The Governor of CEB, Carlo Monticelli: “We did a grand total of more than €1 billion in terms of operations to support Ukrainian people”

In June 2023, Ukraine successfully completed the accession process and became the 43rd member state of the Council of Europe Development Bank (CEB). Even before that, the bank promptly provided grants to offer immediate assistance to refugees from Ukraine at the start of the full-scale invasion. Recently, the bank approved the allocation of a whopping €100 million to Ukraine to meet urgent medical needs. ZN.UA had an exclusive conversation with the Governor of CEB, Carlo Monticelli, to discuss the next key directions of cooperation.

 

Governor Monticelli, Ukraine began to cooperate with the Council of Europe Development Bank (CEB) during the war. Does the CEB consider this cooperation risky? 

This is a very interesting question, because it allows me to really go to the core of our mission and the way we operate.

First, let me give you just some institutional background. The Council of Europe Development Bank (CEB) can only operate directly in the countries that are our member states. This is why we had to wait for the process of accession to finish, in June this year, to finance operations directly in Ukraine. But we started operating to support the Ukrainian people immediately after the Russian invasion started, by supporting the many refugees going in the neighboring countries.

As you know, plenty of the people who had to flee were women with children, young children, sometimes children who were ill or with handicaps, and this is where we immediately started to help.

We did it for a variety of countries neighbouring Ukraine. We did a grand total of more than €1 billion in terms of operations to support Ukrainian people. Then the opportunity came, with the accession of Ukraine, to operate directly in the country.

So, of course, as a multilateral development bank, we have to be mindful of the risks. We need to take risks that are well controlled, while delivering on our mission that is financing investments in social sectors—social housing, hospitals, schools. 

So, risk is a consideration, but your mission is important too...

Across our 43 member countries, we really go out of our way to deliver even in operations that seem prima facie very risky using, for example, our internal guarantee system.

For Ukraine, we operate only at the sovereign level.  We are not going to lend to the private sector or the local authorities. Аs a result, the CEB has a “preferred creditor status”, that is – as a multilateral development bank – we are given priority for repayment of debt in the event of the sovereign experiencing financial stress. This for us is an important risk-mitigation factor. For this reason, we do not see the credit risk as the key challenge. 

Of course, we want to maintain the triple A rating that we have just regained in July because of the capital increase that our shareholders approved in December 2022. We are keen to maintain that high credit rating, by setting aside the necessary reserves and continuing to manage our capital well.

In terms of operation, our key challenge is going to be to operate in a country, Ukraine, that is new to us. We are banking on our experience in other post-conflict countries. We are setting up very tight cooperation links with other multilateral development banks, which have been operating in Ukraine for long. They know Ukraine much better than we do. We also plan to have a few staff in Kyiv. 

This is the real challenge as opposed to credit risk.

What projects or investment programs will interest the CEB in Ukraine? 

It is important for me to stress that the CEB is the only multilateral development bank that has as sole mission to promote investments in the social sector.

So, we don't finance electric grids or transport. While these are very important, the three areas of operation that are at the core of our business are health, social housing and education. It is in these areas where we can provide the most value-added.

Even before Ukraine became a member of the CEB, we organised a joint technical mission with the Ukrainian authorities to showcase the Regional Housing Programme in the Western Balkans. This is a decade-long initiative that provided social housing to many people displaced by the war in the former Yugoslavia. The point that I want to make is that we start from a solid expertise in these sectors. 

Based on your experience, what are the most common problems that arise in such projects? 

We have solid expertise in running and implementing projects in post-conflict countries where the governance may be weak. In these cases, we supervise procurement with extra care. This may lead to delays because we want to make sure that things are done right. 

We are used to cooperating with post-conflict countries that can have weak implementation capacity, and so this is something that is within our skillset. Plus, we own specific technical expertise in the areas that we finance.

I'll give you an example. In social housing, there are two big components. The rehabilitation/repair part and the reconstruction. Given our expertise, we are going to follow more the reconstruction part. We have a very open dialogue with the Ukrainian Government to identify together what the priorities are. 

At the moment, there are priority sectors, but there is also a priority of delivery.

The Ukrainian Government wants to have projects that are completed soon. We, at the CEB, have a tradition of being able to deliver while respecting all of the safeguards that I was discussing before.

Can you add any specifics of the project? Maybe any additional features. 

Cristian Tabacaru, Director of the CEB’s Loan and Social Development Directorate, will help us with this. He’s the one that is supervising the team directly working on Ukraine.

