideological tub thumping job to have this huge emphasis on privatisation. The emphasis ought to be, and deservedly so, on reconstruction and reconstruction ought to be based on what works, not on what is desirable according to some sort of ideological or political agenda. It is quite right that the agenda should include democracy, human rights and pluralism. Coming from this country, with its recent history, to give other people lectures about the importance of pluralism is a bit rich. We are not very good at it when it gets difficult and to start giving lectures to other people about it is a bit rich. Nevertheless, I suspend my scepticism on that and say that it is a good thing.
To suggest there is an inherent advantage in moving large areas of activity from the public to the private sector in all countries of eastern Europe, irrespective of the performance of the company and their future prospects, is carrying reality beyond the bounds of what is pragmatic and practical, and into the area of ideology, and whether it is done by the Left or the Right, that is not the way to do it. You do what works; you do what is practical; you do what is sensible, and that is the basis on which it should be done.
The proposals and the plans are fine. There is a certain irony in all this, that is, according to the Minister's script and roughly according to my calculations, the total maximum commitment the country is undertaking under this proposal both in what is initially drawn down and what may well be drawn down in the future would be about £30 million. It is somewhat ironical that at a time when we insist that we do not have the money to even maintain our existing level of commitments to the part of the world that are utterly and totally impoverished, even by the standards of eastern Europe, and when we do not have money to deal on a generous and imaginative scale with the prospect of 15 million people starving to death in sub-Saharan Africa, when Europe does not have, either inside or outside the EC, the resources to deal with that nor does the United States, we can create a bank to reconstruct and develop a less impoverished and a less threatened area of the world.
Am I wrong in suspecting that this bank has more to do with strategic interests and politics than with any sort of altruistic benevolence that has suddenly attached itself to the governments of Europe and North America? What we are talking about here are politics, and that may be why there is this ideological bias in the Bill. I regret that. It is also a matter of great regret that the resources that will have to be available for both Eastern Europe and for sub-Saharan Africa will be dwarfed into insignificance by comparison with the enormous resources that are being consumed in the useless slaughter of thousands of Iraqi civilians in the interests of I do not know what in the Gulf at present. It is a lesson in the need for ordinary citizens or ordinary politicians to be profoundly sceptical about governments, particularly when governments start to claim high moral motives for things that are obviously being done in their own self-interests. I enjoyed it when governments explained that realistic decisions have to be taken. In some article about the war one particularly sceptical journalist quoted somebody from the last century who said: particularly when governments start talking about the need for realism or eminent men start talking about the need to be realistic, it is almost inevitable that they are about to do something very nasty.
The principle and the values that underlie this legislation are to be welcomed but the ideological bias that had been tied on to the end makes it suspect. The apparent way in which resources can be conjured up to achieve development that is politically necessary for the future of Europe and politically desirable for the political interests of Europe is absent when you talk about the resources needed not to prevent disorder in Sub-Saharan Africa, not even to develop the environment in Sub-Saharan Africa but, simply, to guarantee that 15 million people who are alive today will not die from starvation in the next nine months. A lack of political will, an unwillingness to confront some of the world's more spectacular problems and the apparent selectivity of our view of where we can afford to spend money, devalues the good intentions of the Bill.
I welcome the Minister to the House. It is hard for us to imagine the changes which are happening now in eastern Europe but as one American economist said recently we would have to go back about two centuries to find anything that would compare to the changes now under way there.
The Government have committed .3 of 1 per cent to the total capital being allocated to this bank. Overall, it is a very small amount when one looks back on our recent budget but what is significant is what we are here today discussing a European Bank for reconstruction, which has as its main objective the establishment and development of the states in eastern Europe committed to the fundamental principles of multi-party democracy, the rule of law, respect for human rights and market economics. Recently in an interview with the new President of the European Bank for Reconstruction and Development, Mr. Jacques Attali said that his priorities while President will be agriculture, housing, communications, energy, tourism and the development of chemical industries. He also mentioned education and training as vital in the future development of these countries. I am sure we all hope that the bank is successful.
We have seen great changes in eastern Europe reported on our television screens. It has become abundantly clear that the centralised socialist economies are not working. They were not delivering to the people the kind of living standards they expected and they were certainly not delivering on the hopes and aspirations of their people. Because of the changes we have seen recently in the Soviet Union, we may have to wait some years before we get the changes in eastern Europe which we believe are correct. This time last year there was a wave of optimism throughout the world. Changes were taking place everywhere in eastern Europe and also in South Africa. These changes which are taking place will not be easy and we know of the great difficulties in countries such as Poland, Bulgaria and Romania. They have shown that the changeover to a free market economy will be long and painful.
