The fall of the Iron Curtain in 1989 triggered a gigantic transformation process in the former Eastern Bloc states at the beginning of the 1990s. Meanwhile, some of these countries have become members of the European Union: the Czech Republic, Slovakia, Poland, Hungary, the Baltic states and Slovenia were part of the EU’s first eastern enlargement in 2004; they were joined by Romania and Bulgaria in 2007. Although there’s a big prosperity gap between these countries and the “old EU”, the situation beyond the EU’s boundaries is much more difficult. The transformation process still hasn’t been concluded in many eastern and southern European countries and in the Caucasus, where the infrastructure is often in a poor state. Whether it’s energy, water supplies, sewage disposal or roads – billions need to be invested. And in some countries there is also legal uncertainty, excessive bureaucracy and corruption. Despite an atmosphere of eagerness and an enterprising spirit, small and medium-sized businesses often experience great difficulty in finding capital.
These are some of the many reasons why KfW Entwicklungsbank (KfW Reconstruction Loan Corporation) is actively involved in 16 European countries on behalf of the Federal Ministry for Economic Cooperation and Development (BMZ). KfW admits that its activities also involve interests of security and foreign policy, as well as climate protection and secure supplies of raw materials and energy. But the overriding aims are the fight against poverty, creating jobs and resolving conflicts. According to the Ministry, “financial cooperation” via KfW Entwicklungsbank is the most significant instrument in German development cooperation when measured in terms of volume. However, KfW doesn’t implement the projects itself, but works with domestic project agencies.
KfW has a variety of instruments at its disposal. In 2007 funding commitments totalled 3 billion euros. Of this, 803 million euros came from grants and 277 million from long-term, low-interest loans. Development loans accounted for a further 579 million euros of the total amount. These loans are used mainly in the more economically strong countries and consist partly of budget funds and partly of money borrowed by the KfW on the capital market. This mixture enables the KfW to offer more favourable interest rates than the normal capital market. Finally, the KfW’s fourth funding instrument consists of the promotional loans introduced in 2003. In 2007 they totalled 1.26 billion euros and accounted for well over a third of the bank’s overall development aid. The KfW Entwicklunsbank provides these promotional loans to projects it considers financially viable. They are provided entirely from the KfW’s own resources and at the bank’s own risk. The purpose of the promotional loans is to act as a bridge between development loans and the open capital market.
One of KfW’s main areas of activity in Europe is the energy sector. “It’s vital for sustainable economic development,” says Kirk Mildner of KfW. He adds that there can be no sustainable development without an efficient energy industry; conditions for foreign direct investment and domestic small and medium-sized businesses would remain bad, as would the living conditions of the general population. Funding focuses primarily on renewable energies and energy efficiency, for instance in the Balkans. 500 million euros in grants and loans have already flowed into the region or been firmly pledged. A further 250 million euros is in the pipeline, says Mr. Mildner.
In addition to cooperating with governments, state utilities or state development banks within the partner countries, there are projects in which KfW provides credit lines to private banks – so that credit can be made available to entrepreneurs, e.g. for energy investments. Projects like these are ongoing in the Balkans, explains Burkhard Hinz, KfW project manager for the region. “Quite a lot of persuasion was needed at first,” he says, “energy was so cheap, it wasn’t worth saving.” But energy prices have also risen in the Balkans in the meantime, and investments to improve energy efficiency have become increasingly worthwhile. Mr. Mildner agrees that KfW Entwicklungsbank’s successes in Europe, especially in the Balkans, are “clearly evident” and gives an account of the hydroelectric power station, where the plant’s life-span has been extended for many years. There’s also a second effect: cross-border cooperation between states.
Beside the Balkans, the Ukraine is also an important partner country. Measures here include the establishment of a large fund issuing loans to small and medium-sized companies. At first, cooperation concentrated on the banking system and small to medium-sized businesses. In the meantime the focus has shifted to energy efficiency. To give just one example, KfW provided a rediscount line to a Ukrainian bank so that it could advance modernization loans to private individuals and entrepreneurs.
