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2002 Annual Report on German Cooperation with Developing Countries.
For Development with a Future.
New Energy
F O R E I G N O F F I C E S O F T H E K F W G R O U P
Afghanistan: KfW Office KabulDirector: Martin Jenner
Egypt: KfW/DEG Office CairoDirector: Jan Blum
Belgium: Liaison Office to the EU, BrusselsDirector: Stephan Sellen
Bolivia: KfW Office La PazDirector: Stefan Zeeb
Bosnia and Herzegovina: KfW Office SarajevoDirector: Frank Bellon
Brazil: KfW Office BrasíliaDirector: Dietmar Wenz
Brazil: DEG/KfW Office São PauloDirector (KfW): Volker WiederholdDirector (DEG): Thomas Kessler
China: KfW/DEG Office BeijingDirector (KfW): Dr. Karl-Joachim TredeDirector (DEG): Markus tho Pesch
Côte d’Ivoire: KfW Office Abidjan (relocatedto Dakar, Senegal, in 8/2003, currently inAccra, Ghana)Director: Bruno Schoen
Guatemala: KfW Office Guatemala CityDirector: Helge Jahn
India: KfW/DEG Office New DelhiDirector (KfW): Andrea JohnstonDirector (DEG): Hans-Georg Hansmann
Indonesia: KfW/DEG Office JakartaDirector (KfW): Jens ClausenDirector (DEG): Wilhelm Icke
Jordan: KfW Office AmmanDirector: Reinhard Schmidt
Cambodia: KfW Office Phnom PenhDirector: Dr. Klaus Müller
Kenya: KfW/DEG Office NairobiDirector: Oskar von Maltzan
Kosovo: KfW Office PristinaDirector: Dr. Johannes Feist
Macedonia: KfW Office SkopjeDirector: Dr. Christian Lütke-Wöstmann
Mexico: DEG Office MexicoDirector: Armin Albert (from 8/2003)
Montenegro: KfW Office PodgoricaDirector: Frank Bellon
Nicaragua: KfW Office ManaguaDirector: Helge Jahn
Palestinian Territories: KfW Office Al BirehDirector: Reinhard Schmidt
Peru: KfW Office LimaDirector: Stefan Zeeb
Serbia: KfW/DEG Office BelgradeDirector: Dr. Johannes Feist
South Africa: DEG/KfW Office JohannesburgDirector: Beate Baethke
Tanzania: KfW Office Dar es SalaamDirector: Oskar von Maltzan
Thailand: KfW/DEG Office BangkokDirector (KfW): Andreas Klocke Director (DEG): Herbert Jäger
Turkey: KfW Office AnkaraDirector: Burkhard Hinz
Vietnam: KfW Office HanoiDirector: Dr. Klaus Müller
Addresses, phone numbers and e-mail addresses of our foreign offices are available at:
www.deginvest.de/german/home/Service//Kontakt/Aussenbueros/index.htmlwww.kfw.de/DE/Entwicklungszusammenarbeit/Kontakt3/Auslandsbr.jsp
x Nairobi
x Dar Es Salaamx
Jakarta
x Phnom Penh
x Hanoi
x Bangkok
xNew Delhi
Beijing x
Cairo x
xJohannesburg
x La Paz
x São Paulo
xBrasilia
Lima x
Ankarax
x xx
Sarajevo Belgrade
PristinaPodgorica
x
x
Skopje
x Main locations (25)
xAbidjan
Managua x
Guatemala City x
Kabul x
x
Al Bireh
Amman
Pristina
x
Situation as per May 2003
In 2002 an extensive reorganization of the regional departments was prepared under the name of “TEMPO” (transparent
development of a modern and professional organization), and it has been in effect since the beginning of 2003. The main
objective is to put in place an even more client and subject-oriented organization in order to enable an efficient performance
of tasks amid the many internal and external changes that are underway. Within the five regions (Asia and Oceania, Europe
and the Caucasus, sub-Saharan Africa, Latin America, North Africa and the Middle East) Regional Teams are in charge of the
country strategy, the country portfolio and coordination with other donors. The projects are pooled in accordance with the
priorities of cooperation established by the BMZ, permitting them to be worked on by teams composed of professionals from
various disciplines (economists, sociologists, health experts, engineers, etc). Some of the Sectoral Teams have been organized as
“Centres of Competence”. Their mission is to make professional expertise available to the German government, the KfW Group
and, of course, to the remaining regional departments. The functions of the Policy Department include Financial Cooperation
policy, economics of developing countries and general technical support.
N E W O R G A N I S AT I O N S T R U C T U R E O F F I N A N C I A L C O O P E R AT I O N W I T H I N K F W
Regional TeamHenke
Regional TeamTarigan-Sibero
Regional TeamLeibbrandt
Regional TeamDorschel
Regional TeamDr. Welschof
Regional TeamWehinger
FinancialCooperation
PolicyDelbrück/
Stein von Kamienski
EnergyPischke
Transport &Communications
Wenzel
HealthDr. Bichmann
Water ResourcesSolid Waste
(Middle East)Arce
Agriculture andNatural Resources
Dr. Aeppli
DevelopmentEconomics
Dr. Strangmann
GovernanceDecentralisation
Hildebrand
Financial andPrivate Sector
Wagner
WaterKarl
Agriculture &Natural
ResourcesDr. Kessler
Education,Finance,Energy
Fleischhacker
InstitutionalDevelopment,Environment,
Finan. SystemsAbel
SocialInfrastructure,Governance
Neuhaus
Financial Productsand Policy
Strauß
HealthDorf
Protection ofNatural Resources
N.N.
Transport &Communications
Dr. Voss
Watervon Collenberg
Water ResourcesSolid Waste
(North Africa)Prestele
Finance,Economic
InfrastructureWitt
Berlin OfficeSchmidt
ST Sector DivisionKC Sector and Policy Division
Regional Department IDr. Kloppenburg
East Asiaand PacificDr. Müssig
Central andSouthern Africa
Wollenzien
East andWest AfricaDr. Radeke
North AfricaMiddle East
Dr. Callies
Latin America andThe Caribbean
Dr. Zenk
DevelopmentStrategyGauges
EuropeKöhn
South andCentral Asia
Ohls
Regional Department IIDr. Neuhoff
Policy DepartmentWenn
Planning andMonitoring
Kurz
TechinalAdvisory Group
Dr. Schreiver
ITCo-ordination
Brodersen
Water IIDr. von Rabenau
Regional TeamMacioszek
Financial andPrivate Sector
Dr. Glaubitt
Energy,Environment,
TransportDr. Loy
Water IDr. Sieburger
CONTENT
1. Overview 2
2. Activites of KfW and DEG in Development Cooperation 4Guided by the Goals of the Millennium Declaration 4
Activities in Figures 5
National and international Cooperation 8
Message of Greeting on the Cooperation with AFD 9
Main Themes of the Year 2002 10
3. Promotion Energy Efficiency, Renewable Energies and Climate Protection 12Energy and Sustainable Development 12
Strategies for a Sustainable Energy Supply 16
Guest Contribution to AREED Initiative, Senegal 16
Project Examples:Serbia: District Heating in Cold Winter 23
Bangladesh: Clean and Efficient Power Generation by the Private Sector 24
China I: Modernized Coal-Fired Power Plants for Cleaner Air and More Energy 25
China II: Less Pollution Through Wind Energy 26
Egypt: Environmentally Sound Electricity Generation and Irrigation 26
Kenya: Geothermal Energy – Heat from the Earth for a Clean Environment 27
Morocco: Energy from the Sun and the Wind 28
South Africa: Electricity from Solar Home Systems for Remote Regions 28
India: Renewable Energies are Making Headway 29
Nepal: Reducing Costs with Clean Energy – Biogas Plants 30
The PPP Programme: DEG Finances Energy Sector with Promotional Funds of the BMZ 31
4. Regional Perspectives 32The Situation of the Developing Countries and the Transition Countries 32
Regional Development in Sub-Saharan Africa 35
Project Example Mozambique 42
Regional Development in North Africa and the Middle East 45
Regional Development in Asia 47
Regional Development in Latin America 50
Regional Development of the European Transition Countries 52
Statistical Appendix 54
Preface 1
“One World – German Development Cooperation: shaping
globalization, fighting poverty, securing peace” was formulated as the
new guiding message by the German Ministry for Economic Coope-
ration and Development (BMZ). KfW and the DEG are working jointly
on this task with all their financing instruments under the umbrella
of the KfW Group. We understand the guiding message of the BMZ
at once as a mission and a high standard which we can fulfil only
in concert with the people and the governments of the partner
countries.
Under politically and economically difficult global conditions
we continued to pursue the overriding objective of reducing poverty
in the year under review as well. The Millennium Goals with their
concrete indicators provide the necessary orientation also for the
future. The global fight against poverty eases social and economic
tension and reduces ecological risks. Without closing the gap between
rich and poor it will not be possible to bring about lasting peace.
The focal themes of the present 2002 Annual Report address
important issues of globalization and poverty reduction:
• Chapter 3 presents strategies and opportunities for sustainable
energy supplies in developing countries. As the world’s leading
bilateral financier of renewable energies the KfW Group offers
comprehensive expertise and innovative approaches.
• Chapter 4 focuses on the development in sub-Saharan Africa and
presents hopeful trends and adapted cooperation strategies.
These topics make it particularly clear that bilateral develop-
ment cooperation makes a significant contribution to shaping global
development policy.
Wolfgang Kroh
(Member of the Board of
Managing Directors of KfW)
Dr. Winfried Polte
(Chairman of the Board of
Management of DEG)
1
PREFACE
Wolfgang Kroh
Dr. Winfried Polte
2
GOALS
For development cooperation (DC), poverty reduction
continues to be the main objective. The global fight against
poverty reduces social and economic tension, secures peace
and durably mitigates risks to the environment. To achieve
this the German government supports the so-called
“Millennium Development Goals” (MDG), which were adopt-
ed in a declaration of 189 states at the Millennium Summit
of the United Nations in September 2000.
FOREIGN REPRESENTATIONS
The foreign representations of KfW and DEG were
further expanded in 2002. The KfW Group is currently
represented in 25 developing countries. Having a local
presence makes it easier to participate intensively in the
sector dialogue and to coordinate projects and programmes
with other bilateral and multilateral DC institutions.
COMMITMENTS IN A DIFFICULT
ENVIRONMENT
Last year KfW provided around EUR 1.3 billion in new
commitments for the promotion of developing countries
(EUR 3.0 billion in the previous year). Adjusted for a special
loan to the IMF totalling around EUR 1.4 billion last year,
commitments in 2002 were around EUR 300 million lower
than the year before. Commitments from budget funds of the
BMZ were around 7 % below the previous year’s level, at
EUR 971 million (EUR 1,040 million), mostly as a result of
project-related reallocations. Despite the difficult global
economic environment the DEG achieved its highest commit-
ment volume so far, at EUR 464 million (EUR 412 million). The
biggest share of total commitments made by KfW and DEG
went to partner countries in Asia, followed by Europe/the
Caucasus and sub-Saharan Africa.
PRIORITY SECTOR:
SOCIAL INFRASTRUCTURE
The sectoral distribution of KfW’s commitments in 2002
was characterized by the very high volume of commitments
for social infrastructure in the areas of water supply, sanita-
tion, education and health care. DEG financed mainly the
producing sector, followed by the financial sector.
With a share of 49 % (46 %) almost half of the FC
financing volume was invested in the cross-cutting area
“poverty reduction”. Around 37 % of the funds were applied
with the explicit or secondary goal of protecting the environ-
ment and natural resources.
MORE PARTNERSHIPS AND DELEGATION OF
ACTIVITIES
In a number of cooperative projects, cofinancings and
partnerships, the KfW Group is combining its competence
with the specific strengths of other financing institutions.
Chief among these partnerships is the close cooperation with
the GTZ (Deutsche Gesellschaft für Technische Zusammen-
arbeit – German Agency for Technical Cooperation). Both
institutions are supporting the BMZ through an intensive
cooperation above and beyond the project level. For over
30 years KfW has maintained good relations with the French
development bank AFD which in the meantime have lead to
a number of joint projects and mandates exchanged between
both agencies. The subsidiaries of the two agencies in charge
of private sector finance, DEG and PROPARCO, have joined
similar institutions to form the Association of European
Development Finance Institutions (EDFI). Partnerships enable
more efficient and effective work in developing countries.
Eradicating poverty is the most important objective of developmentcooperation.
1. OVERVIEW
PREVENTING CRISES BY MAKING POVERTY
REDUCTION A DEVELOPMENT GOAL
A development policy that seeks to eradicate poverty
can offer new perspectives to many people, improve their
living conditions noticeably and thereby contribute towards
securing peace. This is necessary particularly in crisis situa-
tions – even if development policy cannot solve the intri-
cately connected problems and causes by itself and, most
importantly, without the active participation of the local
population. In addition to our commitment to securing the
peace in Central America, the Palestinian Territories and in the
framework of the Stability Pact for Southeastern Europe, this
is illustrated very strongly by the example of Afghanistan.
Here KfW and the GTZ have a local office since January 2002.
The first projects have already been implemented successfully.
ENERGY EFFICIENCY, RENEWABLE ENERGIES
AND CLIMATE PROTECTION
Sustainable and efficient use of energy is one of the
great challenges for developing countries as well. Climate
protection concerns all of us. Because of their geography
and economic structure, developing countries in particular
have greater difficulty in adapting to the possible effects of
climate change than the industrialized countries. As energy
sources dwindle and energy prices rise, these countries are
seizing the opportunity of applying new technologies to make
rational and efficient use of environmentally friendly and
efficient forms of energy. The main focus of this report lies
on the discussion of problems and possible solutions for a
sustainable energy supply. It has to be achieved with energy
sources of the future – promoting them is an important task
of development cooperation.
IN FOCUS: DEVELOPMENT COOPERATION
WITH SUB-SAHARAN AFRICA
Public opinion literally perceives sub-Saharan Africa as
the "black continent": marginalized from the world economy,
disrupted by violent conflicts, with no hope for an end to
poverty. But hopeful developments are taking place, even
though this region has not remained unscathed by the
consequences of the downswing of the world economy. The
differences in the development of the countries of this region
have become even greater than in the past years. The coun-
tries that have achieved the highest growth rates are those
with reforms firmly in place and above-average political
stability. Sub-Saharan Africa is the main focus area in the
regional section of this report.
3
Climate protection concerns all of us – droughts have devastating consequences for people and the environment.
4
The German federal government has committed itself in
the context of development cooperation (DC) to pursue the
overriding goal of poverty reduction. The global fight against
poverty reduces social and economic tension and durably
mitigates risks to the environment. Securing peace in the long
run is not possible without reducing the gap between rich and
poor. To achieve this the German government supports the
goals of the Millennium Declaration, which was adopted by
189 states at the Millennium Summit of the United Nations
in September 2000. The “Millennium Development Goals”
(MDG) formulated on the basis of this declaration were tak-
en up in the German federal government’s action programme
to reduce poverty by 2015. The MDGs (see box) and the pover-
ty reduction strategies of our partner countries, which are of-
ten laid down in “poverty reduction strategy papers” (PRSP),
constitute the reference framework for all protagonists in DC.
In the context of enhanced donor coordination the
MDGs are also an important yardstick for the orientation of
the work of KfW, which implements Financial Cooperation
(FC) on behalf of the German government. KfW participates
in expert discussions on developmental priorities, checks
whether strategies, programmes and projects are eligible for
promotion from a development-policy perspective, finances
and supports their implementation and, finally, evaluates
every project for its developmental effectiveness and its
contribution to reducing poverty.
INTEGRATION OF DEG IS BEING
CONTINUED
Since the integration of DEG into the KfW Group in
2001 both companies have closely coordinated their pro-
motional instruments and the products they offer to the
developing countries. In the framework of FC KfW concen-
trates on projects in the public sector and finances mainly
projects in the field of social and economic infrastructure.
DEG continues its development-policy mission and finances
investments in the private sector in developing countries. In
their activities there are a variety of synergies ranging from
joint projects and a uniform appearance before customers to
a coordinated handling of customer inquiries.
The network of foreign representations of KfW and DEG
was further expanded in 2002 with the opening of two new
offices in Kabul and Ankara. The KfW Group is currently
represented in 25 developing countries. The experts in the
foreign representations help to intensify cooperation with the
local project partners. Also, having a local presence makes it
easier to participate intensively in the sector dialogue and to
coordinate projects and programmes with other bilateral and
multilateral DC institutions.
2. ACTIVITIES OF KFW AND DEG IN DEVELOPMENT COOPERATION
THE „MILLENNIUM DEVELOPMENT GOALS“ (TO BE ACHIEVED BY 2015):
• Halving the proportion of extremely poor people and people who suffer from hunger, measured by the world pop-
ulation of 1990 and by the proportion of people whose income is less than USD 1 a day
• Achieving universal primary education for all children, girls and boys alike, up to the age of 14
• Promoting gender equality and empowerment of women
• Reducing child and infant mortality to two-thirds of the level of 1990
• Reducing maternal mortality to three-quarters of the level of 1990
• Combating HIV/AIDS, malaria and other epidemics
• Ensuring environmental sustainability, halving the proportion of people without access to safe drinking water, cli-
mate protection, protection of biodiversity and forests
• Building up a global partnership for development by implementing fair trading and financial systems (including
debt reduction) and responsible good governance, both nationally and internationally
Guided by the Goals of the Millennium Declaration
DEVELOPMENT OF COMMITMENTS OF
KFW AND DEG
In the year 2002 KfW and DEG committed a total
of EUR 1.8 billion to support the developing countries
(see table 1).
Commitments for the promotion of developing coun-
tries comprise federal budget funds, especially from the
German Ministry for Economic Cooperation and Development
(BMZ), funds from other donors in the context of mandates
as well as KfW’s and DEG’s own funds. The biggest share of
total commitments made by KfW and DEG went to Asia,
followed by Europe/the Caucasus and sub-Saharan Africa
(see chart 1).
The sectoral distribution of KfW’s commitments in 2002
was characterized by the very high volume of commitments
for social infrastructure in the areas of water supply,
sanitation, education and health care. DEG financed mainly
the producing sector, followed by the financial sector
(see chart 2). More detailed commitment figures are given
in the Statistical Appendix.
