Development Has Its Price. the Future Depends On

Development has its price.

The future depends on it.

2001 Annual Report on Cooperation with Developing Countries THE KfW GROUP

The KfW Group gives impetus to economic, social and ecological development on a global scale. KfW plays an active role in the business areas of investment finance, export and project finance, Financial Cooperation with developing countries and also advisory and other services. Its subsidiary DEG promotes private sector initiatives in developing and reforming countries.

Investment Finance: With its long-term, low-interest loans, KfW is the partner of small and medium-sized enterprises (SMEs), which are the backbone of the German economy. In this way it stimulates innovations and the equity capital market, pushes environmental protection and encourages the expansion of municipal infrastructure.

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 to make it environmentally compatible.

Environmental Protection: KfW is also a bank that supports environmental protection. Its 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 conservation measures possible.

Corporate Finance in Developing Countries: An important focus is the promotion of the private sector in developing countries. In creating and developing efficient private companies, DEG operates according to principles of private enterprise: the projects have to be economically viable, environmentally friendly and develop- mentally sound. In this DEG assists primarily German SMEs with their process of internationalization.

KfW also puts its banking know-how to use by supporting the federal government in the privatization of state-owned enterprises such as Deutsche Telekom AG and Deutsche Post AG. This is complemented by additional tasks on behalf of the State: among others, contract management for the Federal institute for special tasks related to reunification (Bundesanstalt für vereinigungsbedingte Sonderaufgaben, BvS) and the Compensatory Fund of Securities Trading Companies (Entschädigungseinrichtung der Wertpapierhandelsunternehmen, EdW). OVERVIEW

COMMITMENTS OF THE KfW GROUP (EUR BILLION)* 1999 2000 2001 Promotion of the German and European Economy 41.78 34.68 33.68 Promotion of Developing Countries 1.63 1.45 2.85 (incl. DEG) (3.26) Advisory and Other Services 0.02 0.02 0.03 Total 43.45 36.16 36.56 (incl. DEG) (36.97)

PROMOTION OF DEVELOPING COUNTRIES BY THE KfW GROUP* KEY FIGURES (EUR BILLION)* 1999 2000 2001 Commitments under FC on preferential terms 1.63 0.93 1.30 of which from the federal budget 1.28 0.85 1.03 of which from market funds of composite finance/mixed finance/ Market Fund Initiative Southeast Asia and interest reduction 0.36 0.08 0.28 Commitments for FC promotional loans 0.03 0.12 DEG Commitments (from 2001) (0.34) (0.36) 0.41 Loans to the Poverty Reduction and Growth Facility of the IMF 0.5 1.43 Total Commitments (from 2001 incl. DEG) 1.63 1.45 3.26 Disbursements to developing countries (budget funds and market funds, from 2001 incl. DEG) 1.33 1.22 1.74 Net transfer (disbursements from budget funds minus debt service, from 2001 incl. DEG) 0.38 0.25 0.51

* Sums may not add up to totals due to rounding

DISTRIBUTION OF COMMITMENTS DISTRIBUTION OF COMMITMENTS SOURCE OF THE FUNDS OF THE KfW GROUP BY REGION* OF THE KfW GROUP BY SECTOR* (IN EUR MILLION AND %) (IN EUR MILLION AND %) (IN EUR MILLION AND %)

5% 10% 13% 18% 14% 34% 41% 32% 55% 16% 20%

19% 23%

Region EUR million Sector EUR million Funding source EUR million Asia/Oceania 758 Economic infrastructure 630 KfW’s own funds 1,827 Europe/Caucasus 338 Social infrastructure 416 Budget funds 1,029 Sub-Saharan Africa 294 Financial sector development 364 DEG’s own funds 409 Latin America 259 Production and trade 337 North Africa/Middle East 180 Multi-sectoral projects 82

* without loans to the Poverty Reduction and Growth Facility of the IMF FOREIGN OFFICES OF THE KfW GROUP

Afghanistan: KfW Office Kabul Côte d’Ivoire: KfW Office Abidjan Montenegro: KfW Office Podgorica Director: Martin Jenner Director: Bruno Schoen Director: Dr. Johannes Feist

Belgium: KfW Liaison Office to the EU, Egypt: KfW Office Cairo Nicaragua: KfW Office Managua Brussels Director: Jan Blum Director: Helge Jahn Director: Stephan Sellen Guatemala: KfW Office Guatemala City Palestinian Territories: KfW Office Al Bireh Bolivia: KfW Office La Paz Director: Helge Jahn Director: Reinhard Schmidt Director: Michael Wehinger India: DEG/KfW Office New Delhi Peru: KfW Office Lima Bosnia and Herzegovina: KfW Office Sarajevo Director (KfW): Andrea Johnston Director: Michael Wehinger Director: Frank Bellon Director (DEG): Hans-Georg Hansmann Serbia: KfW Office Belgrade Brazil: KfW Office Brasília Indonesia: DEG/KfW Office Jakarta Director: Marc Engelhardt Director: Dr. Gregor Wolf Director (KfW): Jens Clausen Director (DEG): Dr. Herbert Baumgartner South Africa: DEG/KfW Office Johannesburg Brazil: DEG/KfW Office São Paulo Director: Beate Baethke Director (KfW): Volker Wiederhold Jordan: KfW Office Amman Director (DEG): Thomas Kessler Director: Reinhard Schmidt Tanzania: KfW Office Dar es Salaam Director: Oskar von Maltzan Cambodia: KfW Office Phnom Penh Kenya: KfW Office Nairobi Director: Dr. Klaus Müller Director: Andreas Holtkotte Thailand: KfW/DEG Office Bangkok Director (KfW): Andreas Klocke China: DEG/KfW Office Beijing Kosovo: KfW Office Pristina Director (DEG): Herbert Jäger Director (KfW): Dr. Karl-Joachim Trede Director: Dr. Johannes Feist Director (DEG): Markus tho Pesch Vietnam: KfW Office Hanoi Director: Dr. Klaus Müller

Telephone numbers, postal addresses and e-mail addresses can be found under:

www.deginvest.de/german/home/Service/Kontakt/Aussenbueros/index.html www.kfw.de/de/entwicklungszusammenarbeit/kontakt30/auslandsbr.jsp

FOREIGN OFFICES OF KfW

Sarajevo Belgrade Podgorica ̆̆ Beijing Pristina Al Bireh Kabul ̆ Amman Cairo New Delhi Hanoi

Guatemala ̆Managua Bangkok ̆ City Phnom Penh

Abidjan Nairobi Dar es Salaam Limă Jakarta La Paz Brasília

São Paulo Johannesburg

Main office Branch TABLE OF CONTENTS

Preface 3 1. Overview 4 2. Activities of the KfW Group 6 Activities in Figures 6 Supplementing Public Funds 9 National and International Cooperation 10 Main Themes in 2001 12 Text Contribution by the Aga Khan Foundation 14

Infrastructure, the Basis for Sustainable Development 15 3. Infrastructure to Reduce Poverty 15 Involving the Population 25 Infrastructure for the Environment 26 Seizing the Opportunities of the Private Sector 30 Infrastructure Helps to Close the Digital Divide 33 Project Examples: Bangladesh: Passable Roads to the Markets in Tangail 17 Brazil: Better Quality of Life and Higher Standard of Living through Electricity 18 Zambia: Clean Water in the Long Term through Participation 18 Mali: Fund for Self-Help – Development from People’s Own Strength 19 Guatemala: Education for the Poor 21 Jordan: Infrastructure for the Poor 22 China: Clean Water for the City of Qingdao 23 Nepal/Pakistan: Environmentally and Socially Compatible Construction of Hydropower Plants 24 Turkey: Decentralized Energy Supply with Wind Power 27 Egypt: Boosting the Economy with Wind Energy 27 South Africa: Private Sector Support for the Health Sector 28 Africa: Mobile Telephony – Communication as a Prerequisite for Development 28 Montenegro: Clean Water Supports Development 29 Mongolia: Economic Upswing through Telecommunication 32

4. Regional Perspectives 33 The Situation of the Developing Countries and the Transition Countries 33 Regional Development Asia 36 Country Example: Vietnam 38 Regional Development Sub-Saharan Africa 42 Country Example: Uganda 44 Regional Development Latin America 48 Regional Development North Africa and the Middle East 51 Country Example: Morocco 53 Regional Development European Transition Countries 57

Statistical Appendix 60

PREFACE

We are pleased to present the first joint report by DEG and KfW on their work to promote the developing and transition countries. It is a clear expression of the synergies that have been tapped in the past months and the growing interrelation between the instruments of both institutions.

The main theme selected for this report – infrastructure – illustrates how the experiences and capabilities of each institution complement those of the other. Apart from the utilization of funds from the German Federal Ministry for Economic Cooperation and Develop- ment (BMZ) KfW and DEG contribute a considerable volume of own funds for their development-policy mandates and for the achievement of the federal government’s goals in the field of development policy. In doing so KfW concentrates on supporting sector reforms and on establishing market-economy relations. DEG promotes the private sector primarily in places where the risks for commercial banks are still Wolfgang Kroh too high and long-term financing for investments is not sufficiently (Member of the Board of available. Managing Directors of KfW)

The deciding factors for focusing the 2001 Annual Report on the topic of infrastructure were the following basic considerations that are discussed in more detail in the third chapter.

• Infrastructure exploits economic potential and is a prerequisite for alleviating poverty in developing countries. It enhances their productivity and competitiveness and serves as a basis for their successful inclusion in the international division of labor.

• Financing for infrastructure is an essential driving force that urges the governments of partner countries to implement difficult reforms and encourages them to allow the population to participate more intensively in the political decision-making process. Dr. Winfried Polte • The promotion of the countries’ productivity and in particular the (Chairman of the Board of development of disadvantaged regions, both of which are Management of DEG) brought about by improved infrastructure, open up development opportunities that contribute to diminishing the potential for conflict and thus also to discouraging conditions favorable for terrorist groups.

For the first time we are including a contribution by a cooperating financing institution from a developing country in this year’s report. The Agha Khan Foundation underscores the importance of infrastructure and describes some development approaches. These approaches complement not only Financial Cooperation but also the concept of the contribution of own funds by KfW and DEG. Infra- structure is not a sufficient precondition but it is a necessary precondition for development and for poverty alleviation.

3 1. OVERVIEW

EUR 1,302 million (EUR 927 million). Additionally, EUR 116 million (EUR 30 million) in FC promotional loans was granted that did not include any public funds. With EUR 412 million (EUR 360 million) DEG undertook a record volume of new commitments in its almost 40-year business history.

EFFECTS INFLUENCING REGIONAL DISTRIBUTION

Last year 41% (25%) of the KfW Group’s commitments in the field of development cooperation went to Asia. The Timely participation of the population ensures the long-term success of a crucial factor behind this rise was the renewed, significant project. increase in KfW’s commitments in 2001, which accounted for 47%. 19% of the commitments of the KfW Group went to OBJECTIVE European countries and 16% to sub-Saharan Africa. DEG’s financing commitments to sub-Saharan Africa in 2001 The broad objective of the development-policy tasks of reached EUR 90.5 million, an all-time high. The regional dis- KfW and DEG is to improve the economic and social condi- tribution of the remaining commitments of the KfW Group tions of people in developing countries. In this way both in- includes North Africa/Middle East with a 10% share and stitutions contribute to reducing poverty, protecting natural Latin America with a 14% share. resources and securing peace worldwide. ENERGY AND TRANSPORT DOMINATE On June 19, 2001 DEG was integrated into the KfW NEW COMMITMENTS Group as a subsidiary. This enables the promotional instruments applied by the two institutions in the field of devel- The high volume of KfW’s commitments in the Asian opment policy to be coordinated even better. Owing to its region in the year 2001 had a considerable effect on the concentration on the promotion of the private sector in de- sectoral structure of the new commitments. 40 percent veloping and transition countries DEG adds to KfW’s range of financed economic infrastructure (20%), 29% social infra- development-policy instruments. structure (50%), 17% the financial sector (15%) and 10% forestry and agriculture (5%). DEG’s new commitments in RISE IN COMMITMENTS 2001 focused above all – with 43% – on the manufacturing industry (25%). Of these commitments, 32% were for finan- Last year KfW and DEG committed a total of EUR 3.3 cial sector development (52%), 17% for infrastructure proj- billion (prior year: EUR 1.8 billion) in financing for develop- ects (11%) and 5% for the agricultural sector (7%). ing countries. The share contributed by KfW was EUR 2.8 billion (EUR 1.5 billion). The substantial increase over the prior RISE IN DISBURSEMENTS year is due primarily to another KfW loan amounting to EUR 1,430 million (EUR 495 million) to the Poverty Reduction and KfW and DEG spent a total of EUR 1.7 billion (EUR 1.5 Growth Facility administered by the International Monetary billion) on development cooperation projects. Taking the in- Fund (IMF). The commitments made on the basis of budget terest and redemption payments into account, the net out- funds from the German Federal Ministry for Economic Coop- flow from the federal budget through FC in 2001 amounted eration and Development (BMZ) grew in 2001 to reach EUR to EUR 506 million (EUR 247 million). The disbursements by 1,026 million (EUR 851 million). In ten projects KfW added DEG added up to EUR 244 million (EUR 277 million). own funds of EUR 276 million (EUR 76 million) to BMZ budget funds, causing concessionary commitments to rise to

4 Infrastructure is the key to developing economic opportunities.

EXPANSION OF INNOVATIVE INSTRUMENTS assigned such mandates totalling EUR 139 million (EUR 40 million). In connection with its mandate to carry out the The FC promotional loan offered by KfW since the year TRANSFORM Programme on behalf of the German federal 2000 primarily to advanced developing countries was well- government KfW spent EUR 23 million (EUR 22 million) in received. In 2001 more than EUR 116 million was committed. favor of Central and Eastern European countries. These funds were used, for example, to grant SME credit lines to reinforce the SME economy in Mexico, refinancing lines to ENVIRONMENTAL PROTECTION AND RESOURCE finance infrastructure in India and promotional loans to CONSERVATION REMAIN KEY CROSS-GOAL microfinance banks in Albania and Georgia. In the past year developing countries received EUR 436 In 2001 DEG provided EUR 66 million for equity million in FC loans at special conditions for projects specifi- financing. The loan commitments amounted to EUR 346 mil- cally targeting environmental protection and resource con- lion, of which EUR 27 million were granted in the form of a servation (33% of commitments). For a further 21% of the quasi-equity loan. As a result the use of venture capital in commitments, protecting the environment and natural re- the form of equity investments and mezzanine financing sources was an explicit secondary aim. added up to a total of EUR 93 million, or 23%. ENHANCING DEVELOPMENT POTENTIAL COOPERATION AND MANDATES THROUGH INFRASTRUCTURE FINANCE GAINING IMPORTANCE An infrastructure that functions is an essential pre- In a number of cooperative projects and partnerships requisite for satisfying basic needs such as clean drinking the KfW Group is combining its competence with the specif- water or schooling and for effectively combating poverty. ic strengths of other national and international institutions. Building up and expanding the infrastructure opens up addi- These cases of cooperation make it easier to combine the tional perspectives for economic development and for the funds and to concentrate on selected priorities. creation of income and jobs. Without adequate transport connections or electric power, existing economic opportuni- In addition to co-financing and joint projects with ties cannot be exploited. other donors KfW is assuming the implementing tasks connected with the provision of the funds on behalf of other donors more and more often (mandates). In 2001 KfW was

