The Bank | Publications | Special Funds

SPECIAL FUNDS

BSTDB DONOR SUPPORTED PROGRAMS FOR CO-FINANCING & TECHNICAL ASSISTANCE

Part I

Executive Summary

Proposal to establish Special Funds with partners active or interested in the Black Sea Region

This proposal lays out the rationale, the operational scope, and the modes of implementation for Special Funds established with, and operated by, the Black Sea Trade and Development Bank (BSTDB). It is intended for all parties which are interested in cooperating with BSTDB and enhancing the quality and scope of their existing or planned activities in the greater Black Sea Region- including multi-lateral institutions, official bilateral agencies and donors, and both for profit and non-profit private sector entities.

BSTDB has an explicit mandate for Special Funds to promote activities

As BSTDB gears up its trade and project finance operations, it has embarked upon an effort to use available facilities in order to fulfill its dual mandate of promoting (i) development and (ii) greater regional cooperation among the eleven Member States of the Black Sea Economic Cooperation (BSEC); these 11 Members constitute the shareholders of BSTDB and comprise the area of coverage of Bank activities. In addition to its Ordinary Capital Resources- defined as the Bank’s capital stock, borrowed capital, and income derived from its regular operations- the Bank has made provision for Special Resources, defined as other contributions of capital to be provided for a specific purpose or purposes that help to promote fulfillment of the dual mandate of the Bank. Specifically, Article 12 (f) of the Agreement Establishing the Black Sea Trade and Development Bank states “The Bank shall carry out its operations… by deploying Special Funds Resources in accordance with the agreements determining their use”. Article 16 of the Agreement states “The Bank may accept the administration of Special Funds provided by a Member State, a group of Member States, or a third party donor which are designed to serve the purpose and come within the functions of the Bank”.

Broad scope for Special Funds’ application

BSTDB Special Funds may be dedicated for stand alone financing/ co-financing of projects, for provision of technical assistance, or some combination of these. They can be opened for a lengthy period covering a number of projects or technical assistance operations, or they can be limited in time and scope to a specific activity. Likewise, they can be focused on specific sectors or countries of activity, they can promote a general theme topic, or else they can be open to utilization on a case by case basis. Such funds would usually be grants to be provided for the intended purpose, but depending on the nature of the liability which they imply for the Bank, they could conceivably be provided in the form of credits on concessional terms.

Including Co-financing…

Co-financing (and stand alone financing) helps to mobilize additional resources for specific projects, either covering shortfalls or permitting a broader scope of coverage; co-financing helps financiers coordinate their programs, establish common policies and avoid redundancy or conflict in the implementation of their programs; co-financing permits donors interested in the Black Sea region- but either new to it, or without the appropriate organizational structure- to become involved through the Bank’s capacity and network of operations. Thus, co-financing plays a strategic cooperation role in addition to its financial role, helping to rationalize policies and improve (i) the management and coordination of country-wide assistance programs and (ii) the impact and implementation of individual operations. For Special Funds, co-financing would normally be ‘joint’, executed by the Bank, rather than ‘parallel’. Priority sectors for Co-financing programs include the Environment and Export Promotion.

… and Technical Assistance

Provision of technical assistance is equally a critical element in the successful fulfillment of the mandate of the Bank. In addition to requiring additional financial resources, the countries of the greater Black Sea region often require technical resources in order to gain access to new ideas, best practices, latest knowledge and know-how, new techniques, or new technologies in a specific area of interest. The availability of technical assistance will help public and private sector clients, helping to complement, expand, and enhance regional operations. The range of needs is great, and there exists considerable flexibility to meet specific areas of interest, but particular priorities identified by BSTDB include improving feasibility studies, upgrading the quality of financial reporting methods and standards, and assessing regional cooperation structures and prospects.

Black Sea Region is poised for economic take-off

The advantages and opportunities of the Black Sea Region make it an attractive investment destination, poised to become the locale of successful fast growing emerging markets. Although risks remain, the preconditions for rapid economic growth now exist in the greater Black Sea Region in terms of growing stability and market structures, emerging entrepreneurialism, highly educated and linguistically able working forces, and proximity to developed markets. Above all, though, there is the desire of the countries to cooperate with neighbors and to attract outside capital. BSEC and BSTDB are two tangible results of this interest. All the countries of the Black Sea region are reaching out regionally as well as globally, creating new opportunities for investors which were unimaginable as recently as a decade ago.