5
COMMITMENTS OF KFW AND DEG FOR THE PROMOTION OF DEVELOPING COUNTRIES 1998–2002
(COMMITMENTS IN EUR MILLION)
1998 1999 2000 2001 2002
Federal budget funds 1,357 1,278 851 1,040 971
Market funds of composite finance/mixed finance/interest reduction 33 356 76 276 140
Commitments under FC on preferential terms 1,390 1,634 927 1,316 1,111
Commitments for FC promotional loans – – 30 116 41
Mandates/TRANSFORM Programme 35 38 62 162 139
Loans to the Poverty Reduction and Growth Facility of the IMF – – 495 1,430 –
Total KfW Commitments: 1,425 1,672 1,514 3,024 1,291
Total DEG Commitments 358 343 360 412 464
Total Commitments for the Promotion of Developing Countries (KfW and DEG) 1,783 2,015 1,874 3,436 1,755
Activities in Figures
Access to clean drinking water is an important development objective.
6
COMMITMENTS OF KFW
KfW is currently financing a total of 1,408 projects in
109 partner countries. Last year KfW provided around EUR 1.3
billion (EUR 3.0 billion) in new commitments for the pro-
motion of developing countries. Adjusted for a special loan
of approx. EUR 1.4 billion granted to the IMF in 2001,
commitments in 2002 were around EUR 300 million lower
than the year before. Commitments from budget funds of the
BMZ were around 7% below the previous year’s level, at
EUR 971 million (EUR 1,040 million). This is mostly the result
of project-related reallocations. Of the commitments from
budget funds 70 % were extended as non-repayable grants
and 30 % as low-interest loans with terms of 30 to 40 years.
The weighted average interest rate of FC loans newly
committed in 2002 on preferential terms was 1.19 % p.a.
(1.05 % p.a.)
With a share of 49 % (46 %) almost half of the FC
financing volume in 2002 went to the cross-cutting area of
“poverty reduction”. Around 22 % of the funds were com-
mitted explicitly for the protection of the environment and
natural resources and another 15 % for projects which have
the protection of the environment and natural resources as
an important secondary objective.
The weak cyclical development worldwide has lead to
a stretching of and shift in investments in the developing
countries as well. This had a direct impact on the volume
of market funds (composite and mixed finance, interest
reductions), and on FC promotional loans committed by KfW.
In these loans, funds are provided at market conditions to
promote projects that are developmentally justified. In the
year under review, despite a difficult world economic
environment, KfW was able to mobilize a total of EUR 181
million (EUR 392 million) for such projects.
Moreover in 2002, KfW was assigned new mandates
for EUR 139 million (EUR 161 million), among others for
measures in Southeastern Europe, Afghanistan, Georgia and
Turkey. After the above-average amount committed under
mandates in 2001, this is again a particularly good result.
The most important mandates assigned to KfW were from the
EU Commission, the EIB, the UN and the Agence Française de
Développement (AFD), but also from the German Ministry of
Foreign Affairs and the German Ministry of Finance.
Activities in Figures
After the war in Afghanistan reconstruction began immediately.
COMMITMENTS OF DEG
For DEG, too, the business climate in 2002 was marked
by the persistent weakness of the world economy and the
difficult environment for investment that prevailed in nume-
rous partner countries. Nevertheless, DEG was able to further
expand its financing business, and with commitments to-
talling EUR 464 million in 2002 (EUR 412 million) it recorded
its highest volume of new commitments ever. DEG’s total
portfolio of loans and equity holdings of EUR 2.3 billion
comprises investments in 453 companies in 84 countries.
In the year under review DEG provided EUR 49 million
for equity financing and EUR 398 million for loans, of which
EUR 31 million was for mezzanine loans. Thus, total venture
capital provided in the form of equity investments and mez-
zanine financings added up to EUR 80 million, which is a share
of 17 % in the total commitment volume. More than EUR 16
million was committed for guarantees. Co-financing was
provided for investments in 66 projects in 31 countries.
Under the Public-Private Partnership (PPP) Programme
initiated by the BMZ for development partnerships by German
7
Chart 1:Regional Distribution of Commitments of KfW and DEG in 2002(in EUR million)
0 100 200 300 400 500 600 700
DEG KfW
Europe andCaucasus
Asia andOceania
Sub-SaharanAfrica
Latin America
North Africa/Middle East
Supra-regional
Chart 2:Sectoral Distribution of Commitments of KfW and DEG in 2002(in EUR million)
SocialInfrastructure
0 100 200 300 400 500 600
DEG KfW
EconomicInfrastructure
Financial Sector
ProducingSector
Other
companies DEG promoted another 51 projects in the year
under review. For this purpose the German government
provided grants in the amount of EUR 8 million. On behalf of
the Federal Ministry for Economic Cooperation and Develop-
ment (BMZ) the DEG offers a special Business Start-up
Programme for qualified experts from developing countries
who return to their home countries.
DISBURSEMENTS OF KFW AND DEG
In the year 2002 KfW and DEG altogether disbursed a
total of EUR 1.7 billion to support developing countries (EUR
1.8 billion). DEG’s share of this amount was EUR 357 billion
(EUR 244 billion) and KfW’s share amounted to EUR 1.3 mil-
lion (EUR 1.6 million).
Of KfW’s FC disbursements (not including market funds)
in the total amount of EUR 998 million (EUR 1,157 million)
35 % (38 %) were for services rendered at the local level in the
partner countries and had direct income and employment
effects in these countries. The German industry accounted
for 40 % (45 %) of disbursements for supplies and services
subject to international public invitations to tender. The
8
disbursements in foreign currency benefited in particular
the following sectors: advisory and consulting services (27 %),
the construction industry (22 %), electrical engineering
(19 %) and mechanical engineering (14 %).
DEBT CONSOLIDATION AND
DEBT CONVERSION
Under specific circumstances the German government
is prepared to ease, or to grant partial release from, the
repayment of development assistance loans of highly
indebted partner countries willing to implement reforms.
KfW participates in the negotiations on the German side. In
2002, for instance, KfW concluded debt consolidation
agreements with Côte d’Ivoire, Ghana, Indonesia, Jordan,
Yugoslavia, Cameroon, Kyrgyzstan, Nigeria and Pakistan for
altogether EUR 3.7 billion. In addition, Bolivia was the first
country whose debt was completely cancelled under the HIPC
Initiative (for Heavily Indebted Poor Countries). The amount
released was EUR 335 million.
In 2002 the federal government committed a volume of
EUR 49 million for debt conversions. In exchange for the
release from repayment these funds can be utilized in the
debtor country for poverty reduction and environmental
conservation projects. Including commitments made in 2001
KfW concluded debt conversion agreements for EUR 97
million in 2002. In total, EUR 244 million was already waived
for this purpose.
National and International Cooperation
In a number of cooperative projects, co-financings and
partnerships, the KfW Group is combining its competence
with the specific strengths of other financing institutions.
Chief among these partnerships is the GTZ (Deutsche
Gesellschaft für Technische Zusammenarbeit – German
Agency for Technical Cooperation). GTZ’s primary goal is to
strengthen the performance of local partner organizations
in order to improve the living conditions and perspectives of
the people in the developing and transition countries. The
competences of GTZ and KfW complement one another and
together both institutions support the BMZ. In many partner
countries KfW and GTZ are already operating joint offices. GTZ
and KfW have formed a strategic alliance with regard to the
development and implementation of country strategies and
priority strategies. In this context national measures are being
embedded in the activities of the international donor
community. Moreover, KfW and GTZ have established an
intensive cross-project cooperation and carry out a number
of cooperative projects. At the end of 2002 there were 229
ongoing cooperative projects with GTZ in 68 countries.
At the international level KfW is currently implement-
ing 260 projects in co-financing with other donor organiza-
tions. The joint financing contributes actively to a better
In 2002 Bolivia was the first country to have all its foreign debtcancelled under the HIPC initiative.
Leistungen in Zahlen
interaction between bilateral and multilateral development
cooperation. The different donors coordinate their procedures
and requirements, thus increasing the developmental effec-
tiveness of the individual contributions and enabling the
partners to coordinate and administer the assistance more
efficiently.
KfW can look back on a very close and long-standing
cooperation with the French development bank AFD. This
partnership is much more than a joint financing of projects.
It also comprises learning from one another, supported by
the exchange of staff, and the joint appearance at the inter-
national level. This also includes jointly implementing
projects for other contractors (see message of greeting from
H. Severino).
9
MESSAGE OF GREETING ON THE COOPERATION WITH AFD
FROM JEAN-MICHEL SEVERINO, DIRECTOR GENERAL OF AFD
This year we have celebrated the 40th anniversary of the Elysée Treaty, which is
a sign of the friendship between our two countries. Is there a better opportuni-
ty for KfW and AFD to celebrate their cooperation? This cooperation has a long
history. In 1973 the two institutions together set up an association of European
development finance institutions. Since then the Financial Cooperation segment
of the KfW Group has proved to be a remarkable partner of AFD. Our mutual
understanding is also illustrated by the exchange of staff. This exchange of
competence, experience and views, which was started roughly 10 years ago,
has helped to bring our two "professional families” closer together. Our mutual
confidence has grown and recently expressed itself again by the reciprocal
assignment of mandates by KfW to AFD (e.g. in Mali) and by AFD to KfW (e.g. in
Kenya). In fact, our close relationship reflects a subtle but fundamental truth:
We share a common mission. Was not each of our institutions entrusted with the
task of taking up the challenges of the post-war era? Today we are also engaged
in reforms that pursue common objectives: efficiency of our assistance, sectoral
and geographic concentration, and donor coordination. Finally, and as a matter
of fact also beyond this, we are united by a common vision of the future, in
particular the future relations between Europe and the industrializing and
developing countries.
At the European and international levels the DEG also
cooperates closely with other development finance institu-
tions. Under the organizational umbrella of the association
of European Development Finance Institutions (EDFI) a lively
exchange of experience is taking place on all investment-
related areas. Comparably intensive contacts exist also with
the International Finance Corporation (IFC), which is part
of the World Bank Group. The result of such cooperations are
co-financings with one or more of these partners in
altogether 147 projects. This includes, in particular, joint
project financings with the Dutch FMO and the AFD sub-
sidiary PROPARCO.
Jean-Michel Severino
Reopening a reconstructed school in Afghanistan.
10
PREVENTING CRISES BY MAKING POVERTY
REDUCTION A DEVELOPMENT GOAL
Given the imminent dangers of terrorism and war all
over the world the contribution of development policy
to poverty reduction has taken on new significance. It is
undisputed that the trend towards radicalization is nourished
by poverty and the resulting lack of perspective of large
sections of the population. A development policy that seeks
to reduce poverty can offer new perspectives to many people,
noticeably improve their living conditions and thereby
contribute to securing peace. This is necessary particularly
in crisis situations, even if development policy cannot solve
the intricately connected problems and causes alone and,
above all, without the active participation of the local
population.
In addition to our commitment to securing the peace in
Central America, the Palestinian Territories and in the frame-
work of the Stability Pact for Southeastern Europe, this is
illustrated very strongly by the example of Afghanistan:
Since January 2002 KfW and GTZ have been present in Kabul
with a joint office in order to coordinate the emergency aid
for the reconstruction on site in Afghanistan. FC and EU funds
have been provided, among others, to rehabilitate education
and health care facilities and to co-finance the reconstruc-
tion of the water and power supply. Now power is again being
supplied for street lighting, hospitals and schools. Despite
difficult starting conditions 13 projects were launched in
2002. Of these, five projects have already been concluded.
In addition, on behalf of the BMZ, DEG provides equity
assistance to start-up businesses in Afghanistan with
non-repayable grants. Overall, more than two million people
in Afghanistan benefit directly or indirectly from our
activities. Despite considerable efforts and a good donor
coordination the conditions for DC in the country are expect-
ed to remain extremely difficult for many years to come.
Sustainable results can by achieved only through a longer-
term involvement.
WATER AS A BASIS FOR
SUSTAINABLE DEVELOPMENT
In line with its importance for poverty reduction the
water sector is one major focus of KfW’s promotional
activities. Several sub-goals of the Millennium Declaration
are directly supported through projects in the water sector
(access to safe drinking water, promotion of health care
and the protection of natural resources). In the last five years
KfW committed roughly EUR 260 million annually for the
water sector. A sustained development success can be
achieved only if the projects are demand-oriented, i.e. if the
users are involved in the planning and implementation of
the projects. For instance, in rural water supply projects
the future users are involved in many stages – from the
Main Themes of the Year 2002
consideration of alternative solutions to the organizational
design of the operation of facilities. In the field of urban
infrastructure public relations work conducted at an early
stage plays an important role to meet the demand. Financial
sustainability is ensured through tariff systems that take
account of the income situation of poorer sections of the
population.
Moreover, environmental impacts spreading across
regional boundaries from unregulated water use are becom-
ing ever more important, since conflicts over the use of
water are increasing with growing regional water scarcity.
Often there is competition within the country between the
drinking water needs of the population and agriculture as
a large-scale consumer but also between neighbouring
states for the use of cross-border watercourses. FC also
promotes regional cooperation between different countries
sharing the same international waters for the joint manage-
ment of the water resources. FC projects in the water sector
support the efficient use of the water reserves. Protecting
the water resources can mitigate impending conflicts over
their use.
SOCIAL STANDARDS
IN DEVELOPMENT COOPERATION
The social standards, which we have taken for granted
in our working environment for a long time, have not
been adequately implemented in many countries yet. These
so-called core labour standards include the ILO Conventions
concerning the ban on child labour and forced labour, free
collective bargaining and the non-discrimination of women
on the job. An important concern of German development
policy is to improve the working and living conditions in the
partner countries by promoting the core labour standards.
For this purpose KfW has supplemented its guidelines for
the award of contracts under Financial Cooperation, which
bindingly stipulate that all core labour standards applicable
in the respective country have to be adhered to also in the
event of contracts being awarded to local contractors in the
developing country.
DEG has laid down these goals particularly in its guide-
lines for the social compatibility of its project business. Thus,
when appraising and structuring a project it agrees on specific
criteria for social aspects in its contracts with the customer.
Key elements are mandatory reporting on the part of the
project partner and the right of DEG to inspect the project
during the operating phase.
11
The number of people who have no access to clean drinking water is tobe halved by the year 2015 (Millennium Declaration, September 2000).
3. PROMOTING ENERGY EFFICIENCY, RENEWABLE ENERGIES AND CLIMATE PROTECTION
ENERGY AND ECONOMIC
DEVELOPMENT
Poverty eradication, the main objective formulated in
the Millennium Declaration, also means supplying all people
with adequate energy services. How do we have to manage
our energy resources if we want to make development
sustainable for all the world’s people? How can the dilemma
between protecting the Earth’s climate and economic
development be mitigated for our partner countries? The
subject of energy was very fervently debated at the World
Summit on Sustainable Development in Johannesburg in
2002 (see box).
Life in our world is unthinkable without energy. There is
still a very close connection between economic growth and
energy consumption. Use of energy makes an economy grow,
creates jobs and income. All convenience goods are produced
with energy. It keeps the entire physical and social infra-
structure going. Railways, buses and cars need electricity and
fuels. Most staple foods and often drinking water must be
heated or boiled. People inhabiting the Earth’s cold zones
cannot survive without heating. Electrical pumps provide
clean drinking water from pipe networks or wells. All this
requires a reliable and efficient energy supply.
ENERGY AND POVERTY ERADICATION
Around 1.6 billion people have no access to “modern”,
usually commercially traded forms of energy. Without
corrective measures this will hardly change even in the next
30 years. About 2.4 billion people, primarily in the rural
regions of Africa and Asia, still use traditional biomass for
cooking and heating, that is, firewood, agri residues and dung.
According to estimates of the International Energy Agency in
Paris (IEA) the absolute number of people who will continue
12
WORLD SUMMIT ON SUSTAINABLE DEVELOPMENT IN JOHANNESBURG IN 2002:
THE ROLE OF THE TOPIC OF ENERGY
At the World Summit in Johannesburg the international community of states adopted measures at the national and
global level designed to achieve the objective of sustainable development. Where consensus was possible, concrete
milestones were agreed for these measures.
The summit participants had a very controversial debate on the subject of energy. The debate centred on the desire
of the EU and several developing countries to increase the proportion of renewable energies in the coming years.
They wanted an agreement to raise the share of renewable energies in worldwide energy consumption to 15% by the
year 2010. This initiative was blocked particularly by the USA, the OPEC countries and the Group of 77. Therefore,
instead of agreeing on specific time-bound targets and percentages the states only settled for the political intent
to substantially increase the share of energy to be obtained from renewable sources. They also emphasized the need
for diversifying energy supplies and improving energy efficiency.
Responding to this outcome of the negotiations and encouraged by the German government, the EU started an
initiative to expand the use of renewable energies. Germany will take the following measures in support of this initia-
tive, which many other states have already joined:
• Conduct an international energy conference in Germany, presumably in June 2004, focusing on sustainable energy
systems and the role of energy in the fight against poverty.
• Support developing countries by stepping up the promotion of sustainable energy systems. Over the next five years
EUR 1 billion will be made available for renewable energies and increasing energy efficiency from the budget of
the BMZ.
Energy and Sustainable development
13
to be dependent on this primary energy source in the future
will increase to 2.6 billion by the year 2030. Yet wood and
dung are already becoming scarce in many regions as a result
of unsustainable forms of use.
Especially in the poorest countries this is creating what
is called an “energy-poverty trap” in which women and girls
in particular are caught. They must walk increasingly longer
distances to collect wood and dung. This takes away valuable
time which they need for productive work, trade, child care,
health, education or other social and cultural activities.
Besides, the traditional use of biomass for cooking and
heating is very damaging to human health. The World Health
Organization estimates that approx. 2.5 million women and
small children die annually from breathing the toxic smoke
produced by burning biomass for cooking. Around 6 % of
the world’s population is suffering from acute respiratory
disorders as a result.
Replacing traditional biomass with more modern forms
of energy will be a gradual process. Contrary to common
perception, the energy problem cannot be solved simply by
making electricity available. Electricity is usually too expen-
sive, particularly for the most urgent, basic energy-consum-
ing activities such as heating and cooking, as well as for
mechanization in agriculture. Immediate, short-term solu-
tions consist in improving end-user technologies and switch-
ing to more refined fossil fuels. Thus, traditional three-stone
cooking fires can be replaced by improved stoves that save
wood and emit less smoke. The use of liquified gas such as
propane or butane gas also leads to considerable health
improvements. Kerosene pressure lamps emit more light than
conventional candle lighting.
These measures, however, are insufficient for a sustain-
able energy supply. More comprehensive strategies are need-
ed to enable people to escape from the “energy-poverty trap”.
People must walk increasingly longer distances to collect wood.