C.T. We are mapping risks, because you asked about them. We are mapping risks related to budget, type of funding and the execution risks. We also assess the so-called stakeholder arrangements, that is the social management of the project. Is it accepted? Is it desired? How does the community, the local authorities, respond to it? 

Ultimately, we stand ready to provide support to increase the technical capacity of the Ukrainian authorities to implement our projects.

This is how we work across our membership. This approach is systematic, we do not invent anything new in Ukraine. Maybe if there is a difference, it's a difference of scale, but this is the systematic approach of the CEB.

What is bank's engagement with Ukraine now?

C.T.  Our Board approved €100 million one week ago to finance the health sector. We hope to be able to start disbursements in the first quarter next year.

In parallel, as the Governor mentioned, we are exploring projects for building reconstruction in envelopes of €50 to €100 million, together with the Ministry of Finance and Ministry of Reconstruction. We hope to be able to bring these projects to the Bank’s Board for approval in a few months.

We are also exploring a project related to health services, and especially mental health services or trauma, with the Ministry of Social Affairs. We expect this project to be financed mostly with grants.

This is where we are as of today. These are our priorities for the coming months. 

We are looking more at areas where, once again, the CEB can be most effective and add the most value. Sometimes it is because we have developed a specific expertise, or we focus on areas that are in urgent need of support. This is why, we are now thinking to work on mental health. Before the war, this was already an area where healthcare in Ukraine was not up to par. Clearly, after all the cruelty of war, mental health traumas are even more important than they were before. So, this is something that we are really very keen to focus on to help the Ukrainian people.

Governor Monticelli, do we understand correctly that we are talking about «long and cheap» money?

One very interesting feature of the way we finance projects is that we are very flexible in terms of the modality of financing. We don't have complicated financing instruments. Mostly, we try to accommodate the needs of the borrower.

The way that the pricing works is related to the CEB’s borrowing cost on international capital markets, which is very low, because we are triple A rated. So, the spread that we apply on our operations is minimal, especially when we lend to the sovereign level, like in Ukraine.

If the war in Ukraine continues for a long time, will it affect Ukraine's cooperation with the CEB?

Last year, we had a very thorough discussion with our shareholders about the strategy of the Bank in the next five years. This was about various aspects. One important aspect was about our operations in Ukraine. This is related to the kind of resources, in terms of size, that the shareholders want to give us. They decided, importantly, to approve the first capital increase in the history of the Bank with paid-in resources, asking us to continue our operations as well as to start investing in Ukraine. 

This is all based in our Strategic Plan 2023-2027. It foresees that we are going to build a portfolio of operations in Ukraine of around €1.2-1.3 billion.

For Ukraine, as mentioned, our first operation was in the health sector, working together with the World Bank. This operation can become larger, if shareholders provide more resources. I expect they will once they see the quality of the work that we do. 

We have also established a trust fund for Ukraine. At this stage, it is relatively small with some seed financing from Ireland and contributions from Germany and the Czech Republic for a total of around €3 million. Lithuania will follow in the coming week. This, we believe, is going to increase. We plan to use these resources to make the implementation of our projects more effective, including by providing technical assistance and capacity building. 

At the same time, we are very well aware of the urgent humanitarian needs in Ukraine. We have been, for example, using the Bank’s own reserves, after the eruption of the war, to provide grants to the International Organization for Migration (IOM) to provide well-focused help to the Ukrainians displaced in neighbouring member countries. I saw the use of our money in Warsaw, with a home dedicated to mothers with children that had handicaps and mental problems. It was really, really moving. Now we are also working with Catholic Relief Services.

Mr. Monticelli, I want to ask you as an economist how long will it take to Ukraine's recovery? What should be our priority during this recovery, based on your experience?

Experience in all countries shows that the engine of recovery is the private sector. The work of the CEB is crucial to have a just recovery that promotes social cohesion. But the engine of growth must come from the private sector. 

The private sector, as far as I understand, is very interested in investing in Ukraine. Ukraine is a good market, it has plenty of skilled workers, so there is appetite. There is also appetite to bear the risk that the implementation of investment implies. However, the risks linked to the war are what the private sector is not willing to bear.

It is difficult to talk about de-risking for a country at war. There is a plant; there is a risk that is going to be destroyed. So, the issue is, who is going to bear the risk? 

The private sector often has the view that de-risking should come through multilateral development banks bearing such risk. I can take the risk, but to do so I need the resources if the CEB is operating more like an insurance company. 

My view is that the acceleration of the process to strengthen Ukraine’s links with the European Union will help enormously to reduce risks. 

And as you know, we economists are good to make analyses, but at the end of the day, it is the investors who put the money on the table.