BSTDB intends to catalyze Regional development & integration

The Black Sea Trade and Development Bank, in accordance with its mandate, aims to play a catalytic role in the Region for both public and private sector operations which are consistent with its dual mandate. The main value added of BSTDB is in filling key niches which promote regional economic activity, but which are not adequately covered by other actors at present- either governments, international organizations, or private banks and enterprises.

Institutional cooperation a key for success

BSTDB can– and actively does– cooperate with multilateral, official bilateral, and private financiers to channel additional resources into the Black Sea region, thus contributing to the process of transition and development, while ensuring that the operations in which it becomes involved are economically sound and actively assist market development, at sectoral, institutional, and enterprise level. The Bank intends that Special Funds will play a significant role for such activities, offering an additional vehicle through which multi-lateral, official bilateral, and private sector entities may become involved in the complementary processes of regional development and increased cross-country integration.

BSTDB is owned by, and works for, the Member Countries of the Black Sea Region

BSTDB is first and foremost a regional bank, focused on improving integration within the Region and adding value to the economies of its shareholders. The Bank is aware of opportunities and challenges in the Region. It draws much of its staff from the Region or from institutions which are active in the Region; it undertakes thorough research of its markets of activity; it conducts frequent missions to stay on top of developments; it has established working relationships with Member country Central Banks and other public and private sources of economic and business information; and it cooperates with other international institutions. In addition, BSTDB works closely with other BSEC institutions, and it enjoys excellent access to the governments of the Region, drawing its Board of Directors from high ranking echelons of the government of each Member country.

The challenge of mobilizing knowledge and capital for the benefit of the Region

A significant operational challenge for BSTDB is to leverage its assets to bring in maximum flows of capital and know-how into the Region. Similarly, one of the key contributions BSTDB can make to the Region is increasing knowledge and awareness about the Region, including improving access to information, and contributing to the development of greater managerial, technical, and financial capacity in the region.

Special Funds are an additional operating tool to meet the challenge

In order to meet this challenge, the Bank has made provision for the establishment of Special Funds- trusts, endowments, or other pools of financing resources which may be used for operational purposes that further the mandate of the Bank. Typically, these Special Funds would be established to provide financing for projects (usually joint co-financing, but on occasion also stand alone financing) or to provide technical assistance to build capacity, effect skill transfer, provide know-how, or to help improve the quality and flow of information available. The Bank has developed the internal procedures to design and operate Special Funds, and it possesses the necessary systems and staff skills to maintain efficiency, transparency, and consistency with the intended objectives of the Special Fund(s).

BSTDB intends to work with all interested public, private, and multi-lateral entities

BSTDB has worked with international financial institutions that regularly use Special Funds, and is contacting private contributors and representatives of the governments and organizations that provide funding or act as donors for Special Funds- for both technical assistance or for co-financing. Potential donors are targeted for their interest in the greater Black Sea region, and for their track record in providing effective development assistance in the past. The Bank organizes conferences bringing together public and private sector representatives with an active interest in the Black Sea Region, and will continue to play a pivotal role in bringing together parties which desire to discuss and coordinate the existing and the evolving range of regional development and cooperation issues.

Part II

Establishment of the Black Sea Trade and Development Bank

The BSTDB was upon the initiative of the Black Sea Economic Cooperation Organization (BSEC), and formally commenced operations on 1 June 1999. The Member Countries of BSEC are the shareholders of BSTDB as follows:

Shareholding Structure of the Black Sea Trade and Development Bank

BSTDB is a regional financial institution with a developmental mandate. The Bank supports economic development and regional cooperation by providing project financing, trade financing, and technical assistance programs available to the public and private sectors in Member States (See Annex I for an overview of the Black Sea Region).

The initial authorized capital of the Bank is SDR 1 billion[1], of which SDR 300 million is paid-in. The Bank enjoys preferred creditor status.