ENERGY AND ENVIRONMENT
The conversion of energy always has environmental
consequences. Burning fossil fuels impacts the environment
by releasing hazardous substances (particulates, sulphur and
nitrogen) and greenhouse gases that damage the Earth’s
climate. Oil spills and leakages during transport, as in the
case of tanker accidents, cause severe damage to the environ-
ment. The unsustainable use of traditional renewable energies
such as wood and other biomass can cause deforestation,
desertification and soil erosion. At the same time, the burning
of cow dung for heating and cooking purposes deprives
agricultural soils of important organic material. Even the
generation of electricity from hydropower can produce
negative social and ecological consequences through the
construction of dams and reservoirs, as the “World Commis-
sion on Dams” (WCD) has prominently established. If the WCD
recommendations are followed, however, hydropower will
continue to be an important element in energy supply in the
future as well.
The greatest challenge from a global perspective is to
limit the anthropogenic greenhouse gas emissions (GHG
emissions, the main GHG is CO2). The IEA estimates that the
demand for primary energy in the developing countries will
more than double by the year 2030. The burning of fossil fuels
14
Energy and Sustainable development
Obsolete technology in coal-fired power plants and industrial enterprises pollutes the environment in China.
like oil, coal and natural gas will account for more than 75 %
of additional GHG emissions in the next 30 years. The World
Energy Council estimates the resulting CO2 emissions to be
around 70 % above today’s level around the year 2030 if all
other conditions remain the same. The developing countries
will have the highest growth rates. In the year 2030 their
share in worldwide CO2 emissions will already be at 47 %,
exceeding the 42 % share of the OECD countries. By com-
parison, in the year 2000 the OECD share was 55 % and that
of the developing countries 34 %. On the other hand, per
capita emissions in the OECD countries will still be around five
times as high as in the developing countries, at 13 tonnes per
year against 2.4 tonnes per year.
Given the long time it takes to develop and implement
new energy technologies it is all the more important to set the
course for CO2 avoidance in due time. The industrialized
countries need to act first. Because of their high primary
energy consumption they are today the biggest emitters
of CO2. However, greenhouse gas emissions in the atmosphere
can be limited in the long term only if the developing coun-
tries are involved in this process.
For them it is particularly difficult to adapt to climate
change because of their geography and economic structure.
Therefore they will be particularly hard hit by expected
15
impacts such as global warming, rising water levels, hurri-
canes and cyclones, and droughts. So it must also be in the
developing countries’ immediate interest to contribute to
global climate protection.
PRECONDITIONS FOR A
SUSTAINABLE ENERGY SUPPLY
Worldwide demand for energy will continue to rise,
particularly in developing countries. According to the current
state of knowledge, the main problem does not consist in
making additional energy resources available in the future.
Fossil fuel reserves are sufficient to meet growing energy
needs until far beyond the year 2050. Technically, renewable
energies, especially solar energy, can be used almost without
limitations. However, the utilization of renewable energies
on a broader scale is currently more costly than the use of
conventional energy technologies. If market conditions and
prices remain unchanged, conventional energies will be given
preference.
For this reason the IEA estimates that the share of
renewable energies in primary energy consumption will
even decline in the next three decades. Given that the mix of
energy sources will then consist mostly of fossil fuels there
will be an overproportionate increase in air pollution and
greenhouse gas emissions. Expanding nuclear power gene-
ration – itself without impact on atmospheric CO2 – is no
solution because of the high risks and unnecessary given
the vast renewable energy potential in developing countries.
The main challenges for sustainable energy supply in
developing countries are threefold:
• Energy must be safe. Consumers must be able to count
on reliable energy services. This presupposes an adequate
energy supply that can be maintained and expanded
only by continuously investing in the entire energy
infrastructure. Maintenance and repairs on energy
installations must be ensured. Not least, the growth of
energy demand must be contained through the efficient
use of energy and by prices that adequately reflect costs.
Thus, it will be necessary to decouple economic growth
from the growth of energy consumption.
• Energy must be cost-effective. Necessary energy services
should be delivered at reasonable and affordable prices
and, at least over the medium term, without subsidies.
This is a prerequisite for economic growth and pro-
ductivity increases in which the poor groups of the
population participate as well. Energy must be gener-
ated, distributed and utilized efficiently.
• Energy must be “clean”. This implies the requirement of
ecological sustainability of the energy supply system.
Negative environmental and health impacts of energy
consumption must be reduced. This means that clean
sources of energy and environmentally benign energy
technologies should be applied wherever possible. In this
connection the promotion of renewable energies is of
particular importance.
Promoting renewable energy is of particular importance.
REFORMING AND LIBERALIZING
ENERGY MARKETS
In many developing and transition countries the ener-
gy sector is dominated by state monopolies. Governments in-
fluence energy utilities’ day-to-day business. Widespread
clientelism leads to inefficient management which disregards
commercial criteria. Energy prices are kept at an excessively
low level for political considerations so that the revenue
collected is insufficient for maintenance and upkeep and
investments cannot be financed without help from outside.
Since state coffers are notoriously empty the funds required
for new investment and reinvestment can no longer be
mobilized in such a situation.
Several developing countries, particularly in Asia and
Latin America, have reacted by starting to liberalize their
energy sector in the past years. The purpose of opening the
market is to involve the private sector more strongly in
investment and operation. This is expected to raise produc-
tivity and lower the cost of energy supply.
But in order to encourage private investors to invest in
developing countries it is necessary to create a trustworthy
regulatory framework. Potential investors must regard it as
transparent and stable enough for a long-term capital
investment. In addition to market-based regulatory mecha-
nisms and incentive structures, appropriate monitoring
instruments must be created to prevent market abuse.
The hope for a greater role of the private sector and, in
particular, of small and medium-sized enterprises, is appro-
priately expressed in a guest contribution on the “AREED”
Initiative in Senegal (see box).
16
PROSPECTS FOR WIDENING MODERN ENERGY SERVICES IN AFRICA
Guest contribution by Youba Sokona, Director of Environmental Development Action in the Third World (ENDA),
Head of Energy Programme “African Rural Energy Enterprise Development” (AREED) in Senegal:
The vast majority of Africans have no access to modern energy services. Improvements in the standard of living for the
growing population and economic development for the continent cannot be achieved, however, without access to
affordable and appropriate energy services.
Great efforts are necessary to unleash the great potential of Africa’s rich energy and natural resources. Policy reform,
social development and institutional development must be advanced. But in undertaking these tasks it will be essen-
tial to develop models, new types of institutional arrangements, policies and approaches that really work under the
conditions currently prevailing in Africa. Critical actions to meet human needs in the area of energy must take the
following elements into account:
• more sustainable use of biomass for energy,
• access to affordable, modern energy services must be extended to those who lack them,
• the efficiency of energy production, distribution and use must be improved,
• indigenous energy resources must be expanded to promote self-reliance and reduce net import costs.
The aim of the AREED initiative is to show that a significant portion of the energy services needed in Africa’s rural areas
and urban peripheries can be reliably provided by small and medium-sized enterprises. The ongoing negotiations on
climate change present an opportunity for African countries to revisit sustainable energy options with renewed
urgency. The negotiations should result in new forms and approaches of north-south cooperation that will contribute
to promoting the private sector approach followed by AREED.
Strategies for a Sustainable Energy Supply
17
Flue gas desulphurisation plants in coal-fired power plants reducehazardous emissions.
HARMONIZING ENERGY PRICES WITH
ENERGY COSTS
In developing countries consumers often pay much less
for energy services than it costs to make them available. Fossil
fuels in particular are often heavily subsidized. This leads to
excessive demand and, in consequence, causes damage to the
environment and climate that would be avoidable. If prices
are made to reflect costs and subsidies that distort the market
are dismantled, consumer behaviour can be positively
influenced. Consumers would be encouraged to use energy
responsibly and economically, thereby protecting the envi-
ronment. KfW therefore makes its support of energy projects
conditional on the existence of a tariff system that reflects
the actual cost of providing energy services. In countries
where these conditions are not yet fulfilled German DC and
other donors jointly conduct a dialogue with the govern-
ments to improve the overall framework. A level playing
field in the market improves not only the prospects of
renewable energies but also the chances for increasing energy
efficiency.
Access to modern energy supply systems brings developmentopportunities to rural regions.
18
SPREADING THE USE OF RENEWABLE
ENERGIES
Renewable energies include hydropower and biomass,
the “traditional” renewable energies, as well as solar energy,
wind, geothermal energy and modern biomass energy systems
– the “new” renewable energy sources. The great advantage
of renewable energies is that they can be used without
affecting the Earth’s climate, meaning that they emit few or
no additional greenhouse gases during operation. In general,
they also emit fewer hazardous, polluting substances than
fossil fuels. Another advantage is that their operation is
usually relatively cost-effective because the energy sources
(sun, wind, water, geothermal energy) are freely obtainable.
On the other hand, there are also many reasons that still
limit the economic potential required for a purely commercial
financing of renewable energies in developing countries.
The risks are being perceived as too high, and the projects
using “new” technologies, which are typically smaller, incur
relatively high transaction costs (particularly in the case of
solar energy).
Even in countries where the macro-economic environ-
ment and the energy sector conditions favour renewable en-
ergies it is easier to mobilize private capital for conventional
and technically proven technologies. This trend can even
be observed in investments aimed at increasing energy
efficiency, which would amortize the costs incurred by the
enterprise through energy savings even in a short time. The
problem is more serious for renewable energies.
Particularly in remote rural areas, where consumers
can be equipped with decentralized generating systems,
renewable energies have cost advantages over conventional
technologies. Electricity demand there is low and the central
power grid is far away, so that it would be too costly for the
utility to expand its interconnected grid, as it would other-
wise do under a “classic” electrification strategy. Moreover,
renewable energy sources – mostly photovoltaic systems – are
increasingly being used in the promotion of other sectors such
as health care, primary education, water supply and tele-
communications.
Strategies for a Sustainable Energy Supply
Hydropower will play an important role as a classic renewable energy in the future as well.
USING ENERGY MORE EFFICIENTLY
A concrete approach towards making energy supply
sustainable consists in making energy utilization more effi-
cient in all stages of the energy cycle – from extraction
through distribution to end use. This is where ecological and
economic concerns can usually be harmonized at a reasonable
cost. Through efficiency improvements the same energy
output, such as heating and electricity, can be made available
with less energy input. In many developing countries there are
ways to achieve a considerable economic potential at rela-
tively low cost. With these approaches, pollutant emissions
can usually be reduced in a cost-effective way.
ASSISTANCE MECHANISMS
The vicious circle has not been broken yet: because of
low production numbers, the risks and costs of the new re-
newable energy technologies in particular are still very
high and the high costs, in turn, keep demand low as well.
Renewable energies can be made much more competitive
by bundling the demand of potential users. Equipment price
reductions that are expected to result from rising production
numbers will also benefit low-income buyers. Increased risks
can be mitigated by suitable guarantee instruments.
In the medium term, however, additional incentives will
be necessary in most projects. Favourable financing condi-
tions, grants and tax relief can contribute to reducing the
costs from a business perspective. On the earnings side cost
disadvantages can be offset by administratively increased
sales prices. Output-based “smart subsidies”, which are based
on performance and reward the sustainable operation of a
photovoltaic system, for instance, are increasingly being
considered. It is important to limit subsidies to a minimum
while at the same time applying public funds in a targeted
and cost-effective way in order to limit free-rider effects.
Subsidies should also be restricted to the phase of market
introduction, be reduced over time and contain an explicit
exit clause. The volume of subsidies should generally be
limited to the extent required to compensate for market
distortions.
Such considerations require a more differentiated
approach in defining strategies of cooperation and in select-
ing financing instruments to spread the use of renewable
energies. Essential criteria include the state of competitive-
ness of the technology to be used for the energy service
required (heating, power, lighting, etc) and the supply and
income situation of the end user. Where various alternatives
are available the economic and ecological cost-effectiveness
will be the decisive selection criterion.
19
In many rural regions the use of solar power is already the most cost-effective solution.
20
CO2 CERTIFICATES – AN INNOVATIVE
FINANCING INSTRUMENT
The “flexible Kyoto Mechanisms” and the trade in CO2
Certificates constitute innovative instruments for the financ-
ing and dissemination of renewable energies and efficiency-
enhancing technologies.
KfW intends to set up a Carbon Fund for Climate
Protection to promote emissions trading (see box p. 21).
PROMOTING SUSTAINABLE ENERGY SUPPLY
IN DEVELOPING COUNTRIES
FINANCING OF ENERGY PROJECTS BY KFW AND DEG
Promoting environmentally benign and sustainable
energy supplies in developing countries has a particularly
high priority for KfW and the DEG. KfW is today the world’s
leading bilateral financier of renewable energies. The follow-
ing table shows the volume of commitments made by KfW
and the DEG in development cooperation in the energy sector
over the last five years:
Total commitments during this period amounted to
around EUR 1.1 billion. Renewable energies are increasingly
gaining in importance. In the last five years EUR 653 million,
or 58% of the total financing volume for energy projects, was
Strategies for a Sustainable Energy Supply
committed to support these technologies. Hydropower
accounted for the greatest portion, with around EUR 330
million. Most projects focused on rehabilitating existing
hydropower plants rather than building new facilities. New
renewable energies such as wind power, solar energy and
geothermal energy already account for 27 % of the commit-
ments in the energy sector.
The following graph shows KfW’s commitments over
the past five years by energy source and technology:
COMMITMENTS IN THE ENERGY SECTOR FROM 1998 TO 2002
(EUR MILLION):
Category KfW DEG Total %
Renewable Energies(hydropower, solar and wind energy, biomass, geothermal energy, other renewable energies) 615 38 653 58
Other Energy Projects(promotion of energy efficiency in electricity generation from non-renewable energies, transmission and distribution, sector policy) 446 28 474 42
Total 1,061 66 1,127 100
Energy Sector:Commitments for Renewable Energies 1998 – 2002(including market funds)
Biomass
Wind
Solar
Hydropower
OtherGeneration (RE)
0
EUR million
50 100 150 200 250 300 350
21
In the face of the looming global climate catastrophe
a framework convention on climate protection was signed
in the Japanese city of Kyoto in 1997. In this convention,
known as the Kyoto Protocol, the industrialized countries
took responsibility as the main originators of the greenhouse
effect and for the first time entered into a legally binding
commitment to limit or reduce their emissions: they under-
took to reduce their emissions of the six most important
greenhouse gases in the years 2008 to 2012 by at least 5.2 %
against 1990 as their emissions base year. Different reduction
objectives were set for the individual countries. The govern-
ment of the Federal Republic of Germany adopted the
objective to lower carbon-dioxide emissions by 25 % by the
year 2005 against the base year 1990.
Because of the global relationship of cause and effect
the Kyoto Protocol gives the signatory states flexibility in the
implementation of the reduction objectives through the
instruments of Emissions Trading, Joint Implementation,
(cooperation between industrialized countries in the imple-
mentation of projects) and the Clean Development Mecha-
nism (projects to reduce emissions in developing countries).
The basic principle behind all three flexible mechanisms is
to allow the industrialized countries to choose the most
cost-effective ways to meet their reduction obligations.
Developing countries and transition countries have clear cost
advantages in this regard.
The main purpose of the KfW Carbon Fund for Climate
Protection is that of purchasing certificates from projects that
utilize renewable energies or enhance energy efficiency. Fund
investors will be enterprises that must reduce their green-
house gas emissions but do not themselves intend to invest
abroad. They will be able to meet their reduction obligations
through the acquisition of CO2 reduction certificates. Public
funds can also be deposited in the Fund. The reduction credits
will be paid out to the depositors in proportion to their
contributions.
But not only the industrialized countries committed
to reducing emissions may benefit from emissions trading.
The additional revenues generated from the sale of certifi-
cates often allow technologies that are almost competitive to
be lifted over the threshold of profitability. This applies
particularly to the use of wind energy parks and small
hydropower plants. Another great potential exists in sewage
and landfill projects which reduce or avoid the particularly
ozone-damaging methane emissions. The implementation of
projects designed to protect the climate will direct additional
capital to developing and transition countries while serving
the transfer of technology at the same time.
CO2 reduction certificates contribute to lowering the
transfer and exchange rate risk in project financings. Earnings
from the sale of energy accrue in domestic currency but the
debt service and repayment of capital often have to be made
in foreign currency. As the revenues from the sale of CO2
certificates accrue in hard currency they offer protection
against some of these risks.
THE KYOTO PROTOCOL AND
THE PLANNED KFW CARBON FUND FOR CLIMATE PROTECTION
22
Promoting Sustainable Energy Supply in Developing Countries
CLIMATE PROTECTION BEGINS AT HOME: KFW NEUTRALIZES ITS CO2 EMISSIONS
As an enterprise KfW itself participates actively in protecting the Earth’s climate. Most of the CO2 emissions caused by
KfW result from the energy supply for its headquarters and from staff travel, particularly air travel. Total emissions are
approx. 16,000 t CO2 per year. KfW will invest EUR 1.2 million in funds of its own in a project designed to avoid the
corresponding volume of CO2 emissions through the “Clean Development Mechanism”. KfW will deactivate the result-
ing reduction certificates, that is, it will not place them in the market. This way it will neutralize its own emissions.
Energy partnerships are being constantly expanded
through the KfW Group’s long-standing cooperation and
strategic partnerships with other bilateral and multilateral
donors such as the World Bank and the EU. With this approach
we are seeking to enhance the coordination among donors,
particularly in the area of renewable energies. We are partic-
ipating primarily in the following initiatives, which were
launched alongside other initiatives around the topic of en-
ergy at the World Summit in Johannesburg: “Global Network
on Energy for Sustainable Development”, “Global Village En-
ergy Partnership” and “Global Forum for Sustainable Ener-
gies”. Apart from governments and international institutions,
members often include local initiatives and private organiza-
tions (NGOs) from donor and recipient countries. Within these
networks, members exchange their experiences concerning
strategies and approaches and identify promising projects.
The networks enable our partners in the developing countries
to access expertise, advice and financing for projects in the
energy sector.
The project examples presented on the following pages
offer an overview of the variety of approaches followed by
KfW and the DEG.
In the Kyoto Protocol which was signed in 1997 the industrialized countries committed themselves to limiting and reducing their emissions.
Serbia’s winters are cold. For lack of cost-effective
alternatives, Serbia’s inhabitants are increasingly using
electricity for heating. Power consumption is therefore twice
as high in the winter as it is in the summer. Electricity can
still be purchased at a low price because tariffs do not cover
costs. In addition, many customers have a low payment
morale. In this situation electricity is wasted and the environ-
ment heavily polluted. Besides, the reliability of electricity
supply for other uses is impaired. This demand surge is
pushing Serbia’s obsolete electricity system to its capacity
limits with increasing frequency. Scheduled and unscheduled
power cuts are on the rise.