5 2. ACTIVITIES OF THE KfW GROUP

Activities in Figures

The acquisition of DEG enables KfW to offer its part- (IMF). These funds are spent on the implementation of pro- ners in the developing countries an even broader scope of grammes that reduce poverty and encourage growth in poor services. It now begins with equity investments and ranges and heavily indebted developing countries. from loans at market conditions to low-interest, long-term loans and grants and related planning and advisory meas- The commitments made under Financial Cooperation ures. Within the KfW Group these instruments can now be on the basis of budget funds from the Federal Ministry for coordinated more efficiently and correlated more closely. Economic Cooperation and Development (BMZ) grew in 2001 DEG will continue to center its activities on the promotion of to reach EUR 1,026 million (EUR 851 million). Nearly 50% of the private sector in developing countries while KfW focuses these budget funds were extended as non-repayable grants on projects in the public sector and with public institutions. and slightly more than 50% as low-interest, long-term loans. For ten projects KfW supplemented the BMZ budget funds RISE IN COMMITMENTS with own funds. This enabled the bank to mobilize an additional EUR 276 million (EUR 76 million) for the promotion of Last year the KfW Group committed roughly EUR 3.3 developing countries so that a total of EUR 1,302 million billion (previous year: EUR 1.8 billion) in funds to partner (EUR 927 million) in FC commitments could be offered at countries. KfW’s share of this amount was EUR 2.8 billion ODA conditions. With commitments of EUR 116 million (EUR (EUR 1.5 billion) and DEG’s share amounted to EUR 412 mil- 30 million) the volume of FC promotional loans increased lion (EUR 360 million). The increase over the previous year substantially in the year 2001. The instrument of the FC pro- can be traced back primarily to stronger support for the HIPC motional loan, introduced in 2000, makes it possible to (Heavily Indebted Poor Countries) debt relief initiative in the extend loans at market conditions for projects that have form of another loan amounting to EUR 1.43 billion (EUR development-policy objectives without recourse to public 495 million) extended to the Poverty Reduction and Growth funds. Facility administered by the International Monetary Fund

COMMITMENTS OF THE KfW GROUP FOR THE PROMOTION OF DEVELOPING COUNTRIES 1997–2001 (COMMITMENTS IN EUR MILLION) 1997 1998 1999 2000 2001 Commitments under FC at preferential terms 1,737 1,390 1,634 927 1,302 from budget funds 1,475 1,357 1,278 851 1,026 from market funds of composite finance/mixed finance/Initiative Southeast Asia and interest reduction 262 33 356 76 276 FC promotional loans 30 116 Loans to the Poverty Reduction 495 1,430 and Growth Facility Commitments of DEG 369 358 343 360 412 of which equity investments 47 50 38 71 66 of which loans 322 308 305 289 346 Total commitments 2,106 1,748 1,977 1,812 3,260 Note: mandates, including 33 35 38 62 162 TRANSFORM Programme

6 With a 14% increase to EUR 412 million (EUR 360 mil- record high in its support for sub-Saharan Africa. KfW’s 13% lion) DEG made a record volume of new commitments in its (28%) share of commitments for North Africa/the Middle almost 40-year business history. In the year under review East and 8% (14%) share for Latin America shifted compared DEG provided EUR 66 million for equity financing. The share with the year before as a result of this effect. In contrast, provided for loans and guarantees amounted to EUR 346 Latin America was DEG’s main project region in 2001, million, of which EUR 27 million was for quasi-equity loans. receiving 36% (25%) of the fund commitments. In 2001 As a result the use of venture capital in the form of equity there were no new commitments by DEG in North Africa and investments and mezzanine financing added up to a total of the Middle East. Europe’s share of the total commitments EUR 93 million. DEG financed this new business with EUR rose again to 19% (17%). This increase can be traced back to 409 million (99.3%) through own funds and capital market the increase in activities by the German federal government funds (own business) and EUR 3 million (0.7%) through funds in the Balkans and in the Caucasus. held in trust for the federal government. ENERGY AND TRANSPORT DOMINATE BACKLOG EFFECTS INFLUENCED NEW COMMITMENTS REGIONAL DISTRIBUTION The new regional breakdown of KfW’s commitments in In 2001 approximately 41% (25%) of the commitments the year under review 2001 had a significant effect on the of the KfW Group were for Asia. A major contributing factor sectoral breakdown of the new commitments. The volume of was the high level of commitments of KfW, which accounted commitments for the expansion of the economic infrastruc- for 47% (24%). This was due to the fact that several project- ture, particularly in the areas of energy and transport, rose to executing agencies did not sign the contracts for their proj- 40% (previous year 19%). The main reason for this increase ects, which had already been prepared in the year 2000, until was a backlog of commitments in the energy and transport 2001. One consequence of this backlog effect is that a share sectors in Asian countries that were not posted in the same of only 16% of the Group’s commitments is stated as being year they were agreed. The share of social infrastructure in for sub-Saharan Africa in spite of their increase from the fields of water supply, sewage disposal, education and EUR 243 million to EUR 294 million. With EUR 90.5 million, health care shifted accordingly to 29% (51%), with a multi- or 22% (15%) of its total commitments, DEG reached a annual average of 34%. The share of commitments flowing

EUR million EUR million 800 700 700 600 600 500 500 400 400 300 300 200 200 100 100 0

0 e Social Other e/ / rica Producing Economic Asia/ us industry Europ Africa Financial sector Oceania aucas infrastructure infrastructur Sub-Saharan C Latin Ame North Africa Middle East KfW DEG DEG KfW KfW Group KfW Group

7 Activities in Figures

RISE IN DISBURSEMENTS

In the year under review KfW and DEG disbursed funds in the amount of EUR 1.7 billion (EUR 1.5 billion) for development cooperation projects. Taking the interest and redemption payments into account, the net outflow from the federal budget through FC in 2001 amounted to EUR 506 million (EUR 247 million). The disbursements of DEG that were included in the group’s figures totaled EUR 244 million (EUR 277 million) in 2001. Of this amount operations financed from its own funds accounted for EUR 237 million.

Again KfW disbursed over one-third of the funds for local services in the partner countries. In this way positive income and employment effects were generated in the partner countries through the performance of services on-site. Last year as well the German economy was competitive when it came to supplies and services for which there were international public invitations to tender. Around 45% (50%) of The orthopaedic ward of the Indira Gandhi Hospital in Kabul is supported the disbursements for supplies and services attributable to by emergency measures of FC. countries of origin in the year 2001 flowed to German enterprises. The mechanical engineering industry (28%), consult- to the financial sector increased slightly to 16% (15%) of the ing services (20%), the construction industry (19%) and the fund volume primarily due to the FC promotional loans. electronics industry (14%) profited in particular from the Although the commitments for the producing sector doubled disbursements in foreign currency. over the previous year by 5% to attain 10%, they matched the multiannual average of 7%. Five percent (10%) of the DEBT CONSOLIDATION AND DEBT CONVERSION commitments were for multi-sectoral projects. To help relieve its partner countries of their debt bur- DEG’s new business focused to 43% on the manufac- den KfW concluded debt consolidation agreements with turing industry, much more so than in the previous year Bosnia and Herzegovina, Ecuador, Gabon, Kenya, Macedonia, (25%). Preferably investment projects in the food, building Pakistan and Syria in 2001 for a total of EUR 351 million. materials, mechanical engineering and metal industries were financed. A share of 32% (52%) went to financial sector Last year the federal government provided a fund vol- development. These funds included financing for commercial ume of EUR 244 million for debt conversions. In exchange for banks in structurally disadvantaged regions, loan pro- the adoption of the redemption obligation these funds can grammes for energy projects and education, equity partici- be utilized in the debtor country for poverty reduction, envi- pation funds and leasing companies as well as the promotion ronmental conservation, education and vocational training of microfinance institutions. In total 17% (11%) of the new projects. On this basis KfW concluded corresponding agree- commitments were provided for infrastructure projects. The ments in the amount of some EUR 50 million each in the year agricultural sector received a share of 5% (7%). Altogether 2001. Altogether these agreements add up to EUR 385 mil- 3% (5%) of the funds were committed for projects in the lion. Of this amount, EUR 187 million was finally authorized, areas of tourism, other services and mining. of which EUR 35 million in 2001.

8 Supplementing Public Funds

Branch office of the Micro Finance Bank, Serbia. Strengthening national financial markets facilitates independent development.

At the turn of the millennium the international donor The instrument of interest reduction was introduced in community set as a world development goal the halving of the year 2001. It complements the instruments of composite the world’s poor population by the year 2015. The German and mixed financing already being applied for many years. federal government pledged to work towards this aim, Under this mechanism the entire loan is provided via market among others, in its “Action Programme 2015”. Considerable funds, and the funds from the BMZ are only used to reduce efforts and additional private resources are required to the annual interest burden. These loans also fulfil the implement the world development goals. KfW is playing a requirements for official development assistance (ODA). progressively greater role in mobilizing these additional resources. Experience shows, however, that adding market funds is far from sufficient to meet the developing countries’ INNOVATIVE MARKET-FUNDED financing needs. Against this background KfW has been FINANCING INSTRUMENTS offering FC promotional loans, which are fully financed by the bank’s own funds, for development-policy projects since In order to utilize the federal budget funds as effec- the year 2000. This is a promising new approach via which tively as possible KfW is observing the principle of structur- KfW is offering, for example, credit lines for small and ing its financing in such a way that it is as close to market medium-sized enterprises (SMEs) in Mexico, refinancing lines conditions as possible and as concessionary as necessary. to support the infrastructure in India and FC promotional Depending on the projects’ profitability and the status of loans to microfinance banks in Albania and Georgia. Overall development and debt capacity of the country in question, more than EUR 116 million was committed in 2001 (2000: capital market funds can be added to the budget funds from EUR 30 million) the federal government, which have highly favourable terms and conditions. The addition of market funds is frequently possible for investments in infrastructure and projects in the financial sector in advanced developing countries. This scheme offers advantages, not only for the economically stronger partner countries but also for the poorest countries since more projects can be financed with the same volume of government funds.

9 National and International Cooperation

In order to implement the broad development-policy serve to incorporate national measures into the contribu- goal of poverty reduction the resources of developed and tions by the international donor community. Also, GTZ and developing countries need to be coordinated. For this pur- KfW cultivate intensive technical cooperation across project pose numerous donors are adjusting their procedural boundaries and carry out numerous cooperative projects requirements to the recipient countries and agreeing on an (end of 2001: 236 ongoing projects in 69 countries). international division of work. Additional cooperative and co-financing projects are PROMOTING DEVELOPMENT currently being carried out together with 72 organizations THROUGH COOPERATION ranging from large multilateral development banks to a large number of NGOs. These include church charities such as Mis- In a number of cooperative projects, co-financings and ereor and foundations such as the Agha Khan Foundation. partnerships, KfW and DEG are combining their competence with the specific strengths of other financing institutions. Apart from the co-financing of joint projects with These include, among others, the World Bank Group, Agence other donors KfW is arranging the financing for development Française de Développement (AFD), the European Union (EU) projects on behalf of other donors more and more often and in particular the German Agency for Technical Coopera- (mandates). In 2001 KfW was assigned new mandates cover- tion (GTZ). ing EUR 139 million (EUR 40 million). In addition to various German ministries, the EU, the World Bank, and the Global The main aim of GTZ is to improve the capabilities and Environment Facility (GEF), other European governments have performance of people and organisations in developing also given KfW mandates. On their behalf KfW is now han- countries. To this end GTZ provides governmental and non- dling projects far away from the Balkans in Asia and Africa. In governmental partner organisations with technical knowl- connection with its mandate to carry out the TRANSFORM edge as well as organisational, methodical and economic Programme on behalf of the federal government KfW spent skills. The measures being applied to accomplish this vary an additional EUR 23 million (EUR 22 million) to the benefit greatly and range from advising government agencies and of Central and Eastern European countries. reinforcing economic associations to emergency aid measures in areas of conflict. On the international level DEG cooperates closely with other national development financing institutions in the The competences of GTZ and KfW complement one European Union (EU) and with the European Investment another and together both institutions support the BMZ. Bank (EIB). A lively exchange of experience and transfer of They place special emphasis on the development and appli- expertise is taking place across all investment-related areas cation of country concepts and priority strategies that also under the organisational umbrella of EDFI, the European

OVERVIEW OF THE MAIN CO-FINANCING INSTITUTIONS International Number of FC funds Common institution ongoing co-financing in EUR million financing volume projects in EUR million World Bank 65 514 3,158 European Investment Bank 17 245 501 Asian Development Bank 5 89 494 European Union 19 167 364 Japan Bank for International Cooperation 4 71 310 Agence Française de Développement 10 92 225

10 Development Finance Institutions for the promotion of the Untying the development support enables the partner private sector. In many cases the cooperation has led to joint countries to fully exploit the advantages of the international project financings. There is also comparable, intensive con- tender. The German economy will profit from the broader tact with the International Finance Corporation (IFC), part of competition, brought about in part by other institutions. the World Bank Group. KfW GROUP USES SYNERGY EFFECTS AT ITS UNTYING OF DEVELOPMENT SUPPORT AGREED FOREIGN OFFICES IN THE PARTNER COUNTRIES FOR LDCS Since 1994 and 1998, respectively, KfW and DEG have After three years of negotiations the Development been building up a network of foreign offices in their main Assistance Committee (DAC) of the Organization for Eco- partner countries in order to enhance their effectiveness nomic Cooperation and Development (OECD) generally rec- locally. For DEG the foreign offices play a vital role in the ommended to stop offering tied development support under intensification of local acquisition efforts within the frame- FC with Least Developed Countries (LDC) in the future. Since work of its established process organization. Each institu- the beginning of this year German FC contracts for supplies tion’s local representation increases as a result of their joint and services in the LDCs are being categorically put to ten- use of these offices. Group-wide joint offices were also der in the LDCs as untied contracts. Only under special cir- founded together with the GTZ in particular. The KfW Group cumstances can the requirement for an international tender now has 24 local offices in developing countries. be circumvented for contracts with a volume of less than 700,000 Special Drawing Rights (SDRs).

PROGRAMME-ORIENTED DEVELOPMENT COOPERATION

Development Cooperation (DC) is rendered more effective if the individual donors do not take isolated action but instead join efforts to apply the development-policy strategy of the partner country together. In doing so the governments work out their own development strategies, which strengthens the responsibility of the partner country for the success of the programme and leads to a substantial reduction in the coordination efforts that are required. However, the administrative and technical capabilities of the recipient have to be sufficient to guarantee that the funds are utilized properly, since the donors refrain from being closely involved in the application of the measures and their financial processing. KfW gained initial experience with programme-oriented cooperation organized in this way in Tanzania. There Germany, together with six other bilateral donors and the World Bank, is supporting an extensive reform programme which is meant to improve health care for the population. Since 1999 individual donors have been paying financial contributions into a financing pot that the Tanzanian government administers itself. These funds are used to finance and exe- cute activities, such as AIDS prevention, that are defined beforehand in the form of a “master plan”. The participation of German FC in other sector programmes in several countries in Africa is under preparation. In order to better assess the possibilities for organizing programmes and the risks for German FC, KfW is planning on conducting a number of country studies. Ultimately the programme approaches enable the governments of the partner countries to assume considerably more responsibility for the proper use of the funds. Risks arise for the partner countries primarily from a weak institutional framework, poor transparency and insufficient internal controls of the use of the funds. The comprehensive results of the studies are then elaborated for practical application in FC according to area of operation. Additionally, in connection with the donor networks Sector Wide Approaches (SWAp) - Learning Network and Strategic Partnership with Africa (SPA) KfW continues to be actively involved in the international discussions on concepts for programme-oriented cooperation.