I am glad that the planning and structuring of this Bill is based on a commitment by the countries that have set up the bank and on the perception of a commitment in the countries that will benefit from the development of democratic structures and market economies. It is right that it should be so. I hope we will insist that this should be tied into democratic structures or parliamentary democracies with freely functioning market systems. That is not to say that these countries will not have a wide range of choices as to how they will manage their economies or enjoy their democratic systems. I do not believe anybody has anything to fear with regard to the kind of parliamentary democracies which we will see in eastern Europe. I do not believe they will be any less free or less mature than western Europe. Of course this will involve these countries in enormous changes.
The Minister mentioned some of the inconvenient consequences which we can foresee in the short term. There is no doubt that there will probably be stagnation or even decline in output but the long term outlook can be very positive. It is inevitable that in the changes from a command economy to a free market economy great changes will have to take place in the short term such as very high inflation — which we are already seeing in eastern Europe — but the free market economy needs free formation of prices to get them where those countries are now, basically command economies, to the free formation of prices. It is a fundamental change in the nature of the economy and of the way it works.
The early indications are that the authorities of these countries generally understand the importance of the kind of change that will happen but they will have to withstand the pressures as people's expectations are not realised quickly. One of the great needs of these countries in eastern Europe will be of training and management skills. The kind of management skills which are at present in eastern bloc countries will have very little relevance to a market economy and the more rapidly we can extend training and management skills to the eastern European countries the more easily they will be able to make the transition. There could be great opportunities for Irish businesses to train and sell their skills in these countries. We have already seen some good examples of this in the Aer Rianta-Aeroflot link.
I would agree with Senator Brendan Ryan that there is indeed a great need in the eastern bloc countries to work on their environment. The environmental damage over the past 50 years is very hard to calculate. The great Danube River is polluted totally from one end to another. I recently saw a programme on it and the effect of the damage throughout the whole area was quite alarming. In eastern Europe the bill for environmental damage stands at about £24 billion which is our total national debt and that is just to clean up about four of the worst polluters in East Germany.
Senator Ryan mentioned the elections. Indeed he is correct. People here have a choice. I would not agree with him that there is a lack of freedom of information. People have a choice here. They have always been able to choose between the various parties the sort of Government they want and long may it remain so.
At one stage I thought Senator Ryan was speaking to a Fianna Fáil group meeting because he was talking about us not having any hang-ups about privatisation. Fianna Fáil policy has always been that we will not have any hang-ups on privatisation. If it is worth doing we will do it and we will not rush gung-ho into privatising everything. Our record on that stands. We will only privatise what we see as being suitable to privatise. We recognise that the semi-State sector has done enormous amount of good for the Irish economy over the years. In fact, it was Fianna Fáil who originally set up the semi-State sector.
Senator Ryan also discussed the ODA programme. One has to remember that the ODA programme is only one of many contributions which Ireland makes to the Third World. I will not go into them here because we had that earlier but it would be wrong for us to say that the only money Ireland gives to the Third World is through the ODA programme. The list is endless and there are many organisations which collect money here and do great work in the Third World.
I would like to wish the bank well. The hopes and aspirations for the future of millions of people lies in the success of this bank. The political future of many of these countries lies in the success of this bank as long as the people can get in some sort of structural way the social and economic progress they wish. I would like to welcome the Bill.
I would also like to welcome the Bill and to support it. I would be concerned as to whether the funds involved are adequate for the enormous needs of the countries of eastern Europe. It is very easy for us to casually refer to eastern Europe as such, without fully appreciating the enormous size of the area, the enormous variety of countries involved, the extraordinary differences between their economies and between their stages of social development, the almost complete lack of infrastructure in most of the countries involved and the limited infrastructure even in the more relatively developed countries of eastern Europe. Added to that there is the enormous debt burden which all of these countries, without exception, are endeavouring to carry. There are problems of relationship, there is the question of the cohesion of a country such as Yugoslavia, where Croatia, Serbia and Slovenia and various other constituent states of that country are rapidly moving away from one another on economic, ethnic, social and nationalistic grounds.