An obvious alternative is to revert to using the old
district heating networks more strongly for heating and hot
water supply. But lack of investment and maintenance during
the 1990s has heavily impaired the functioning of Serbia’s
district heating networks. Tariffs far below cost coverage and
management deficits have brought the enterprises to the
brink of bankruptcy. The district heat supply was subsequent-
ly reduced, eventually falling short of demand.
German FC therefore has been supporting the rehabili-
tation of the district heating systems in the three largest cities
of Belgrade, Novi Sad and Nis with around EUR 18 million
since 2001. The funds are being used to replace defective
pipelines and transfer stations in the houses in order to elim-
inate the main causes for heat and water losses. In addition,
pilot projects are being run to demonstrate what little invest-
ment it takes to install thermostat valves and heat meters
so as to reduce the demand for district heat while meeting
heating needs at the same time. The district heating compa-
nies are also being offered advice in how to improve the dis-
trict heating supply to their customers while giving them a
better price than they would have to pay for heat from
electricity. Besides, the municipalities as the owners of the
district heating companies are being supported in imple-
menting important reforms such as tariff adjustments and
improving the consumers’ payment morale. The success of
these efforts, however, also depends on reforms in the
electricity sector. Only if the electricity tariffs are also raised
to a cost-covering level will there be an incentive to heat
buildings with district heat instead of electricity.
First advances were made in the last two heating peri-
ods. Thus, the FC project improved the district heating supply
in the three cities. The financial situation of the district heat-
ing companies has improved as a result of the higher tariffs.
Because the energy efficiency of the district heating system
is higher than that of electrical heating and losses in the dis-
trict heating network are being avoided, the electricity de-
mand in the winter has decreased. The project thereby reduces
the substantial environmental damage that otherwise occurs
in the form of pollutant and greenhouse gas emissions from
the burning of fossil fuels.
23
Serbia: District Heating in Cold Winter
Project Examples
24
Bangladesh’s electricity sector is still characterized by
two very different institutional structures. One is the
Bangladesh Power Development Board (BPDB), which has
limited financial capacity and technical efficiency. BPDB is to-
day the main player in the area of electricity generation,
transmission and distribution. The other is the rural electri-
city sector in which privately organized electricity distribu-
tion cooperatives operate under the umbrella of the Rural
Electrification Board (REB).
The REB is much more efficient than the BPDB. Indica-
tors of this include the degree of cost recovery through tariffs,
the system losses and consumers' payment morale. With the
approval of the government the REB has founded a power
plant company, the Rural Power Company (RPC). So far it is
the only domestically owned, privately organized electricity-
generating company in Bangladesh. In the 1990s the RPC
built a gas turbine power plant with a capacity of 140 MW in
Mymensingh in the north of the country. The electricity
generated by this power plant is fed into the national trans-
mission grid.
The country's entire electricity sector is suffering from
considerable bottlenecks in generation which often result in
Project Examples
A combined heat and power station can achieve a 50 % higher power output without additional fuel.
Bangladesh: Clean and Efficient Power Generation by the Private Sector
blackouts. This is why the RPC is planning to expand the
Mymensingh power plant. The existing steam power plant is
to be converted into a combined-cycle plant with a total
capacity of 216 MW. The exhaust gas from the existing gas
turbines will be harnessed to generate high-pressure steam
which will drive a steam turbine to generate electricity. This
will raise the capacity of the power plant by around 50 %
without the need for additional fuel – a particular advantage.
The plant will generate around 500 GWh additionally.
This makes the project environmentally benign as well as
economically efficient.
KfW committed FC funds of EUR 21 million to co-fi-
nance the investment cost. The plant will be constructed by
a German enterprise on a turnkey basis and the owner will
be the RPC.
The expanded power plant will be operated as a private
business under a joint venture with a German consulting firm.
An operator model of this kind could serve as a model
for other privatization projects in Bangladesh's electricity
sector. The project aims to improve energy efficiency and
promotes reforms in the electricity sector by supporting
private players in this previously state-dominated sector.
25
China I: Modernized Coal-Fired Power Plants for Cleaner Air and More Energy
In the People's Republic of China live around 1.3 billion
people who need to be supplied with electricity. With around
1,500 billion kilowatt hours annually the People's Republic of
China is the world's second largest producer of electricity
after the USA - and already the second-largest CO2 emitter
after the USA. In a few years China could move up to first
place, with 30 % of all CO2 emissions. It is estimated that
electricity consumption will grow sixfold from increasing
industrialization and rising standards of living by the year
2050. China produces 75 % of its electricity in coal-fired
power plants and mostly from coal with a high sulphur con-
tent.
As some of the existing technologies are obsolete,
power supply is associated with considerable environmental
problems. Ambient air pollution is a particularly serious prob-
lem. Particulates and sulphur dioxide, which leads to acid rain,
contaminate the already heavily polluted urban agglomera-
tions. This is partly responsible for the respiratory diseases
that affect large portions of the population. Moreover, the
high CO2 emissions from burning coal contribute to climate
change. As a traditional coal country, Germany can provide
China with urgently needed expertise in the form of modern,
energy-eficient and environmentally friendly technologies.
One of the most effective and economically efficient
ways of achieving this is to increase power plant efficiency.
This would consume less coal while generating the
same amount of electricity. Natural resources are spared and
pollutant emissions reduced.
Under the turbine modernization programme individual
measures in six Chinese power plants are being financed with
FC funds of EUR 39 million. The use of advanced technologies
raises the efficiency and capacity of the power plants while
reducing pollution. Under the programme German enterpris-
es are modernizing 13 turbines of the Soviet-built 200 MW
class. German exporters are also supplying 15 vehicles with
mobile measuring technology to identify further measures to
enhance efficiency. The use of the measuring vehicles is be-
ing supported by training courses conducted through the GTZ.
The modernization of the turbines is intended to lower
the average specific coal consumption by 25 g/kWh and
increase power plant capacity by around 8 %. In the case of
the Huangdao power plant, for instance, which has two
turbines with a total capacity of 420 MW, savings amount to
roughly 50,000 tonnes of coal per year. This corresponds to a
reduction of approx. 110,000 t of CO2. Projected across the
overall programme, the avoided CO2 emissions will amount to
around 600,000 tons per year. The avoidance of a total of
9–15 million tonnes of CO2 across an estimated lifetime of
15 to 25 years for the rehabilitated turbines makes a signi-
ficant contribution to global climate protection.
Measuring vehicles are being used to measure pollution caused by coal-fired power plants and to be able to take corrective action.
26
In the framework of China's overall strategy, promoting
wind energy is another important approach in the diversifi-
cation of power generation. According to one study, the
exploitable wind power capacity throughout the country is
around 250,000 MW. This makes China a world leader. By
developing this potential China's power supply could at least
temporarily be decoupled from using the depletable coal
resources, and electricity could be generated in a more
environmentally friendly way with lower greenhouse gas
emissions.
Erecting wind generators with a capacity of 16.35 MW
under a German-Chinese joint venture in Shandong Province
is part of this strategy. The DEG is co-financing this project
with a loan of USD 10 million. This first commercial project
finance operation in the wind energy sector serves as a model
for China. It is intended to demonstrate that a project
financed and operated under market conditions is possible in
China too.
In comparison with conventional energy generating
technology used in Shandong Province the wind park can
avoid 25,000 tonnes of CO2 emissions annually.
China II: Less Pollution Through Wind Energy
Egypt: Environmentally Sound Electricity Generation and Irrigation
Wind generators can earn additional revenues through the sale of CO2reduction certificates.
The Nile River is Egypt's lifeline. Its water is crucial to
Egypt's irrigated agriculture, which has been successful for
thousands of years. The population growth requires the
irrigation systems to be continuously expanded. Over 70 years
ago, seven dams were built in the Nile River, some of them up
to 800 m wide. They divert water from the Nile into channels
to irrigate vast areas of farmland. After more than 70 years of
operation the Naga Hammadi Dam in Upper Egypt has
reached the end of its technical life and is no longer safe to
operate because of the depression of the river bed and the
weathered structure. The channels fed by the reservoir take
water to an area of 286,000 ha which secures the livelihood
of more than 300,000 peasant families. A dam rupture would
endanger the livelihood and incomes of these families for
years until a new barrage is completed. The Egyptian govern-
ment therefore conducted detailed studies and decided to
build a new barrage. At the initiative and with the support of
KfW it made an extensive environmental impact assessment
of the project. The results went into the planning of the
construction, such as drainage systems and measures to pro-
tect the buildings. KfW is also advising the project-executing
agency's environmental unit. It monitors the environmental
impacts of the project during the construction and operating
phase.
The new barrage will offer the opportunity to use the
great hydropower potential of the Nile River for electricity
generation in the future as well. Four turbines with a capac-
ity of 16 MW each will generate a total of 462 GWh per year.
This corresponds to the average annual electricity
consumption of over 200,000 Egyptian families. In the future
Project Examples
this electricity will no longer have to be generated by burn-
ing natural gas in thermal power plants. This will avoid the
emission of 272,000 tonnes of CO2 every year.
Construction began in the year 2002, and the new dam
and hydropower plant are due to go into operation in the
year 2008. Of the total cost of around EUR 390 million the
Egyptian government provided EUR 190 million, KfW
financed EUR 125 million from FC funds and the EIB EUR
75 million. The project demonstrates how irrigated farming
and, thus, the livelihood of about 1.5 million people can be
safeguarded and clean electricity can be generated at the
same time.
27
Kenya: Geothermal Energy – Heat from the Earth for a Clean Environment
The Okaria II geothermal power plant is making an importantcontribution to Kenya’s economic development.
In the past decade Kenya was affected by four droughts,
some of which were extreme. Because Kenya relies on hydro-
power for much of its energy, these droughts had a severe
impact on energy supplies. The result was a marked recession
that affected all economic sectors. The construction of addi-
tional power plants that use environmentally sound and
renewable geothermal energy follows the aim of bridging
critical supply shortages in Kenya during periods of drought.
Despite Kenya's high geothermal potential the electricity so
generated contributes only around 6% of the country's total
electricity generation today. In the course of the sector
reform supported by the World Bank, the EIB, Japan and
German DC the Kenyan government is now planning to
considerably increase the share of geothermal energy.
Private investors mainly shirk the risk of developing a
new geothermal field, a risk that is high and hard for them to
assess. German Financial Cooperation intends to assume part
of this risk with around EUR 9 million. The measures support-
ed comprise three components. First, six test drills will be
conducted to a depth of up to 2000 metres. The results of the
drills will be evaluated for the geotechnical development of
the geothermal field. The risk that the geothermal potential
required for power plant operation will not suffice will be
covered through a risk guarantee fund. In this case the
guarantee fund could cover additional costs for further test
drills, for example.
The project is based on experience gathered in other
undertakings, such as the geothermal power plant Olkaria II,
which is currently under construction and designed for a capa-
city of 65 MW. The FC share in the financing of the overall
power plant investment cost of approx. EUR 200 million is around
EUR 13 million. By providing electricity from geothermal
energy in a clean and cost-effective way the project will make
an important contribution to Kenya's economic development.
Similar projects are being planned in Kenya, Uganda,
Tanzania and Ethiopia under a regional programme planned
by the Global Environment Facility and the United Nations
Environment Programme to promote geothermal energy
in the East African Rift Valley. KfW is already cooperating
closely with the Federal Institute for Geosciences and Natural
Resources (Bundesanstalt für Geowissenschaften und Roh-
stoffe – BGR) in Hanover. The BGR is currently conducting
a sector project to promote the use of geothermal energy
on behalf of the BMZ.
The technical life of the Naga Hammadi Dam in Upper Egypt is endingafter 70 years of operation.
28
For many years Morocco has placed great emphasis on
using its hydropower potential. Recently the government has
also made plans to use its wind and solar power potential. This
way the country wants to reduce its dependence on energy
imports while expanding its electricity generation capacities
and contributing to protecting the Earth's climate. German
FC has accompanied Morocco along this path since the
beginning of the 1970s. Financial Cooperation activities
initially focused on developing the hydropower potential.
Today they also support photovoltaics and the use of the
excellent wind conditions.
In comparison with other countries, Morocco decided
early to develop wind power infrastructure. The locations for
two wind parks were identified on the basis of a wind atlas
produced with the assistance of German Technical Coopera-
tion. The FC project “Windpark Tangier” in the northern Rif
Mountains near the Strait of Gibraltar was Morocco’s first
wind energy project financed in the framework of inter-
national development cooperation. It has a capacity of 3.5
MW and was connected to the Moroccan integrated grid
at the end of 2000. It has allowed the country to gather
valuable experience on the use of wind power which now aids
in the realization of a much larger wind park. Situated on the
Cape Sim pensinsula on the Atlantic Ocean, the Windpark
Essaouira will have a capacity of 60 MW and is scheduled
to go into operation in 2005. The total cost of this project is
estimated at EUR 78 million. EUR 50 million will be financed
by KfW under an FC composite loan which will consist half
each of budget funds and market funds. The remaining one-
third of the total cost will be raised by the Moroccan owner
and operator.
The Windpark Essaouira can supply around 50,000
households with electricity. It will avoid CO2 emissions of
around 143,000 tonnes per year and emissions of further
pollutants such as sulphur dioxide and nitrogen oxides which
would be released by thermal power plants. With the project
Morocco is making an important contribution towards
protecting the Earth's climate. Both wind parks created the
essential momentum for implementing further wind power
projects in Morocco.
Morocco: Energy from the Sun and the Wind
South Africa: Electricity from Solar Home Systems for Remote Regions
Eight years after the end of apartheid South Africa has
a well-developed electricity network. Yet a large portion of the
poor, predominantly black population still has no access to
electricity, particularly in rural areas. The existing network is
very distant, potential consumers are few and can hardly
afford to pay the tariffs, and the mostly private households
have a low electricity consumption. As a result, the cost of
connecting and servicing these consumers via the regular
electricity grid would be extremely high. The South African
government is therefore planning to introduce environ-
mentally benign decentralized technologies, which are more
cost-effective than extending the grid to these rural areas.
These include photovoltaics (PV). The government programme
for the electrification of remote rural areas pursues the
objective of equipping around 1.5 million households with
solar home systems (SHS) within 10 years.
The FC project supports this programme with a con-
tribution of around EUR 16 million. Around 27,000 SHS are to
be financed for private households, schools and health
stations in order to improve the living conditions of the
population in the remote rural areas in the Eastern Cape and
North West provinces. The simple solar home systems, which
have a capacity of up to 200 Wh/d, supply electricity for about
three or four lightbulbs as well as a radio or a black-and-white
television set. For the target group this means a great
improvement in their quality of life. Electricity makes work
easier and provides more protection against break-ins. It also
reduces health hazards and the risk of accidents from tra-
ditional energy sources like candles and kerosene. Electricity
also has some impacts on productivity in small industry and
trade. For example, chicks can be raised with the aid of heat
lamps operated by SHS.
Project Examples
The government is planning to cooperate with a private
concessionary in the distribution and operation of the systems.
The private concessionary will invest, install and maintain
the systems over a period of at least 15 years. Part of the
initial investment cost of the SHS will be reimbursed to the
concessionary from the FC funds. This subsidy will be passed
on to the users in the form of reduced fees. The systems will
not be owned by the users. Instead they will pay a monthly fee
that covers the costs of repair and maintenance, among
others. The rate is prepaid through the purchase of a chip
card required to operate the SHS (“fee for service” model).
This pre-paid system guarantees rate collection at relatively
low transaction costs. The chosen delivery model makes the
use of the systems affordable for poorer target groups as
well. The concession is to be put to international tender in
mid-2003.
29
India: Renewable Energies are Making Headway
IREDA also promotes Indian manufacturers of wind generators.
In the past years India has achieved comparatively high
economic growth of up to 7% per annum. The demand for
electricity has grown accordingly. The country's electricity
generating capacities were unable to keep pace with the rise in
demand. Electricity is in short supply and unscheduled power
cuts are frequent. This is a formidable obstacle to the develop-
ment of India's economy. India generates most of its electri-
city in coal and gas-fired thermal power plants. Hydropower
plants supply around one-fourth of total capacity. Other
renewable energy sources provide a mere 2 %. If the Indian
government were to rely only on thermal power plants for the
necessary expansion of the country's generating capacities a
substantial increase in pollutant and greenhouse gas emissions
would be inevitable. For this reason India has taken the
welcome decision to significantly raise the share of “new”
renewable energies in electricity supply to 10 % in the next
10 years. Half of this share is to be provided by wind power.
The Indian government is supporting private investors in the
sector with a variety of fiscal incentives. In this endeavour the
Indian Renewable Energy Development Agency (IREDA) is an
important public financing institution. It offers not only loans
but advisory services to investors in the energy sector. KfW has
been supporting IREDA since 1997 with a long-term FC
composite loan of EUR 61 million. The project aims to improve
the decentralized power supply, preserve non-renewable
energy resources and reduce greenhouse gas emissions. For
this purpose the scope of IREDA for offering long-term
financing for appropriate investments is to be improved by
strengthening its institutional capacities. IREDA has proven to
be a competent partner. So far projects of private investors
have been promoted through German FC in the areas of wind
energy, bagasse cogeneration and photovoltaics with a total
installed capacity of 85 MW. The main focus is on wind
generators which were provided primarily by German
manufacturers. The experience gathered thus far has generally
been positive. The BMZ therefore agreed with the Indian
government in 2002 to continue its support for IREDA with a
second FC composite loan of around EUR 42 million.
Rural families will be supplied with electricity for lighting and electricalappliances through solar home systems.
30
Nepal: Reducing Costs with Clean Energy – Biogas Plants
The Nepalese government has been promoting the construction of biogasplants since 1975.
Nepal is one of the poorest countries in the world. It has
no coal, oil or natural gas reserves and is forced to spend
nearly one quarter of its foreign exchange earnings on the
import of fossil fuels. In the countryside people use mostly
wood for cooking and heating. This traditional energy source
accounts for 75% of Nepal's total energy consumption.
Extensive wood cutting has dramatically depleted the forests
in the course of time. Firewood has grown very scarce in
many regions. Uncontrolled firewood cutting greatly reduces
the protective function of the remaining forest. Environ-
mental problems such as the growing threat of erosion are
on the rise. Firewood collection and cutting, traditionally a
task of women and children, takes up to three hours a day.
Cooking with wood or cow dung produces smoke in huts
without chimneys, leading to respiratory and eye diseases.
