Alleviating the confusion: Germany’s new aid structure and business model

Click here to view the image in large size.

The German aid program is undergoing a major organizational restructuring that has attracted the interest of the donor community, implementing partners, and aid recipients. If you are not already aware, beginning January 1, 2011, Germany’s three main aid agencies for technical cooperation – namely the German Technical Cooperation (GTZ), German Development Service (DED), and InWEnt – were merged together to form Gesellschaft für Internationale Zusammenarbeit or GIZ (English translation: German Society for International Cooperation). The move resulted from successive Organization for Economic Cooperation and Development peer reviews that revealed unnecessary compartmentalization and structural inefficiency in the German aid program.

Generally speaking, the creation of GIZ – a Devex Top 40 Development Innovator – has been applauded by the global development community. Despite sound rationale behind it and a relatively smooth organizational integration to date, however, Devex has received many inquiries over the actual structure and business model of the new regime and what it might mean for clients, partnership, and business. Development stakeholders also often ask us about the role and function of the German development bank KfW Entwicklungsbank and how that agency will work within the new German development model. The simplified and abridged organizational chart above is our attempt to shed some light on these dynamics.

Starting with the actual source of the money, the German Ministry for Economic Cooperation and Development (BMZ) manages the vast majority of German international development strategy, programming, and funding. The Federal Foreign Office, Ministry of Education, and Ministry for Environment, Nature Conservation and Nuclear Safety (BMU) also administer foreign aid money that can trickle down throughout the German aid program. Due to the German government’s strategic focus on environmental protection and climate change, BMU in particular is becoming more and more of a key funder of Germany’s aid program.

Still, BMZ is Germany’s main foreign aid disbursing department. This is reflected by the fact that 68 percent of what is now GIZ’s budget came from BMZ in 2010, while only 10 percent came from other federal ministries. In the years ahead, GIZ will likely benefit from BMZ’s reduced administrative burden borne by the fact that it now has fewer agencies to manage.

Perhaps the most important fact to understand when assessing various opportunities within Germany’s aid program is that the country distinctly separates technical cooperation, now led by GIZ, and financial cooperation, led by KfW. While there was once a push to integrate the two agencies, both GIZ and KfW will each continue to manage their own procurement processes and issue their own tenders.

Click here to view in large size

The creation of GIZ will mean that there is a single source of all German technical assistance services. Before the merger, GTZ, DED and InWEnt often competed over the same projects and had different development philosophies which were evident in program design and implementation. Now, GIZ will have a combined 17,300 employees in 130 countries; with an estimated turnover of 1.9 billion euros ($2.56 billion). GIZ will retain the procurement processes and management model of the former GTZ, which was by far the largest among the three aid agencies. GIZ was planning to reach a major milestone on September 1 when all internal parallel structures were to be eliminated, but the date was pushed back until October 1 to accommodate final changes.

As a 100 percent government-controlled organization, GIZ might be forced to sacrifice some of the bilateral and multilateral funding that predecessor GTZ, a quasi-governmental organization, worked hard to win. In the past, GTZ bid on and sometimes won projects financed by major bilateral agencies such as Australian Agency for International Development (AusAID), United Kingdom’s Department for International Development (DFID), and European Union, as well as international institutions like the United Nations and World Bank. In 2010, this constituted 15 percent of GTZ’s business. It remains to be seen if and how GIZ will be able to continue to position itself as an independent implementing agency that works with other donors.

On the financial cooperation side of the new German aid model, the KfW Entwicklungsbank, or KfW development bank, will continue to provide loans and grants on behalf of the German government for development aid. It is a sub-unit of the KfW Banking Group, which is one of Germany’s main promotional banks for financing government initiatives domestically and abroad.

KfW frequently channels funds through the procurement system of partner countries and provides the necessary financial grants or loans to carry out partner country projects. Interestingly, the “supreme principle” guiding KfW is to “intervene as little as possible” with partner countries so they assume responsibility and take the lead. While this is true, KfW does oversee procurement and advises the project-executing agency from the request for proposal stage through the selection of firms. Contracts may not be awarded until KfW has raised “no objection” during its examination.

Most analysts agree that the creation of GIZ will help unify the German aid program and result in better coordination between Germany’s technical and financial cooperation arms. For example, the two agencies have partnered to launch the German Climate Technology Initiative in 2011 by designing innovative instruments for 27 partner countries to pursue economic development without compromising the environment. As the development community gears up for the United Nations Rio +20 Earth Summit in 2012, GIZ and KfW together will showcase how Germany’s technical and financial cooperation can help build and sustain a “green economy,” proving that environmental protection, climate change, and sustainability will continue to be priority sectors for the German aid program.

This new model will be evident at the country level. Even though GIZ and KfW will continue to manage their own procurement processes, both agencies will jointly comprise the “Development Cooperation Country Office” stationed within major German aid recipient countries. The Development Cooperation Country Office is expected to work closely with the German embassy to carry out all cooperation activities. For implementing partners, particularly those not based in Germany, getting to know the personnel and priorities of the Development Cooperation Country Office within countries of interest will be critical to working with the reformed German aid program.

Aileen Cruz contributed to this report.

About the author

  • Pete Troilo

    Former director of global advisory and analysis, Pete managed all Devex research and analysis operations worldwide and monitors key trends in the global development business. Prior to joining Devex, Pete was a political and security risk consultant with a focus on Southeast Asia. He has also advised the U.S. government on foreign policy and led projects for the Asian Development Bank and International Finance Corp. He still consults for Devex on a project basis.

Join the Discussion