Let us take the case of Czechoslovakia. Before the invasion in 1938 and the Munich situation Czechoslovakia was one of the more developed and wealthier countries of Europe and many of its firms were international and very important firms. Quite apart from the war situation they suffered more than 40 years of almost total stagnation. Their factories are hopelessly uncompetitive. Their labour practices are extremely archaic, and their labour forces are far too great. They have a lack of training, and a relative lack of sophistication or expertise in marketing. Their computing and communications systems are primitive by western European, north American or Japanese standards. As well as that, they have their own major internal division between the Slovaks and the Czechs. They are in an extraordinarily uncompetitive situation. They are going to have the greatest difficulty in managing their economy and this difficulty will be compounded by the very high expectations which have been raised by the onset of democracy. We sometimes equate democracy with economic progress and to some extent that may be true but it is by no means the whole story. Democracy in itself does not necessarily guarantee economic progress.
With all these disadvantages Czechoslovakia is by far the best possible state for development in eastern Europe. The only other state which is comparable is Hungary and it has horrendous problems compared with Czechoslovakia, and perhaps Slovenia if it gains some degree of independence, might be competitive. These states have even indicated that they wish to join the European Community. We know the problems we had in joining the European Community; the great problems which Spain, Portugal and Greece have accommodating to the situation within the Community, and the problems for Czechoslovakia and Hungary would be far greater than for any of the countries I have mentioned. This is the measure of the ground which these countries have to make up. Yet they are the very best of the eastern bloc. I do not think we in western Europe fully appreciate the extreme backwardness of the greater past of eastern Europe. Poland may be a major State, but it is an extremely backward State in today's terms.
Many people at quite senior level in financial and business circles are, to some extent, assuming that Poland, Czechoslovakia and Hungary are, in some degree, equivalent to western European states. Some of those companies and executives who have been there thought about setting up businesses there, and doing business with these countries not on a developing or even third world country status but attempting to treat them as equals, have retreated in horror and dismay. I think we have a major banking problem here. We have an enormous crisis in the banking industry at the moment, a crisis which possibly had its origins in the lending of the petro-dollars in the seventies and the lending to countries in South America and eastern Europe on the basis, which one heard the most eminent people repeating, that a country or a state cannot go bankrupt. Many bankers today look rather wryly when they hear that phrase. This is having pretty enormous effects on the banking system. Allied to that you have, of course, the extraordinary difficulties which the North American banks, particularly the US banks, are now encountering in relation to lending on property, etc., which are turning sour. Add to that a mounting recession and you have an extraordinarily difficult financial situation.
Looking at this Bill and hearing some of the comments, I wonder if, even today, the financial sector fully realises what an enormous extra burden the modernisation of eastern Europe will impose on it. I think it is a very serious situation and I am glad we have this Bill which is attempting to tackle it. There are many very sanguine assumptions and a great deal of learning still to be undergone, and the simplistic ideas with the introduction of a market economy, infrastructures, social systems and ways of working which are totally unused to these systems are rather optimistic. I hope it works out but I have the greatest reservations.
This particular institution will in a sense, attempt to be a venture bank and if it works out in that sense, it is very much to their good. It is certainly a very brave attempt and I am delighted we are playing a significant part. However, I am sorry the headquarters will not be in Dublin but we have something to offer in this respect. I welcome the Bill.
I am very heartened by the tone of the debate on this innovative element in the Community's and, indeed, the wider western world's assistance to central and eastern Europe in their pathbreaking and painful transition to a market economy. Ireland has played a part in the negotiation of the agreement setting up this new institution in the course of the first half of 1990. We presided over the EC Council at this critical period in the modern history of central and eastern Europe and we signed the agreement on behalf both of our own country and of the Community. I would like to stress the necessity for a speedy ratification of the agreement on our part.
The initiative for this bank came from within the Community. The Irish Presidency played a constructive and unstinting role in bringing about agreement on the statute of the new bank and there were times when the negotiations were difficult, and this to some degree reflected the innovative nature of the task being undertaken. In the course of achieving agreement among such a broadly based worldwide grouping of members, some compromises were necessary and the statute of the bank is probably a little different from the seminal idea of the late 1989 concept matured in the course of the negotiations and the agreement reached. It bears witness to the willingness of all the parties concerned to meet each other half way. It augurs well for the future of a Europe based on mutual understanding and reconciliation. I will now briefly deal with the points raised by Senators in the course of the debate.
Senator Avril Doyle asked how the capital was shared out — was there any specific rule for breaking it up or not? I want to say that within the EC a minimum of 51 per cent was reserved for the Community member states and their own institutions; 6 per cent was allocated to the European Investment Bank in the Community; the remainder was divided broadly in proportion to member states, contributions to the EIB share capital. For the non-EC countries relativities between the size of the members' contributions to other international institutions were taken into account along with the geographical proximity and the expressed wish of the members themselves. At the end of the day, the shares are not the result of any automatic formula but they are broadly as a result of a very rational approach to the whole idea.
