KfW Development Bank
The Kreditanstalt für Wiederaufbau (KfW) was initially set up by the German government to address societal challenges locally and abroad. KfW is a corporation based in Frankfurt, created under public law in 1948. Its two shareholders are the federal government and the German states (Länder), and as such its work is closely tied to the priorities of the state. "KfW has the mandate of promoting and financing measures in the areas of SMEs, startups, risk capital, housing, environmental protection, infrastructure, innovation, social measures and education, financing of municipalities and development cooperation and specific areas of project and export finance".
The KfW Group focuses on distinct activities in Germany and abroad, functioning as a promotional bank for the local economy and a development bank for partner developing countries. Promotional activities in Germany are divided into two business areas:
- "KfW Mittelstandsbank (SME Bank) brings together KfW's offers for business startups and SMEs, thus promoting commercial investments over the entire life cycle of a company.
- "KfW Kommunal-und Privatkundenbank Kreditinstitute (Municipal and Private Client Bank/Credit Institutions) offers financing for infrastructure projects, primarily for municipalities, grants global funding instruments to promotional institutions of the German Federal States and other financial institutions, and provides housing-related loans and grants as well as financing for education, both to private individuals."
Internationally, KfW's initiatives are focused on the promotion of internationalisation of the German economy and supporting development initiatives. These are carried out by three of the bank's business areas and subsidiaries:
- "KfW-IPEX-Bank GmbH provides project and export finance for SMEs and large German and European companies with projects focused on infrastructure, climate and environmental protection, and supplies of raw materials.
- "KfW Entwicklungsbank [Development Bank] is in charge of the financial cooperation between Germany and public organisms in developing countries. The 'financial cooperation' work of KfW Development Bank is complemented by 'technical cooperation' by the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) and other public agencies. The main sectors of financial cooperation are water supply and sanitation, renewable energy and energy efficiency, as well as the development of the financial sector.
- "Deutsche Entwicklungs Gesellschaft mbH (DEG) [German Investment Corporation] takes minority equity stakes and provides loans to private companies investing in developing countries. It pursues a business model broadly similar to that of the International Finance Corporation of the World Bank Group. Its main sectors of activity are banking, agribusiness, renewable energy, telecommunications and manufacturing."
The challengeIn the immediate postwar years there was a pressing need to reconstruct the shattered German economy and assist in international development. In order to address these challenges, adequate financing plays a key role. Thus the German federal government saw the need to create an institution with the mandate to support the key development areas – which are particularly vulnerable and not addressed by regular financial institutions – for its promotional strategy at home and abroad.
The public impact
KfW works with developing countries under the aegis of the federal government's Financial Cooperation (FC), and partners with countries on a range of different target areas. "KfW finances investments and project-related consulting services. FC funds are given mainly in the form of low-interest loans, but also as grants. In addition, KfW raises funds for development cooperation on the capital market. They are combined with funds from the budget of the Federal Government into so-called composite loans to finance projects in more advanced and creditworthy countries. The poorest countries, in turn, receive financial contributions that do not have to be repaid."
KfW is one of the most significant active investors in international development, and lately it has been particularly involved in climate-related initiatives. "In 2015 KfW disbursed the second highest sum of funding and grants to developing and emerging countries after the record year in 2014. For projects and programmes in Africa, Asia, Latin America and South-East Europe a total of around EUR7.8 billion was pledged in 2015. This amount went into climate and environmental protection, primarily into funding renewable energies and climate change adaptation measures. Thanks to its projects and programmes, KfW helps 2.5 million people gain access to energy for the first time." There is a particular focus on helping children: "some 3.4 million children and young people are reached as part of the education projects, while the water, waste water and waste disposal projects ensure a marked improvement in the living conditions for 10.8 million people".
The Development Bank cooperates with several large development organisations for which they execute projects and receive financing. "KfW Development Bank's main client is the German Federal Ministry for Economic Cooperation and Development (BMZ). It also acts on behalf of other government departments like the German Federal Foreign Office, the Federal Ministry for the Environment, Nature Conservation, Building and Nuclear Safety, the Federal Ministry for Economic Affairs and Energy and the Federal Ministry of Education and Research. In addition, we use funds from other donors, for instance the European Union for development projects."