This affects women and children in particular. Besides,
cooking with cow dung takes away an important fertilizer
needed in agriculture. This results in declining crop yields.
The purchase of additional fertilizers puts as much of a strain
on farmers' household incomes as does the purchase of
kerosene for lighting. The FC project addresses these prob-
lems. The beneficiaries of the project are farm households
with livestock. Women and children benefit most from the
project.
The Nepalese government has made efforts to improve
the energy situation for a long time and has been promoting
the construction of biogas plants since 1975. It was initially
supported by Dutch development aid. Since 1997 KfW has
been financing the construction of biogas plants under
FC with around EUR 15 million. The plants are essentially
made up of an underground tank, the so-called digester, and
a pipe system. The pipe system conveys the gas produced in
the digester to the cookers and lamps where it is burned.
The digester is fuelled with organic substrates, particularly
with animal excrements. The fermented slurry is composted
and then used as fertilizer. This simple, robust technology
has proven its worth for many years. So far around 100,000
biogas plants have been installed within the framework of
the FC project. Another 200,000 plants are to be built by
2009.
They are to be built by Nepalese firms. The FC funds
are channelled to the plant manufacturers through the
Agricultural Development Bank of Nepal (ADB/N). A portion
of the FC funds is granted as a subsidy to contribute to the
building costs. The diverse awarding criteria favour the
construction of smaller plants. The remaining FC funds go to
a fund from which ADB/N extends loans for the manufactur-
ing of biogas plants. The farmers are owners and operators
who render their counterpart contributions in kind. They
contribute substantially to the financing of the overall
programme cost. The FC project will be running until autumn
of 2003 and a follow-up project is under preparation.
Project Examples
The PPP Programme: DEG Finances Energy Sector with Promotional Funds of the BMZ
“Development Partnerships with Business Partners” –
under this motto the BMZ launched the Public-Private Part-
nership Programme (PPP Programme) in the year 1999. The
objective is to use private-enterprise undertakings to reach
development-policy objectives. Besides KfW, several other
institutions such as DEG, the GTZ and the Foundation for
Economic Development and Vocational Training are partici-
pating.
The PPP facility, endowed with funds from the federal
budget, also offers financial support for the programme. KfW
offers a sort of insurance for investors to protect them should
the planned operation fail through no fault of their own. KfW
then assumes part of the cost of feasibility studies, legal opin-
ions and other advisory services that accrue in the prepara-
tion of infrastructure investments. The DEG co-finances pri-
vate-sector undertakings in developing and industrializing
countries that are worthy of support against development
policy criteria up to the amount of EUR 200,000 which would
not materialize without additional financing from PPP funds.
Most of the DEG's PPP projects have been conducted in
the areas of environmental protection and vocational train-
ing. For promotional measures in connection with the use of
renewable energies and the improvement of energy efficien-
cy the DEG made around EUR 1 million available within the
framework of the PPP programme in 2002. Around EUR 1.5
million was additionally invested by the enterprises them-
selves.
The measures co-financed in 2002 included a pilot
project for low-cost electrification of rural regions through
solar home systems in Morocco, the construction of three
reference installations for solar thermal energy in Tunisia,
and the development of a prototype solar-powered air
conditioning system in Thailand. In China a sanitary landfill is
being equipped with gas wells in order to study the possibil-
ity of using landfill gas for electricity generation. In India the
purging nut tree (Jatropha curcas) is being planted in a pilot
project. In the future the oil extracted from the purging nut
is to be made available for use as fuel in special diesel motors.
Together with a textile firm the DEG has co-financed a
reference textile factory in South Africa that is designed to
conserve energy and reduce pollution.
31
Most of the DEG’s PPP projects have been conducted in the areas of environmental protection and vocational training.
4. REGIONAL PERSPECTIVES
32
THE SITUATION OF THE
DEVELOPING COUNTRIES AND THE
TRANSITION COUNTRIES
The economic outlook for the developing countries has
deteriorated as a result of the weak economic performance of
the industrialized countries. Yet the differences between
developments in the individual regions are greater than in
previous years. The rift that is expanding the fastest is no
longer that between industrialized and developing countries
but between developing regions. The most marked difference
is between the countries in Asia and in Latin America: the
Asian countries recovered from the serious crisis at the end
of the 1990s more quickly than expected. The two main
economies on the continent – China and India – served as
economic locomotives for the entire region. In contrast, Latin
America is currently in an economic crisis aggravated by
political instability in a number of countries. Africa, which is
still at the bottom of the development scale, saw its growth
in 2002 slow down against the previous year. The transition
countries in Central and Eastern Europe, though, again
registered strong GDP growth.
OVERVIEW OF REGIONAL DEVELOPMENT
In sub-Saharan Africa the trend towards greater hetero-
geneity in economic development continued in 2002.
Countries with consistent reform efforts and above-average
political stability achieved the strongest growth rates. On
the other hand, several countries failed to capitalize on their
extensive natural resources for sustainable development due
to on-going armed conflicts, high corruption and misguided
economic policies. Even poorer terms of trade put a strain on
the entire region.
The Middle East experienced subdued but still com-
paratively stable economic growth overall in 2002. The
continuing high oil price led to an unexpectedly good macro-
economic situation in those countries that export crude oil,
while the overall economic data worsened for most other
countries. At the same time, fears of a military strike against
Iraq combined with the Israeli-Palestinian conflict – which
is not losing any of its severity – and spreading anti-US
sentiment among the population, are putting many govern-
ments under stronger political pressure, both domestically and
internationally.
REAL ANNUAL GDP GROWTH PER CAPITAL 1998–2002 (%)
1998 1999 2000 2001 20021)
All developing countries 1.9 2.4 4.1 2.3 2.6
Africa (without Egypt and Libya) 0.9 0.3 0.6 1.1 0.7
Asia (without the Middle East) 2.6 4.8 5.4 4.3 4.8
Middle East (including Turkey, Malta,Egypt and Libya) 1.4 –0.9 4.0 –0.5 1.6
Latin America and the Caribbean 0.7 –1.4 2.4 –0.9 –2.1
Transition countries (Europe) –0.6 3.9 6.9 5.3 4.2
Source: International Monetary Fund (IMF): World Economic Outlook1) Estimate
INTERNATIONAL DEVELOPMENT FINANCE
The total volume of long-term private and public net
capital flows (disbursements less repayments) in the develop-
ing and transition countries has been on the decline since
1997. This downward trend continued in the year 2002 as
well. According to preliminary information by the World
Bank, total net capital flows decreased by 6.7 % to USD 195
billion. The drop is due mainly to net repayments of bank
loans and the drastic decline in direct investment following
the persistently difficult economic situation worldwide and
greater sensitivity to risk among investors. And still the share
of net private capital of total net capital flows rose in 2002
to 76 % (73 %). Even though the net inflows from foreign
33
Schoolchildren having lunch in Brazil.
Despite the persistent deflation and structural crisis in
Japan and the difficult economic situation worldwide, the
countries in East and Southeast Asia improved their upswing
overall. This is due above all to higher domestic demand, a
better regulatory framework in numerous countries and the
positive effects of China’s dynamic economic performance on
regional trade. Yet the individual countries paint a varied
picture, with growth rates ranging from 2 % in Hong Kong to
8 % in China. In southern Asia relatively high economic growth
was again achieved as a result of robust domestic demand and
the fact that, for the time being, the danger of war has been
averted (India-Pakistan conflict). Poverty reduction and
economic policy reforms are still important tasks on the
subcontinent. In Central Asia primarily those countries that
export energy sources had quite a good year from an economic
perspective. However, the economic reform process hardly
progressed at all in Central Asia’s transition countries during
the year under review.
Since the end of 2001 the Latin American countries
have been suffering from a profound crisis of confidence that
originated in Argentina during the financial and economic
crisis but was aggravated during 2002 by the economic
downswing in the USA and the governmental crisis in
Venezuela. As a result, the recessive trend was aggravated,
accompanied in numerous countries by heavy currency
devaluations, rapid price increases, higher interest rates,
substantial outflows of capital and growing political uncer-
tainty.
Although the economic development in Central and
Eastern Europe slowed down in 2002, it generally remained
robust. Despite the slow expansion of production in Western
Europe, macroeconomic activity continued to grow in the
transition countries. Some problems remain, especially the
high unemployment rate, political instability due to social
hardships, the considerable balance of payments deficits
coupled with modest foreign direct investment and an
inflation rate that is falling ever so slowly.
34
direct investment in developing countries dwindled by 16 %
over the previous year, they are still the most important form
of private capital inflows by far. Direct investment focuses
on a few countries with favourable overall conditions. In 2002
it again proved to be a stabilizing factor for the balance of
payments in these countries.
Net official flows to developing and transition coun-
tries dropped by 18% in 2002 to some USD 47 billion. Where-
as public subsidies increased slightly to just under USD 33
billion, loans decreased drastically at the same time. This
resulted primarily from the fact that, in 2002, the IMF no
longer needed to offer such an immense number of loans for
emergency assistance as in 2001.
THE EXTERNAL DEBT SITUATION
Based on preliminary estimates by the IMF, the total
external debt of the developing countries (and transition
countries) grew slightly in 2002 to nearly USD 2.6 trillion.
At just under 21% (and 16%) the debt service ratio fell to
just under the previous year’s level. Among the regions of
developing countries, Latin America still has by far the high-
est debt service ratio at 41 %.
The countries’ high indebtedness is a major obstacle to
development and aggravates poverty, above all in the least
developed countries. The HIPC Debt Relief Initiative, which
was initially started in 1999 and has since been expanded,
enables these countries to reduce their foreign debt to a level
that is manageable in the long run. Thus, the average annual
debt service of the 26 HIPC countries will be cut back by
one-third by 2005 compared with 1999, when the initiative
was launched. This will enable the governments to increase
public spending for education, health care and other
measures that benefit poor population groups. The World
Bank expects the percentage of public social expenditure
of the total budget to rise from approx. 37 % in 1999 to
56 % in the year 2005. In this way, substantial progress could
be made in reducing poverty.
The HIPC debt relief initiative is to enable highly indebted countries to invest more in education.
ENCOURAGING DEVELOPMENTS IN
INDIVIDUAL COUNTRIES – AN OVERVIEW
Public opinion literally perceives sub-Saharan Africa as
the “black continent”: marginalized from the world economy,
disrupted by violent conflicts, with no hope for an end to
poverty.
The economic and socio-economic data seem to cor-
roborate this picture: sub-Saharan Africa accounts for only
1 % of global GDP and 2 % of world trade. Average life
expectancy is 47 years, and the illiteracy rate is 40 %.
HIV/AIDS is destroying many development successes. Half of
the population lives on less than one dollar per day, and
average per-capita income is a mere USD 480. The goal of the
Millennium Declaration – to halve world poverty by the year
2015 and to substantially improve basic social services –
seems to be an enormous challenge here.
Which factors are responsible for the fact that sub-
Saharan Africa is lagging behind with regard to most
development indicators? One of the key problems is weak
government. It is characterized by high susceptibility to
conflict and corruption, the dominance of self-serving elites,
opaque public finances and deficient economic and social
infrastructure. Financial sectors that function poorly hardly
allow for more mobilization of savings and adequate financ-
ing for investments. Some governments fail to create
appropriate conditions for poverty-oriented economic
growth. They have difficulties to organize basic social
services efficiently and to generate the resources needed for
this on their own. Many countries, also reform-oriented
countries, do not fully succeed in capitalizing on available
export potential. What is more, African exports are limited
by continuing trade barriers imposed by the industrialized
countries.
In view of acute conflicts and setbacks, however, the
achievements of the last three years are often forgotten:
• the illiteracy rate was pushed down from 73 % to approx.
40 %
• the share of people with access to clean drinking water
was raised to 50 % and thus doubled
• the expansion of the infrastructure was considerably
improved in some cases
• and, not least, the average population growth decreased
to far less than 3 % annually.
One contributing factor to these developments was
Financial Cooperation (FC), through its funding of investment
projects and intense efforts to support sector reforms.
Another positive – and by no means self-evident –
aspect is that, since 1990, democratic elections have been
held in 40 countries in sub-Saharan Africa – i.e. in over
80 % of the countries. In the 1990s many conflicts could
either be eliminated or reduced, such as those between
Ethiopia and Eritrea, between the Democratic Republic of
Congo and Rwanda and also the civil wars in Mozambique,
Sierra Leone and Angola. Some reforming countries have
attained growth rates of over 5% p.a., for example Benin,
35
REGIONAL DEVELOPMENT IN SUB-SAHARAN AFRICA
Primary education for all children up to the age of 14 is one of theMillennium Development Objectives.
36
Burkina Faso, Senegal, Uganda and Mozambique. The figures
for Tanzania, South Africa, Mali, Mauritius, Namibia and
Botswana are also quite encouraging. These countries are
consistent in their efforts to press ahead with reforms that are
not easy but are necessary: reforms to combat corruption,
promote the private sector and improve the efficiency of
state services (e.g. health care, education). The list of coun-
tries that are successful in introducing good governance has
grown these last years - a reassuring result.
How is the performance of FC in sub-Saharan Africa
against this backdrop? There, at 69% the share of projects
with a positive development effect (period of evaluation
2000–2001) is only slightly below that for the field of FC
altogether (74 %). Yet in African countries that are not
reform-oriented, that suffer from violent conflicts and high
corruption, the rate is under 30 %. Especially for countries
that are well endowed with natural resources and whose
development performance is disproportionately poor the FC
results are also poor. In contrast, the end result for FC in the
reforming countries is predominantly positive. This confirms
the overall experience that FC cannot achieve sustainable
success in a troubled political and economic environment if
the government of the partner country does not demonstrate
a serious desire to reform.
Which conclusions can be drawn and what perspectives
have opened up for FC in sub-Saharan Africa?
• Reality in sub-Saharan Africa is becoming more and more
heterogeneous, which, accordingly, requires differen-
tiated analysis. In this context it should not be ignored
that success that is indeed sustainable does not arise
overnight (especially with the goals of the Millennium
Declaration in mind) - patience and perseverance are
required in equal measure.
• Apart from good governance, economic growth is not
the only prerequisite for poverty eradication but it is
certainly a crucial factor. Above all the governments
of the African countries are responsible for optimally
exploiting their growth potential; yet the industrialized
countries are also called upon to support the integration
of sub-Saharan Africa into the global economy and to
enable this region to take advantage of the opportunities
that globalization offers.
• Sub-Saharan Africa is faced with tremendous challenges
that the continent is unable to confront alone – the AIDS
catastrophe makes this exceedingly clear. Although it
was able to limit the spread of HIV/AIDS, for many coun-
tries the virus is still a key obstacle to development and
the cause of further impoverishment and marginaliza-
tion, especially for children and women.
• With 10 % of the world’s very poor living in sub-Saharan
Africa, the region’s potential for conflict is above aver-
age. Ultimately, this serves as a breeding ground for
extremist activities that should not be underestimated.
For these reasons as well the region must remain a prior-
ity of development cooperation (DC).
• Although not the only one, DC is still an indispensable
instrument that gives off impulses to reinforce Africa’s
reforming countries – not least so that economic growth
can finally lead to less poverty (“pro-poor growth”).
To accomplish this, not only African governments but
also the donor countries have to contribute so that DC
will be as effective as possible. In the “Strategic Partner-
ship with Africa” (SPA) a promising partnership has
emerged between donor and partner countries for the
purpose of implementing poverty reduction strategies
more effectively (see box on p. 37).
These school children can hardly wait for their new school to open.
ECONOMIC DEVELOPMENT IN
SUB-SAHARAN AFRICA
In the past year sub-Saharan Africa was not spared
the impacts of the downturn of the global economy. For the
most part, real export earnings stagnated. The terms of trade
deteriorated slightly. And this despite the fact that during
the course of the year the world market prices of major
non-oil products recovered from a very low level. The main
products affected were cocoa, coffee and cotton. The region’s
per-capita GDP increased in 2002 from 1.1 % in the prior year
to achieve average real growth of 0.7 %. The mean inflation
rate declined to below 5 %.
The development of the countries in this region varied
much more than in the past years. The highest growth rates
were achieved by countries with reforms firmly in place and
above-average political stability. These include, for example,
Benin, Senegal, Tanzania, Mozambique and Uganda. These
countries still have a good chance for growth. The differences
in development are also clearly illustrated by the fact that the
larger group of some 30 reforming countries participating in
the SPA were able to generate economic growth of 4.4 %, far
above the average.
These hopeful countries are still set against the known
problem countries which, due to armed conflicts, rampant
corruption and misguided economic policies, failed in their
attempt to turn their extensive natural resources into capital
in the form of sustainable economic and social development
– despite at times high world market prices for their raw
materials exports. This applies to Nigeria and the Democratic
Republic of Congo, among others. In spite of stable high crude
oil prices Nigeria even saw its GDP decrease slightly. The high
price level for crude obviously inspired the government to
perceive the rapid implementation of structural reforms as
being less urgent. Consequently, in 2002 the IMF also ceased
its informal monitoring of Nigeria.
In other countries, difficult domestic policy situations
were able to be resolved. In Kenya, after being in power for
24 years the governing party was replaced by the opposition
in peaceful elections. In Madagascar the disputes between the
new and the old president were settled satisfactorily.
37
FOCUS ON THE EFFECTIVENESS OF DC: THE “STRATEGIC PARTNERSHIP WITH AFRICA” (SPA)
The SPA is an informal development forum in which both African governments and all major bilateral and multilateral
donors are represented. At regular meetings the SPA members exchange experience and information on innovative
development-policy approaches in sub-Saharan Africa. It has had several working groups that have analyzed past
experiences and drawn up specific recommendations for practical application. The main topics are how to apply the
Poverty Reduction Strategy Papers (PRSP), how to design effective sector programmes (Sector-wide Approaches, or
SWAP), how to improve public financial management and how to promote poverty-oriented growth (pro-poor growth).
Within the SPA, KfW heads the Working Group on Sector Support and has financed studies on how to embed sector
programmes in the poverty reduction strategies of the partner countries.
New forms of DC are currently the main discussion topic of the SPA, ranging from stronger programme orientation to
basket and direct budget financing. Among other things, the goal is to increase the transparency of the financial
commitments, to harmonize monitoring systems and reporting requirements, and to provide more targeted support
for public financial systems. This will ease the burden on the partner countries and render DC more effective
overall.
38
In some southern African countries a long period of drought has destroyed harvests and hampered development.
