Europe’s development finance institutions (DFIs) are following the EBRD’s eastward operational expansion and directing greater funding to countries in the Balkans and Central Asia.
For example, Germany DFI DEG has made no new loans to EU accession countries since 2004 and has advanced no new equity participations to them since the end of last year.
Instead, DEG is increasing its private equity activity in Russia, Central Asia and SE Europe. According to Franz-Josef Flosbach, regional director for DEG, there has been a distinct shift in new business to Russia, Kazakhstan and SE Europe in general and to Romania, Bulgaria, Croatia and Serbia specifically. And, despite the fact that DEG is no longer providing loans or equity to the EU accession countries in the region, DEG's overall portfolio size has continued to grow.
Explains Flosbach: "Overall, for these transition countries, the increase in our business there over-compensated for the decrease from the accession states." And will these countries continue to see increasing funding? States Flosbach: "Yes, for both Russia and in Kazakhstan and for SE Europe [SEE] - in particular Serbia and Romania - and there will be some increase even in the Ukraine."
And, while the political situation in recipient countries is taken into consideration when determining new activity, it is not a specific source of concern. Notes Thomas Koch, head of Economics and Development Policy at DEG: "We have to take into account the political situation, but that is only one component within our country risk framework."
Currently, the balance between equity and loans in DEG's portfolio is roughly 20/80, but the German DFI expects to increase the proportion directed to equity. Says Flosbach: "We are ready to increase the proportion of equity. The demand is high. The prospects currently are good for private equity and the exit options are increasing in the region."
DEG had total outstanding commitments of €2.75bn at the end of 2005 and made new commitments of €672m during the year. €155m of these commitments were directed to Europe.
The developmental impact of DEG’s activity is measured across a range of indicators but DEG focuses in particular on corporate governance, the environment and supporting social standards in its SEE activity. Says Koch: “In addition to that, we look for jobs. Let me say it strongly, we look for jobs, jobs, jobs.” As Koch points out: "That is the most direct way of reducing poverty and improving people's living standards".