Annex A: Note of visit to KfW, Frankfurt,
27 January 2011
The Chair, Sheryll Murray MP and Dr Alan Whitehead
MP visited the headquarters of KfW in Frankfurt on 27 January
2011. This note summarises points raised by KfW officials, beyond
those already raised in KfW's written evidence to the inquiry.[251]
Members met with the following KfW officials:
- Tatjana Bruns, Vice President
Business Policy (Europe)
- Gudrun Gumb, Vice President Business Policy (Europe)
- Dr Jochen Harnisch, Head of Division, Competence
Centre—Environment & Climate
- Dr Jan Schumacher, Economist, Economic Research
Department
Background
In 2009, KfW had a balance sheet total of €400bn,
second only among 'development banks' to the China Development
Bank (€465bn), and larger than the European Investment Bank
(€362bn).
KfW has subsidiaries responsible for export finance
(KfW IPEX Bank, similar to the UK's ECGD) and finance for companies
in developing countries (DEG, similar to DfID and CDC in the UK).
KfW also has separate divisions focusing on particular sectors
(for example, 'KfW Development Bank' which focuses on international
aid). Its main activity, however, is support for the German economy
through environmental and climate change projects and schemes.
KfW Bankengruppe's business model
KfW Bankengruppe is owned by the Federal Government
and the German states, but is not on the public sector balance
sheet. Public ownership and an explicit government guarantee supports
KfW's 'AAA' credit rating from international rating agencies,
enabling it to raise new funds from the capital markets at beneficial
rates. It is raising €75bn overall in the current year. It
also uses interest received on its loans to the commercial banks,
to support further lending. It does not raise finance from private
individual investors.
KfW Bankengruppe has no branch network of its own,
and does not deal directly with the ultimate borrower for its
domestic business (see figure A1). It lends to commercial banks,
who in turn lend to households, community groups and small businesses
for environmental, climate change and other schemes which meet
the previously Government-approved criteria for loans. The commercial
banks currently make KfW-financed loans of about €24bn to
SMEs; €9bn to larger businesses; €9bn to towns, non-profit
organisations and public bodies; and €16bn to private individuals.
Since 2001, 630,000 loans have been made for housing efficiency
improvement schemes covering 1.8m housing units, both for new
builds and renovations of existing housing stock.
Figure
A1: KfW's lending business model
Source: KfW
KfW Bankengruppe is able to offer loans to the commercial
banks at low rates because of its Government ownership, but these
rates may be further reduced by subsidies from the Government
for particular environmental schemes, such as home energy efficiency
measures (akin potentially to the 'Green Deal' in the UK). In
order to ensure that any interest subsidies reach the final borrower,
KfW set the commercial banks a limit on the margin they are allowed
to charge for covering the risk and handling costs they incur.
This maximum margin differs for particular Government schemes
and according to the type of final-borrower (householders, SMEs,
etc). The commercial banks, rather than KfW, help the final borrower
put together the application for a environmental scheme's finance.
KfW finance is taken up by mainstream commercial banks, but most
is taken by 'promotional banks'—regional banks, 'savings
banks' and co-operative banks—which have more developed
social or environmental aims.
Schemes which attract KfW's beneficial rates tend
to be long-lasting, and with the financial support delivered through
subsidised loans to be repaid over many years, there is
not the greater volatility of grant-based support used
in other countries, which can sometimes only last for a few years
or until the schemes' budget is exhausted. Also, potential beneficiaries
in other countries may have to progress their application for
a scheme without knowing whether all elements of the required
finance (a mixture of loans and grants) will be in place.
The commercial banks, not KfW, decide whether to
lend to a particular final borrower, and carry the loan default
risk. That means that the commercial banks still have to judge
the credit-worthiness of the borrower and assess whether the risk
can be borne within the on-lending margin limit imposed by KfW.
(KfW bear only the risk of the commercial banks defaulting on
their loans from KfW.)
EU state aid rules
Around 2001/2002, the Government gave support to
a number of public sector banks, including KfW. The mainstream
commercial banks objected to what they saw as uneven treatment
and filed a complaint with the European Commission. The Government
then negotiated a memorandum of understanding with the Commission,
setting out what a public sector-backed bank is allowed to do.
The Commission considered that the commercial business of KfW
and other public sector banks had to be separated from the government
supported business. This resulted in KfW creating KfW IPEX Bank,
a separate legal entity licensed as a commercial bank. European
state aid rules continue to apply to all KfW's schemes.
The Government and KfW have to take account of EU
state aid rules whenever KfW is active in countries where Community
law is applicable.
France has had similar discussions with the European
Commission regarding state support for loan schemes delivered
by commercial banks.
Overseas aid through its KfW Development Bank
Division
The KfW Development Bank finances development aid
projects overseas, operating on behalf of the German Government.
KfW overall lent US$4.6bn through the Development Bank (and DEG).
It is one of two vehicles through which the Government delivers
its overseas aid budget. It is responsible for inter-government
financial cooperation and distributes grants and soft loans (with
a proportionately heavier focus on loans than the UK's DfID).
GIZ, the other big German agency in this area, is mainly involved
in providing technical assistance in developing countries. KfW
and GIZ cover a range of sectors, including education, health,
economic and environmental projects. About two-thirds of German
Government overseas aid, however, is through disbursements directly
to multilateral donors (World Bank etc)—a markedly different
mix of bilateral/multilateral aid than in the UK.
KfW introduced a 'climate safe' screening assessment
for its aid projects nearly 2 years ago, which became mandatory
from January 2011. This addresses the environmental/climate change
impacts of projects, including the recipient country's commitment
to such issues.
KfW are given targets for the emissions reduction
impacts of its projects overall—67% reduction in CO2
through energy projects, 28% through forestry projects, etc. (Such
data is used purely to monitor its impact; it is not certified
for international carbon offsetting purposes).
KfW generally achieve about 8 times as much CO2
impact per € overseas than it does through its lending
within Germany, reflecting the existing generally high level energy
efficiency within Germany.
In 2008, KfW provided 14% (US$2.4bn) of global climate
finance, behind only the bank of Japan (36%), and ahead of the
World Bank (11%) and Agence Francais de developpement (10%).
KfW's 'sustainability indicator'
KfW developed a 'sustainability indicator' in 2007.
The indicator was recast and extended in 2010 and uses a wide
range of sub-indicators, some of which are part of the federal
government's sustainable development reporting. The aim of the
indicator is the yearly progress assessment of sustainable development
in Germany. It monitors trends over time in economic, environmental
and social aspects of sustainability.
KfW uses its sustainability indicator in order to
increase public awareness of the importance of sustainability
as a political and economic consideration and as a tool for internal
evaluation of the sustainability of its loan schemes.
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