11 Main Themes in 2001

CONTRIBUTIONS TO COMBATING TERRORISM AND PREVENTING CRISES

The attacks in New York and Washington on Septem- ber 11, 2001 have to be considered in the broader context of global political and societal development. Developmental FC supports Georgia in conserving mountain forests and their biodiversity. deficits, poverty and the related lack of perspective of large parts of the population are important if not the sole influencing factors of a social environment in which terrorism can DEG’s environmental activities are bound by its busi- flourish. ness-policy goal of having to co-finance projects that not only are profitable and make developmental sense but are It is indisputable that poverty is a breeding ground for also socially and environmentally compatible. As does KfW in growing radicalization trends in many regions. Poverty-ori- FC, DEG conducts an environmental impact assessment for ented development policy makes a vital contribution to con- every financing project. Since 2001 social guidelines have taining these radical trends by relieving the distress of a large also applied which encompass all major aspects of social number of people and giving them a new perspective. Our compatibility and refer in part to the core labour standards measures carried out under the Stability Pact for Southeast- of the International Labour Organisation (ILO). ern Europe illustrate this well. Their success resulted largely from the fact that the efforts we undertook within the GREATER COMMITMENT TO FIGHTING AIDS framework of the Stability Pact were able to noticeably improve the living conditions of the people there. The spread of HIV/AIDS has since become one of the most critical obstacles to development in the countries of INTERNATIONAL COMMITMENT TO sub-Saharan Africa in particular. Nearly one-tenth of the ENVIRONMENTAL AND CLIMATE PROTECTION adult population in this region is infected with the HIV virus. In some countries the infection rate exceeds 25%. The World Environmental and climate protection continues to be Bank is anticipating the life expectancy in countries severely a priority of German Development Cooperation. Prior to the affected by AIDS to drop from 64 to 47 years during the next Earth Summit in Rio de Janeiro in 1992 KfW had already decade. begun its continual expansion of the promotion of environmental, resource and climate protection under FC. Sewage The discussion that took place mostly in 2001 on disposal that is environmentally compatible as well as sus- financing drug treatment must not detract attention from tained water and energy supply are key environmental prior- the fact that preventing HIV infection is and always will be ities of KfW’s promotional activities in developing and tran- the most effective weapon in the fight against AIDS. There- sition countries. Additionally, a broad spectrum of support fore, a key aspect of the FC strategy is support for broad- measures is financed which play a role in environmentally scale awareness and information campaigns aimed at chang- benign waste management, help preserve the biodiversity, ing behaviour. Another important aspect is broad combat desertification - among others through erosion con- distribution of high-quality condoms at affordable prices via trol, and support the sustainable use of forests. In the past the formal and informal private sector (e.g. wholesalers, year projects focusing specifically on environmental protec- pharmacies, kiosks). In the past year alone EUR 39 million tion and resource conservation in developing countries were was provided as new commitments in the fight against AIDS funded with EUR 436 million (33% of the commitments at (in 2000: EUR 33 million). special conditions). A further 21% of the commitments went to projects for which environmental and resource protection was a secondary aim.

12 REINFORCEMENT OF THE PRIVATE SECTOR Since 1999 DEG has realized nearly 180 PPP projects, IN OUR PARTNER COUNTRIES cooperating mainly with small and medium-sized enterprises. Last year 54 PPP projects were awarded financing At the UN conference “Financing for Development” commitments totalling EUR 8.1 million. A further EUR 17 held in March 2002 in Mexico the special significance of the million was provided by private enterprises in the form of private sector for the financing of the development process counterpart contributions. Through its 35 public-private was underscored. The KfW Group plays a particular role in partnership (PPP) projects with their current FC volume of strengthening this sector – DEG directly through its support EUR 802 million KfW is also taking part in this development. for the private sector and KfW indirectly in FC through the improvement of the overall conditions. EXPANDED COMMITMENT TO PREVENT CORRUPTION On behalf of the Federal Ministry for Economic Coop- eration and Development (BMZ) DEG offers a special Business Corruption, arising worldwide to varying degrees, is a Start-up Programme for qualified experts from developing serious problem for development cooperation as well, since it countries who have been trained or educated in Germany can substantially minimize development-policy work and and want to return to their home country. Returnees are effects. Consequently, KfW has reinforced its corruption pre- given access to loans in line with market conditions, making vention measures. Since October 2001 explicit anti-corrup- it easier for them to build up an independent livelihood in tion clauses are an integral part of all new FC loan and their homeland. To this end revolving credit funds have been financing agreements. Moreover, declarations of undertaking established since the mid-1970s at partner banks in eleven are prescribed for participants in all tenders financed countries. These funds are financed through contributions through FC. These measures, which are meant to heighten from the German national budget, which are usually the awareness of our partners even more and to make it eas- matched by a contribution from the government of the ier to take legal steps in a dispute, enable KfW to expand its respective partner country. In addition to financing the bor- provisions to combat corruption. rowers are also provided with technical and organizational advice in the start-up process. Thus far the credit funds have DEG is in close contact with its partner institutions in been equipped with a total fund volume of EUR 373.6 mil- Europe and with the IFC to implement a uniform stance lion (of which EUR 191.4 million in German contributions towards customers and partners. Since 1999 codes of con- and EUR 182.2 million in local contributions). These funds duct drawn up especially for DEG have been in effect; these were used to grant EUR 289.5 million in loans for invest- codes are supplemented by the codes of conduct of the ments, with which some 73,400 jobs were created in total. International Chamber of Commerce (ICC) for combating corruption in business transactions. Along with this DEG has Under the Public-Private Partnership Programme introduced the anti-corruption aspect into its appraisal plans financed by the BMZ German companies receive additional for new business and project support and also appointed an financing if their investments contribute appreciably to the ombudsman to provide advice and assistance to staff mem- achievement of development-policy objectives above and bers on the topic of corruption and how to prevent it. beyond their own business targets. DEG makes use of the PPP funds to support preparatory and complementary investment measures, e.g. for environmental protection and training. Through two other PPP facilities KfW assumes part of the risk – under certain conditions – of the private companies involved in the preparation of infrastructure projects. The facilities, sponsored in part by budget funds, are meant to encourage the private sector to participate in develop- mentally sound projects.

13 Text Contribution by the Aga Khan Foundation

FROM INFRASTRUCTURE TO CULTURE: AN INTEGRATED APPROACH TO DEVELOPMENT

BY MR. NAUSHAD PADAMSEE, DEVELOPMENT CREDIT BANK LTD. (DCB) AND SAM PICKENS, AGA KHAN DEVELOPMENT NETWORK

The importance of infrastructure development and Translating that energy into economic momentum is at investment is no more apparent than in Afghanistan. Like the centre of AKDN’s work. An infrastructure project, many countries in the developing world, the country’s needs whether it is a hydroelectric power utility in the Pamir range across the spectrum, from roads to telecommunica- Mountains of Tajikistan, a bank in the Kyrgyz Republic or a tions, to schools, water supply, sewage disposal, waste man- water project in East Africa, works as a catalyst for sustained agement, energy, transport and housing. The peace and sta- economic growth within the overall context of social devel- bility of the country, and by extension the region and the opment. world, depends on the ability of the Afghan people, with the help of the international community, to meet these many These sorts of investments have a greater and greater needs. impact when governments open their economies to the private sector. A very hopeful sign is that legislative and fiscal But how is this to be done - in Afghanistan and else- structures more favourable to private sector development where? The Aga Khan Development Network (AKDN) and its are being put into place in a number of developing world affiliates, notably FOCUS, have been working since 1996 to countries, allowing the inflow of capital resources and address these needs by combining humanitarian assistance expertise needed to stimulate those economies. It should be with an infrastructure rehabilitation programme. AKDN takes noted that KfW - Banking Group has made significant con- an integrated approach, linking elements such as rural sav- tributions to these initial efforts and works to encourage the ings and credit, natural resource management, infrastructure structural and financial contributions to development made development, increased agricultural productivity, cultural by partner countries. preservation and human skills development. The ultimate goal is to enable community members to choose from a Afghanistan needs the same sort of broad develop- range of appropriate options for sustainable and equitable ment effort that not only addresses the immediate humani- development. This grass-roots, community-based develop- tarian needs, but also builds for the future through pro- ment model has been replicated successfully in many places. grammes that take into account the social, economic and The origin of the Development Credit Bank in Mumbai, India, cultural context. Financing of infrastructure in this context is for example, is in village credit co-operatives started after of utmost importance for future social and economic devel- Indian independence. In those days, as today, micro-credit opment. Roads, irrigation channels, schools, clinics and a was not seen simply as a means for economic development, reliable power supply are all desperately needed to alleviate but as a way to strengthen the social and cultural ligatures poverty and to overcome the destruction arising out of that bound a community together. Once those ties were bol- decades of conflict. AKDN, supported by donors and partners, stered, the collective energy of the community could be will continue to initiate these essential measures in released for the benefit of all. Afghanistan as well as in other partner countries. 3. INFRASTRUCTURE, THE BASIS FOR SUSTAINABLE DEVELOPMENT

Infrastructure to Reduce Poverty

CAN INFRASTRUCTURE IMPROVE CAN INFRASTRUCTURE REDUCE THE LIVING CONDITIONS OF THE POOR? THE VULNERABILITY OF THE POOR IN TIMES OF CRISIS? For the majority of the world’s 1.2 billion poor people, clean water, education and health care facilities that are Natural catastrophes and economic crises carry a par- nearby and affordable as well as access to information are ticularly high poverty risk for those affected. A correspond- still not a matter of course. But access to social infrastruc- ing infrastructure with protective buildings, drainage sys- ture services is a universal human right. Educated and tems and roads can offer people a minimum degree of healthy people are more efficient, can better develop their security during natural catastrophes. In India, for instance, capabilities and can actively take advantage of economic and protective buildings were financed for those living along the social opportunities that arise. Infrastructure measures, such Gulf of Bengal to shelter them from tidal waves during as the construction of rural roads and better transport serv- cyclones, which frequently reach a height of several metres. ices, improve access to markets and social services. Having In times of economic crisis people faced with imminent access to energy is an indispensable basis for the processing losses in income can react more flexibly owing to their in- of agricultural products and raw materials resources. Fur- creased mobility. Employment opportunities that are farther thermore, electricity makes the supply of essential services away can also be exploited. possible, such as the supply of light and telecommunications.

FC Projects improve the Drinking Water Situation in Developing Countries

0.2 million

28.3 million

3.6 million

1.5 million 25.7 million

Percentage of population without safe drinking water supply: 1.1 billion people have no access to safe drinking water. No data Since 1995 approximately EUR 900 million has been 0–9% of the population spent under FC projects to supply 59.3 million people 10–24% of the population with clean drinking water. Particular emphasis is placed 25–49% of the population on the sustainable management of the scarce resource 50–74% of the population of water. 75–100% of the population

15 Infrastructure to Reduce Poverty

each country. It requires the precise analysis of the causes of poverty and the overall conditions in the country or region. The resulting infrastructure investments should strengthen the region’s performance, as shown in the energy project in northeastern Brazil described on page 18, and improve the living conditions of the poor, as is the case in the project on rural roads and markets in Tangail, Bangladesh (page 17).

TO WHAT CONDITIONS DO INVESTMENTS IN INFRASTRUCTURE HAVE TO BE TIED?

Structures that foster development in the partner countries are indispensable for long-lasting, effective poverty reduction. The financed infrastructure requires overall conditions in the recipient countries that ensure its sustained and efficient use. Above all, these include a market-economy system that simultaneously preserves the natural bases of life Lack of infrastructure hampers progress. of the people. KfW supports the governments in the partner countries by reinforcing structures that are conducive to DOES INFRASTRUCTURE SUPPLY ALSO INCREASE INCOME FOR THE POOR?

An adequate and functioning infrastructure is a fundamental prerequisite for dynamic economic growth that creates jobs, generates income and thus reduces poverty. In numerous developing countries the underdeveloped infrastructure retards or impairs economic growth. This link is proven in a well-regarded study by the World Bank (Dollar/ Kray: “Growth is Good for the Poor”; World Bank 2001) on 80 countries over a period of 40 years. The study indicates that the income of the poorest one-fifth of the population grew in proportion to overall economic growth. Thus, growth also generally reduces poverty.

Nonetheless the extent of worldwide poverty also requires there to be an effective strategy for combating poverty to ensure that the poor profit from economic growth much more than other groups. The largest successes in fighting poverty were, logically, achieved in countries and regions such as the “Tiger” countries, which not only succeeded in adopting a constant path of significant economic growth but also in having the poor participate in the earnings. As to the question of how growth can be arranged to be “pro-poor”, there are no simple, universal answers. A corresponding For more than 1 billion people, hygienically safe water is still not a matter strategy needs to be adapted to the particular situation in of course.

16 Project Example

Bangladesh: Passable Roads to the Markets in Tangail

In addition to structural effects, road construction provides important temporary income opportunities.

