The changing face of KfW

BERLIN — One of the clearest signals of Germany's emergence as a leader in global development is the growth of the country's development finance institutions, which are setting clearer priorities, while also drawing new scrutiny. The country's flagship development bank, housed within the Kreditanstalt für Wiederaufbau Group, or Credit Institute for Reconstruction, has seen its new annual investments grow from €6.6 billion in 2015 ($7.21 billion) to €8.7 billion ($9.98 billion) last year. The amount of government grant funds contributing to those totals has increased from €2.1 billion to €2.9 billion, with the remainder coming from funds the institution raises on the capital market. While the development bank focuses primarily on public sector investments, it has a colleague — the Deutsche Investitions und Entwicklungsgesellschaft, or DEG, the German Investment and Development Company — that finances private sector development. Also housed within the KfW Group, DEG’s new investments in private enterprises in developing countries and emerging economies have increased from €1.06 billion to €1.86 billion in the same period. Those commitments, particularly from the development bank, are a lens into the German government's development priorities. The distribution of funds regionally “is something that our government decides together with the governments of the respective partner country," Marc Engelhardt, head of strategy, communication and sustainability at KfW Development Bank, told Devex. "Our influence is as an adviser to the government, where we see a potential and absorptive capacity to invest. Once this is decided, then it's our turf to see how a project in a given country or sector is being structured." The bank often works in tandem with the German Corporation for International Development, or GIZ. Though a consulting company with a range of clients, GIZ is the main implementer for the federal development ministry, which also sets KfW's priorities. "On a sector level there is close coordination," Engelhardt said. "And there are synergies in a given country on a project level." While the KfW Group has long been a heavy hitter, it has been known primarily for its efforts within Europe, Mikaela Gavas, co-director of the Center for Global Development's Development Cooperation in Europe program, told Devex. "It's a massive player in the European context, mostly in terms of investment within Germany," she said, which has limited the development of its global identity. "They don't seem to have a specific focus. It's hard to say what their comparative advantage is." But as the German government has taken a stronger role on key development issues in recent years — including addressing climate change and the economic conditions that are spurring global migration — the development bank has taken on a new prominence. Explore the series. Growing goals Engelhardt said that 2015 was a watershed year for the institution, both because of the signing of the Paris Agreement on climate change, but also because of the influx of refugees into Europe. That helped shape the German government's priorities — and, in turn, KfW's. The result is a growing emphasis on climate-responsive infrastructure. Engelhardt said nearly 60 percent of all 2018 investments went toward climate-related and environmental protection projects. He said the institution is particularly looking to carve out a niche in promoting climate change adaptation projects, which help countries to manage the impacts of climate change but do not receive as much global attention as mitigation projects, which hope to limit further greenhouse gas emissions. In addition, Germany used its G-20 presidency in 2017 to build closer ties to African nations through its Marshall Plan with Africa, an initiative that aimed to improve business conditions in African countries and pave the way for German companies to invest and potentially grow job markets across the continent. KfW is clearly a part of that effort, reporting that nearly 48 percent of all new commitments channeled toward development projects in Africa or the Middle East, including 71 percent of the German government funding that is provided. That has gone mostly toward basic infrastructural projects, but also toward more ambitious efforts, such as a new microfinance bank in Nigeria. DEG, meanwhile, has always had a singular focus on Africa. Its goal at its founding in 1962 was to build the private sector on the continent and assist medium-sized German companies moving into the market. The institution’s reach has expanded since then, becoming a subsidiary of the KfW Group in 2001. It is now active in nearly 80 countries, with a portfolio of €8.4 billion. Anja Krautz, senior communications manager at the bank, said its influence is growing "because more importance is being attached to the private sector in the context of the global sustainable development agenda." But the emphasis on Africa remains, with a specific focus on promoting entrepreneurial opportunities for young people. DEG is in the process of creating a program called "Africa Connect," which will provide promotional funding of up to €4 million for small and medium-sized German enterprises that want to work on the continent. This reflects a broader German and European emphasis on long-term job growth in the region, which European officials hope will slow migration. Still, while KfW channels much of the German government's funding to sub-Saharan Africa, overall it was only the third-highest region for new commitments in 2018, behind Asia, at nearly €2.6 billion, and North Africa and the Middle East, which received nearly €2.4 billion. Sub-Saharan Africa received €1.7 billion. Engelhardt said the bank will remain active around the world, though he said there is a growing interest in funding projects in regions that are experiencing conflict. "Given the sad fact that crisis is the new normal, it requires a different set of investments," he said. He pointed to a €70 million peace fund that was established in the Democratic Republic of the Congo as an example. It operated in two phases between 2008-2015 and provided financing for 61 labor-intensive individual projects — such as building water pumps or renovating schools and hospitals — within areas of the country that were experiencing or emerging from conflict. Explore the series. Private sector pioneer While the KfW Development Bank may only now be developing an identity around specific issues, it has long had a reputation for its investment strategies. The bank was a pioneer in blended finance — using development money to mobilize additional funding, which has become central to the efforts to achieve the Sustainable Development Goals, the cost of which far outstrips global aid. "We need the private sector, we need domestic capital on a larger scale to be used for sustainable development," Engelhardt said. "We see part of our role in being a catalyzer or multiplier of these funds." KfW first started blending finance within Germany in the early 2000s and even though the approach has become more common, Engelhardt said clients still turn to KfW for the service. But the ties that KfW and DEG have developed to private industry — through strategies such as blended finance and the use of intermediary institutions to channel funds — has alarmed human rights organizations in Germany. Roman Herre, who works for FIAN, a group that fights against hunger, said the institutions often deny access to information, citing business concerns. That allows them to dodge questions about the human rights implications of the projects they are funding, he said. Herre also worried that the institutions are too driven by a business agenda, which diverts attention from the communities they are meant to support — a criticism faced by development finance institutions worldwide. In current thinking, "development must become 'bankable' or 'investable,'" Herre wrote in an email to Devex. "This fundamentally changes the development approach. From a human rights perspective, it would be key to focus on marginalized groups, to address their needs and demands as directly as possible. And it would be important to let them participate in the planning of development activities beforehand." In response, KfW issued an email to Devex saying it is “fully committed to the protection of human rights in all business areas. In case of substantial doubts or complaints, we immediately start thorough investigations and cooperate closely with human rights groups and NGOs.” KfW has also been cultivating closer ties to other European DFIs. Through the Mutual Reliance Initiative, which also includes the European Investment Bank and AFD, the French development agency, KfW can co-finance a project with other institutions and rely on peers' preparatory work to avoid duplication of activities. Engelhardt said they also work closely with bilateral development banks in Africa, South America, and Asia, something he expects to increase as KfW’s investments grow.