In Ethiopia and several other countries in southern
Africa a drought destroyed many harvests, jeopardizing
development. South Africa was not affected by this. Rather,
this past year the country was able to produce a record maize
harvest. The export-oriented sections of industry and mining
also improved somewhat. This was due primarily to the exter-
nal value of the rand – which was still very low in historical
comparison – even if it did increase slightly in 2002 after a
40 % drop the year before. However, South Africa’s GDP
growth rate was only around 2.2 % and thus was below the
average for the region – as in most previous years.
The revival of the world economy will likely have posi-
tive effects on the development of sub-Saharan Africa as well.
A substantial improvement in economic growth and greater
progress in poverty reduction can be expected only in the long
term, however, and if the political improvements continue.
Here the “New Partnership for Africa’s Development” (NEPAD)
is to play a crucial role (see box p. 39).
COOPERATION WITH SUB-SAHARAN AFRICA
With its diverse financing offers and acknowledged
country and sector know-how the KfW Group is helping to
turn Africa’s potential and the partners’ own efforts into
sustainable development. In 2002 FC commitments for the
countries in sub-Saharan Africa amounted to EUR 275
million. Thus, they were distinctly higher than the previous
year (EUR 204 million), and yet they matched the average
for the preceding five-year period.
In 2002, 42 % of commitments in the region were for
the social infrastructure, and 36 % for the economic infra-
structure. A longer-term comparison shows a moderate
increase in the share of commitments for the social infra-
structure at the expense of the economic infrastructure.
Activities to reach the goals set in the Millennium Declaration
are a vital aspect, such as KfW’s increasing efforts to fight
HIV/AIDS through programmes centering on the distribution
of contraceptives and education campaigns.
The main recipients of FC funds were the countries
of South Africa, Uganda and Mozambique. They are charac-
terized by regulatory and economic policies that are, in
regional comparison, above the average. Of the total com-
mitments for South Africa amounting to EUR 48 million,
just under EUR 31 million was provided in the form of a loan
to the “Industrial Development Corporation,” which supports
small and medium-sized enterprises. This marked the first
time that KfW added market funds to the budget funds
for financing in sub-Saharan Africa. A financial contribution
for water supply and sewage disposal in Entebbe accounted
for the largest share of the commitments made to Uganda.
This support was made possible after the Ugandan govern-
ment – supported by KfW – considerably improved the over-
all sectoral conditions in a long reform process.
39
NEW PARTNERSHIP FOR AFRICA’S DEVELOPMENT (NEPAD)
The New Partnership for Africa’s Development (NEPAD) was founded in October 2001 by reputable African heads of state
and government. South Africa’s President Mbeki played an important role in this. NEPAD believes in its responsibility
and relies on its own strengths to bring peace and stability to Africa through reforms. This will set the stage for further
economic growth and prosperity. The initiative seeks to overcome major obstacles to development and, to accomplish
this, is counting on political changes to improve governance. Some such changes are political pluralism, democratic
elections, the maintenance of peace and security, respect for human rights, the rule of law, and also accountable,
efficient and effective administrations.
The founders of NEPAD expect the industrialized countries to assist them by forming a new development partnership.
In actuality the G8 countries adopted an action plan for this purpose in June 2002. One of the plan’s key components
is a stronger concentration of support for critical bottleneck areas in the relevant African countries; it also provides for
the industrialized countries to "do their homework.” This includes further measures to help open their markets further
to African countries and to enhance the effectiveness of developmental cooperation. In the future the German Federal
Ministry for Economic Cooperation and Development (BMZ) will emphasize cooperation with governments that follow
up on their announcements in the NEPAD forum with concrete action. The BMZ and the KfW Group have given NEPAD
their support by hosting an economic conference in April 2002 in Berlin entitled “Africa Works.”
In March 2002 NEPAD decided to introduce “peer review,” which is extremely important to the success of the initiative.
This means that the NEPAD members will monitor one another’s policies. According to a decision passed in November
2002, a major part of the monitoring will not be carried out by NEPAD but instead by the African Union (AU), of which
every country in Africa is a member. Unlike its predecessor organization, the “Organization for African Unity” (OAU),
the AU has abandoned the principle of non-intervention in the internal affairs of other African countries. NEPAD played
a critical role in this. It remains to be seen to what degree problems like corruption in monitoring are identified and dealt
with and whether policies are open to judgment.
In any case, the values and standards defined by NEPAD are a valuable reference for the respective political opposition
and civil society vis-à-vis their government. If political participation is strengthened there is hope that NEPAD – as was
the case with the Helsinki process in Europe – will prevail over numerous initial doubts to bring about tremendous
positive changes in the long run.
Promotion of the private sector plays a special role in
sub-Saharan Africa. Just as they need long-term investment
capital, the partner countries also need access to modern
broad-based technologies. Processing capacities need to be
expanded on the basis of the available products, especially in
agriculture, and efficient marketing strategies need to be
developed. DEG has already had positive experience in this
area and offered additional investments and loans totalling
just under EUR 58 million for seven projects in the year 2002.
More than half of these funds flowed into two cross-border
projects to promote private infrastructure investments and
an agricultural holding. Although DEG's commitments
decreased over the prior year, the total commitments of the
KfW Group in sub-Saharan Africa rose by some 13 % to EUR
333 million.
PROMOTION OF DECENTRALIZATION
AND DEMOCRACY
Sub-Saharan Africa has a large percentage of very poor
developing countries. In most cases their administrative
structures, which often perform poorly and are highly cen-
tralized, are unable to cope with the task of supplying people
outside of the capital – above all in rural areas – with enough
of the basic social services that they need. This is rendered
even more difficult by the tremendous geographical size
of many countries. Added to this is the fact that the
borders drawn more or less haphazardly in colonial times
usually neglect to take ethnic similarities into account.
Consequently, still today many people do not identify them-
selves with the nation of their citizenship. Having realized
Good opportunities for market economy in Africa.
40
the impediments to development that result from this, many
countries in sub-Saharan Africa have been decentralizing
their administrative structures since 1990. At the same time,
the population is to play a larger role in the decision-making
processes of local and regional authorities, thus supporting
the process of democratization on the communal level.
German Financial Cooperation (FC) supports this
decentralization process by helping communities to make
basic economic and social infrastructure available. The objec-
tive of these measures often corresponds to the key compo-
nents of national poverty reduction strategies. On the one
hand the overall living conditions are to be improved – par-
ticularly for the poor population strata – and, on the other
hand, the revenues of communal administrations are to be
increased. Making investments, which is generally labour-
intensive, also creates additional income for the people for a
limited time. When the population helps to select, decide on
and apply measures, their ability to help themselves and their
sense of responsibility are reinforced. Accordingly, this has
a positive influence on the decentralized political-adminis-
trative structures in the partner country.
A typical FC instrument for the local promotion of
development is a fund established in the partner country. It
enables the flexible and proper realization of a wide range of
small investment projects for different population groups
from both urban and informal village communities. The
central government, but also – and especially – elected com-
munity representatives and representatives of self-govern-
ment and civil society, are members of the decision-making
committees of these funds.
One specific example of a successful fund is in Burkina
Faso. There, several individual social and economic projects
were coordinated and carried out in cooperation with the
dynamically functioning administration of an urban commu-
nity with approximately 15,000 inhabitants. The projects
covered the construction of a market, a row of shops, the
development of a construction area for a simple settlement,
and the construction of a secondary school in the town and
a primary school in a section of town that was previously
unattended. Also, a landmark was turned into a tourist
attraction and lodgings were built to accommodate visitors.
These measures constituted a significant contribution to
increasing the revenues of the community. The key factor
was the realization of the town council and the local civil
society groups that, with their own initiative, they are able
to improve their quality of life and their environment.
Currently over 30 fund financings with an FC volume
of some EUR 150 million are being prepared or implemented
or have already been concluded in over 10 sub-Saharan
African countries. Some are being developed in collaboration
with other donors. Funds, in particular those with a private-
sector organizational structure, are important for encourag-
ing acceptance of decentralization and democratization.
In poor partner countries the new administrative bodies
frequently have insufficient funds, resulting in long delays
in accomplishing the tasks assigned to them and in living up
to the people’s expectations of rapid material improvements
for own efforts. Here the fund concept boosts the standing
of the new institutions with the target groups because
the measures can be applied quickly and reliably. To ensure
sustainable operation, consulting and training measures are
also financed in the start-up phase.
41
Small investment projects are being financed efficiently through locallyadministered funds.
Mozambique, which is located in southeastern Africa,
has extremely good natural conditions for agriculture. It is
the most important economic sector. In addition, this coun-
try on the Indian Ocean has rich mineral deposits and energy
sources. When the colonial power Portugal withdrew in 1974,
Mozambique’s economy was largely destroyed by the civil
war which started shortly afterwards. Already prior to the
conclusion of the peace treaty in 1992 the government began
turning away from a centralized administrative economy,
which had been in place up to that time. Its economy is now
largely market-based. Thanks to the structural reforms and
extensive donor support, since 1994 Mozambique has been
able to achieve impressive real economic growth averaging
approx. 8% p.a. – even if it started out at a very low level –
and to bring its very high inflation rate under control. Under
the HIPC Debt Relief Initiative a large portion of Mozam-
bique’s external debt – which put the country under enor-
mous pressure – was forgiven. Although a few key social
indicators such as the infant mortality rate and the school
enrolment rate have improved, Mozambique is still one of the
poorest countries on Earth
Owing to a high number of development bottlenecks
the German federal government and the government of
Mozambique have agreed that German-Mozambican Devel-
opment Cooperation (DC) will focus on three priorities:
education, rural development as well as economic reform and
the development of a market economy. In this way German
FC will support the poverty reduction strategy programme
that the country has since put forward.
Since the 1980s Mozambique has received non-re-
payable FC grants totalling EUR 336 million. These grants
were used to better supply the population with needed import
goods, to boost structural reforms for a market economy and
to reinstate the destroyed infrastructure. The commitments to
MOZAMBIQUE
Area 800,000 sq. km
Population 17.6 million
Population growth 2.1 % p.a.
Gross domestic productUSD 3.6 billion (2001)
Economic growth 12.2 %
Inflation rate 9 %
Exports of goods USD 727 million
Per-capita income USD 210 (2001)
Life expectancy 45 years
Literacy rate 40 %
Poverty rate 70 %
Priorities of German-Mozambican Development
Cooperation:
• Education
• Rural development
• Economic reform and development of a market
economy
42
Country Example: Mozambique
Mozambique
date break down into around 11% for commodity aid for
current imports such as spare parts and 14% for structural aid
to support the adjustment policy. Most of the other funds
were spent on the rehabilitation and expansion of the
destroyed infrastructure. The port facilities, railways and the
road system were improved and the national power supply
was rebuilt. Financing economic development also improves
the living conditions for the population. Also, most of the
projects financed by KfW strengthen Mozambique’s transit
function in the region.
Due to the loss of trained experts that Mozambique
suffered when many well-trained Portuguese left the country
after it obtained its independence, education and vocational
training are crucial to development. The so-called basket
financing that is now beginning is in some respects a pilot
project for the education sector. Instead of supporting
individual projects such as the construction of school build-
ings in a province, the German funds will be paid into a
basket together with the contributions of other donors. This
basket will then be used to finance measures for the entire
strategy programme for the education sector. Unlike the
standard project approach with its sometimes different
procedures and requirements of the numerous individual
donors, this new concept is primarily expected to ease the
administrative burden of the Ministry of Education and
heighten awareness for the project partner’s sense of respon-
sibility.
Four out of five Mozambicans live in rural areas. As
a result, the development of rural areas is particularly
important for the fight against poverty. Infrastructure
bottlenecks are among the main causes of the widespread
rural poverty. KfW financed the rehabilitation of the gravel
roads in the province of Manica and encouraged the intro-
duction of a labour-intensive road maintenance system
adjusted to local conditions. The roads authority now wants
to introduce this approach nation-wide – partially with FC
support. Another area of intervention will be rural drinking
water supply.
It is particularly the micro, small and medium-sized
enterprises which have above-average potential to create
jobs that lack not only investment capital but also working
43
The national electricity supply is being restored in Mozambique.
capital, which they need to operate. Here KfW can build on
past activities to create a financial institution for medium-
sized enterprises for the third priority area of economic
reform and the development of a market economy. In the
future microfinance institutions are to be strengthened also.
MOZAL ALUMINIUM SMELTER
Apart from KfW, DEG has also contributed substantial-
ly to Mozambique's development. DEG provided long-term
loans to build and expand the “Mozambique Aluminium
Smelter S.A.R.L.” (MOZAL), which deserves special mention.
The MOZAL aluminium smelter is Mozambique’s largest in-
dustrial project and was developed by an international con-
sortium within the framework of the Mozambican-South
African regional initiative “Maputo Corridor.” Together with
other development banks DEG co-financed both its buildup
and then the first expansion of the smelter. Thanks to
state-of-the-art production technology, an ideal location
close to the port and inexpensive power tariffs, worldwide
MOZAL is one of the producers of aluminium with the lowest
costs. The aspired production capacity of 500,000 t of alu-
minium per year reinforces the country's export position and
boosted macroeconomic growth by approx. 7 %. Together
with the infrastructure, which was developed in parallel,
MOZAL serves as the starting point and nucleus for the
addition of further industrial projects with more impacts on
employment and income. A Community Development Trust
that finances health care and education measures and also
supports small and microbusinesses in the area surrounding
the smelter is part of the project. The US Project Management
Institute named MOZAL its “Project of the Year 2001.” In
doing so it underscored the importance of this successful
example of private-sector industrialization for the integra-
tion of one of the world’s poorest countries into globalized
economic processes.
Small and medium-sized enterprises in particular need fresh capital in order to create more employment.
44
In most countries in North Africa and the Middle East
economic development stagnated in 2002. In Israel the pre-
vious year’s recession worsened (change in GDP –1.5 %),
while Egypt, the region’s second economic heavyweight, had
only 0.8% growth. Lebanon and Syria were also in this range.
Only Jordan, Tunisia and Morocco had more robust growth
rates of 3% - 3.5%. In many countries in the region not only
the budget deficits but also – to a greater extent – the trade
and current account deficits increased. In Jordan, Israel
and Tunisia this was also caused by the continued decrease in
the number of tourists. The simultaneous slump in foreign
direct investment made it more difficult to close the result-
ing financing gaps. Therefore, in some cases recourse to high-
er external debt was unavoidable. Additionally, the pressure
on the currencies – most of which are pegged to the US dollar
– augmented. As in the previous year, Egypt was affected the
most by this. Owing to continuing high population growth
(around 2 %), average per-capita income declined in those
countries with weak economic development. Coupled with
growing income differentials, this caused social tension to
rise.
The oil exporting countries on the Arabian Gulf and
Algeria experienced a completely opposite trend. They bene-
fited considerably from the stable, high prices for crude oil
that climbed to over USD 30 a barrel at year-end. This
permitted extraordinarily high export and current account
surpluses, balanced budgets, a rapid increase in currency
reserves, a reduction in external indebtedness and, largely
speaking, a flurry of investment activity.
Irrespective of the oil revenues the majority of the
countries in the region found it more difficult to cut down
on their high unemployment and to create additional jobs
for the rapidly growing number of young workers in 2002
than in previous years. The trend of giving employment to a
large number of these young people in the public sector
was continued. This will lead to new structural problems in the
future.
In FC cooperation countries it could be observed that
the tense economic and political situation again discouraged
their willingness to implement necessary reforms. Privati-
zations are being postponed for fear of negative social
impacts, but also because of a lack of interest on the part of
investors. In many countries the long overdue tariff adjust-
ments – for power and in the water and sewage sector, for
example – were postponed yet again. As was already the case
one year earlier, inefficiencies, in particular high loss rates and
surplus labour, were not dealt with consistently in these
sectors.
In such an environment the private sector does not find
the dynamism it expects and urgently needs. With the excep-
tion of Syria, all countries along the southern and eastern
borders of the Mediterranean Sea have signed association
agreements with the EU. Although such accords greatly
facilitate access to EU markets, owing to the agreed removal
of customs barriers they also significantly increase the com-
petitive pressure on the association countries. Many com-
panies will have to undergo comprehensive modernization
before being able to handle this pressure.
FC is faced with special challenges in the Palestinian
Territories. As a result of the de facto reoccupation of the
West Bank by the end of the year and the Israeli policy of
containment, the economic and social conditions here have
worsened dramatically. The Palestinian National Authority
and the cities have tremendous difficulties in covering their
running expenses. The increase in poverty is extremely high
and, for the majority of the population, their survival is now
dependent on foreign assistance.
In 2002, at EUR 88 million the volume of FC commit-
ments for the region was clearly below its level in previous
years (EUR 180 million). This drop can be explained by the
postponement of a contract for a large project in Morocco,
and partially also by the situation in the Palestinian Territo-
ries which made it impossible to conclude the contracts as
planned.
The FC goal set for the southern and eastern Mediter-
ranean region is to continue assisting the partner countries
with their adjustment process, to improve the sectoral con-
ditions in the priority areas of support and, in so doing, to
cushion social hardships. In order to promote the important
goal of the Millennium Declaration – to protect the natural
resources and the environment – water supply and sewage
45
REGIONAL DEVELOPMENT IN NORTH AFRICA AND THE MIDDLE EAST
46
disposal projects were the main focus of cooperation with the
region, accounting for 42 % of commitments.
As the markets open the competitiveness of the local
industry has to be strengthened. In Morocco, Tunisia and
Egypt FC offers loan programmes in collaboration with
local commercial banks. With their help investments can
be financed that enhance efficiency, improve the quality
of the products and meet more stringent environmental
standards.
Extensive investments in the expansion of social infra-
structure, like the education system, are needed for the young
and growing population. When financing projects in this
sector, KfW places particular emphasis on labour-intensive
building and, wherever possible, on contracting local firms.
To a growing degree the user groups are being included in the
planning and application of these types of measures (e.g. in
the form of parents’ councils). In the Palestinian Territories a
labour-intensive programme was launched at short notice
that involves the construction and rehabilitation of poverty-
oriented infrastructure facilities. In this way the acute eco-
nomic and social problems in Gaza and the West Bank can be
mitigated.
Morocco is promoting wind power.
Within the various projects KfW and the partner insti-
tutions agree on organizational and economic adjustment
measures. The partner institutions will then become more
efficient and able to cover more and more of their costs.
This is an essential prerequisite for the sustainability of the
measures once the FC support ends. Furthermore – as was
already the case in previous years – FC is playing a leading role
in Morocco, Tunisia and Jordan in the dialogue with the
partner governments and institutions on important steps to
reform.