Roads are the most important part of the arterial net- functioning well. The national government stocked up the work in Bangladesh for the transport of goods and people. relevant LGED budget substantially. The infrastructure estab- Yet only a small percentage of the rural roads can be trav- lished under this project will have a long-lasting, positive elled year-round – during the rainy season they are fre- effect on the living conditions of 3.1 million people in the quently impassable. It then becomes very difficult for the vil- district. Sales of goods at the markets have increased sever- lagers to reach the nearest market centres where they can alfold. It is easier for the population to access social services sell their agricultural and crafted products. FC addresses this such as health stations and schools. The transport costs on problem. In the district of Tangail, to the north of Dhaka, it the expanded market access roads have dropped consider- supports the expansion and the periodic maintenance of ably. Owing to the improved quality of transport, lucrative rural roads. Additionally the infrastructure of 16 market- products that are highly transport-sensitive such as fruits places is being improved. This includes the fortification of and vegetables can be cultivated in greater volumes. The access roads, the construction of roofed stalls and wells and routine maintenance of the roads also creates additional jobs also the building of drainage and sanitary facilities, slaugh- for the local population. Especially in remote areas where the ter places and administrative offices. Under FC/TC coopera- majority of the population is poor the project improves the tion GTZ is supporting the project-executing agency, the development opportunities of the poor people and, as a Local Government Engineering Department (LGED). result of these impacts, effectively contributes to reducing poverty. Overall, higher-than-average household income is The FC project has been running since 1996. It is being expected in the region. financed with FC funds amounting to EUR 15 million. The experience gathered thus far has been very positive. The road maintenance system introduced as part of the project is

17 Project Examples

Brazil: Better Quality of Life and Higher Standard of Living through Electricity

Prolonged periods of drought turn northeastern Brazil the supra-regional power grid. The entire energy sector was into one of the largest regions of poverty in Latin America. reinforced this way and through the simultaneous privati- In the early 1970s there was hardly any infrastructure. The zation of numerous utility companies. population earned a living mainly from agriculture and trade. Traditional sources of energy were expensive, uncertain and Ensuring the power supply laid the foundations for ru- hazardous to health. Since 1970 Financial Cooperation (FC) ral water supply since pumping systems for water distribu- has invested some EUR 97 million in various power projects tion can now be operated reliably and cost-efficiently. This in the energy sector, and committed an additional EUR 2.7 made it possible to more than double the per hectare yields million in market funds in the form of a composite loan. of rice, beans and corn in the area of application of the FC Brazil contributed approximately EUR 87 million. measures in West Bahia. Thanks to the FC projects, some 65,000 households were connected to the power grid for the The projects were executed by public power suppliers first time, giving them access to electric light, cooling possi- in the north and northeast of the country. Initially FC cofi- bilities and communication devices. Supplying power thus nanced the construction of thermal power plants in order to improved the living conditions of 2 million people. avoid bottlenecks in remote areas, and then the expansion of

Zambia: Clean Water in the Long Term through Participation

Four out of five people in the East province of Zambia tion of the wells in the long term. Here the most important are living below the poverty line. In this part of the country contacts are women, who are responsible for the welfare and clean drinking water is rare, a luxury available to only about care of their families, and also the traditional chiefs and vil- every third Zambian. Most of the rural population fetch their lage leaders. At the beginning the project-executing agency drinking water from open water or flowing water sources. informs the villagers about the individual programme steps. These are often polluted. As a consequence of the unclean It is explained to the women that their work will be made water many people in the region are suffering from illnesses easier through the shorter distance to the water source and such as diarrhoea, bilharzia or typhoid fever. less time required to nurse sick family members. During and after the construction work events focusing on health care KfW has financed the construction or rehabilitation of and hygiene are carried out in every village with theatrical 568 wells in the province with a grant amounting to EUR 7.7 performances and follow-up discussions. million. This provided 246,000 people with clean water for themselves and their animals. But this alone is not enough. After completion the wells are turned over to the vil- Often the people do not understand that illnesses can be lagers in the form of a certificate of ownership during a fes- caused by insufficient hygiene and contaminated water. tive ceremony. To ensure the long-term operation of the Therefore, the FC project encompasses more than just the wells, well committees comprised of people from the village drilling and excavation of wells and their equipment with are created with the help of the women’s groups set up by hand pumps. The population is also sensitized as to how im- DED. These well committees organize the operation and also portant practising hygiene is for their health. see to the financial aspects of maintaining the wells.

The population has been included in the project plan- The participatory approach has proven to be success- ning and implementation from the very beginning. After all, ful. Owing to the major successes, a second phase has already only their acceptance and responsibility for the installations been started. In this additional phase approximately EUR 11.3 as well as their cooperation will ensure the sustained opera- million is being spent to construct another 820 wells.

18 Project Example

Mali: Fund for self-help – development from people’s own strength

Meeting people‘s basic needs directly and durably.

The ground on the 7,700 km2 Dogon plateau in south- to help themselves was decisive for the success of the proj- eastern Mali is rocky and jagged, and rainfall is irregular. ect. The project created irrigable areas at around 60 locations Without irrigation systems the mostly poor farmers cannot for growing vegetables (about 150 ha) and rice (about 50 grow enough food to feed themselves. They are forced to mi- ha). Today the farmers are producing more and their families grate to other parts of the country to ensure their survival. have enough to eat. The new roads (approx. 100 km of rural KfW therefore supported self-help measures in around 90 roads and about 80 km of regional unpaved routes) make it villages with approx. EUR 7.5 million. This support has been easier for the farmers to reach the markets to sell their pro- combined with consultancy from the German Development duce. The farmers’ incomes, particularly of the Dogon Service (Deutscher Entwicklungsdienst – DED), which is giv- women, has increased noticeably. A further positive effect is ing the local project-executing agency technical and institu- that the rural exodus among the Dogon people in search of tional advice. work has verifiably diminished. The project has thus made a significant contribution to the social and economic develop- The project measures were directly targeted at the ba- ment of the Dogonland. sic needs of the roughly 45,000 people living there, such as food security and employment. The population was supported in improving their agricultural infrastructure: they constructed small dams and built and rehabilitated the rural roads and paths with their own manpower. The project took over the technical planning and made the construction equipment available. The applied principle of helping people

19 Infrastructure to Reduce Poverty

In the majority of cases broad-scale success and sustainable infrastructure projects can only be guaranteed if the respective institutions responsible for the sector policy are strengthened during a sector dialogue with the partner countries. This includes qualification and organizational development measures that target more effective operation of state-owned executing institutions and improve the tariff structures. The FC project on the water supply in Monte- negro (p. 29) and the health fund in South Africa (p. 28) are good examples of this.

HOW ARE WE ENSURING ACCESS TO INFRASTRUCTURE FOR THE POOR?

Parallel to the necessary reforms it has to be ensured The improvement of water supplies in Senegal is complemented by that the poor can actually access the services. For this, ad- information campaigns on paths of infection and hygiene. justed technical standards need to be applied, as was the development by, among other things, promoting the devel- case in the project example of Zambia (p. 18) with the robust opment of the private sector and assisting political reform and simply constructed hand pumps. However, access can al- processes, for example in connection with the Poverty so be ensured through a corresponding tariff differentiation. Reduction Strategy Paper (PRSP) process.

POVERTY REDUCTION STRATEGY PAPERS

The debt remission decided in 1999 for the Heavily Indebted ➢ Results-oriented. The goals of the PRSP are reviewed Poor Countries (HIPC) is tied to the development of a com- regularly. After three years the strategy is subjected to prehensive strategy for combating poverty. The Poverty Re- an extensive evaluation. duction Strategy Papers (PRSP), which resulted from a partic- ➢ Comprehensive approach. Poverty reduction means ipatory process, are to ensure that especially the poorest more than just improving the social services (including population strata will profit from the debt remission. This re- education, health care) for the poor. The overall condi- quirement was originally limited to the HIPC countries. Since tions for economic growth, macroeconomic stability and then it has become a prerequisite for all funds provided by better access to productive resources for poor people al- the World Bank and the International Monetary Fund (IMF). so have to be met. ➢ Partnership-oriented. The PRSP should be developed in The core principles of the PRSP are described as follows: an open dialogue with the donors.

➢ Country-driven. The partner country draws up the PRSP In FC KfW supports the preparation of the PRSP in some part- on its own via a process that includes the active partic- ner countries. The bank plays an active role in the develop- ipation of civil society. ment-policy dialogue with the governments of the HIPC and the donors. FC serves as a catalyst for the developing country’s own efforts in the PRSP process.

20 Project Example

Guatemala: Education for the poor

Around half the roughly 11.5 million inhabitants of International donors have paid a large portion of the Guatemala are of indigenous origin. Most of them live in the cost of thus far around EUR 165 million. Since 1999 German countryside and in extreme poverty. They are being discrim- FC has financed the repair and construction of around 3,000 inated ever since the Spanish colonial period. Overcoming PRONADE schools and necessary teaching materials as well this discrimination is the objective of the Programa Nacional as consulting services for the Guatemalan project-executing de Autogestión para el Desarrollo Educativo (PRONADE). It agency. The first phase, with an FC volume of EUR 10.2 mil- gives the children of these underprivileged groups a primary lion, has been concluded; two more phases totalling EUR 11.8 school education. The parents organize themselves in so- million are scheduled to start soon. Thanks to PRONADE the called education committees which hire teachers, supervise number of pupils and enrolments has exceeded the expecta- their performance and finance them from state funds. tions while that of repeaters and drop-outs has fallen PRONADE is an element of the educational reform in the sharply. Instead of the originally planned 250,000 children context of the Guatemalan peace process which was started the FC project has improved the educational prospects for at the end of 1996. around 300,000 children.

Around 3,000 schools were financed from FC funds under the PRONADE project.

21 Project Example

Jordan: Infrastructure for the poor

The Jordanian government has been making consider- tial which constitutes a latent threat to the country. German able efforts for around 15 years to provide low-income FC is financing the programme with around EUR 12.8 million. households with adequate housing as well as with infrastructure. The state-sponsored programmes for the develop- The FC programme, which is embedded in the CIP, con- ment of new residential areas, housing projects and the im- tributes to substantially improving the living conditions in provement of urban infrastructure, however, still have not two squatter areas and four refugee camps in the greater reached the poorest population in the Palestinian refugee Amman area with a total of 140,000 inhabitants. On the ba- camps. In the wild squatter settlements that have sprung up sis of a comprehensive analysis of needs it finances roads, on the steep slopes of Amman the quality and maintenance walkways, drinking water pipelines, sewerage canals, street of roads, public stairways, water supply and waste water dis- lights, schools and community centres. The inhabitants were posal structures and street lighting is insufficient as well. involved in the selection and design of the programme meas- There are also not enough schools, community centres and ures. health stations. More than half the unskilled workers employed in the Since 1998 the government has made a deliberate at- building measures stem from programme areas with high tempt to stem the decline in the quality of the living condi- unemployment. Thanks to the programme the construction tions with its “Community Infrastructure Program” (CIP). At workers temporarily earn an additional income. the same time this also reduces the internal conflict poten-

FC promotes poverty-oriented infrastructure in Jordan.

22 Project Example

China: Clean Water for the City of Qingdao

Qingdao sewage treatment plant.

The Jiaozhou Bay of the port city of Qingdao has long eration so the power demand of the treatment plant could been one of the most polluted coastal waters in the north- be reduced by about one half. east of China. In this city of 3 million inhabitants domestic and industrial waste water until recently was discharged un- Co-financing was also provided for an industrial water treated into the sea. As a consequence, the marine biodiver- treatment plant that cleans pre-treated water further so that sity and fish harvests – an important industry in the province it can be reused industrially or for the irrigation of greens. of Shandong – fell drastically. The treatment plant is also being used for conducting a training programme set up according to German standards. The city of Qingdao undertook considerable efforts to The operating staff of the 12 treatment plants constructed reduce the pollution caused by urban waste water. Among with German participation in China were the first to partici- other projects, in the past years it has implemented four pate in these courses. The project was accompanied by an in- sewage treatment plants. The Qingdao Tuandao sewage tensive sector dialogue on the introduction of cost-covering treatment plant was co-financed with FC funds totalling EUR tariffs. This made it possible to raise the waste water tariffs 12.8 million. Since 1999 the plant has been treating the in the course of the implementation of the project in Qing- sewage of around 250,000 households and several industrial dao nearly four-fold. It is an important precondition for the areas. Thanks to the fully biological treatment process the sustainable operation of the plant which also encourages the plant meets the Chinese effluent standards which are com- population to save more of the scarce resource of water. parable to the German standards. This led to a noticeable reduction in the pollution of the coastal waters. The digester gas produced in the treatment process is used for power gen-

23 Project Example

Meeting of villagers for the planning of the Middle Marsyangdi project.

Nepal, Pakistan: Environmentally and Socially Compatible Construction of Hydropower Plants

Large-scale dam projects are often controversially impacts, so that the WCD recommendations are also being debated. Critics often charge that such projects force the applied here. Possible consequences were intensively studied resettlement of the population and damage the environ- for both projects, and protective and compensation measures ment. Advocates emphasize the importance of dams as sup- were planned. They correspond with the WCD recommen- pliers of water and power for the economies of the develop- dations. ing countries. The World Commission on Dams (WCD) has presented a helpful outline to aid decisions on the planning, First, the project-executing agencies analysed the construction and operation of dams which takes particular needs and possible power-generation alternatives. The con- account of environmental and socially relevant factors. tinuous dialogue, also with NGOs, ensured that the population accepted the projects. Environmental and social experts On behalf of the German Ministry for Economic Coop- began their work already during the preparation of the proj- eration and Development (BMZ) and in close cooperation ects. 900 people in Pakistan and 240 people in Nepal had to with the Deutsche Gesellschaft für Technische Zusammenar- be resettled. They were informed in time and were able to ar- beit (GTZ) KfW is managing the national WCD follow-up ticulate their interests. They were compensated for the reset- process for the implementation of the recommendations in tlement in accordance with a previously established proce- Germany. Its ongoing projects incorporate the recommenda- dure. At the new location they were given land of equal tions of the WCD. value, help in building their homes, and infrastructure such as schools, power supply, etc. Particular care was taken in the Here are two examples. The Ghazi-Barotha hydropower corresponding technical planning to preserve the bases of plant in Pakistan includes the construction of a dam on the livelihood for the resettled farmers and fishermen. Through upper reaches of the Indus River, a 52 km canal and a power appropriate contractual agreements KfW ensures that all plant with a capacity of 1,450 MW. The Middle Marsyangdi these aspects, particularly the agreements made with the hydropower plant in Nepal will have a capacity of 72 MW. No population, are respected. large dams are built in either case but only diurnal balancing basins. Flooding of vast areas is therefore unnecessary. Nevertheless, the size of these projects does alter the land- scape considerably and does have environmental and social

24 Involving the Population

WHAT DOES INFRASTRUCTURE HAVE TO DO CAN INFRASTRUCTURE DEVELOPMENT HELP WITH DEMOCRACY AND PARTICIPATION? TO PREVENT VIOLENT CONFLICT?

Decisions as to what infrastructure projects are to be The poor supply of basic social services such as safe implemented in which parts of the country for which group drinking water, schools and health care facilities for groups of the population are always political decisions. They are in- of the population are often the basis for violent conflict, as fluenced to a considerable degree by the democratic legiti- is the lack of employment and income opportunities. mation of those responsible and by the transparency of the Through infrastructure development KfW helps to improve decision-making process. The decisions on the location, the material living conditions of the people visibly and on a dimensioning and operation of water supply systems, for in- broad basis. Involving the local authorities and the affected stance, can determine whether poor people will have access people already in the selection and preparation of infra- to drinking water or whether they will be excluded. People in structure projects helps to enable the participants to articu- a previously neglected region can find work and earn an in- late their interests on the local level without violence. come more easily when they are connected to the power grid or have access to the road network. On the other hand, it is In post-conflict situations FC not only can ensure the also possible that influential groups manipulate the develop- supply of basic social services for the population in the re- ment of infrastructure unfairly to their advantage. construction of destroyed infrastructure but can also create the preconditions for the revival of economic activity. Specific local conditions and the needs of the people Labour-intensive infrastructure measures, for instance in therefore have to be taken into account in time. So it is es- road construction, provide temporary employment and in- sential that the affected groups actively participate in the come and contribute to creating social stability in the un- project decisions, for instance through the community repre- steady peace process. In particular, employment for demobi- sentations. KfW promotes this development particularly by lized soldiers, ex-combatants and other former fighters in way of urban and municipal development projects. They labour-intensive infrastructure projects financed under FC combine the financing and accompaniment of municipal in- supports their re-integration into the economy and society vestments with the assumption of more responsibility by the and thus contributes towards safeguarding the peace in municipalities and local protagonists. The objective is to regions of conflict. strengthen the municipal administration and to improve the financial situation of the municipalities. A fundamental prerequisite for the success of external efforts at crisis prevention is always the will and ability of Greater transparency of governmental decisions and the partner country’s government to work on a constructive early involvement of the population make it possible to solution to conflict. When this prerequisite is fulfilled FC can measure the state by the promises it makes. KfW makes use complement the foreign-policy efforts of the German of existing approaches in the partner country and closely co- government. operates with the local decision-makers. This way innovative concepts can be applied and developed further. Non-governmental organisations and the private sector play an active role in numerous target-group related projects. KfW has been able to bring about substantial improvements, particularly in the structuring of water user associations, as in the project example of Zambia (page 18).