Senator Doyle also asked if the shares that are set out in agreement for the former GDR, the eastern part of Germany, will be put into the unallocated category and will be available for existing or future members. Senator Doyle is correct in saying that Germany will not take up those shares as this would disrupt the balance of shareholdings between the major Community member states. Senator Doyle also asked about institutional membership. The institutions mentioned were specifically chosen as EC institutions given the origins of the bank with the Community. In the course of the negotiations there was pressure to remove the institutions as this was an innovatory feature of the bank. The EC Presidency, then held by Ireland, held the line and this new feature was preserved. There was some talk of the Nordic Investment Bank during the negotiations but this was resisted on the grounds that it would lead to too large and diffuse a membership.
Reference was also made to the general question of east European indebtedness. I would remind the House that this bank is only one of the players in the field, albeit an important one. Others are providing, for example, humanitarian aid and grants in areas such as training. The overall foreign debt of the countries in question is a broader issue than the making of loans for specific viable projects which is what this new bank will be all about. The broader question is being dealt with in other fora though the new bank will take account of the overall debt position of a country in making loans to it.
Of the eastern European countries, Poland is the one with the most significant debt overhang. About 80 per cent of this debt is official debt and Poland is expected to enter into discussions shortly with the Paris club of creditor countries on how its debt might be reduced. These countries are trying to build up their exports in the face of rising import bills, including bills for essential capital development. They will be helped by an injection of foreign capital and more particularly so when it is designed to contribute to their development and enhance their future export earnings. There is an emerging reluctance on the part of some private banks to make loans to eastern Europe and there may be a change in emphasis in private capital towards direct investment. In this new situation the new bank could play a significant role in channelling capital into these countries.
Senator Doyle has pointed out the importance of investment and measures to encourage it to the economies that are in course of transition. The promotion of investment is, of course, a recognised priority in the programme of economic assistance being implemented by the EC and by the Group of 24. Technical assistance is being offered to the agencies involved in privatisation in Poland and indeed in the other countries. Particular emphasis is being placed on the negotiation of investment protection agreements which would give investors a greater degree of confidence, for example, in the area of profit repatriation.
Senator Doyle also referred to the location of the bank in Dublin and why we did not get it. The reason is simple. We did put forward Dublin and would have been glad to have it here, but it was clear in the full conference that even the 12 members could not agree themselves on where the location would be. We knew that when it went into the wider fora we had a much lesser chance of getting it here. The fact is that we were not able to muster the type of support that London was able to get in the much wider international fora.
Senator Doyle also asked about the US share. The only implication of the US share rising from 8.5 per cent to 10 per cent is that it is the largest single shareholder. This seemed to be a question of status for the US and has no significant implications. The negotiating conference conceded this increase without any major discussion.
Senator Doyle also referred to the recruitment of staff for the bank. The wide geographic staffing of the bank, of course, will be subject to the efficiency of its own operations and, as Senator Doyle rightly says, the responsibility of the president. Ireland is in constant touch with the bank in this area. Recruitment is expected to begin soon and we are aware that a number of Irish people are in contention for positions in the bank.
Senator Doyle also raised the question of amending the agreement and what the position might be. The agreement may be amended by the members on a proposal from the governors, subject to strict limitations under Article 56. Amendments modifying the following areas require unanimity: the right to withdraw from the bank: the right to purchase capital stock, as set out in Article 5, paragraph 3; limitations on liability provided for in Article 5, paragraph 7; and the purpose and functions of the bank as defined by Articles 1 and 2.
Amendment of Soviet access — Article 8, paragraph 4 — requires the agreement of three-quarters of the members having 85 per cent of the voting power. Any other amendments require the agreement of three-quarters of the members having 80 per cent of the voting power and including at least two countries from central and eastern Europe.
The question of the Baltic states as members of the bank is, of course, quite speculative at this stage. Before dealing with the question of possible new members in the bank and amendment of the agreement, I would like to underline our concern at events in the Soviet Union, some of which suggest that the pace of reform may be slowing down. We have made clear, bilaterally and through the EC, our disquiet at Baltic developments and we have stressed the unacceptability of the use of force to resolve the questions there. We have urged dialogue with the elected representatives of the Baltic peoples with a view to satisfying their legitimate aspirations. The situation in the Soviet Union is, therefore, being closely monitored and dialogue maintained with the Soviet authorities.
