German development cooperation must become more effective and efficient.

German development cooperation is under fire. In setting up the new budget for 2024, the funds available for development cooperation have been reduced by about 700 million Euro compared to 2023. At the same time the public debate on the efficiency and impact of German development aid grows. In his essay, Roger Peltzer makes specific proposals how the effiency of German development aid can be increased and how more market funds outside the budget can be mobilized for development finance purposes.

The BMZ budget for 2024 has been cut by around 700 million euros compared to the budget for 2023. This means painful cuts in many budget items. This is of course the wrong approach. In principle, Germany should not only invest more in development cooperation in order to remain innovative and competitive and to contribute to cohesion in the One World. This would require lifting the debt limit and/or increasing taxes. However, there is currently no majority for this either in parliament or among the population. This is another reason why we need to think about how to get the most out of the available funds and opportunities.

At the same time, there is a growing public debate about the usefulness of German development cooperation. The development policy community would be well advised not to simply dismiss this criticism as statements by individual CDU, FDP or AFD politicians that should not be taken seriously.

The growing skepticism towards established politics is fed by widespread dissatisfaction with how public money is spent. One example of this is the discussion about the budgets of public broadcasters. For a long time, public broadcasters tried to ignore this discussion or responded with rather marginal savings proposals. Now the "Future Council" set up by the Broadcasting Commission of the federal states has formulated very far-reaching proposals for the reform of ARD and ZDF, partly due to increasing public pressure.

This kind of fundamental reform debate is currently affecting many areas of government action: halving the approval times for wind turbines, extensive reform of the public building administration in order to get building applications and new buildings off the ground much faster, etc. Development cooperation must also face up to this discussion on efficiency in order to a) maintain its credibility and b) generate as much benefit as possible for international cooperation from existing resources and structures. There is much to suggest that, while maintaining the benefits for the recipients in the countries of the global South, massive savings can be made in the implementation costs of development cooperation. There is much to suggest that hundreds of millions of euros can be sensibly reallocated or additionally mobilized outside the budget.

What is it about?

1. Mobilization of local resources

The traditional understanding of development cooperation assumes that financial transfers must flow from the North to the Global South. In reality, however, there are often large financial resources available in the Global South that have not been used or have been used far too little for development financing. For example, commercial banks in many African countries have large amounts of unused liquidity. The same applies to pension funds in these countries. In Africa alone, this is likely to amount to several billion euros.

One of the reasons why these funds cannot be used for development financing is that savers in these countries only invest their money in the short term, meaning that it cannot be used to refinance long-term loans. In many cases, local legislation does not allow pension funds to invest 5% or 10% of their assets in start-ups, for example. If this were possible, the lively start-up scene in Kenya or Nigeria could be financed locally to a large extent without having to resort to "development funds" from the West.

If you want to mobilize more local resources, you have to approach the regulation in the respective countries via consulting. But we also need to think much more about partial guarantees or other forms of partial risk assumption (first loss) by donors (development banks) in order to use this lever to mobilize 80% of local resources when using, for example, 20% DC financing. Of course, this local 80% does not contribute to the ODA quota, but this should not be the decisive criterion for meaningful development financing.                                            

2. Combination of market funds with budget financing

For many years, KfW Entwicklungsbank has refinanced its loans for developmentally useful projects not only with budget funds (HA), but also with funds that it raises on the capital market. Through a clever combination with the HA funds used, the funds refinanced via the market can also be largely counted towards the German ODA quota. These market funds used for development loans have exceeded the funds from the BMZ budget for financial cooperation at the KFW for years - in some cases significantly.

The business model of DEG-Deutsche Investitions- und Entwicklungsgesellschaft also follows this logic of using funds from the capital market to finance companies in developing countries, rather than from HA funds. With around 1.5 billion financing commitments per year, DEG plays a much smaller role in development financing than its parent company KfW, but together with its sister organizations from other European countries, it nevertheless plays an important role in enabling investment projects in the Global South.

The financing potential of both KfW Entwicklungsbank and DEG is now being massively restricted by increasingly restrictive regulation. Both are subject to the same degree of supervision by BAFIN (German financial supervisory authority for banks) as commercial banks. This actually makes no sense, as KFW and DEG are supposed to provide financing precisely when commercial banks are not prepared to bear the corresponding risks. However, BAFIN and other regulatory requirements de facto force KfW and DEG to base their investment decisions on the same risk calculations as commercial banks.

The extremely bureaucratic regulation and the associated costs mean that DEG no longer sees itself in a position to finance investments by SMEs in the Global South from its own funds: too risky (according to BAFIN criteria, not actual), too labor-intensive. DEG has also withdrawn from certain forms of agricultural financing. These segments are now covered by the provision of HA funds, e.g. for DEG's Africa Connect program (now Global Connect) or for KfW's AATIF fund (agricultural financing). As these HA funds are not subject to regulation, these instruments can provide cost-effective and flexible financing. This is actually completely absurd: one form of state financing (KfW and DEG are state-owned companies) is only possible with regulation, the other is not.