25 Infrastructure for the Environment

WHAT DO INFRASTRUCTURE MEASURES the environment that endanger people’s health and the

MEAN FOR ENVIRONMENTAL global climate, such as sulphur dioxide, dust and CO2 emis- AND CLIMATE PROTECTION? sions. Therefore it is high time to set the course for an ecologically sustainable energy supply in these countries as well. For one thing, infrastructure measures are aimed at FC supports the developing countries in their efforts to make promoting environmental, resource and climate protection. energy supply more efficient and climate-friendly. It acts on For another, environmental protection is considered a cross- two levels. For an energy supply that is gentle on the Earth’s cutting task in all infrastructure projects of FC. Projects for climate a thorough reform of the energy sector is often es- environmentally sound sewage disposal and power from re- sential. In many cases FC can set structural changes in mo- newable energies have a special significance. tion, for instance in regard to statutory requirements relat- ing to the emission of pollutants, through political dialogue Because of the high population growth and the rising and project-related consulting services. At the same time it threat of contamination, clean water is a precious and scarce puts efficient and climate-friendly technologies to use. In- commodity. The task of FC therefore consists in using water creasing the efficiency of older power plants, replacing pol- resources as sparingly as possible and supplying people with luting energy sources by less polluting ones, reducing losses clean water without contaminating surface and ground wa- in power transmission and distribution networks and build- ter reserves. For hygienic and ecological reasons water sup- ing facilities that use renewable energies are only a few ex- ply projects always also take into consideration the disposal amples. Energy supply projects are often combined with cor- of sewage. In rural areas this means providing the population responding tariff policies that provide incentives for energy with water as well as with latrines. Hygiene and sensitization conservation. campaigns are further important elements of the programmes. KfW and DEG are increasingly promoting the use of wind energy, solar energy, geothermal energy and biogas. Rehabilitating urban water supply networks con- Commitments totalled EUR 154 million for renewable energy tributes substantially to reducing the losses of the scarce projects under FC in 2001. This was 51% of the funds com- commodity of water. Sewage treatment plants dispose of the mitted for the energy sector. Good examples of the utili- sewage in an environmentally appropriate and hygienic way. zation of wind power are the wind park Cannakale in Turkey, Sewage treatment plants permit effluents to be re-used in financed by DEG (p. 27) and the wind park Zafarana in Egypt, agriculture or manufacturing. Sewage treatment plants have financed by KfW (p. 27). KfW is currently preparing strategies far-reaching positive environmental impacts that go beyond that utilize the project-related flexible Kyoto mechanisms for the immediate beneficiaries. They reduce the pollution in the financing of projects in developing countries. These can rivers, lakes and oceans. This is illustrated by the project ex- tap additional funding sources for projects in renewable ample of Jiaozhou Bay in China (p. 23). The treatment of the energies and make the technologies economically more sewage produced by the port city of Quingdao has reduced attractive for investors. pollution in the coastal waters and made the region more attractive for tourists. Quingdao will be the site of the Olympic sailing competition in the next Summer Games.

Energy supply plays an important role in the protection of the environment and the climate. The total energy consumption of the developing countries is expected to more than double by the year 2020. It relies primarily on the burning of fossil fuels and wood. The extraction of these fuels already has a great impact on the environment. Besides, the combustion of these fuels produces a variety of strains on

26 Project Examples

Turkey: Decentralized Energy Supply with Wind Power

The demand for power in the country on the Bosporus Now 17 turbines transform the strong northerly winds has recently grown by an average 9.5% per year. The existing near the Strait of Marmara into electricity for around 7,000 capacities, however, cannot meet this growing demand. This households in Cannakale. The expected energy output is leads to shortages, particularly in the manufacturing sector. around 34 gigawatt hours per year. With the current German filtering technology, the burning of coal for the same energy

The Turkish Ministry of Energy tendered for the con- would release around 30,000 tonnes of CO2 and contribute struction of a wind power plant to improve the power sup- to the greenhouse effect. The wind park also avoids the ply in the province of Cannakale. A Turkish-German joint emission of dust and SO2 from the burning of coal. venture was awarded the contract. The German partner is an experienced wind generator manufacturer with which DEG The wind park is considered one of the pioneer projects has already implemented a wind park in Brazil. It is in charge for the new Turkish energy policy, which aims at making use of managing the operations, maintenance and spare parts of the favourable local wind conditions, among other things. supplies. It also ensures the technical availability of the tur- The wind park also confirms the fact that regional electrici- bines. ty shortages can be covered by the decentralized use of wind energy, which is gentle on natural resources.

The windparks of Bozcaade and Zafarana avoid the emission of 210,000 tonnes CO2 each year.

Egypt: Boosting the Economy with Wind Energy

Today 80% of Egypt’s electrical energy is being gener- This is where FC projects come in: FC is financing the ated in thermal power plants. The remaining 20% is provid- foreign currency costs for up to 85 MW of installed capacity ed by the hydropower plants in the Nile river, the potential and the connection to the grid with EUR 74 million in the of which is thus exhausted. Since the Egyptian population is projects „Windpark Zafarana I-III“. This capacity is enough to consuming increasingly more energy, the share of thermal supply 170,000 Egyptian households with electricity. The first power plants is rising quickly. 55 wind generators were erected by a German enterprise and put into operation in the spring of 2001. After the comple- The Egyptian government is therefore pursuing the ob- tion of all three phases over 300 GWh of electrical energy jective of increasing the share of renewable energy sources. For will be generated and fed into the national grid, thereby pre- this purpose a wind atlas was prepared which shows that the venting the emission of more than 180,000 tonnes of CO2. wind conditions along the coast of the Red Sea are extremely favourable. On this basis a wind park with a total installed capacity of 600 MW was prepared for the location of Zafarana.

27 Project Examples

South Africa: Private Sector Support for the Health Sector

The South African government sets great store by the capital for young innovative companies which play a pioneer national health care system, which accounts for a compara- role in the private health sector in South Africa: for instance, tively high share of the gross domestic product at 8.5%. But they provide basic medical care through a countrywide net- still, the public health service is not able to supply the pop- work of health centres and organize domestic medical care ulation adequately. Any significant improvement is not fore- which closely cooperates with hospitals. In this way costs for seeable since the growing number of AIDS cases puts addi- in-patient care can be lowered. tional strain on the national budget. As a result the demand for health services offered alternatively be the private sector The private services are targeted at medium-income has increased considerably. and, increasingly, low income households which have been supplied only inadequately by the public system so far. This To develop and promote a privately structured health relieves the strain on the public health service and conse- sector the DEG is participating in the financing of a health quently the public health budget can be targeted better at fund together with other development banks and institu- the poor population. An additional development impact of tions. The fund focuses its investment on building up private this project is the general improvement of preventive med- health facilities that are able to offer high-quality services at ical care, especially for women. The medical services were ex- low cost. A particular emphasis is on the provision of venture panded to include prenatal care and AIDS counselling.

Africa: Mobile Telephony – Communication as a Prerequisite for Development

For many people in Africa, using a telephone is still not capital is not sufficient to ensure the further growth of the a matter of course. In numerous countries less than one per- company. For this reason, besides institutional investors from cent of the population has a telephone connection at all. South Africa, development finance institutions such as the Usually the quality of fixed-network lines is far below the DEG and other development banks are participating in the standard in other parts of the world. financing.

However, many African countries cannot afford the The funds of nearly EUR 18 million provided by the expansion of fixed telephone networks throughout the entire DEG are used for the expansion of the existing network in- country. The solution is: mobile networks. Transmission and frastructure. In addition, the transmission technique is being receiving stations for mobile phones are less expensive and improved. faster to set up than those for fixed networks. A telecommunications company domiciled in the Netherlands for instance The privatisation of state-owned mobile telephone operates mobile telecom networks in 14 African countries companies and the liberalization of telecommunication mar- through local subsidiaries. Given the high capital intensity of kets will have positive impacts for the consumer. Owing to telecommunications investment and the immense political the competition among suppliers the services offered will and economic risks in Africa the available private commercial have a better quality and the price level will be lower.

28 Project Example

Montenegro: Clean Water Supports Development

The approximately 200 km of Montenegrin Adriatic teaqua” through a user association founded in the course of coast are lined by long beaches and picturesque towns. In the the project. The German investor will finance EUR 7.7 million summer months more than 250,000 tourists are again visit- of the PPP’s equity and is responsible for the operation of the ing the region. Inadequate supply of clean drinking water to project. Further participations have been taken by a private the population and the discharge of untreated sewage into Montenegrin investor and the KfW subsidiary DEG, which the sea, however, constitute a major obstacle to development also supports the foundation of the new joint venture with in the region. its expertise.

In order to improve the living standard of the 150,000 KfW has committed a commercial loan of EUR 15.3 inhabitants along the coast and to promote tourism, which is million refinanced in the capital market for the implemen- important for Montenegro, KfW is providing finance for the tation of the project. The German federal government has rehabilitation and extension of the water supply and waste provided a grant to reduce the interest rate of the loan. As a water disposal systems. The project is being financed and im- result, tariffs for consumers can be reduced. plemented in cooperation with a private German investor, the DEG and the GTZ. Altogether, funds of about EUR 36.8 million have been mobilized for the project. The prospect of clean water for the The facilities will be operated by a joint venture with population, which was threatened by armed conflict and suf- public and private participation (public-private partnership). fered from the sanctions of the Milosevic regime only some Seven coastal municipalities will participate with approx. two years ago, and the growing attractiveness for tourists are 26% in this public-private partnership (PPP) named “Mon- an important contribution to economic recovery.

The water supply and sewage disposal project in Montenegro will reduce pollution in the coastal waters.

29 Seizing the Opportunities of the Private Sector

The importance of the private sector for the economic ample which demonstrates that the instruments of KfW and and social development of the partner countries has grown DEG complement each other also in joint projects. considerably in the last decade. This holds particularly true also for the infrastructure sector. In the course of deregula- In the last few years the private sector has become in- tion, liberalization and privatization this sector, which was volved mainly in commercially attractive infrastructure proj- formerly dominated by state enterprises in most developing ects such as mobile telecoms, container terminals or electric- countries, was opened for private companies in order to ity generation. The challenge for the future is to increasingly mobilize entrepreneurial know-how and private capital. The find private-sector solutions also for the currently less at- latter is necessary since the investments required often go tractive areas such as health, education and waste water dis- beyond the financial capacities of the state and also beyond posal. Against this background, securing the access of the the possibilities of international official development financ- poorer sections of the population will be one focus of KfW’s ing. and DEG’s efforts in the next years.

The involvement of private enterprises – by way of INFRASTRUCTURE AND FINANCING CONCEPTS privatization or simply by opening the sector in question to private enterprise – can make an additional contribution to Successful infrastructure projects require tailor-made improving performance, cost efficiency and risk manage- financing concepts. Besides development policy aspects spe- ment. In this way the population and the economy have a cific institutional and economic aspects (what financing better and more reliable supply of infrastructure services, terms are acceptable for the project?) also have to be taken and the location advantages created will attract more in- into consideration. vestment. Examples include the introduction of efficient fee collection systems and cost-covering tariffs. The DEG project The various sectors of infrastructure differ considerably in South Africa described on page 28 shows that the private in their commercial profitability and underlying risks. Proj- sector can offer efficient solutions also for the provision of ects in the field of urban mobile telephony frequently offer basic health care. very good prospects for profitable operation and thus quali- fy for commercial financing. Still, if the private financial However, the private sector can be integrated success- sector is not able to provide financing the KfW Group may fully in infrastructure projects only if barriers to market provide assistance in the financing through a participation or access are eliminated and natural monopolies are regulated a loan at market conditions provided the project is eligible appropriately. for promotion from a development-policy perspective.

Depending on the general economic situation in the However, high specific investment requirements, long country and the project-specific conditions different types of amortization periods and the sometimes low willingness and cooperation with the private sector are required. Often a ability of consumers to pay their bills clearly restrict the management agreement concluded on the basis of a per- mobilization of commercial funds for many projects. This formance-related remuneration is the first step in the coop- applies, for instance, to sewage systems or local public pas- eration. This applies especially in countries or areas in which senger transport by rail. With appropriate risk spreading the private sector has so far not been included and little ex- among investor, lender, operator and the state it is still pos- perience has been gathered. Longer-term cooperation – sible to use market funds in these areas by combining them through granting a concession for instance – is mostly based with concessionary budget funds. on an equity stake acquired by the private partner. DEG supports privately built and operated infrastructure projects by In the social sectors such as education and health the providing long-term loans, mezzanine financings and equity provision of elementary education, primary health care and holdings. The project “Water Supply Montenegro” is an ex- preventive medical care (e.g. vaccination) is a political objective. In most of the partner countries projects in these sec-

30 tors can be supported only by means of concessionary fi- on page 32). The existence and proper functioning of such nancing. Charging cost-covering fees would not be a politi- infrastructure is an indispensable prerequisite for almost any cal objective and would also not be enforceable, as is the ICT application. Here the main focus is on undersupplied and case in the industrial countries. mostly rural areas. To ensure the sustainability of the measures and to achieve the largest possible macroeconomic ben- In addition to granting direct loans for the financing of efit the fixed-asset investment is accompanied by technical infrastructure projects, the KfW Group extends credit lines to expertise. Equally the partners in the developing countries efficient development banks and commercial banks in devel- are advised in the sectoral development and reform of polit- oping countries which serve to finance projects to expand ical and regulatory conditions which are the prerequisite for infrastructure. Moreover, DEG participates in funds investing the desired involvement of the private sector. in private infrastructure projects.

Infrastructure Helps to Close the Digital Divide

The “digital divide” between those who have access to information and communication technologies (ICT) and those who are excluded is continuously widening. The fact that there are more telephone connections in Manhattan than in the entire sub-Saharan region and that 90% of all In- ternet users live in countries which belong to the Organisa- tion for Economic Cooperation and Development (OECD) illustrates this clearly. ICT comprise voice telephone services in the fixed and mobile telecom networks, the Internet, management information systems and much more. The use of ICT can have positive effects on growth and development by increasing efficiency and reducing transaction costs in the private and public sectors. ICT help to offer social services for the benefit of the population at large, for instance through remote training and remote diagnostics. They allow participation in the national and international markets. Tendering via the Internet, for instance, makes it possible to achieve higher transparency and lower costs. For a country to be cut off from the digital world is tantamount to losing touch with the world economy. Closing the digital divide is being given high political priority around the world – and rightly so.