Development Policy of BSTDB

BSTDB is able to offer a wide range of banking products and services to its prospective clients. The main products BSTDB offers are: (a) loans; (b) equity investments; (c) guarantees; and (iv) trade finance (See Annex II for a more detailed description of BSTDB products). One of the key objectives of the Bank is to catalyze the mobilization of financial resources for the greater Black Sea region and to increase the economic integration of the member countries. To this end, it intends to be complementary to private sector activity, taking on elements of political risk which often prove prohibitive for private firms interested in investing or trading in countries where the economic situation and investment environment are perceived as uncertain or risky.

The Bank’s key distinctions relative to other multi-lateral development organizations already active in the region are that a) as a priority objective, BSTDB explicitly seeks to promote trade among members as well as increasing their export capacity, and to this end the Bank provides a number of trade finance products, and b) BSTDB is able to finance smaller sized projects flexibly and more quickly than other multi-laterals. This is quite significant since most of the dynamic enterprises in the Black Sea region are small to medium sized. (See Annex III for a description of BSTDB’s Operational Strategy).

The Black Sea Region

Special Funds & BSTDB

Special Funds represent a form of additional resource mobilization. By definition, they are beyond the Bank’s Ordinary Capital Resources[2] and are mobilized from outside sources. They differ from other forms of resource mobilization in that they generally come in the form of grants, and rarely concessional debt, and they have an ‘identity’ in that the funds are earmarked for their end use, or are labeled by the country, organization, or firm from which they originate[3].

Special Funds will focus for the most part on funds set up in support of BSTDB activities to provide (i) technical assistance, (ii) resources to finance projects on a stand alone basis, and (iii) co-financing for projects by adding these resources to other BSTDB resources[4]. Special Funds may be set up for both project finance and trade finance activities of BSTDB. The framework applies to both of these principal spheres of BSTDB activity, except in places where there is specific reference to (or exclusion of) the one or the other.

Technical Assistance

Technical assistance[5] may be for conveyance of general knowledge, establishment of a framework for knowledge transfer, the provision of specific skills, or for transmission of ideas and methods in order to complete a particular task. Normally such assistance takes the form of a facility to provide access to new ideas, best practices, latest knowledge and know-how, new techniques, or new technologies in a specific area of interest. The justification for technical assistance is based upon the necessity of having access to a skill or technique for a task, but its lack of availability either due to problems of information and/or problems of funding. Therefore, technical assistance is an additional activity, one considered integral to promotion of the main objectives of BSTDB, but not otherwise available in a ready form to clients. Another way of looking at it is that technical assistance should complement, expand, and enhance Bank programs.

Co-financing

Co-financing is the financing by two or more partners of activities to provide financing support for a project, program, or other activity. The partners are thus able to achieve consistency of approach in providing the financing, and/ or are able to mobilize funds in excess of those available to any one partner for the intended activity. In addition, co-financing allows partners to share risks- operational, disbursement, repayment, etc.- and it helps donors that wish to be involved in the region to do so by using the Bank’s experience and capacity to support the development and implementation of operations. Furthermore, it can facilitate the access of borrowers to private financing and the establishment of working relationships with new external public and private financiers.

In the context of Special Funds, co-financing would most likely be “joint”, meaning that it would be administered by BSTDB alongside other resources committed to a venture, since that is the most meaningful way to obtain expected benefits from the establishment of a Special Fund. In addition to being administered by the Bank, joint co-financing normally implies the provision of funds for the same items as would be financed by other BSTDB resources. However, in certain cases the co-financing could be administered by BSTDB but be more “parallel” in nature- funding a discrete set of items distinct from those financed by other BSTDB resources.

4.

Institutional Mandate for Special Funds

The Agreement Establishing the Black Sea Trade and Development Bank states that the Bank shall have the power to “establish and operate Special Funds for specific purposes, which are to be decided by the Board of Governors” (Article 2.d). This foresees both “deploying Special Funds Resources in accordance with the agreements determining their use” (Article 12.f) and “participating in loans and providing technical assistance for the reconstruction or development of infrastructure, including environmental programs” (Article 12.g). Articles 16 and 17 additionally empower the Bank explicitly to carry out technical assistance and co-financing activities, and a number of other Articles indirectly lay an enabling framework (e.g. Article 2.a/e/f). Section 12 ‘Co-financing’ of the Rules and Regulations for Financing Projects and Commercial Activities also makes provision for co-financing and coordination of activities with other institutions.