In 2002 DEG concentrated its work in the region on
the financial sector and the promotion of long-term cor-
porate financing; it committed a total of EUR 31 million. In
Egypt it financed an investment bank and an investment firm
and, in Lebanon, provided investment and loan capital to a
commercial bank.
EAST ASIA AND THE PACIFIC
Driven by exports and domestic demand the upswing
that started in East Asia in the last quarter of 2001 continued
during the course of 2002. Thus, the region attained growth
of a good 6%, considerably higher than the previous year’s
3.5%. The rise in domestic demand was not so much in the
field of investments as in consumption, and low inflation and
interest rates were contributing factors. Other indicators of
the upturn are relatively stable exchange rates, continuing
current account surpluses and an increase in currency
reserves. Particularly in China, Malaysia, South Korea and
Thailand domestic demand has also been boosted by higher
deficit spending. This is a walk on a tightrope which, given the
rising public debt, cannot be continued in the long run.
The individual countries give a varied picture. Growth
rates range between 2 % in Hong Kong and 6 %–8 % in
Vietnam and the People’s Republic of China. Whereas Vietnam
is steadily continuing on its path to reform, the other
transition countries such as Cambodia, Laos and Mongolia
are being left behind. For example, with a growth rate of
3 %–4 % Indonesia and the Philippines fall considerably short
of the average. Both countries have to cope with large bud-
get deficits and a high level of public and external debt.
Moreover, the decline of the ”new economy” in the Tiger
countries of Taiwan, Hong Kong and Singapore left deep
traces. Finally, by far not all the problems afflicting the cor-
porate and banking sectors of the countries in this region
have been resolved.
Today, five years after the Asian crisis, it can be said
that East Asia has mastered the most serious macroeconomic
distortions. Beyond this, the country average shows that
poverty, which affects 12% of the population, has fallen
below the poverty line of USD 1 per day. This is the lowest
level ever reached. Now the traditional strengths of the region
can start to dominate again. For instance, owing to high
savings rates and comparatively good macroeconomic
management the region’s prosperity is less dependent on the
inflow of foreign capital than other developing regions. This
is probably the main reason East Asia has so far not been
infected by the financial crisis afflicting Latin American
countries.
Yet we cannot be oblivious to the fact that the world
economic situation has deteriorated since mid-2002 and that
the risks to further development, also of this region, are
increasing markedly. Worth mentioning are the widespread
stagnation of the industrialized countries in the West, the
lingering deflation and structural crisis in Japan, and the
steep increase in oil prices prior to the war in Iraq.
One risk that used to be latent and turned virulent
by the terrorist attack on Bali in October 2002 involves
terrorist acts in several countries in the region with an Islamic
population. Even though the majority of the population
adheres to an apolitical, non-fundamentalist Islam there is
still considerable potential for a politically radical type of
Islam aiming to polarize the population. Apart from Indo-
nesia, the neighbouring countries of Malaysia and the
Philippines also have higher political risks.
What is astonishing is that the economic growth of
the advanced countries in the region has been cut off from
the intense capital investments after 1998. This is true not
only for the overheated economic and investment phase of
the 1990s but also for the 1980s. In part, this is a natural
consequence of the investment boom prior to the financial
crisis and the bursting of the high-tech bubble in the Tiger
countries after 2000. Another explanation is that China’s rise
to become a regional motor for growth leads to the restruc-
turing of regional production and trade structures and, above
all, attracts most of the foreign direct investments to the
region.
For most of the countries in the region, China is the
fastest-growing export market, for example for raw materials
from Malaysia and Indonesia or for supplies from Taiwan and
South Korea for the automobile and electrical industries.
Countries with a high percentage of low-wage sectors such
as Indonesia or the Philippines are losing the production
competition with China. As regards foreign direct investment
the trend that began in the 1990s continued to the benefit
of China: between 1990 and 1995 China already lured 75 %
of the direct regional investments, and from 2000 to 2002
this figure jumped to 90 %.
47
REGIONAL DEVELOPMENT IN ASIA
48
Apart from these foreign investments, in 2002 China's
boom continued to be based on an expansive budgetary
policy and solid domestic demand. The general course of its
market-economy reforms and the opening of its markets was
reinforced when the country joined the World Trade Organi-
zation one year ago. Growing regional disparities between
China’s dynamic east and poor west as well as its state-owned
enterprises, kept afloat through regulated lending for socio-
political reasons, are serious structural problems that involve
risks, not just for China’s development.
The trends noted in German Financial Cooperation with
East and Southeast Asia these past years continued in 2002.
This cooperation on financial system development is growing
more significant in nearly every country. The financial sector
is beginning to play a key role in the promotion of the private
sector and the rise in growth through the active participation
of the poor. In conformity with the Millennium Goals to be
implemented there are important priority areas of coopera-
tion in the region in the health care sector, including HIV/AIDS
prevention (Indonesia, Vietnam, Cambodia) and environmen-
tal and resource protection (above all in China and Vietnam).
The scarce budget funds are supplemented regularly with
market funds in more advanced countries, chiefly in the
transport sector (China, Indonesia). An agreement was
reached with Indonesia on the conversion of FC claims into
additional investments in vocational training.
In East Asia DEG is increasing its commitments with
funds totalling EUR 79 million. The financing commitments
mainly targeted the sectors of infrastructure development
including water supply and wind power, foodstuffs, and
finance.
SOUTH AND CENTRAL ASIA
In 2002 South Asia was not able to avoid the impacts
of the world economy either, but still managed to achieve
average economic growth of 4.6 %. As a result, together
with East Asia/the Pacific South Asia topped the list of all
developing country regions in terms of economic growth.
Yet poverty remains a mass phenomenon in southern Asia:
on the subcontinent 490 million people, corresponding to
43 % of all poor people worldwide, have to live on less than
USD 1 per day. Unfortunately, in 2002 the countries failed
yet again to contribute to significantly reducing poverty
themselves, although this was necessary and also within their
means. Many governments lack the courage to introduce
far-reaching economic policy reforms. This also includes the
privatization of "strategic” areas such as heavy industry and
banks, the reorientation of fiscal policy, enhanced efficiency
of the public administration, financial sector reforms, fight-
ing corruption, etc. In general political terms Sri Lanka
succeeded in 2002 in advancing its domestic peace process
quite a ways, and as concerns the India-Pakistan conflict,
at least it did not intensify.
Last year the Central Asian countries of the former
Soviet Union achieved economic growth that was, in some
cases, relatively high. But this does not totally reflect good
economic policy; rather, in Kazakhstan and Turkmenistan it
was primarily the result of the favourable development of
prices for energy sources, their main exports. The gross
domestic product, exports and foreign direct investments are
heavily influenced by these goods. In contrast, the other
economic sectors hardly developed at all. In Central Asia as
well, no significant progress in reform could be observed
for 2002. In some countries (like Kyrgyzstan) the internal
political tension increased, which was manifested in the form
of serious political crises, among other things, and con-
sequently also in poor economic results.
The traditional Naadam Festival in Mongolia.
In 2002 FC with South and Central Asia kept its focus
on important priorities of development policy while taking
the Millennium Goals into consideration. Dialogues with the
partner countries succeeded in keeping FC largely focused on
sectors that are particularly relevant to poverty elimination
and growth. At the heart of this cooperation are the priorities
of health care, the financial sector and energy.
In the health care sector FC mainly supports the gov-
ernments in Central Asia in their battle against tuberculosis,
a disease that crosses many borders and is rampant in many
regions of Central Asia. Additionally, together with other
donors family planning measures are funded that also help
to fight HIV/AIDS. This includes the distribution of contra-
ceptives via “social marketing.”
In Central Asia in particular the financial sector plays
a decisive role in the establishment of market-economy
systems and the promotion of the private sector. FC supports
this by granting credit lines to private banks, and sometimes
also by founding new development institutions, as well as by
persistently pursuing sector dialogue.
Ultimately, in the energy sector in South and Central
Asia it is important to make more use of renewable energies,
to increase power generation capacities and to improve
energy efficiency. This is meant to spur on economic growth
and create urgently needed jobs. In southern Asia DEG
committed EUR 83 million to new projects. The focus was on
India, with financing commitments for four industrial
projects and a development bank.
In the year under review cooperation with Afghanistan
earned special mention. Here, official FC began in early 2002
and was coordinated by a local KfW office (p. 10). FC aims to
support the reconstruction of Afghanistan as quickly and
effectively as possible. Specifically, FC takes place mainly in
the fields of health care, elementary education, energy
and drinking water supply. A number of emergency measures
are also being funded. On behalf of the BMZ DEG is providing
company start-ups in Afghanistan with non-repayable
equity assistance. This created around 2,000 jobs in nearly
50 projects.
49
50
The year 2002 brought a bitter setback in development
to Latin America. On average real GDP declined by an esti-
mated 1 %. Thus, average per-capita income dropped by
approx. 2.1 %. Latin America had not produced such unsatis-
factory key figures since 1983. In view of this negative devel-
opment, the inflow of foreign direct investments was, at USD
35 billion, much smaller than the year before (USD 58 billion
in 2001). Yet arithmetically it covered the balance of pay-
ments deficits that amounted to 1.5 % of GDP on average.
This illustrates that in spite of the current crisis international
investors believe in Latin America's medium and long-term
potential.
Access to the capital markets became increasingly expen-
sive for Latin American countries owing to higher risk pre-
miums – until the markets calmed down somewhat as of
October 2002. This development affected Brazil the most, which
elected a new president in October. The average debt service
burden remained high at about 41 % of export earnings.
Although there were improvements at year-end, the
low prices for agricultural and mineral resources such as
coffee and copper continued to weigh heavily on the results.
Only net exporters, especially Mexico and Trinidad and
Tobago, were able to profit from the steep increase in the
price for crude oil.
The largest economy on the subcontinent – Brazil – pro-
duced a moderate result, with around 1.5 % growth. The
feared payment problems did not occur, also due to a record
loan from the IMF in the amount of USD 30 billion. However,
the country's debt situation remains problematic, so that the
recently elected president and his government have to follow
a strict austerity policy to avoid a crisis relapse.
REGIONAL DEVELOPMENT IN LATIN AMERICA
Its neighbour Argentina, which is unable to pay its
debts and defaulted on some payments to multinational
banks, fell into a dramatic depression. Its GDP decreased by
12%. It had the highest inflation rate in Latin America
(approx. 45%). Meanwhile, there are initial indications of
economic recovery. But foreign debt still had not been taken
care of at the end of 2002. In early January 2003 Argentina
and the IMF agreed on only a stand-by credit arrangement,
which defers all payment obligations for 8 months.
Together with Argentina, but also because of home-
made problems, Uruguay and Paraguay fell into payment
difficulties. In the case of Uruguay a suspension of payments
was initially avoided thanks to the intervention of the USA
and the IMF. The picture was not uniform for the other coun-
tries in South America. At 4.5 %, Peru’s GDP increase was the
highest in all of Latin America, but political risks taint the
picture. Columbia too posted growth of 1.6 % despite the es-
calating civil war.
Bitter internal political conflicts are weakening
Venezuela, which is not using its rich oil resources soundly for
the country’s development and has had to accept a decline in
GDP of 10%. The Central American and Caribbean countries
suffered under a weaker US economy, lower export prices for
coffee, and rising oil quotations. Nevertheless, they posted
results that were slightly above average.
Against this backdrop the public finance situation
worsened almost everywhere in Latin America. The average
state deficit equalled roughly 2.6 % of GDP. The savings and
investment ratios and also the development of productivity
are still insufficient. The social problems are intensifying as
a result of the crisis. Around 44 % of all Latin Americans
are considered poor, and 20 % are even extremely poor. This
leads to social tension, and it comes as no surprise that the
governments are less willing to carry on with reforms that
they started but which will have medium-term effect at the
earliest, such as the privatization process.
In this context, how Brazil’s new president intends to
achieve the task he has set for himself, namely to continue
the market-economy reform and modernization policies and
simultaneously to remedy obvious social wrongs, will play an
important role. His success or failure will have a major impact
on the entire subcontinent.
In the year 2002 the commitments again comprised
both budget and market funds and were earmarked for
developmentally relevant projects. The volume of FC
funds committed by KfW (loans, grants and participations)
amounted to a total of EUR 293 million (EUR 257 million).
The key recipient countries were Bolivia, the Dominican
Republic, and Brazil. The volume of FC commitments
amounted to EUR 150 million, plus funds provided by DEG
(EUR 95 million), FC promotional loans (EUR 33 million) and
the market fund portion of an FC composite loan (EUR 15
million).
When committing these FC loans or grants KfW
emphasized projects in the financial sector. The total funds
of EUR 61 million will be used to finance small and medium-
sized enterprises and also investments in the environ-
ment. The main recipients were Chile and the Dominican
Republic.
The second main-focus area in 2002 with a commit-
ment volume of EUR 34 million was again water supply and
sewage disposal projects. The regional focus was on Peru and
Bolivia. As stated in the Millennium Goals these projects
contribute directly to improving the living conditions, above
all for poor population groups. And together with Technical
Cooperation (TC) measures are being supported (for example
in Bolivia) that aim to improve the organizational structures
by founding special-purpose associations.
The regional focus of DEG’s activities was Brazil and
Venezuela (together EUR 50 million), and the sectoral focus
was on the manufacturing industry (EUR 47 million). Among
others, projects in Brazil's packaging industry, Mexico's steel
industry and Venezuela’s paper industry were co-financed.
In Brazil DEG provided quasi-equity funds to a telecoms
company. The financial sector also occupied an important
position: most important were loans to commercial banks in
Brazil and Costa Rica and a participation in a microfinance
institution in El Salvador.
51
52
The economic dynamics in Central and Eastern Europe
(CEE) slowed down slightly in 2002 compared with the pre-
vious year.The GDP growth of 4.2 % per capita in this region
is still comparatively high and increased for the fourth year
in a row.
In intraregional comparison the Central European
and Baltic EU accession countries saw slightly slower
growth (approx. 2.5 %) than the average. This reflects the
close ties between these relatively far advanced economies
to the EU countries. Poland more or less has its inflation
under control, but it is still grappling with rising budget
deficits.
The region of South Eastern Europe experienced com-
paratively stronger growth, which averaged around 4 %.
The political stabilization following Serbia’s democratic
development improved the conditions for the entire region.
Ethnic tensions simmered down in Macedonia as well. The
two EU accession countries Bulgaria and Romania and also
Croatia underwent the greatest transformation. Serbia is
exhibiting a formidable speed of economic reform and offers
considerable potential for development. Yet in spite of the
progress in pacification, a number of ethnic-political issues
have been solved only superficially. Peace depends on the
military presence of Western countries. A plan for peace that
is feasible in the long term is needed to give the region's
development momentum. Following the severe economic
crisis of 2001 Turkey managed to stabilize its situation thanks
to resolute reforms and external financial support.
Economic growth in the CIS countries in Europe and in
the Caucasus was also around 4 % in the year 2002. Russia’s
growth was disappointing, dropping from over 8 % in 2000 to
approx. 4 % in 2002 in spite of the impressive speed of the
country’s economic reform and the continued favourable
conditions on the raw materials market. This reduces the
chances of smaller, neighbouring countries to benefit from
Russia’s economic strength. In all other countries in this group
structural reforms were introduced, but not to an extent or
depth that would enable one to conclude that their market-
economy system was already functioning. The elimination of
the structural distortions and inefficiencies of the former
Soviet economic system is a tedious and difficult task. The
mostly autocratic rulers do not demonstrate a strong will to
reform, and corruption and weak public administration are
widespread.
A key political event for the CEE countries is the deci-
sion made at the EU summit in Copenhagen in December
2002 on the eastward expansion of the EU to add the eight
accession countries in Central and Eastern Europe as well as
Malta and Cyprus by May 2004. This gives off a stabilizing
REGIONAL DEVELOPMENT OF THE EUROPEAN TRANSITION COUNTRIES
Georgia: rural market.
impulse that encourages growth for all of Eastern Europe.
After a decade of transformation in Eastern Europe it can be
said that the Eastern European countries have embarked on a
path of market-economy reforms, reinforcement of private-
sector initiative, and free foreign trade. Since the growth im-
pulses from outside were below average, the relatively good
economic development of the region as a whole is proof of
the strong power of resistance and considerable momentum
of Eastern Europe’s economies.
Yet the high unemployment and the social hardships
tied to the collapse of the socialist economic system and
necessary structural reforms remain problematic. Economic
policy has to make a compromise between that which is
beneficial for economic policy and that which is politically
enforceable. Also, it must support small and medium-sized
private enterprises much more than before.
The development policy commitments of the KfW
Group for the region totalled EUR 282 million in the year
2002, of which EUR 118 million was financed by DEG. In
connection with its mandate business – for which KfW assists
interested donors with the implementation of specific
development projects – an additional EUR 100 million was
committed.
KfW’s financings under the Stability Pact for South
Eastern Europe concentrated on promoting small and medi-
um-sized private enterprises (SMEs). This involves building up
and funding special SME banks or financial instruments. In
addition, water supply and sewage disposal projects as well as
investments in the power supply and transport projects are
financed. Altogether the commitments in 2002 amounted to
EUR 84 million. In order to design a regional energy concept,
KfW supports the coordinator of the Stability Pact by deploy-
ing staff of its own.
In the countries in the southern Caucasus, FC priorities
are water and power projects and the promotion of the pri-
vate sector by building up a banking system with long-term
effectiveness. Overall EUR 8 million was committed to the
three countries in 2002. Under the Caucasus Initiative the
German federal government has provided a total of EUR 17
million in FC funds to date to strengthen regional coopera-
tion and to ensure peace. A conference in Tbilisi on regional
energy exchange that was organized by KfW also served these
goals. In 2002 commitments for Turkey added up to EUR 77
million. In collaboration with the EU these funds mainly serve
to finance small and medium-sized enterprises and, in coop-
eration with the EIB, to improve the water supply and sewage
disposal in medium-sized cities.
Of the financing commitments made by DEG for private
investments in the entire region, EUR 61 million went to
South Eastern Europe, with a special focus on Romania,
Bosnia and Herzegovina, and Turkey. Projects in the CIS
countries in Eastern Europe and in the Caucasus received EUR
38 million. EUR 19 million was committed in total for projects
in Central Europe and for a supraregional project. The em-
phasis was on industrial processing plants and the financial
sector. In addition, a private-sector water supply project in
Romania had particular developmental importance.
The federal government’s TRANSFORM Programme,
which promotes the market economy in CEE, ended in late
2002 as scheduled for the EU accession countries. This
consulting programme, which KfW coordinates as mandatary
for the participating ministries and carries out for the Min-
istry of Economics and Labour and the Ministry of Finance,
has contributed to strengthening the basis for democracy,
building up the market economy and achieving entry to
the EU. The cooperation under TRANSFORM with Ukraine,
Belarus and Russia is being continued. A short-term expert
fund is still available to all the countries in the region.
