The Federation of German Industries (BDI) and the CDU parliamentary group are united in calling for German industry to receive more support from the BMZ for its investments in the Global South and for development cooperation to be at least partially tied to deliveries in future. Roger Peltzer evaluates these demands and assesses whether and to what extent the deficits diagnosed by the BDI and CDU actually exist.
In the context of the current discussion about the cuts in the BMZ budget and the positioning of German development cooperation in the increasingly tough international competition, the Federation of German Industries and the CDU parliamentary group in the Bundestag have presented papers with the above-mentioned demands. The Africa Association has already expressed similar views in the past
In particular, it calls for the use of development cooperation funds to promote investments by German companies in the Global South to a greater extent and to limit the associated risks (such as local currency risks) to a greater extent. The CDU parliamentary group is also calling for DEG to provide amounts of less than 750,000 euros as part of its Impact Connect program, which is aimed in particular at financing investments by SMEs in the Global South, which has not been the case to date. DEG should also provide export financing of less than 10 million euros. Innovative German technologies should be promoted as part of development cooperation.
The BDI and CDU papers also include the proposal that German development cooperation should gradually abandon the principle that German development cooperation is not tied to deliveries from German companies. State-owned enterprises, e.g. from China, should generally not be considered as suppliers within the framework of German or EU development cooperation
These demands are justified with the argument that private investment and the mobilization of private capital must play a decisive role in achieving the UN’s Sustainable Development Goals (SDGs) and, in particular, in the global transition to a carbon-neutral economy.
Investment momentum in the Global South is increasingly being driven by local companies.
As correct as this argument is, the conclusion that German investments can play a greater role in the global mobilization of private capital for the financing of SDGs and climate goals is questionable. Their share of private investment in the Global South will remain modest – and this is particularly true for investment in Africa – even with the greatest efforts. If you look at developments in sub-Saharan Africa over the last 30 to 40 years, for example, local sub-Saharan African companies are playing an increasingly important role. This started in the food industry, continued with banks and insurance companies, encompasses the transport sector, cement and pharmaceutical production, but today also includes areas such as large-scale palm oil and rubber plantations, which until recently were dominated exclusively by investors from the old colonial powers. Added to this are the increasing investments from other emerging countries. Anyone who wants to promote private investment in Africa and the Global South will therefore have to focus in particular on supporting local investors.
Nevertheless, German companies can play a role in mobilizing private capital to a limited extent. Are they sufficiently supported in their investments and trade relations with the Global South? I would argue that Germany has one of the most sophisticated foreign trade promotion systems in the world. KfW IPEX Bank finances exports by German companies all over the world and this is often combined with Hermes insurance, which covers economic and political risks for the supplier. If KFW IPEX Bank finds it difficult to finance exports with a value of less than 10 million euros, as the CDU motion suggests, then KFW IPEX Bank should be able to remedy this potential shortcoming relatively easily.
The German government’s capital investment guarantee provides German companies that invest their own capital with one of the world’s most cost-effective instruments for hedging political risks. The EU Commission has also recently launched a guarantee program worth billions, which bilateral development banks can use, for example, to hedge the political risks of their loans to companies. This will also enable more financing in countries with high political risks.
Since 2019, DEG-Deutsche Investitionsgesellschaft has been offering German SMEs loans of up to 5 million euros to finance their investments in the Global South as part of its Impact Connect program (previously Africa Connect) in a fairly streamlined process. The CDU’s demand that Impact Connect should also finance smaller investments of less than 750,000 euros makes little sense. The transaction and processing costs are no longer in proportion to the processing volume. In addition, there are now efficient local banking institutions in almost all countries of the global South and also in Africa (often set up and refinanced with the help of development banks such as DEG), which can also handle much larger loan volumes without any problems. Consideration should be given to introducing “German desks” at local banks in countries where there is greater German investment interest. In Kenya, this is already the case with Equity Bank and Access Bank. These banks would presumably largely finance this themselves. However, it is urgently recommended that Impact Connect is also extended to local investors in the countries of the Global South and not limited to investors from the EU.
There is also the German government’s DeveloPP program, which is managed by DEG and GIZ. Under this program, companies can receive a grant of up to 50% from HA funds to support projects that make sense in terms of development policy. This program has also successfully promoted innovative business concepts and technologies. However, the fact that significantly more than 50% of develoPP projects are now in demand from local investors and not from German companies shows just how much investment dynamics have shifted around the world. Another relatively small but highly efficient programme is DEG Business Support, where DEG subsidizes 50% of the costs of highly specialized consultants for its current and potential customers on all issues of business optimization for their investments in the Global South.
Are there any financing gaps?
Where are there financing gaps? There are now a large number of international funds for mobilizing equity capital for investments in the Global South, which also provide smaller amounts and also finance highly innovative projects. In individual cases, funds from the now well-developed start-up support system in Germany should also be available for this purpose.