The KfW Group has gained vast experience in the field of ICT promotion since the 1960s. It has provided more than EUR 1 billion for projects in the areas of telecommunications and media. Currently one focus of our activities is on equity financing for telecommunications companies as shown in the mobile telecom example in Africa (p. 28). Another focus is creating access to ICT by rehabilitating or setting up telecommunications infrastructure (see example Mongolia

31 Project Example

Mongolia: Economic Upswing through Telecommunication

Mongolia is one of the world’s least densely populated A first FC telecommunications project was imple- territorial states. Approximately 2.5 million people live in an mented in cooperation with the Asian Development Bank area which is more than four times the size of Germany. (ADB) and other donors. The objective was to modernize and Especially in a country with large distances, efficient com- expand the existing facilities in the capital and seven eco- munication is indispensable for the development of econom- nomic and provincial centres. The FC funds were used for the ic activities and the smooth running of public administration digital transmission technique and training measures to and utilities. This is true all the more of Mongolia, as trans- familiarize the staff with the new technology. The facilities port infrastructure is still at a rudimentary stage. However, were put in operation in 1998. The measure was followed by already when the country opened up at the end of the 1980s two other FC projects involving the installation of digital the telecommunications facilities of Soviet origin were switching centres and cable networks as well as project- totally obsolete and overburdened. related training measures. The aim is to ensure a basic supply of the population in all provincial centres throughout the country. The social and economic infrastructure in these centres, i.e. hospitals, schools, markets and administration, is also of considerable importance for nomads in the surround- ing countryside. And the Internet is now also accessible and is being widely used in larger towns. The German contribution amounts to a total of EUR 28.2 million.

First sector reforms were also implemented in Mongo- lia in the second half of the 1990s. After the partial privatization of the operating company in 1996 a law on the further deregulation was passed in autumn 2001, which still has to be implemented. Since the start of the German-funded activities the improved communication opportunities have led to a rapid rise in telephone calls. The resulting higher revenue from telephone charges ensures the sustainability of the project, especially the maintenance and repair of the facilities and networks.

Directional transmitter – Telecommunications plays an important role in a sparsely populated country.

32 4. REGIONAL PERSPECTIVES

THE SITUATION OF THE DEVELOPING Diagram 2: COUNTRIES AND THE TRANSITION COUNTRIES Real Annual Growth in Per Capita Income 1997–2001 in %

Gross domestic product (GDP) in the developing coun- 7 tries grew in real terms more strongly than in the industrial 6 countries in 2001 as well. However, with the worldwide cycli- 5 cal downswing average economic growth in the developing 4 countries also slowed. According to preliminary estimates it 3 fell to 4% (Diagram 1). 2 1

The cyclical slowdown, which originated mainly in the 0 excess capacities and consequent decline in investment in -1 the high-tech sector in the United States, led to a sharper -2 1997 1998 1999 2000 20011) fall in growth in the industrial countries as a whole than in the developing countries. Hence, for the first time for some All developing countries years, per capita income again grew noticeably more strongly Africa (without Egypt and Libya) in the developing countries than in the industrial countries, Asia (without the Middle East) Middle East (including Turkey, Malta, Egypt and Libya) at +2.5% compared with +0.5%. Latin America and the Caribbean Transition countries

In 2001 economic growth declined in every region 1) Estimate except Africa (Diagram 2). The question to what extent the Source: International Monetary Fund (IMF), World Economic Outlook (WEO) slowdown was due to the attacks on September 11, 2001 and their consequences cannot be answered with certainty. It is clear that the worldwide cyclical slowdown had already greatly depend on tourism, like the Caribbean, Egypt and started before September 11, and that some countries that Turkey, have been particularly badly affected by the consequences of these attacks.

Diagram 1: Real Annual Growth Rates in GDP 1997–2001 in % Both as a whole and per inhabitant Asia again achieved the highest growth rates in 2001. With strong dif- 7 ferences from one country to another per capita income rose 6 on average by 4.4% (5.6%). The growth, which was still 5 impressive, was mainly in China and India. Both these coun- 4 tries felt relatively little impact of the global recession 3 because their internal markets are so huge, and they grew in 2 2001 as well at around 7% and 4–5% respectively. However, 1 in the case of India a very low initial level of per capita 0 income has to be taken into account. In many countries -1 1997 1998 1999 2000 20011) average per capita income is stagnating, and so despite the upswing after the Asia crisis it is still below the level of 1996. Industrial countries Developing countries In Africa the – very low – economic output per inhab- Transition countries itant grew slightly (+1% compared with +0.3% in the previ- World economy ous year), despite the development in the prices of important 1) Estimate Source: International Monetary Fund (IMF), World Economic Outlook (WEO) raw materials, which was unfavourable for many countries. Here, too, the average conceals big regional differences.

33 Countries with a growth-friendly economic policy, like tries, although again from a very low level per inhabitant. Botswana, Mozambique and Uganda, grew more than the The main reasons for this were the stabilization of internal average. Altogether this continent is less affected by the conditions in Russia, the maintenance of relatively good global recession than other regions as most African countries international competitiveness through the devaluation of are not strongly integrated in the world economy. However, the rouble and some other CIS currencies in 1998 and higher the lack of participation in globalization has also meant that energy exports, with prices remaining relatively favourable. Africa’s shares of world trade, foreign direct investment and the worldwide volume of production have fallen noticeably Growth for the world economy as a whole in 2002 is over the long term. Together with the growth in population expected to be as low as in the previous year (IMF forecast this has given Africa a higher share in the number of poor +2.4%). After a weak first half-year a clear revival is people in the world. expected in the second half of the year. Of the developing countries the open economies in Southeast Asia and some Average per capita income in Latin America stagnated countries exporting raw materials, which are particularly in 2001. As a result of the high need for external finance sensitive to changes in the cycle, should profit most from the many countries in this region are suffering from investors’ expected upswing in the United States and the Eurozone. The greater aversion to risk. Despite the drastic reductions in development in the highly indebted newly developed coun- short-term interest rates in the United States public and pri- tries, particularly in Latin America, will also depend on the vate borrowers are still facing high interest payments in dol- effects of the Argentina crisis on international capital mar- lars, because higher risk premiums are being charged in the kets. Up to early 2002 these were less than the effects of the financial markets. Moreover, the decline in demand for crises in Thailand in 1997 and Russia in 1998. imports in the industrial countries has also led to loss of income in some Latin American countries. That applies to INTERNATIONAL DEVELOPMENT FINANCE Mexico, for example, 90% of whose exports go to the United States, and to Chile and Venezuela, which are affected by the The total volume of long-term private and official net falls in prices for copper and oil. capital flows (disbursements minus redemptions) to the developing countries and transition countries has been In the Middle East the economic reversal in 2001 was falling since 1997. The downward trend continued at an particularly marked. Per capita incomes stagnated on aver- accelerated rate in 2001. According to preliminary data from age for the region. This reflects not only the consequences of the World Bank total net capital flows fell by 25% to USD September 11 and the fall in prices for oil exports, but pri- 196 billion. The drastic fall was mainly due to net repayments marily the financial crisis in Turkey and the contraction of of loans to private banks and the fall in portfolio investment the Turkish economy (–8%) in 2001. In Egypt GDP growth fell as a result of the difficult situation in the world economy to 2.5% and even Israel had to take a slight fall in its GDP of and private capital investors’ greater sensitivity to risk. Nev- –0.5%. ertheless, during the year under review 79% of the net capital flows were still private capital, amounting to USD 160 In the transition countries GDP was still about 20% billion. below the level of 1989, with considerable differences from country to country. In 2001, however, the second highest As a result of the net outflow of funds from the finan- growth rate since the start of the transition process was cial markets (loans, bonds and portfolio investment) foreign achieved. After the slump in production in the early 1990s, direct investment for the first time was higher than total the reversal from the Russian crisis of 1998 and the recovery private net capital flows to the developing countries and the in 1999 the region’s economy thus grew for the third year in transition countries in 2001, at USD 168 billion. Direct succession. Remarkably, GDP in the countries of the Commu- investment was also slightly above the high level of the pre- nity of Independent States (CIS) again grew faster than GDP vious year. In most of the countries where direct investment in the more advanced Central and Eastern European coun- is concentrated because conditions are favourable, this

34 inward investment proved a stabilizing element in a difficult Diagram 3: world economic environment in 2001 as well. Official Capital Flows to the Developing Countries and Transition Countries (in USD billion 1)

Official flows to the developing countries and the 70 transition countries did grow in 2001 by 3% from the previ- 60 62.1 ous year to USD 37 billion, but nominally they were 41% 50 53.4 below the 1991 figure. In real terms, that is, taking price rises 47.4 since 1991 into account, the decline is even greater. Non- 40 35.3 36.5 repayable grants, which are particularly important for the 30 poorest countries in Africa, fell by 2.5% in 2001 (Diagram 3). 20

10 THE DEBT SITUATION 0

According to preliminary estimates by the IMF the -10 1991 1998 1999 2000 20012) total external indebtedness of the developing countries and transition countries grew slightly in 2001 to USD 2.5 trillion. Official grants3) Official loans at preferential conditions (net) The relation of interest and redemption payments to export Official loans at market conditions (net)4) earnings (the debt service ratio) in the developing countries 1) At current prices and exchange rates remained just under the level of the previous year, at 22%. 2) estimate 3) Without ODA flows under Technical Cooperation (2001: USD 15.2 billion) Of the different regions Latin America still has by far the 4) without IMF loans highest debt service ratio at 46%. In the other regions the Source: World Bank, Global Development Finance (GDF) ratio is between 13% and 18%, with big differences between individual countries. Altogether, the HIPC Initiative will lead to a substantial Over-indebtedness is one of the main obstacles to reduction in the debt service and widen the financial scope development. A high share of the state’s revenue has to be for the effective reduction of poverty. However, it is not yet spent on debt service and so is not available for the urgently certain that the debt relief process can be sustained. In order needed expansion and maintenance of the productive infra- to break the cycle of debt, new borrowing, renewed insol- structure or social services. The highly indebted poor devel- vency and repeated debt relief, structural changes are oping countries suffer particularly from this. The extended needed, both in the government practices in the developing debt relief initiative for the Highly Indebted Poor Countries, countries and in the lending policy of the World Bank. Link- the HIPC Initiative, started in 1999, will enable them to ing the HIPC Initiative to the presentation of a structural reduce their external debt to a sustainable level. This depends poverty reduction plan (cf. p. 20) may make it possible for on presentation of a consistent plan to combat poverty, these countries permanently to escape the poverty trap. which the domestic funds released from the debt relief are to Above all, however, the HIPCs must fix a limit for their exter- be used primarily to implement. The HIPC Initiative covers 42 nal borrowing under a medium-term financial plan. countries, which account for about 10% of the external debt of the developing countries.

The Federal Government decided in 1999 to waive bilateral debt totalling about EUR 5.1 billion under the HIPC Initiative (around EUR 3.1 billion in commercial debt and around EUR 2 billion in Financial Cooperation funds). Thir- teen highly indebted poor countries will benefit from the FC debt relief.

35 ASIA

REGIONAL DEVELOPMENT mass of the population. So even two years after the recovery from the Asian crisis in 2001 these countries have not been Compared with the two previous years 2001 saw able to make up the reversal in poverty reduction it caused. growth in East and Southeast Asia fall to nearly half at 3.9%. China is increasingly assuming a special and leading role in The terrorist attacks of September 11 prolonged and the region. It is less dependent on exports, and with an deepened the recessionary tendencies in this region. The expansive fiscal policy, continued market economy reforms direct negative effects are falls of up to 30% in revenue from and a policy of opening more to other countries, achieved tourism in countries like Thailand, Malaysia, the Philippines economic growth of 7.3%. After more than ten years of and Hong Kong. Under these conditions individual countries negotiation China joined the World Trade Organization have reacted very differently in their economic and fiscal (WTO) at the end of 2001, and now the country faces two policies. South Korea, Malaysia and Singapore have advanced challenges. First, the Government must continue to work on furthest in their reform policies since the Asian crisis and this creating the legal and administrative conditions needed for has given them the necessary scope for action in their mon- the gradual opening of the various economic sectors to the etary and fiscal policies. But the reaction in Thailand, Indone- outside world which WTO membership requires, and second, sia, the Philippines and Taiwan has been rather passive, and it must cope with the social consequences which the accel- structural and internal political problems have persisted. erated structural change has for the population. Hitherto Among the structural problems the over-indebtedness of the protected sectors like agriculture, the automotive industry, banks is one of the most serious. banks, insurance and telecommunications are particularly affected. China is far ahead of all the other developing coun- The development in the transition countries Vietnam, tries in receiving direct investment (USD 47 billion in 2001) Cambodia and Laos was less affected by the world economic and it is only exceeded worldwide by the United States. environment. The path China has taken has certainly been a China’s main objective in this is high transfer of know-how. model for these countries to increase their economic dynamic while maintaining social and political stability. China’s role in the region is growing with its economic Cambodia and Laos still have much leeway to make up. strength and its increasing attractiveness as a partner for joint ventures with its neighbouring countries. At the same South Asia achieved average growth in GDP of only time Japan’s importance is declining. The reasons for this are 4.5% in 2001. The decline is partly due to the cyclical weak- continued recessionary and deflationary tendencies and far- ness in the industrial countries. However, the main obstacles reaching structural problems in the corporate and banking to growth in South Asia came from internal factors - a severe sector. Devaluation of the Yen has been in sight as part of the drought that badly affected agriculture in Pakistan, solution since autumn 2001, but it will only have sustained Afghanistan and Sri Lanka, the devastating earthquake in effect if the basic problems in this crisis, which has lasted for Gujarat in India and internal unrest in Sri Lanka and Nepal. more than ten years now, are seriously tackled. Unless that is Advantages for the region in 2001 were low inflation rates, done devaluation would only export deflation to the neigh- stable exchange rates and falling oil prices that helped the bouring countries, some of which are themselves struggling economy. It cannot be denied that South Asia still has evi- with recession and deflation. dent shortcomings in the market economy reform process. Without thorough-going improvements in the state budget, Owing to the drastic fall in demand for exports in the privatization, the efficiency of the public administration, the United States, especially for electronics goods, Singapore, infrastructure and banking these economies will not grow Taiwan, Hong Kong and Malaysia have all had to register faster nor will there be any significant increase in foreign negative growth rates of between –3% and -1%. Indonesia, direct investment. That is also a basic prerequisite for any Thailand and the Philippines were just able to achieve slight noticeable reduction in poverty. In South Asia more than 540 growth in their domestic product, but their growth rates of million people are regarded as poor - more than in any other 1% to 3% were not enough to increase real incomes for the region.

36 The countries of Central Asia made economic progress Financial Cooperation is making important contributions to again in 2001, although at very different rates. Kazakhstan this. Since September 11 Afghanistan has been a particular and Turkmenistan achieved two-figure growth rates. As focus of attention. Here FC is supporting the reconstruction countries with high resources of energy raw materials they and improved operation of existing facilities for basic educa- were initially helped by the trend in world market prices, but tion, health care, water supply and waste disposal, as well as later, as prices fell back, they were negatively affected. In the municipal infrastructure and electricity supplies. KfW has Kyrgyzstan, Uzbekistan and Tajikistan, on the other hand, set up an office for this work in Kabul in cooperation with economic growth was clearly lower at 4% to 8%. The inflow GTZ, and DEG has been commissioned by the Federal Ministry of foreign direct investment to Central Asia is still low as a for Economic Cooperation and Development to build up a whole, and largely limited to the raw materials sector. Pay- programme for new businesses in Afghanistan. ments balance and indebtedness problems are growing. The standard of living has not yet regained the level of the end DEG’s new operations in Asia were affected by the of the Soviet era and it did not prove possible to reduce the recessionary tendencies in the world economy and the level widespread poverty noticeably in 2001 either. To a large was slightly down. Commitments were concentrated mainly extent the many shortcomings in economic and social policy on the manufacturing industry. are the root causes of poverty. Unfortunately, the reform process hardly progressed during the year under review. The main themes on the reform agenda are privatization, price reforms, other improvements to sectoral conditions and transparency in government action. Without progress in these areas the countries of Central Asia will not achieve their targets for combating poverty. KfW is supporting improvements to these general conditions in persistent dialogue within Financial Cooperation. The events of September 11 have again underlined how urgent progress in development is for Central Asia as well. In the Fergana valley, in the triangle between Uzbekistan, Tajikistan and Kyrgyzstan, for example, Islamic fundamentalism and poverty are closely related.