Relevant Articles Pertaining to Special Funds from the Agreement Establishing the Black Sea Trade and Development Bank[6]

Article 2 FUNCTIONS AND POWERS

To fulfill its purpose, the Bank shall have the following functions and powers:… (d) to establish and operate Special Funds for specific purposes, which are to be decided by the Board of Governors…

Article 10 ORDINARY AND SPECIAL OPERATIONS

The operations of the Bank shall consist of ordinary operations financed from the Ordinary Capital Resources of the Bank referred to in Article 8 of this Agreement and special operations financed by the Special Funds Resources referred to in Article 17 of this Agreement. The two types of operations may be combined.

Article 11 SEPARATION OF OPERATIONS

1. The Ordinary Capital Resources and the Special Funds Resources of the Bank shall, at all times and in all respects, be held, used, committed, invested or otherwise disposed of entirely separately from each other. Financial statements of the Bank shall show the reserves of the Bank together with its ordinary operations and the special operations, separately.

2. The Ordinary Capital Resources of the Bank shall under no circumstances be charged with, or used to discharge, losses or liabilities arising out of special operations or activities for which Special Fund Resources were originally used or committed.

3. Expenses appertaining directly to ordinary operations shall be charged to Ordinary Capital Resources of the Bank. Expenses appertaining directly to special operations shall be charged to Special Fund Resources. Any other -expenses shall, subject to Paragraph 1 of Article 16 of this Agreement, be charged as the Bank shall determine.

Article 16 SPECIAL FUNDS

1. The Bank may accept the administration of Special Funds provided by a Member State, a group of Member States, or a third party donor which are designed to serve the purpose and come within the functions of the Bank. The full cost of administering any such Special Fund shall be charged to that Special Fund.

2. Special Funds accepted by the Bank may be used in any manner and on any terms and conditions consistent with the purpose and the functions of the Bank, with the other applicable provisions of this Agreement, and with the agreement or agreements relating to such Funds.

3. Each Special Fund shall be governed by specific rules and regulations adopted for such Fund by the Board of Directors. Such rules and regulations shall be consistent with the provisions of this Agreement and the law of the countries of operations of the Special Fund.

Article 17 SPECIAL FUNDS RESOURCES

The term "Special Funds Resources" shall refer to the resources of any Special Fund and shall include:

(a) Funds accepted by the Bank for inclusion in any Special Fund;

(b) Funds repaid in respect of loans or guarantees, and the proceeds of equity investments, financed from the resources of any Special Fund which, under the rules and regulations governing that Special Fund, are received by such Special Fund; and

Objectives of the Special Funds Program

The Special Funds program arises from the Bank’s objective to mobilize financial and technical resources for the benefit of the Member States of BSEC. In addition, it is a critical necessity given the limited resources which BSTDB has and the challenging development agenda facing most of the Bank’s Member States. Mobilization of such funds:

i. increases the impact of Donor activities

ii. provides an alternative route for raising funds- diversifying obligations and exposure among the Donors involved in specific operations

iii. improves harmonization of procedures and consistency of approach among co-financiers/ co-donors

iv. establishes working relationships with governments, organizations, and other entities with an active interest in the BSEC region, and

v. provides the opportunity to attempt different activities such as pilot projects, complicated ventures, undertakings with high development and/ or cooperation impact but low financial return, experimental endeavors with lengthier time horizons and other initiatives which for one reason or another might be considered high risk

One essential element to achieving success is that any such effort should have clear ‘ownership’ by the beneficiary party and/or the sponsors. Furthermore, Special Funds, mobilized by BSTDB for purposes of providing technical assistance or additional co-financing resources, must promote the key objectives of the Agreement Establishing BSTDB. At a minimum, therefore, Special Funds should promote- preferably both, but at the very least one of- the two principal goals of (i) promoting cooperation among agents of the public and private sectors of the member states and (ii) contributing to the development of one or more of the member states.

Other major International Financial Institutions (IFIs), including the World Bank, the European Bank for Reconstruction and Development, the Inter-American Development Bank and the Asian Development Bank have a variety of Trust Fund, Technical Assistance, and other Special Fund- type programs. They have received support from numerous donors, and have had great success over the years, helping to mobilize resources for development activities which otherwise would not have been possible.

