Financial cooperation

The main task of Financial Cooperation is to support partner countries in the financing of measures which are important for their development. These might be investments in the education or health system of the country, in the water supply and wastewater system, in the energy sector, in climate protection or agriculture.

Wind wheel in front of a blue sky. Copyright: Bundespresseamt, FaßbenderIf they are to bring about lasting improve­ments, invest­ments of this sort must be accom­panied by reform processes. Financial Co­ope­ra­tion is thus always conducted in close consultation with other German and international development cooperation measures.·

Selection and implementation of projects and programmes

Projects and programmes to be promoted with Financial Cooperation funds are devised jointly by the German government and the government of the partner country and agreements which are binding under international law are generally concluded after the KfW has assessed whether the planned project is beneficial and promising. The objective, the volume of funding pledged and other important details are then agreed and implemented by KfW Entwicklungsbank in the name and on behalf of the German government on the basis of a financing or loan agreement.

Once the loan agreements are signed, KfW Entwicklungsbank makes the funds available. KfW supports the project executing organisations in the partner country in preparing the project and provides back-up services during implementation. It monitors the progress of the measures financed and, once the project has been completed, reviews whether the development objectives have been achieved and will have a lasting impact.

Financing through BMZ budget funds

The terms and conditions governing the awarding of Financial Cooperation funds are laid down by the Federal Ministry for Economic Cooperation and Development (BMZ) in agreement with the Federal Ministry of Finance, the Federal Foreign Office and the Federal Ministry of Economics and Technology. They take into account the specific economic situation and the debt sustainability of each individual developing country.

Since 1978, funds have been accorded to the least developed countries (LDCs) in the form of non-repayable grants (financial contributions).

Developing countries granted specially favourable lending terms by the World Bank as a result of their low per capita income are accorded German Financial Cooperation loans on the same terms. Generally loans are made available at an interest rate of 0.75 per cent over a 40-year period, including a 10-year grace period.

All other partner countries are granted loans over a 30-year period, at a rate of interest of 2 per cent, and are not required to begin repayment for the first 10 years.

Funds for parallel and preparatory measures such as studies, advisory services for the project executing organisations or training for local specialists are provided free of charge. In addition, 34 per cent of Financial Cooperation funds can be granted to countries which are otherwise accorded loans only as a non-repayable grant for certain projects: for self-help-oriented poverty reduction measures, for the empowerment of women, for environmental protection, for upgrading the social infrastructure, or for credit guarantee funds for medium-sized enterprises.

Additional financing instruments: Development and promotional loans

The demand for funding in many partner countries is rising, in particular as a result of the need to expand public infrastructure. The German government is thus further extending the use it makes of development loans and promotional loans within the framework of its development cooperation.

Development loans

In economically more powerful developing countries, in particular in emerging economies, funds from the German national budget can be mixed or combined with funds raised by KfW Entwicklungsbank on the capital market. The specific mix of market funding and budget funding and the terms and conditions of financing are tailored to the specific situation of the recipient country and the economic feasibility of the project or programme:

  • Composite financing
    This form of financing combines federal budget funds (loans) with KfW Entwicklungsbank market funding. The terms and conditions that apply to composite financing are considerably less stringent than those that otherwise apply on the market. The German government can also bear 90 per cent of the risk of default for the KfW Entwicklungsbank market funding used; where this is the case, KfW Entwicklungsbank bears 10 per cent of the risk of default. Guarantees of this sort are intended for low-risk countries. Guarantees may be given to other countries if projects or programmes are particularly worthy of development support and the risk is justifiable. Projects to promote infrastructure and financial sector projects are especially likely to qualify for composite financing. The term of financing is flexible and can be adapted to suit the term of the project, but may not exceed 25 years.

  • Low-interest loans
    The BMZ makes available budget funds in the form of grants so as to reduce interest rates payable on KfW Entwicklungsbank loans backed by market funding. In addition, the German government may also bear 80 per cent of the risk of default for the KfW loans backed by market funding; in such cases KfW Entwicklungsbank bears 20 per cent of the risk of default. Because of the short terms involved, low-interest loans are particularly well suited to promoting development through the financial sector. Via the intermediary of suitable partner banks, individual groups such as small and medium-sized enterprises or certain types of investment, such as investment in environmental protection, can be promoted. The instrument is also used extensively for climate and environmental protection projects. In principle it is also possible to promote other investments in infrastructure.

  • Mixed financing
    Mixed financing uses funds from the German national budget, supplemented by funds raised at low interest rates on the capital market by KfW Entwicklungsbank. This type of loan depends on official export guarantees and is thus tied to official export credit agencies such as Hermes. Projects financed in this way are handled, selected and appraised by KfW Entwicklungsbank using customary development-policy criteria. They must, however, also comply with the conditions set by the export credit insurance agency. In recent years, mixed financing has been largely replaced by low-interest loans and composite financing.

Promotional loans

KfW promotional loans have been used since the beginning of 2003. They are used to finance projects and programmes which are both eligible for promotion from a development-policy stance and economically viable. These loans are provided by KfW Entwicklungsbank, without using national budget funds but always on behalf of the Federation, whereby KfW shoulders the entire risk associated with these loans. The loans are made available on terms and conditions similar to those available on the financial market. Promotional loans are designed to bridge the gap between the various development loans and the funding available from normal commercial banks. They are particularly well suited for expanding the economic infrastructure, and undertaking measures in the field of climate protection and the financial sector in more advanced developing countries. One example is extending support to microfinance institutions, which provide loans for small businesses and private clients. In these cases, the KfW Entwicklungsbank acts as a stakeholder and provides venture capital.

Export credit guarantees and sureties (Hermes coverage)

The export credit guarantees issued by the German government, known generally as Hermes guarantees, are a state instrument in foreign trade promotion. The German government offers exporters and banks, especially small and medium-sized businesses, the chance to cover the risk of non-payment for economic and political reasons in the export sector. A large percentage of exports to developing countries and emerging economies are covered by Hermes guarantees.

Applications for an export credit guarantee are handled by the Interministerial Committee, under the aegis of the Federal Ministry of Economics and Technology (BMWi). The BMWi makes its decisions in consensus with the Federal Ministry of Finance, the Federal Foreign Office and the BMZ.

The BMZ ensures that when decisions are made to award or withhold an export credit guarantee, important development-policy factors are taken into adequate account, on the basis of the revised version of the OECD environmental guidelines, dated June 2007. This ensures that internationally accepted standards are used to review the environmental, development-policy and social impacts of exports.

In addition to Hermes coverage, the federal government also guarantees direct investments made by German investors and untied financial loans in the form of federal guarantees and sureties covering the risk of non-payment.

BMZ glossary

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