DEVELOPMENT COOPERATION

Two tendencies have become apparent in Financial Cooperation with East and Southeast Asia in recent years. First, the financial sector is gaining in importance in nearly every country. It will play a central role in achieving growth to reduce poverty and in establishing the market economy, including promoting the private sector (cf. Vietnam, Country Example on p. 38). The scarce budget funds that are being used are increasingly being supplemented with market funds in the more advanced countries.

Second, in South and Central Asia greater efforts must be made to achieve lasting improvements in the living con- Methane is obtained from animal excrements and used for cooking and ditions for the people in view of the widespread poverty. lighting in Nepal.

37 Country Example: Vietnam

In the course of the reforms price controls are being VIETNAM successively removed, economic decisions decentralized and Area 333,600 sq.km foreign trade liberalized. In the 1992 constitution a number of company forms were expressly accepted and ownership of Population 79 million productive capital guaranteed. Population growth 1.7% p.a.

Gross domestic product USD 30.7 billion The reform path taken so far has not, however, run Economic growth (2001) 4.8% p.a. continuously. Owing to ideological conflicts between the Per capita income USD 390 political leaders the initial enthusiasm and clear orientation Life expectancy 69 years were lost about the mid-1990s. There is a striking inconsis- Literacy rate 93% tency in policy on the general order between a market economy orientation on the one side and adherence to the dom- Debt service ratio 9.4% ination of state property, motivated by socialist beliefs, on Poverty ratio (international the other. The monopoly of power held by the Communist poverty line = USD 1/day) 37% Party and the time-consuming processes of consensus-form- DAC category Low-Income Country ing paralyze the forces of reform. HDI ranking (in Human Development Report 2001) 101 out of 162 While the privatization of agriculture through the The main focus of German-Vietnamese devel- issue of heritable rights of use was a full success, the core of opment cooperation: the state industrial and services sector has so far been left untouched. Despite repeated announcements that the priva- • economic reform and building up the market tization, part-privatization and restructuring of the state economy enterprises will be accelerated the number of state enter- • environmental policy, protection and sustained prises, about 5,500, most of which are operating at a loss, has use of natural resources, including water supplies, not noticeably fallen. In the industrial and services sector waste and sewage disposal about 50% of the domestic product is still earned by state • health care, family planning, HIV/AIDS prevention. enterprises. Key areas of the economy are still reserved for them, and the influence of the state is in general high. That applies to the banking sector as well, which is also burdened The Socialist Republic of Vietnam is a transition country that has been gradually opening since 1986. Orienting to the Chinese model, Vietnam is gradually and cautiously changing from the planned to the market economy. In the political and social sphere, however, the country still holds firmly to the dominance of the Communist party. With this combination Vietnam has achieved remarkable successes in economic growth and poverty alleviation. Per capita income has doubled within ten years and the share of people living below the poverty line has fallen from 50% to 37%. Reform of agriculture has turned Vietnam within a very short time from a rice importing country to the second biggest rice exporter in the world. Essential factors in these successes are the political stability in the country, comparatively well educated and motivated workers, flexible and dynamic small businesses and extensive foreign aid. Fish vendor in a market hall in Ho-Chi-Minh City.

38 with considerable poorly performing loans. A major obstacle China to the privatization of state enterprises is the lack of a social China network to help cushion workers made redundant. Hanoi Rabat The company law that came into force early in 2000 has set in motion a wave of new entrepreneurship, producing altogether more than 14,000 small and medium-sized firms and traders. But the private corporate sector is still dis- Laos advantaged compared with the state sector in land rights, Laos ThailandThailand access to credit and foreign trade licences. Under such cir- cumstances a broader private sector cannot develop. But despite the obstacles the private sector has made a considerable contribution to reducing the serious unemployment CambodiaKambodscha VIETNAMVIETNAM problems. In the last decade nearly all the new jobs have been created in the non-state sector.

Vietnam’s membership in the Association of Southeast Asian States (ASEAN) and its integration in the world economy through its aim to join the World Trade Organization Environmental protection has received greater atten- (WTO) are increasing the pressure to carry out market econ- tion from both the Government and the people only recently. omy reforms and strengthen the private sector. At the end of The national environmental protection strategy agreed at the 2001 a trade agreement with the United States came into end of 2000 acknowledges that the environmental problems force which should provide powerful impetus to opening the are urgent and outlines an appropriate action programme, country’s economy further. With its export structure in agri- among the most important elements of which are extensive cultural products and textiles Vietnam was not so badly reforestation (5 million hectares), the implementation of a affected by the downswing in the world economy in 2001 new inland lakes and waterways protection law, better con- and at 4.8% its economic growth was the second highest in trols and disposal facilities for industrial and urban waste Asia after China. and sewage and incentive mechanisms to avoid their production. Social organizations and the people themselves are The country’s main problem is still mass poverty, par- to be more involved than in the past in planning and carry- ticularly in the rural areas, despite the successes that have ing out the measures. already been achieved. Large parts of the country remained untouched by the economic upswing of the 1990s, which The most important prerequisites for achieving the was most noticeable in the greater districts of Ho-Chi-Minh objectives in the development plan must be created by Viet- City and Hanoi. Some of the allocations of state funds for nam itself through an accelerated reform policy. Over the education and health care are declining, and this is jeopard- medium term better use should be made of the internal izing Vietnam’s relatively high state of development in these resources, and for this the financial system, among other fields. The goal of poverty reduction still has high priority in things, needs to be made more efficient. The country’s abil- Vietnamese development planning, and the aim is to achieve ity to borrow commercially is still limited. To increase this this mainly on the basis of high, employment-intensive eco- and attract more foreign private capital in the form of direct nomic growth and intensified promotion of the rural areas. investment and project finance (including public-private In addition, special programmes to help particularly back- partnerships) it is also necessary to increase the legal security ward regions and poorer sections of the population and fam- and the transparency of decisions. ilies are to be continued.

39 Loans from the credit line for poor business people were also given to the small shops in downtown Hanoi.

DEVELOPMENT COOPERATION WITH VIETNAM To support vocational training KfW will complement the GTZ vocational training programme by financing equip- Vietnam is a priority partner country for German ment for vocational schools that offer courses for which development cooperation. It has been and still is the strate- there is strong demand in the market. To achieve multiplier gic design of Financial Cooperation to support positive effects promotion has also been agreed for two of the four approaches in Vietnamese reform and growth policy in the schools that train vocational school teachers in Vietnam. In priority areas with the overall aim of reducing poverty. the financial sector the aim is to improve access to financial services for this target group. For this purpose the sector is ECONOMIC REFORM AND BUILDING to be diversified with FC support and made more efficient. UP THE MARKET ECONOMY There are still too few banks in the country that can offer attractive financial services to customers. The relatively low In the fields of economic reform and building up the savings ratio illustrates this and people’s lack of confidence market economy micro, small and medium-sized firms and in banks. Since the early 1990s FC has been operating in new businesses receive targeted promotion through the selected areas of SME and financial sector development with financial sector and the vocational training sector. DEG has 4 loan programmes for a total of EUR 41 million. DEG has set so far invested a total of around EUR 13 million for three up a revolving special loan fund through which new busi- projects to promote the private sector; it has also realized a nesses can be financed. The local banks and new entrepre- number of measures with German and Vietnamese private neurs are receiving consultancy in cooperation with the Ger- firms, in energy supplies, for example, using funds from the man Development Service (DED). BMZ’s PPP Facility. Further efforts are needed to build permanent structures in the financial sector. The political dialogue on the

40 problem areas must be continued, while other issues are among the international donors in Vietnam. Other FC activi- political influence on lending, accounting to international ties to protect the environment and resources include proj- standards and the need to free interest rates. Complementary ects for the supply of drinking water and sewage and waste measures to train staff in partner institutions are also disposal. needed. FC projects for a total volume so far of EUR 82 million HEALTH CARE AND FAMILY PLANNING have made the Vietnam railways more ecological and efficient as a means of transport. After years of procrastination In the priority areas of health care, family planning and the Vietnamese government has now made the introduction HIV prevention the FC commitment totals EUR 38 million and of market principles in the running of the railways, which is being used to finance hospital facilities and contraceptives, KfW wanted to see right from the start, its declared aim. in combination with information campaigns. The projects are Progress has been achieved here by allowing the railways to being carried out in close cooperation with the German take responsibility for setting tariffs and by separating pub- Agency for Technical Cooperation (GTZ) and other donors. lic and commercial operations, among other things. The Viet- nam Railways have been converted to a more independent ENVIRONMENTAL AND RESOURCE PROTECTION state enterprise, an important step towards commercializa- tion. Moreover, since 2001 reform of the railways has been Progress in reducing poverty will not be possible in supported by a German TC project. Vietnam without protection and intensified and sustained use of the scarce arable land, the forests and potential fish- ing grounds. The main focus of FC activities in the priority area of environmental and resource protection is on sustained forestry projects. At present there are four reforestation projects with a total volume of EUR 20.5 million. They are located in poor districts and are so conceived that measures to create income and employment for the local population will make essential contributions to reducing poverty. With its commitment to developing sustained forestry Ger- man Development Cooperation is playing a leading part

Railroad line from North to South Vietnam near Da Nang. SUB-SAHARAN AFRICA

REGIONAL DEVELOPMENT The high price of oil in the first half of the year mainly benefited the oil-exporting countries like Nigeria. However, As in the previous year, economic growth of 3.3% is Nigeria did not use this revenue consistently to improve the forecast for sub-Saharan Africa in 2001 as well. In the sec- state budget, instead the additional revenue led to an ond half-year the worldwide recession slowed growth, as did increase in the money stock, higher inflation and a turbulent the effects of September 11. Countries that are greatly exchange rate. The downslide in the oil price in the second dependent on exports and tourism, like Kenya and South half of the year eased the situation for the oil-importing Africa, were particularly badly affected. Altogether per countries in turn, which include most of the African states. capita income in Africa improved by only 1% during the year The world market prices for other raw materials, particularly under review. in the agricultural field, have mostly fallen further, as in previous years. The world market price for coffee, in particular, While South Africa was able to achieve growth in GDP has fallen nominally by 60% since 1997 owing to excess of around 3% in 2000 the figure fell to 2% in 2001. So the capacities. The negative effects have been felt mainly by the downward trend in per capita income continued. The deteri- big coffee-exporting countries Uganda and Kenya. Cotton oration in the development from 2000 is mainly due to the and tobacco prices have also fallen. Altogether this led to weaker world economic trend, together with a considerable continued deficits on current account for most states south fall in the prices for gold and platinum. The Government’s of the Sahara. persistence with a restrictive policy enabled the budget deficit to be reduced. The inflation rate has been relatively Countries like Tanzania and Botswana were impressive low at around 5% for a considerable time. The high level of with growth rates of over 5%, owing to stable political con- unemployment, which is South Africa’s main problem, has ditions. A positive factor of note in 2001 was the cessation worsened. Major structural reforms, particularly in privatiza- of some open hostilities in the region. Ethiopia and Eritrea tion, are still awaited and this backlog in reform, combined kept the peace agreement signed the previous year. It also with the continuing crisis in neighbouring Zimbabwe and the became clear in 2001 that politically unstable governments external shocks, contributed to the continued decline in the and a lack of orientation to development in government external value of the rand in 2001. action are having a very negative effect on economic development in sub-Saharan Africa. In Zimbabwe the unrest over land reform and other shortcomings in the government have caused the economy to shrink by an estimated 8%. In Côte d’Ivoire political unrest caused the investment climate to deteriorate and reduced the country’s total output.

Many countries have now presented their first national strategies on how they would like to reduce poverty. Gener- ally they include higher rates of schooling and better health care, but they also include measures to promote growth. The spread of HIV and AIDS is still a major problem for the entire region of sub-Saharan Africa, and it is having far-reaching effects on every sector of African society.

Leading heads of state on the African continent set up an initiative for the whole of Africa last year, the New Part- nership for Africa’s Development - NEPAD. The initiative aims The participation of women is an absolute precondition for sustainable well to strengthen the principles of African responsibility, leader- operation. ship and accountability with the help of an action plan. It

42 was expressly supported by the industrial countries at the G 8 Summit in Genoa. The member countries of the Initiative see the lack of infrastructure facilities as the main obstacle to economic development in sub-Saharan Africa. For example, there are only around 5 million telephone connections altogether for the approx. 600 million people who live in sub-Saharan Africa (without South Africa), only 16% of all the roads are tarmac, and only about half the Africans have access to clean and hygienically safe water. In many countries the financial sector is underdeveloped. There are many reasons for this. The lack of urbanization in sub-Saharan Africa plays a part as does the small size of the countries, their unfavourable geographical position and inadequate government. Uganda is one example that shows how these countries can be actively supported in building up their infrastructure through Financial Cooperation and DEG’s pro- DEVELOPMENT POLICY COOPERATION WITH THIS REGION motion of the private sector. Commitments by the KfW Group to the countries of sub-Saharan Africa rose to EUR 295 million in 2001. This was due both to the record volume of DEG commitments at EUR 90.5 million (previous year EUR 52.6 million) and the rise in FC commitments from EUR 190 million to EUR 204 million. The most important recipient countries in 2001 were Sene- gal, Mozambique, Côte d’Ivoire and South Africa.

A particularly high share of the FC funds was used for social infrastructure projects and AIDS prevention. DEG’s new commitments in 2001 covered a wide range of sectors, extending from agricultural enterprises, like an orchard in Côte d’Ivoire and a rubber plantation in Nigeria, through the processing of agricultural products, like a cotton deseeding plant in Côte d’Ivoire, to the infrastructure and services sectors described in the project example sections, and large industrial facilities. A long-term DEG loan enabled the very successful aluminium smelter in Mozal in Mozambique to be expanded; this was chosen as Project of the Year 2001 in December 2001 by the US International Project Management Institute.

Woman carrying a load of building material to make bricks in a Nairobi slum rehabilitation project.

43 Country Example: Uganda

As a result of the structural adjustment carried out UGANDA since 1990 the economy is now largely back to market econ- Area: 236,000 sq.km omy principles. In agriculture the yield per hectare is still low, but with better technology, supplies and infrastructure the Population: 21.5 million yields could be considerably increased. Uganda’s main export Population growth 2.7% p.a. is coffee, but the 1990s in particular have shown how vul- Gross domestic product: USD 6.4 billion nerable Uganda’s economy is in this sector, owing to the Economic growth: 6.4% (2001) p.a. fluctuating world market prices for coffee. Per capita income: USD 320 Life expectancy: 42 years The industrial sector is now largely reprivatized and it Literacy rate: 66% accounts for 27% of GDP. Most of the plants consist of simple raw materials processing equipment, mainly for textiles Debt service ratio: 23.7% and tobacco, beverages, timber and paper processing and the Poverty rate (< USD 1 per day): 36.7% production of building materials and chemical products. In DAC category: Least Developed Country addition there are many small and micro enterprises, many of HDI ranking (in Human Development which are making simple household articles or selling craft Report 2001): 141 out of 162 work. The planned privatization of state enterprises will take a long time yet, as in Uganda, too, many government offi- The main focus of German-Ugandan development cials will then lose privileges and so they are putting up cooperation: resistance in a variety of ways.