Uses and Benefits of Special Funds

The Inter-American Development Bank in its publication Technical Cooperation Trust Funds mentions the following benefits that can emerge from Special Funds:

Increasing the opportunities for reciprocal technical cooperation or exchange of experiences among member countries;
Increasing the Bank’s capacity for financing technical cooperation, in addition to its own resources;
Promoting new forms of technical cooperation among the donor countries and the beneficiary countries;
Helping to expand and diversifying the exchange of external expertise, through access to the experience and knowledge of the relatively more developed countries;
Promoting better and more intensified use of institutional, human, and physical resources from the relatively more developed countries to support pre-investment activities, execution of Bank loans, sectoral adjustment and implementation of policies, and institutional strengthening in the borrowing member countries
Establishing links among public and private institutions of the various member countries and international organizations;
Promoting integration of enterprises, association of private capital and expansion of commerce among all of the member countries;
Promoting new opportunities for new joint investment opportunities; and
Increasing the opportunities for the donor countries to have ever greater access to regional experience on economic and social development promotion, thus helping their aid programs for other regions of the world.

Applications of Special Funds

A Special Fund, depending on its nature, may be general purpose, permitting a wide scope of activities. Otherwise it may be earmarked for a specific country, a specific sector (environment, transport, etc.), or for a specific purpose such as strengthening cross-country cooperation or private sector development. Limitations on the free use of funds will generally impose direct and indirect costs which will need to be accounted (see also section 8, BSTDB Management and Operation of the Special Funds Program). Within the framework of co-financing and technical assistance, the types of Special Funds will fall into one of the following four categories:

Financing support for projects[7], including co-financing, stand alone financing, and all activities which assist in the mobilization of external funds for a project, trade transaction or program. The co-financier (or stand alone financier) may request the Bank to administer the project- partly or in total- and disburse funds on its behalf, or it may disburse funds directly and employ the Bank for particular administrative functions. In the case of co-financing, the support may be parallel, meaning that the Bank and the co-financier finance different goods, services, or activities of a project. Otherwise co-financing may be joint, meaning that the Bank and the co-financier both finance specific goods, services, or activities of a project, according to some agreed apportionment of financing shares.

Financing advisory services, research, or knowledge/skills transmission. This could involve a range of activities including: project preparation and pre-investment work; from feasibility studies to strategic planning to project evaluation; training; institution building; seminars; secondments; scholarships and fellowships; and other pilot activities.

Preparation of studies on issues of regional importance, country or cross-country interest, and sector (or cross-sector) concern. This could involve research and studies; focus on ways to promote regional integration; analysis of economic sectors; and seminars and conferences. This category contains much overlap with the financing advisory services category, except that the advisory services would tend to be directly involved with the preparation of a project of program for financing; preparation of studies is less directly operationally oriented and may cover research, issues of general interest, or establishing links with other research institutions[8].

Supporting special regional programs that may contain elements of the previously described categories, addressing specific need(s) within the economies of the countries of operation. Such programs may be project/ transaction oriented, or they may be regionally focused, based upon sector policy development or cross-border initiatives.

BSTDB has opted to focus on certain sectors of operation as a matter of priority during its first years of operation. They are not exclusive choices, but the needs and the scope to provide genuine value added are especially high in these areas, and they present great potential for fulfillment of the dual mandate of achieving development impact and increasing regional cooperation. Trade finance activities are generally focused on export promotion, and development of greater capacity in the financial sector. Project finance activities are concentrating on sectors which are crucial for promotion and facilitation of co-operation between the Member countries: in particular, energy, transportation, manufacturing and services, and telecommunications; in addition, small and medium enterprises represent a priority sector since they account for the greatest share of new employment generation in Member countries.

Annexes IV and V provide conceptual summaries concerning two special regional programs for which Special Funds participation is actively sought in order to bring further financial and technical resources to supplement Bank ordinary capital resources. The first covers Environmental Programs, and the second covers Export Promotion. Both have high developmental impact as well as regional cooperation elements. In addition, they reflect the common thread that would prevail with any initiative undertaken in that they address specific needs, and do not intend merely to substitute for Bank financing of regularly Bank budgeted activities.