In particular, Senator Doyle referred to membership changes. Regarding changes in membership of the bank, new members may be admitted with the agreement of two-thirds of the governors having three-quarters of the voting power. An existing member which fails to fulfil any of its obligations to the bank may be suspended by two-thirds of the governors having two-thirds of the voting power. A suspended member automatically ceases to be a member of the bank one year after suspension unless the governors decide otherwise.
Senator Batt O'Keeffe referred to procurement. Article 13 stipulates the bank:
Shall place no restriction on the procurement of goods and services from any country from the proceeds of any Bank financing, and,
Shall, in all appropriate cases, make its loans and other operations conditional on international invitations to tender being arranged.
The agreement therefore, enshrines the idea of completely open procurement, and not procurement open only to members. This would be based on international tendering, where appropriate, and would be genuinely competitive in line with the GATT agreement and Government procurement. Private sector enterprises with which the bank was involved would be encouraged, though not obliged, to use international tenders to obtain goods or services efficiently and economically.
This approach was designed to give the less developed countries who might not become members the opportunity to tender for bank contracts on equal terms with bank members as a means of assisting their development process and of reassuring them, through this original gesture, that the interest of shareholders in the new bank did not mean reduced interest in their traditional partners in development.
Senator O'Keeffe, and indeed Senator Brendan Ryan, raised the very important subject of the environment. Article 2.1 obliges the bank "to promote in the full range of it activities environmentally sound and sustainable development." The interim team at the bank and the prospective shareholders are currently putting together a very strong environmental policy. This will not only involve the environmental implications of development projects assisted by the bank but will involve projects directly aimed at improving the environment itself in central and eastern Europe. The bank will also make an annual report on the environmental implications of all its activities. These environmental issues are strongly supported by Ireland in the bank.
Also on the environment, I can certainly agree with Senator Ryan about the enormous scale of the problem and the needs there. The bank approach in this area is but one of the instruments being availed of. There is also economic assistance available in other programmes through the Group of 24 and the EC have also as a priority focus projects in the environmental area.
Senator Ryan referred to the focus of this new institution, which is on the private sector. This is clearly because the countries concerned do not have a private sector and are trying to develop one. I stress that the countries themselves are trying to develop the private sector because they have seen that the centrally planned state system, which was foisted on most of them, has not worked. The new bank is not purely a developmental bank; it is a combined merchant and development bank and one of a number of players in the field.
The EBRD is not confining its activities purely to the private sector. Some 40 per cent of its activities can be directed towards the public sector. This is not the public sector in transition to private ownership and control: that will effectively count as part of the private sector; it means what we normally understand by the public sector, namely, national and local governments, their agencies, and enterprises owned or controlled by any of them. Assistance with this sector will normally be directed towards infrastructural projects.
There are also other bodies in the field. The European Investment Bank, the EC Commission and, of course, the Bretton Woods institutions, namely, the IMF, the World Bank and the International Finance Corporation, are also now operating in central and eastern Europe. The World Bank concentrates entirely on the public sector and is not confined to dealing with "individual projects" as this new bank is. The International Finance Corporation deals with the private sector.
There is an obligation on the new bank to co-ordinate its activities with these bodies and it is likely that it will undertake a substantial amount of co-financing with the World Bank and the IFC. The International Monetary Fund is a slightly different case in that it does not finance projects as such. However, much aid to eastern Europe is conditional on the countries concerned agreeing a macro-economic strategy with the IMF, the EBRD will have due regard to the analysis and activities of the IMF in its own operations; indeed, it is obliged to do so. This does not mean, however, that it would completely subordinate its own judgment to that of the Bretton Woods institutions. Each of these institutions will have its own niche in the overall effort to assist the transition of the recipient countries to market economies.
There was also the question mentioned during the debate of development aid to the Third World. In response to Senator Brendan Ryan there is no question of any diminution in the funding we are devoting to development aid because of the contribution being made to the EBRD. The position in relation to development aid in 1991 is that a total of £43.7 million has been appropriated. This compares to a figure of £34.4 million for 1990. The percentage of GNP represented by ODA this year will rise from 0.16 per cent to 0.18 per cent. The major reason for the increase is the provision of assistance to countries most affected by the Gulf crisis, particularly Egypt. Aid has also been increased to our priority countries in Africa.
The long term importance of the provision of assistance to the economies in transition in central and eastern Europe cannot be overstated. To neglect the demands from the area would, indeed, put at risk the stability and growth of the whole European economy and that would be against the interest of all developing economies.
Question put and agreed to.
Agreed to take remaining Stages today.