However, KfW Development Bank is also limited in its options by excessive regulation and requirements from the Minister of Finance. One example: for decades, the expansion and maintenance of the port of Douala in Cameroon was financed by KFW HA loans, which the Cameroonians have all dutifully repaid. Now, understandably, BMZ has other priorities in Cameroon, HA funds could not anymore provided. However, the KFW development bank could of course now step in with market funds for such a long-standing customer with a good credit history. But it cannot do this because the German government does not provide the corresponding guarantee framework. Germany apparantly prefers to leave the field to financiers from the Emirates or China.

It is therefore time to thoroughly rethink and revise the entire regulatory and risk hedging structure of KfW and DEG. A lot can be optimized there without having to increase default risks. Above all, additional funds can be generated for development financing without burdening the budget.

3. The separation of Financial Cooperation (FC) and Technical Cooperation (TC) and GIZ's business model

When comparing the handling of bilateral development cooperation in Germany with that in France, it is particularly striking that Financial and Technical Cooperation are united under one roof in France, namely that of the AFD (Agence Francaise de Developpement). In 2022, the AFD pledged around 12 billion in financing for the Global South. This roughly corresponds to the amount of the BMZ budget (although AFD presumably also uses market funds in a similar way to KfW Development Bank). However, while GIZ and KfW Development Bank together employ around 26,000 people, 25,000 of them at GIZ, AFD manages the same volume with around 5,000 employees.

There are certainly a number of country-specific characteristics that partly explain these differences. However, most of the difference can be explained by the fact that GIZ pursues a business model that is quite unique worldwide. It carries out technical cooperation on its own behalf, i.e. it uses its own staff to implement its projects in the Global South. KfW Development Bank, on the other hand, invites tenders for the implementation of financial cooperation projects, both for the necessary planning services and for the delivery of the "product" (roads, wind turbines, health stations, etc.). In this respect, the construction of a road in a DC is not supervised by a KfW civil engineer, but by a contracted consulting firm.

The reason given for the specific nature of GIZ's business model is that the provision of advisory services, GIZ's core business, is of a different nature than the financing of infrastructure, as provided by KfW Development Bank.

And indeed, GIZ can point out that donors from other countries, large private foundations and even the EU sometimes make use of GIZ's advisory structures to implement their own projects on the ground.

Overall, however, it is certainly the case that a large proportion of GIZ advisors on the ground could easily be replaced by external specialists and, above all, local executing agencies. A comparison with AFD alone shows this. This would be more cost-effective and efficient in many respects. The very specific German constellation of separating Financial and Technical Cooperation must also be fundamentally questioned. This is also problematic, not least because KFW and GIZ work together in many projects, which entails enormous bureaucratic friction losses compared with a solution, where such services are provided out of one hand. It would certainly be interesting to hear representatives of the AfD explaining how the model of providing financial and technical cooperation from a single source works for them.

4. Reducing bureaucracy and streamlining processes

Like almost all other areas of public administration, the administration of development cooperation is characterized by ever-increasing bureaucratization. On the one hand, this is due to constantly increasing regulatory and compliance requirements. However, it is also characterized by ever longer decision-making and coordination processes (with the corresponding number of meetings), the increasing reluctance of responsible persons to make decisions, ever more complex hierarchies and sprawling organizational charts, duplicate structures and duplicate reporting, etc.

There is a massive need for reform here. Many regulations make sense and of course the world cannot be turned back 30 years. However, the systematic question must be asked as to whether each individual project has to satisfy the totality of a large number of development policy objectives, especially since in reality this requirement is often taken into account in the submission of applications and in reporting by means of sophisticated "lyricism" anyway. It must also be asked whether small projects/projects must be assessed according to the same risk and objective grids as, for example, a large hydropower plant.

Decisions can be delegated downwards and the number of people to be involved can be significantly reduced. Delegating tasks to external consultants and committees, especially in the Global South, offers considerable potential for savings and efficiency. The external structures of development cooperation could be significantly streamlined.

Conclusion

In the debate about the current savings in the BMZ budget, one astute observer asked whether any ambassador from a country in the Global South had complained about these savings? This was probably not the case, which of course also says something about the importance attached to German development cooperation in our partner countries. We remember the uproar in France when the Foreign Ministry decided to close the branches of three Goethe Institutes there.

On the other hand, German development cooperation has nothing to hide. The fact that Kenya, Uganda and Morocco now largely obtain their electricity from renewable energies is largely the result of German development cooperation, which was significantly better than the Chinese in this area. If German development cooperation succeeds in using its funds more efficiently and combining aid funds even better with market funds and local resources, then it will be able to assert itself as a global player in the Global South in cooperation with its European partners.