Types of Technical Assistance Activities

The list below provides an indication of the types of technical assistance for which needs have been identified by Bank staff, as well as by other International Financial Institutions. A particular fund may be tailored to provide technical assistance for a particular type of activity, a particular group of activities, or for general needs identified later under the auspices of a framework fund. The list is not necessarily comprehensive, nor absolute, since new requirements may evolve over time requiring alternative forms of technical assistance to be established.

While there are numerous-often overlapping- ways to classify the various types of technical assistance available, BSTDB broadly defines technical assistance along four lines: (i) directly project oriented TA (ii) Research into a particular topic of interest or sector of activity, (iii) TA that is intended for provision of training, and (iv) other types of technical expertise involving various corporate and administrative skills which are necessary but not conveniently categorized. The reason for this particular set of distinctions is because BSTDB is an operationally oriented institution which will normally seek TA that can be practically translated into on the ground results, and more effective operations.

Direct Project Oriented

· Project Identification	· Project Management & Monitoring
· Feasibility Studies	· Post-Evaluation of Projects
· Project Appraisal	· Rehabilitation of Existing Projects
· Final Design	· Institutional Design
· Support/ Assistance to Project Implementation	· Institutional Strengthening

Priority Project Preparation TA Needs: Feasibility Studies

Feasibility study is an important, sine-qua-non, stage in project appraisal. In order for the Bank to undertake thorough evaluation of the costs and benefits of a project, to assess its estimated environmental impact and finally its economic viability and long-term sustainability, a substantial amount of time and financial resources need to be dedicated to primary and secondary research, where applicable. However, in the Bank's countries of operation the skills required for such an endeavor are often scarce and data is usually poor. This makes the preparation of the application costly and overburdening for the Bank's clients, in particular for medium size enterprises in the private sector.

Since capacity building and transfer of technology and know-how are some of the most useful long-term effects of Bank involvement in an operation, there is a clear need for external assistance in the preparation of feasibility studies. However, applicants are often unable to bear the costs of such studies, and the Bank is not in a position to cover the cost of such detailed and intensive planning work either. Therefore, there is an opportunity for cooperation with other donors who may be interested in assisting this vitally important project preparation activity.

The major areas that need to be covered are: (i) Technical or Engineering Module, in which the input parameters (quantities and types of inputs, prices, sources, concentration and availability of supply, information on and evaluation of the technology used) are specified in detail and cost estimates developed; (ii) Market Analysis Module, in which the demand for the goods and services and prices of the relative needs of social services are estimated, quantified and justified; (iii) Introduction of Sensitivity Analysis as a tool to determine the impact of various factors; and (iv) Environmental Impact Assessment.

Sector Research

· Basic Studies

· Analysis of Economic Sectors

· Regional Cooperation Structures

· Promotion of Cross-Border Integration and Cooperation

Priority Sector Research TA Needs: Regional Cooperation Structures

Promotion of regional cooperation is a key objective of the Bank, but studies of countries in the Black Sea region for the most part have either focused on a country individually or an economic sector of activity in the country. If there has been an international dimension, it has focused upon removal of trade barriers and liberalization of investment in order to integrate in the world economy. Such studies have tended to focus on preparing for accession to the European Union, or conforming to the requirements of the World Trade Organization. By and large there has been little work on the implications- at region-wide level- of improved regional cooperation and expanded trade links. Sector studies have tended to restrict themselves to one country, even though links to neighbors in areas such as transport and telecommunications are important, and there may be significant advantages such as economies of scale or expansion of capacity, to coordinating trans-nationally. Regional studies at ‘macro’ level could assess trends and provide recommendations on future directions, including issues such as strengthening frameworks for cooperation and improving the compatibility of economic policies on trade and investment issues. Regional sector studies could link up the sectors across countries and identify key possibilities, opportunities to achieve efficiencies, and other sectoral prospects which would confer tangible economic and cooperation benefits to the countries concerned.

Training

· On the Job Training	· Distance Learning
· Preliminary Training	· Seminars and Informational Conferences
· Secondments

Other Types of Technical Expertise