When working in developing countries, there is always a local representative involved. "Regardless of the client and financing partner, responsibility for programmes always lies with an institution in the partner country. These institutions are mostly ministries, government authorities, state development banks or other public sector authorities. They execute the projects and programmes financed by KfW and are responsible for their success. However, we also work indirectly via banks with private institutions or with civil society organisations in fragile states."
The bank also encourages an open dialogue with stakeholders through a sustainability portal of its website, where it also provides updated information on its activities. Other key stakeholders include:
- "Shareholders, public sector clients and strategic partners in politics and business
- "End clients and borrowers from the promotional programmes, export and project finance
- "The general public
- "The media, scientists and NGOs
- "Analysts and investors...
- "Local residents at KfW locations."
The group is fully owned by German government bodies, with 80% of shares owned by the federal government and the remaining 20% held by the German states (Länder). Therefore, the decision-making for the initiatives that it pursues are closely aligned with national priorities. "KfW works in strong connection with the Ministries of the German Federal government. In its regular field of activity, KfW also develops programmes and new initiatives [on its own instigation], but in close cooperation with the government Ministries and complying with larger government strategies; before any of KfW's programs may be put into practice, KfW normally is mandated to do so by a Federal Government Ministry in writing by a mandate letter/contract."
The German government has a strong interest in development contribution as part of its wider international strategy. Therefore, working with developing countries and eliminating poverty are the KfW's most important objectives. "Financial cooperation is by far the most important instrument of German development cooperation. KfW Entwicklungsbank supports its partners in initiating an economically viable and socially just development. The overall objective is to reduce poverty and improve the living conditions of people, especially the poor population. The development bank promotes investment in infrastructure, financial systems and environmental protection, for example, in securing resources. Through the development of efficient financial systems, which offer new opportunities to SMEs, income and employment opportunities are being created. In crises, for example, KfW contributes to the stabilisation of the social environment by investing in employment programmes."
The most recent survey of the effectiveness of KfW internationally was conducted in 2014 and its results were published in 2016; it is a study that addressed the work of KfW together with GIZ and German embassies. "The German Institute for Development Evaluation, and AidData, a research lab at William & Mary [College], today released a groundbreaking study that evaluates the policy influence and performance of German aid agencies from the perspective of those receiving their advice and assistance. In a survey that AidData fielded in the summer of 2014, more than 1200 governmental and nongovernmental counterparts from 110 low- and middle-income countries reported on their firsthand experiences with and perceptions of GIZ, KfW, and Germany's network of embassies around the world."
The perceptions of Germany's international development clients vary according to the nature and locations of the projects that are funded. "Germany is highly valued as a 'green' donor: its advice and assistance is perceived to be particularly useful and influential in addressing environmental issues in low- and middle-income countries, and it outperforms the average bilateral donor in this policy area. One potential factor contributing to Germany's strong performance is that it has made environmental issues such as climate change, environmental protection and remediation, and renewable energy a strategic priority of its international development programme... And while Germany is regarded as a particularly influential and high-performing development partner in Europe, Central Asia, the Middle East, and North Africa, it is viewed by decision-makers in Latin America, the Caribbean, and sub-Saharan Africa as having less agenda-setting influence than the average bilateral donor. Germany's relatively low level of performance in sub-Saharan Africa is somewhat surprising, since sub-Saharan Africa receives the largest share of German development assistance out of all regions."
Clarity of objectivesKfW's legal mandate defines a number of functions that the KfW Group needs to perform. "The primary objective of KfW Development Bank is promotion – to help the German Federal Government and its partners achieve comprehensive development goals (i.e. reducing poverty, securing peace, promoting democracy and inclusion as well as environmental and climate protection). The priorities of these development initiatives concentrate around social issues, climate and protection of the environment and natural resources. There is also a focus on projects that add significant value towards the goals of international agreements on environment and climate protection such as the United Nations Framework Convention on Climate Change (UNFCC), the Convention on Biological Diversity (UNCBD) and the Convention to Combat Desertification (UNCCD)."