However, it is regrettable that DEG has discontinued its “upsclaing program”. As part of this program, innovative SMEs were able to receive repayable grants from DEG, which then opened the door to further financing. As DEG had to structure the program for regulatory reasons in such a way that DEG could not participate in the upsides of successful projects, but on the other hand had to bear all losses, this program was a loss-making business, at least from an economic point of view. On the other hand, over the years it has produced a whole series of developmentally and economically successful lighthouses. However, as it was a manageable “side issue” for DEG, the management probably lacked the will to invest energy in reorganizing this concept in the end. It must also be said that the beneficiaries of this program were again predominantly local entrepreneurs, see above.
As far as the financing of loans in local currencies is concerned, DEG and KFW can offer such local currency loans for an increasing number of countries. The TCX Fund created for this purpose (which also contains BMZ HH funds) is expanding its business volume and is thus also gradually becoming more favorable in terms of interest costs. DEG could possibly also issue even more direct guarantees for local currency loans from local banks to companies in the Global South. In contrast, hedging equity investments against local currency risks makes no sense in my view. Investors must critically examine for themselves whether their companies compensate for local currency risks through exports, for example, or whether possible devaluations can be absorbed by price increases in the local markets. If this is not the case, they should refrain from investing.
It remains fundamentally more difficult to obtain loan financing for so-called “green field projects”, i.e. projects that are being built from scratch on greenfield sites. Financiers know that the risk of failure is relatively high for such projects and require appropriate safeguards. The reluctance to finance primary production in agriculture is even more pronounced. Here there are world market price fluctuations, weather risks, epidemics in animal production, but also changes in state regulation, many of which cannot be insured in the Global South. The KFW development bank has therefore created the AATIF fund, an instrument aimed at financing agricultural projects in Africa. There is a first loss tranche from BMZ-HH funds. But even with AATIF, it is still difficult to finance the actual primary production. Preference is given to financing the first processing stage or the purchase of harvests once they have been produced, so-called trade financing.
Overall, however, it can be said that a smaller or larger German company that needs financing for a well thought-out and well-designed investment in the Global South should have no problem finding funding, provided the sponsor is prepared to put up its own money. Moreover, our comments only focus on financing options in Germany. However, German investors can also easily turn to the development banks of other European countries or local banks, so that they also have a choice when it comes to financing. The AWE program of DEG and GIZ (financed by BMZ) offers German companies comprehensive advice on all financing options in Germany, in the EU or in the target country. The federal enterprise GTAI also provides investors with a wealth of qualified information on practically all target countries in the world.
Does supply commitment in development cooperation help the German economy?
This leaves the proposal of a supply commitment, i.e. the demand that projects financed by development cooperation source their capital goods exclusively or largely from German, or possibly European, companies. This proposal from the BDI and the CDU has a particular flavor, as they generally advocate the free world market without reservation. The widespread feeling is that German companies do not participate sufficiently in deliveries financed by bilateral or multilateral development cooperation. Is that the case? In contrast, a recent GTAI study on the flagship projects of the EU’s Global Gate Way Initiative shows that German companies are significantly involved in the deliveries for the implementation of these projects. A recently published study commissioned by KfW shows that 35% of German FC funds flow into the order books of German companies. My personal experience is also – recently confirmed by the example of an edible oil project in East Africa – that behind a turnkey delivery from an emerging country, in this case India, there is a great deal of German and European technology. In this specific case, 80% of the machine parts (motors, pumps, etc.) come from Germany, Italy, Belgium and Denmark. And in reality, it is often the case that German and, for example, Chinese deliveries go hand in hand. For example, Voith supplied the turbines for Angola’s largest hydropower plant, while the Chinese and Brazilians built the dam. Quite a few Chinese road construction projects in Africa are being supervised by German engineering companies. Innovative German companies are getting the electrification of rural areas in Africa off the ground. They are working with Chinese solar panels and batteries. Do the BDI and CDU want to jeopardize this international division of labour, from which Germany and countries in the global South benefit equally? Tying up supplies would make development cooperation projects more expensive. We would get less impact for the same money. And it would reduce the pressure on German companies to innovate. Conclusion: We need much more private capital for development financing. That is correct. To achieve this, hurdles must be removed in Germany so that KFW and DEG can operate on a much larger scale refinanced via the capital market. This alone would more than compensate for the savings in the BMZ budget. And it is safe to assume that a significant proportion of the deliveries to the Global South induced by additional DEG and KfW financing will end up in the order books of German companies and that this will also open up exciting new investment opportunities for German companies.
Cover picture: Voith hydropower plant in Cambambe, Angola, during rehabilitation work with the aim of significantly increasing output. URL: https://voith.com/corp-en/about-us/markets-locations/africa/voith-hydro-in-africa/cambambe-angola.html