53
54
STATISTICAL APPENDIX
1. PROMOTION OF DEVELOPING COUNTRIES
FINANCING COMMITMENTS OF THE KFW GROUP BY COUNTRY IN 2002
(COMMITMENTS IN EUR MILLION)
Rank Country Budget Market Other Funds DEG PromotionFunds Funds1) under Delegation (Market Funds of Developing
Activities and Own Funds) Countries
1 Turkey 77.29 – 64.00 12.50 153.79
2 India 43.63 15.34 – 57.81 116.78
3 People’s Republic of China 54.71 21.50 – 39.37 115.58
4 Indonesia 50.20 48.40 – 10.00 108.60
5 Philippines 30.81 16.51 – 20.38 67.70
6 Brazil 30.50 – – 29.04 59.54
7 South Africa 27.61 20.45 – 2.75 50.81
8 Afghanistan 34.63 – 15.10 – 49.73
9 Dominican Republic 11.48 20.34 – 16.64 48.46
10 Egypt 24.79 – – 20.00 44.79
11 Romania 1.02 – – 34.58 35.60
12 Bosnia and Herzegovina 8.33 – 14.25 12.82 35.40
13 Bangladesh 30.32 – – 5.04 35.36
14 Bolivia 32.78 – – – 32.78
15 Africa, supra-regional – – – 32.50 32.50
16 Vietnam 32.21 – – – 32.21
17 Kosovo 15.52 – 15.50 – 31.02
18 Serbia 21.13 – 5.00 1.10 27.23
19 Chile 11.76 15.34 – – 27.10
20 Tanzania 12.83 – – 12.88 25.71
21 Ukraine – – – 24.50 24.50
22 Supra-regional 0.06 – 21.55 0.61 22.22
23 Peru 15.59 – – 6.10 21.69
24 Venezuela – – – 20.97 20.97
25 Costa Rica 18.66 – – 2.15 20.81
26 Uganda 19.71 – – – 19.71
27 Palestinian Territories 19.45 – – – 19.45
28 Côte d’Ivoire 13.25 – – 6.10 19.35
29 Yemen 19.11 – – – 19.11
30 Mozambique 18.85 – – – 18.85
31 Malawi 18.10 – – – 18.10
32 Mexico – – – 17.86 17.86
33 Niger 17.05 – – – 17.05
34 Albania 13.80 2.92 – – 16.72
35 Zambia 15.94 – – – 15.94
55
1. PROMOTION OF DEVELOPING COUNTRIES
FINANCING COMMITMENTS OF THE KFW GROUP BY COUNTRY IN 2002
(COMMITMENTS IN EUR MILLION)
Rank Country Budget Market Other Funds DEG PromotionFunds Funds1) under Delegation (Market Funds of Developing
Activities and Own Funds) Countries
36 Ethiopia 14.83 – – – 14.83
37 Mali 14.83 – – – 14.83
38 Burkina Faso 14.20 – – – 14.20
39 Macedonia 13.43 – – – 13.43
40 Mongolia 12.58 – – – 12.58
41 El Salvador 10.31 – – 1.95 12.26
42 Panama – 12.23 – – 12.23
43 Kazakhstan 2.56 – – 9.60 12.16
44 Morocco 11.47 – – – 11.47
45 Lebanon – – – 10.56 10.56
46 Pakistan – – – 10.16 10.16
47 Europe, supra-regional – – – 10.14 10.14
48 Russian Federation – – – 10.00 10.00
49 Tunisia 7.16 2.56 – – 9.72
50 Benin 9.71 – – – 9.71
51 Cape Verde 8.69 – – – 8.69
52 Nicaragua 8.29 – – – 8.29
53 Namibia 7.11 – – – 7.11
54 Cameroon 6.14 – – 0.92 7.06
55 Georgia 2.56 – 1.20 3.00 6.76
56 Kyrgyzstan 4.14 – 2.45 – 6.59
57 Ghana 6.39 – – – 6.39
58 Senegal 6.14 – – – 6.14
59 S.A.D.C. 6.14 – – – 6.14
60 Cambodia 6.14 – – – 6.14
61 Guatemala 5.11 – – – 5.11
62 Armenia 5.11 – – – 5.11
63 Bulgaria – 5.00 – – 5.00
64 Slovenia – – – 5.00 5.00
65 Uzbekistan 5.00 – – – 5.00
66 Thailand – – – 4.89 4.89
67 Asia, supra-regional – – – 4.40 4.40
68 Southeastern Europe 4.21 – – – 4.21
69 Chad 4.09 – – – 4.09
70 Hungary – – – 4.00 4.00
56
1. PROMOTION OF DEVELOPING COUNTRIES
FINANCING COMMITMENTS OF THE KFW GROUP BY COUNTRY IN 2002
(COMMITMENTS IN EUR MILLION)
Rank Country Budget Market Other Funds DEG PromotionFunds Funds1) under Delegation (Market Funds of Developing
Activities and Own Funds) Countries
71 Madagascar 3.58 – – – 3.58
72 Papua New Guinea 3.07 – – – 3.07
73 Honduras 2.91 – – – 2.91
74 Rwanda 2.91 – – – 2.91
75 Syria 2.56 – – – 2.56
76 Guinea 2.50 – – – 2.50
77 Nepal 2.50 – – – 2.50
78 Nigeria – – – 2.50 2.50
79 Kenya 2.33 – – – 2.33
80 Moldovo 2.30 – – – 2.30
81 Colombia 2.00 – – – 2.00
82 Sierra Leone 1.77 – – – 1.77
83 Tadjikistan 1.50 – – – 1.50
84 East Timor 1.30 – – – 1.30
85 Montenegro – – 0.40 0.51 0.91
86 Azerbaijan 0.77 – – – 0.77
87 Algeria 0.70 – – – 0.70
88 Jordan 0.47 – – – 0.47
89 America, supra-regional – – – 0.40 0.40
Total 970.63 180.59 139.45 463.73 1,754.401) Market Funds of Mixed Finance, Composite Finance and Interest Subsidy as well as FC Promotional Loans.
2. PROMOTION OF DEVELOPING COUNTRIES
FINANCING COMMITMENTS OF KFW AND DEG BY REGION IN 2002
(IN EUR MILLION)
Country Budget Market Other Funds DEG Promotion ofFunds Funds1) under (Market Funds Developing
Mandates and Own Funds) Countries
Total 970.63 180.59 139.45 463.73 1,754.40
Sub-Saharan Africa 254.70 20.45 – 57.65 332.80
Asia/Oceania 315.30 101.75 17.55 161.65 596.25
Europe/Caucasus 165.47 7.92 100.35 118.15 391.89
Latin America 149.39 47.91 – 95.11 292.41
North Africa/Middle East 85.71 2.56 – 30.56 118.83
Supra-regional 0.06 – 21.55 0.61 22.221) Market Funds of Mixed Finance, Composite Finance and Interest Subsidy as well as FC Promotional Loans.
57
4. FINANCING COMMITMENTS OF DEG 1998–2002 BY SECTORAverage 1998 1999 2000 2001 2002
1998–2002
Sector EUR % EUR % EUR % EUR % EUR % EUR %million million million million million million
Total 387 100 358 100 343 100 360 100 412 100 464 100
Producing Sectors 164 42 151 42 151 44 128 35 202 49 190 41
Agriculture, Forestry, Fishery 28 7 30 8 47 14 27 7 20 5 16 4
Manufacturing, Raw Materials, 136 35 121 34 104 30 101 28 182 44 174 38Mining, Construction
Economic Infrastructure 47 12 48 14 31 9 37 10 60 15 58 12
Energy 14 4 18 5 12 4 21 6 0 0 17 4
Transport and Storage 21 5 30 8 12 4 16 4 28 7 16 4
Communications 13 3 0 0 6 2 0 0 32 8 25 5
Social Infrastructure 14 4 14 4 7 2 2 1 9 2 39 8
Water Supplies and Waste 10 2 9 3 0 0 0 0 0 0 39 8Water/Solid Waste Disposal
Education 2 0 0 0 0 0 0 0 8 2 0 0
Health Care 3 1 4 1 7 2 1 0 1 0 0 0
Public Administration 0 0 0 0 0 0 1 0 0 0 0 0
Financial Sector 147 38 111 31 138 40 187 52 130 32 168 36
Other Services 15 4 34 9 16 5 6 2 11 3 9 2
Trade and Tourism 10 3 32 9 8 2 5 1 6 1 0 0
Real Estate, Leasing, 5 1 2 0 8 2 1 0 5 1 9 2Business Services
3. SECTORAL DISTRIBUTION OF TOTAL COMMITMENTS
(IN EUR MILLION)DEG KfW Summe
Others 9.4 182.2 191.6
Producing Sector 190.0 101.9 291.9
Financial Sector 168.0 194.8 362.8
Economic Infrastructure 57.6 322.7 380.3
Social Infrastructure 38.7 489.1 527.8
Total 463.7 1,290.7 1,754.4
for infrastructure projects (water supply, telecommunications,
energy, transport). Other services accounted for 2 % of the
commitments.
The commitments of DEG concentrated on the producing
sector (manufacturing industry, agriculture and forestry with
41% (49 %) and on the financial sector with 36 % (32 %).
Altogether 21% (17 %) of the new commitments were provided
58
fell to 27 % (43 %). The financial sector recovered its earlier
share of commitments, at 12 % (9 %). Commitments to the
forestry and agriculture sector remained on their long-term
level of 7 % after the unusually high volume of the previous
year (10 %).
The sectoral distribution of KfW’s commitments at
preferential terms in 2002 was characterized by the parti-
cularly high volume of commitments for social infrastructure,
specifically for water supply, sanitation, education and health
care. Their share rose to 40 % (30 %). Accordingly, the share of
economic infrastructure – primarily energy and transport –
5. KFW’S FINANCING COMMITMENTS 1998–2002 BY SECTOR (AT PREFERENTIAL TERMS)*Average 1998 1999 2000 2001 2002
1998–2002
Sector EUR % EUR % EUR % EUR % EUR % EUR %million million million million million million
Total 1,275 100 1,390 100 1,634 100 924 100 1,316 100 1,111 100
Producing Sector 92 7 124 9 74 5 50 5 138 10 73 7
Agriculture, Forestry, Fishery 88 7 123 9 74 5 40 4 133 10 73 7
Manufacturing, Raw Materials, 3 0 2 0 – 0 10 1 5 0 1 0Mining, Construction
Economic Infrastructure 452 35 429 31 778 48 186 20 571 43 295 27
Energy 202 16 275 20 275 17 67 7 298 23 94 8
Transport and Storage 237 19 132 10 498 30 107 12 263 20 186 17
Communications 12 1 21 2 5 0 11 1 10 1 15 1
Social Infrastructure 444 35 501 36 404 25 481 52 393 30 443 40
Water Supplies and Waste 264 21 328 24 215 13 333 36 270 20 173 16Water/Solid Waste Disposal
Education 57 4 90 6 31 2 37 4 50 4 79 7
Health Care 44 3 35 3 66 4 14 2 24 2 79 7
Population Policy 33 3 31 2 14 1 38 4 39 3 41 4
Other Social Services 47 4 17 1 78 5 59 6 11 1 70 6
Financial Sector 142 11 150 11 187 11 114 12 121 9 136 12
Cross-sectoral 109 9 119 9 100 6 93 10 90 7 144 13
Commodity Aid 24 2 54 4 53 3 0 0 0 0 13 1
Structural Aids 13 1 13 1 38 2 0 0 4 0 8 1
Cross-cutting Areas:
Environmental Protection and Resource Conservation 469 37 418 30 426 26 394 43 700 53 406 37
Poverty Alleviation 683 54 766 55 1.011 62 520 56 592 45 528 49
* From 2001 incl. training measures. Figures may not add up to totals due to rounding.
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I M P R I N T
Published by:KfW, Corporate Communication Department
Edited by:Secretariat of International Credit Affairs 1
Graphic design, typesetting and printing:Grützmacher GmbH, Frankfurt
Photos:ABB, Mannheim, and Enercon, Aurich, p. 46; Decon GmbH,Bad Homburg, p. 26; DEG, p. 31; E.ON Engineering GmbH,Gelsenkirchen, p. 25; Groupe Agence Française deDéveloppement, Paris, p. 9; GTZ, Eschborn, p. 30; LahmeyerInternational, Bad Vilbel, p. 2; Siemens AG, Erlangen, p. 24;Petar Vasiljevic, Belgrade District Heating Company, p. 23;KfW photo data base, pp. 6, 10, 11, 13, 17, 34, 38.
Photographs by the following members of our staff wereused from the KfW photo photo data base:Matthias Adler, p. 40; Mona Ahmed, p. 29; Carla Berke, p. 49;Andreas Fikre-Mariam, p. 27; Dr. Klaus Glaubitt, p. 52; Elke Hellstern, p. 35; Georg Kraft, p. 29; Albrecht Küppers, p. 3; Heinz Lüll, pp.17; 33, 43; Daniela Mohaupt, p. 15; Walter Parvisi, p. 36; Wolfgang Reuß, p. 41; Christian Schmidt,p. 44; Thomas Selzer, p. 27; Dr. Christoph Sigrist, p. 5; Dr. Franz Sprenger, p. 8; Dr. Josef Stadlbauer, p. 48; MichaelWehinger, p. 50; Michael Wenzel, pp. 14, 19, 22.
ABBREVIATIONS
ADB/N Agricultural Development Bank of NepalAFD Agence Française de DéveloppementAREED African Rural Energy Enterprise Development, SenegalBGR Bundesanstalt für Geowissenschaften und Rohstoffe
(Federal Institute for Geosciences and Natural Resources)BMZ German Ministry for Economic Cooperation and
DevelopmentCEE Central and Eastern EuropeCIS Commonwealth of Independent StatesCO2 carbon dioxideDC Development CooperationDEG DEG-Deutsche Investitions- und Entwicklungsgesellschaft
mbHEBRD European Bank for Reconstruction and DevelopmentEDFI European Development Finance InstitutionsEIB European Investment BankEU European UnionEUR EuroFC German Financial CooperationFMO Financieringsmaatschappij Voor Ontwikkelingslanden
(Dutch development bank)GDP Gross domestic productGEF Global Environment FacilityGHG greenhouse gasGTZ Deutsche Gesellschaft für Technische Zusammenarbeit
(German Agency for Technical Cooperation)
HIPC Heavily Indebted Poor CountriesHIV/AIDS Human Immunodeficiency VirusIEA International Energy Agency of the OECD, ParisIFC International Finance CorporationILO International Labour OrganizationIMF International Monetary FundIREDA Indian Renewable Energy Development AgencyLDC Least Developed CountriesMDG Millennium Development GoalsNEPAD New Partnership for Africa’s DevelopmentNGO Non-governmental organizationOECD Organisation for Economic Cooperation and
DevelopmentOPEC Organization of Petroleum Exporting Countriesp. a. per annumPPP public-private partnershipPRSP Poverty Reduction Strategy PaperPV PhotovoltaicsSHS solar home systemSPA Strategic partnership with AfricaSWAP sector-wide approachTC Technical CooperationUSD US dollarWCD World Commission on DamsWTO World Trade Organization
60
The KfW Group gives impetus to economic, social and ecological development
on a global scale. As bankers we strive to work efficiently every day. The fruit
of our work flows back into our promotional activities and ensures our poten-
tial to provide support in the long term. We have been proving our competence
for more than 50 years. With long-term, low-interest loans KfW supports,
among others, small and medium-sized enterprises (SMEs), which are the back-
bone of the German economy.
THE KFW GROUP:PROVIDING SUPPORT WITH BANKING EXPERTISE.
61
Investment Finance: As a partner of SMEs we support innovations and are committed to the instrument
of equity capital. In so doing we rely on long-term loans and on innovative financing mechanism such as
securitization programmes and global loans. Together with IKB Deutsche Industriebank AG we are developing
new products for SME finance.
Housing Finance: As Germany’s leading promotional bank, KfW is also the main financier of private housing
property. KfW gives many people the opportunity to realize their dream of owning their own four walls, or to
modernize their home. In accordance with our comprehensive focus on the environment we are particularly
pleased to finance construction projects that make ecological sense.
Environmental Protection: Our programmes aim to protect the atmosphere and improve the climate on
our planet. This is accomplished through, for example, the financing of clean energy generation, renewable
energies or construction measures that reduce CO2 emissions.
Export and Project Finance: KfW is one of Germany’s largest providers of financing for exports of capital
goods. It finances exports of aircraft and ships as well as machines and other equipment all over the world.
KfW is also involved with project finance, for instance in the areas of industry and transport infrastructure.
Financial Cooperation with Developing Countries: On behalf of the German federal government KfW
finances investments and project-related advisory services in developing countries, which then support the
sustained expansion of the economic and social infrastructure and make environmental and resource conser-
vation measures possible. Our partners in cooperation are foreign governments and publicly owned institutions.
Corporate Finance in Developing Countries: Our subsidiary DEG ist committed to building up and expand-
ing efficient private companies in developing countries. DEG operates according to principles of private
enterprise: the projects have to be not only environmentally friendly and developmentally sound, but also
economically viable.
We have since developed more than ever into a strategic partner for the economy and the government. As an
advisor to the federal government we offer our expertise in the privatization of federally owned enterprises
companies. On behalf of the government we also handle agency business for the Federal Agency for Special
Tasks associated with Unification (Bundesanstalt für vereinigungsbedingte Sonderaufgaben, BvS) and the
Compensatory Fund of Securities Trading Companies (Entschädigungseinrichtung der Wertpapierhandelsunter-
nehmen, EdW).
1834
12
KfWPalmengartenstrasse 5-9, 60325 Frankfurt am Main, Germany
Postfach 11 11 41, 60046 Frankfurt am Main, GermanyPhone +49 69 7431-0, Fax +49 69 7431-2944
www.kfw.de
Press DepartmentPhone +49 69 7431-4400
Information CentrePhone +49 180 1 335577, Fax +49 69 7431-64355
e-mail: [email protected]
Berlin BranchCharlottenstrasse 33/33a, 10117 Berlin, Germany
Phone +49 30 20264-0
DEG – Deutsche Investitions- und Entwicklungsgesellschaft mbHBelvederestrasse 40, 50933 Köln (Cologne), Germany
Phone +49 221 4986-0, Fax +49 221 4986-290www.deginvest.de
June 2003