Strength of evidenceKfW has developed an evaluation methodology that looks to learn from previous projects and build on its many decades of experience. "Institutional feedback loops are needed to learn from experience and thereby exert a positive influence on the effectiveness of future interventions. This includes, in particular, evaluation – the systematic and objective assessment of current or completed projects and programmes. It enables patterns to be identified in project designs that repeatedly have a positive or negative impact on the achievement of objectives. This knowledge flows into the design of new projects and programmes – thereby helping to secure the quality of engagement in complex contexts. KfW regularly publishes evaluation reports to make the concrete results of its promotional activities transparent to policymakers and the public."
The legal and financial feasibility of KfW's activities go hand in hand. The law concerning KfW establishes the guidelines by which the bank must operate in terms of management, financing and legal issues. In terms of funds it establishes that the "nominal capital of KfW amounts to three billion seven hundred fifty million euros. The Federal Republic (Bund) participates in the nominal capital in the amount of three billion euros, and the Federal States (Länder) in the amount of seven hundred fifty million euros." Moreover, its obligations are guaranteed by the Federal Republic." The bank uses funds sourced from the federal budget as well as its own. Management of these funds is regulated by the Board of Supervisory Directors.
The use of the funds to make a positive international impact depends on KfW's selection of viable and feasible projects, and on the commitment of its partner countries. KfW has been supporting Germany's international development policy goals "for over 50 years, and has accrued considerable expertise as a financing and development institution". KfW projects are funded on behalf of the federal government, but partner countries take responsibility for the outcomes. The bank works closely with the German government on the selection of projects, and implements a thorough evaluation methodology that helps ensure good management of its resources. A regular project cycle after an international agreement has been completed includes: an evaluation of a feasibility study with local partners and consultants, evaluation of social cultural and ecological aspects of the project at hand, and examination of the project after completion. This methodology guarantees a good performance, and "in the long-term average, the development bank's projects and programmes have a success rate of around 80%".
The mandate that set up KfW also provides the guidelines for managing its operations. "KfW's corporate governance is set out in the KfW-Law. Article 7 of the KfW-Law provides for a Board of Supervisory Directors on which Federal Government Ministers constitute a strong group, with the Federal Minister of Finance and the Federal Minister of Economics and Energy taking annual turns to preside over this body. Other members are appointed by the Bundestag, the Bundesrat or the Federal Government. The Board of Supervisory Directors has a strong role in approving the basic strategy of KfW."
There are independent committees responsible for overseeing different part of the business and they review operations from time to time. "The Board of Supervisory Directors and its committees constantly monitor the performance of KfW's business activities and the management of its assets. It has taken the necessary decisions on the provision of financing and the implementation of other business in accordance with the conditions set forth in the KfW Law and Bylaws. The Board of Supervisory Directors, the Presidial and Nomination Committee, and the Remuneration Committee each met three times in 2015 for this purpose; the Risk and Credit Committee seven times and the Audit Committee twice."
MeasurementKfW implements regular long-term evaluations of its projects. An independent evaluation department reviews approximately half of the projects that the bank has financed, chosen via random selection, and evaluates whether the impact achieved has been sustained over the years. "Systematic evaluation helps to guarantee the quality of the work carried out by KfW Development Bank, helping us to learn from it for new projects and programmes. We want to know what works, as well as how and why, so that we can achieve as much as possible for the people in partner countries with the funds employed. We publish the results of all our evaluations. The current effectiveness rate is high: around 80% of the projects funded by KfW Development Bank are evaluated as long-term successes by the evaluation department."
Given its scale, KfW Development Bank is involved with a range of international and local organisations on behalf of the federal government, which cooperate on achieving mutual development goals. These include:
- German institutions: "Projects and programmes are coordinated to ensure that the tasks are sensibly distributed in the partner countries. The most important German cooperation partner is [GIZ]. Together, we advise the [BMZ] with regard to creating country strategies and developing priority area strategies."
- European partners: "KfW Development Bank cooperates closely with EU institutions on behalf of the German Federal Government with a view to further increasing the effectiveness of European development cooperation."
- International cooperation: "The cooperative partnerships range from reaching agreements in strategy-related dialogue with the partner organisations to joint promotion and financing of specific projects and programmes."
- The private sector: "KfW Development Bank devotes its energies to involving private companies and financial institutions in the wide variety of development cooperation tasks. Public-private partnerships (PPPs) are one form of cooperation. Here, private companies play a contractually agreed role when operating a water supply facility or managing a fund, for instance. PPP approaches are very successful, particularly in the financial sector."
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