• Water supplies and sewage treatment In the last ten years Uganda has achieved impressive • Vocational training growth figures. In 2001, for example, real growth was 6.4% • The financial system p.a. However, with average per capita income of only USD 320 p.a. Uganda is still one of the poorest countries in Africa. Social indicators, like a high infant mortality rate and lack of Uganda lies in the East African highlands, which rise to access to clean drinking water, are characteristic of the dif- between 1000 and 2000 m. Thanks to the altitude a large part of the country enjoys a subtropical or temperate climate. Fertile soil and good water potential provide good conditions for farming. Nearly one quarter of Uganda’s land area is subject to special reservation control; it includes 10 national parks.

The Ugandan economy had good starting conditions when the country gained independence in the early sixties. But between 1970 and 1986 civil war and economic mis- management caused a drastic decline, and by the end of the war most of Uganda’s infrastructure was in ruins. The private and state organizations and the marketing facilities had almost collapsed. Since 1986 the policy pursued by the gov- erning National Resistance Movement Party has helped Uganda to a remarkable economic upswing. The country’s own efforts have been supported with generous financial assistance from the international community of donors. Transporting mats for home construction.

44 ficult living conditions. The HIV/AIDS epidemic is having serious effects in every walk of life. The active and mobile urban Sudan population aged between 30 and 40 are particularly at risk, with an infection rate of 20%. Largely due to the HIV/AIDS epidemic the average life expectancy, which was low in any case, has fallen in the last twenty years by six years and is now only 42. However, Uganda is at present the first country UGANDA Zaire in sub-Saharan Africa to be showing a declining trend in new HIV cases. This is due to a consistent and open anti-AIDS policy and extensive prevention campaigns, to which German Kampala FC projects are contributing. Kenya

DEVELOPMENT COOPERATION WITH UGANDA

Especially since the reconstruction of the country in Rwanda the second half of the 1980s Uganda has been an important Tanzania partner for German development assistance.

URBAN WATER SUPPLIES AND SEWAGE TREATMENT latory body are to ensure that the private operator does improve the efficiency of the supply system, e.g. by reducing Germany is Uganda’s biggest bilateral donor for urban water losses. drinking water supplies and sewage treatment. Beyond providing infrastructure KfW also advises the Ugandan Govern- DEVELOPING THE FINANCIAL SYSTEM ment in developing its sectoral policy. The partner organization for this is the para-statal National Water and Sewerage It is the objective of German development cooperation Corporation (NWSC), which is responsible for the 12 biggest in the financial sector to promote the private sector by offer- towns in the country. Although state-run, NWSC is formally ing funds for small and medium-sized firms (SMEs) at independent and it has to ensure that water supplies and favourable conditions. The supply of financial services in sewage treatment are operated to commercial criteria. State- rural areas in particular is to be improved, in order to offer run centralized water supplies and sewage treatment have better chances of development to the people there, who are proved inefficient and too expensive, and FC is therefore especially vulnerable to poverty. This requires adjusting the supporting the change in the paradigm in the government’s Ugandan financial and capital markets to modern market sectoral policy to involve the private sector more in future. economy standards. From 2004 all Uganda’s urban water supplies are to be leased “as a package” to a private operator, who will be subject to Under FC so far three credit lines to a total of EUR 7 control by a state regulatory body. But the necessary infra- million and capital and loans in trust funds have been made structure will remain state property. The appropriate institu- available through DEG to the Development Finance Company tional and organizational conditions are currently being cre- of Uganda (DFCU) to fund long-term lending in manufactur- ated. ing. The DFCU has diversified its range of instruments with the support of KfW, i.a. by merging with a local bank, and The project to supply water to the capital Kampala is a above all by entering the leasing business. This was also sup- pioneering project in this context. The reorganization and ported with a DEG participation in trust funds. This has not expansion of the derelict pipeline network by a private oper- only improved the economic prospects for the DFCU; the ator is being financed with EUR 3.3 million in FC funds. A leasing business will also be an instrument of promotion for performance-related remuneration system and a state regu- very small enterprises, like group taxi operators.

45 Local people repairing their road.

FC is also financing the development of a modern pay- funds in the state budget the number of Ugandan private ments transaction system in a cooperative project conducted training centres and their training capacities have risen with the German Agency for Technical Cooperation. In this strongly in the past ten years. Their approach to training has project the manual cheque clearing office is being converted now been adapted and both in quality and quantity they are to a legally autonomous automated interbank clearing office making a bigger contribution to employment-oriented voca- that is independent of the central bank. Other forms of cash- tional training than the state. less payment like transfers or direct debits are also to be made possible. In addition cost-cover charges are being The first FC project to promote private vocational introduced. This project will make a major contribution to training centres is for a total of EUR 6 million, and it will help building up an efficient financial system in Uganda and it to improve and expand the training infrastructure of 26 will help to reduce transaction costs. In addition, to selected centres. As a complementary measure, training strengthen the financial sector DEG has invested its own courses (primarily for instructors and management staff) are funds in shares in Industrial Promotion Services Uganda Ltd. being organized to ensure sustained use of the capacities to (IPSU), an investment company. meet needs. A further EUR 6 million is being provided for the expansion of private vocational training centres under a sec- VOCATIONAL TRAINING ond promotional programme.

The population of Uganda is still growing at about 3% ECONOMIC INFRASTRUCTURE a year and 50% of the native population are under the age of 15. Every year, therefore, around another 340,000 young As Uganda is land-locked and seaports are a long dis- people come on to the labour market, which cannot absorb tance away the Ugandan railways are extremely important them as it is now. So basic and advanced training for broad for foreign trade. Since 1981 FC has been helping the Ugan- sections of the population is of outstanding importance for dan Railways Corporation (URC) to maintain the locomotives the future of the country. Owing to the serious shortage of of German origin. On the initiative of KfW a German-African

46 Vocational training centres in Hoima give adolescents a future. joint venture was set up with the URC and with a German been either built or repaired. The first road maintenance pro- manufacturer of locomotives as the managing and majority gramme was carried out from 1992 to 1998; it was the first partner. The URC has transferred both the general overhaul of its kind, and performed a pioneering function in the post- and repair work and the current maintenance of its locomo- war period by giving more orders to the private sector in tives to the joint venture. German FC is mainly financing the Uganda. Encouraged by the welcome progress of the project general overhaul of the locomotives. The work has made and a fruitful sector dialogue FC launched another pro- more locomotives available; however, the other aspects of gramme for the road sector in 1998. This time the road con- the railways (superstructure, signals) are still in an unsatis- struction is being supplemented with institutional reforms, factory state. Only full privatization will, in our view, offer like setting up an independent Road Authority, and consis- the prospect of permanent operation of the railways. The ini- tent axle load controls. They are to help Uganda achieve its tial conditions for this have been created under German FC. objective of maintaining its main road network without foreign support from 2002. During the economic decline of Uganda the efficiency of the road sector declined as well. German FC for the road DEG has given a guarantee for EUR 6 million to the sector has been concentrated mainly on East Uganda, as Mobile Telecom Network Uganda Ltd. (MTN) which has trade with Kenya is of crucial importance to Uganda. So far strengthened Uganda’s communications infrastructure. EUR about 300 km of main and long-distance roads have been 1.5 million has been committed in DEG’s own funds to con- repaired with support from KfW and about 50 bridges have struct a commercial office building.

47 LATIN AMERICA

REGIONAL DEVELOPMENT among international investors. The average burden of debt service remained high at 34% of export earnings. Foreign After the welcome results of the previous year the eco- trade stagnated compared with the previous year, and the nomic and social development in all the Latin American intra-regional trade flows, particularly in South America countries did not come up to expectations in 2001. Average (Mercosur) were affected by the crisis in Argentina. growth in GDP fell from 4% in real terms to 0.5%, while average per capita income fell by 0.5%. The inflation rate in Although the general situation was depressed the the region was around 7%, so at a welcome low level. The development in the individual countries differed greatly. inflow of foreign direct investment was slightly weaker than Countries that had made only little efforts to carry out struc- in the previous year but still on a high level at USD 58 billion tural reforms in times when the world economy was in bet- (USD 64 billion in the previous year). Direct investment cov- ter form were particularly badly affected by the crisis. They ers a considerable part of each country’s current account particularly felt the falling prices for agricultural and mineral deficit and provides important stimulus to development, as it raw materials, like coffee, copper and oil. Another factor was supports the formation of fixed assets and human capital, in how far a country was integrated in the economy of the and helps to spread technical and organizational know-how United States. Mexico, Chile and the countries of Central in the recipient countries. America and the Caribbean were particularly badly affected by the recession in the United States. Growth in Mexico, for Access to the international capital markets became example, fell to zero, and delays in carrying out important expensive for Latin American countries as risk premiums structural reforms contributed to this. Nevertheless, key basic were increased. The main reason for this is the debt crisis in economic data remained positive. The same applies to Chile, Argentina and the consequent greater sensitivity to risk which was able to achieve one of the best results in the

48 region with around 3% growth in GDP. Brazil, by far the tions. Access to productive resources, like capital and land, biggest economy in the region, also had a respectable result must be improved. At the same time the efforts directly to with 2% growth, despite the internal energy crisis and a dif- combat poverty must not slacken, although progress has ficult environment. But the recession accompanied by defla- been achieved. tion in neighbouring Argentina deepened. Despite considerable efforts by the Government to cut spending, which were Latin America’s economic prospects for 2002 depend supported by the International Monetary Fund (IMF) and largely on the cyclical development in the world economy other creditors, the financial crisis worsened as the year went and above all on the development in the United States. on, culminating in the open declaration of insolvency just Despite all the problems there is no alternative to continuing before the end of the year. Social and political unrest caused the market economy reforms and modernization policy. In several changes of head of state. The currency was devalued. this connection the “second generation” reforms are of even It is a testimony to the successful economic policy of Brazil more importance. They are intended to modernize the legal and Chile that these countries have successfully warded off and administration systems, many of which are obsolete, in the crisis and prevented it being transferred to them, order to improve the institutional bases for an efficient and although they have relatively close trade links with socially balanced development. Argentina. Argentina itself, on the other hand, is an example of only half-hearted efforts at reform and a fiscal policy that DEVELOPMENT COOPERATION is not viable. WITH LATIN AMERICA

In the other South American countries the picture was In the commitments for Latin America in 2001 more uneven. In Ecuador a strong surge in growth was achieved market funds could be used for projects relevant for devel- which compensated in part for some of the losses suffered in opment policy. The volume of the flows committed by the previous years. Colombia was able to register moderate KfW Group under development cooperation (loans, grants growth; however, the country is weakened by persistent civil and participations) amounted to EUR 257 million altogether war. Peru was not able to overcome stagnation under its new (EUR 227 million in the previous year). This included DEG President Toledo either, while Venezuela achieved a good market funds totalling EUR 148 million and KfW market result with its oil exports. It is the only major country in the funds under a composite loan for EUR 18 million. The FC region with a surplus on current account. However, the commitments financed with BMZ budget funds amounted to authoritarian and dirigistic policy of the current President is EUR 54 million. The most important recipient countries were not likely to create economic confidence in the country. The Brazil, Chile and El Salvador. Central American and Caribbean countries were not only affected by the economic slowdown in the United States but The FC loans and grants committed were again focused also by the fall in prices for their main export product, cof- on projects in the environmental resource protection sectors, fee, and a serious drought. El Salvador also suffered two with regional focus on Brazil and Chile. The main aim was to strong earthquakes at the start of the year. make ecologically sustainable use of natural resources. While protection of the rain forests was the main aim in the Brazil- With the unsatisfactory rate of economic growth ian projects, the Chile project, which is a composite finance unemployment and poverty increased almost everywhere, loan, is designed to improve industrial pollution control. The and many countries were not able to achieve real improve- funds are being channelled to small and medium-sized firms ment in the state of public finances. The savings and invest- through Chilean banks so that they can finance the neces- ment ratios and the development in productivity are still sary environmental investment. As these investments are inadequate, so Latin America is losing more ground in world- generally also commercially advantageous the terms and wide competition. Sustained growth that benefits broad sec- conditions are commercially structured. tions of the population is needed to help solve the present social problems and increase support for democratic institu-

49 The second big focal area is water supply and sewage A focus of DEG’s activities was on projects with Ger- treatment projects, particularly in Central America. These man partners, as in the vehicle components supply industry projects help to reduce poverty because they improve the liv- in Mexico, the textile industry in Guatemala and Mexico and ing conditions for poor sections of the population. The rapid a container terminal in Chile. DEG has also committed more assistance to rebuild houses destroyed by the earthquake in loans to a number of local commercial banks, e.g. in the El Salvador served the same aim. It was possible to start Dominican Republic, to fund USD mortgages for housing rebuilding 4,200 homes a few months after the catastrophe construction and for micro-financing in Brazil. A loan to the in cooperation with an experienced non-governmental proj- local Brazilian development bank Banco do Nordeste will ect sponsor. help the commitment of micro loans and improve access to the formal financial sector for hitherto disadvantaged KfW was also able to increase the FC promotional loan groups in the population. to El Salvador (financed with market funds). In view of the shortage of capital that still persists in this region these funding lines enable the medium to long-term investment needs of SMEs to be financed through local commercial banks. Two loans for a total of EUR 39.1 million were committed for this purpose.

50 NORTH AFRICA AND THE MIDDLE EAST

REGIONAL DEVELOPMENT As the economic dynamic slows most of the countries in the region are having great difficulties in reducing their The countries of North Africa and the Middle East are high unemployment rate and creating more jobs for the rap- looking back on a difficult year. With few exceptions they idly growing number of young workers. In Egypt alone suffered from the cyclical downswing in Europe and the 500,000 young people come on to the labour market every United States. In the Middle East the cyclical downswing was year. Like the Egyptian Government, other governments in worsened by the escalating violence during the year and the the region as well are forced to employ a large percentage of dwindling hopes that peace can be achieved in the medium these people in the public sector, and this is creating new term. Hence, the tourist figures for Israel and Egypt have structural problems: the administrative apparatus is growing fallen to half the previous year’s total and in Jordan tourism larger and state industries are less easy to restructure and has practically ceased to exist. The drought in the 2000/2001 privatize. Moreover, the growing expenditure on personnel is season also left evident traces. As in the previous year it increasingly reducing the scope for the public budgets. caused losses in Morocco, Tunisia and Jordan particularly. It is evident in the partner countries of development With the exception of the oil-exporting countries on cooperation that the enthusiasm for continuing the neces- the Gulf the budget deficits in the region have risen, as have sary reforms is diminishing. Privatizations are being post- most of the deficits on trade and current accounts. With a poned for fear of negative socio-political effects, and owing slump in foreign direct investment at the same time it to lack of interest from investors. The adjustments of tariffs became more difficult to close the gaps that developed in for energy, for example and particularly water supplies and state finances. In some cases, therefore, recourse to higher sewage treatment that are overdue in many countries are foreign borrowing was unavoidable. In addition, pressure being suspended. Inefficiencies, particularly high rates of loss grew on the currencies, most of which are tied to the US dol- and overstaffing, are not being consistently reduced. lar. Egypt was most affected by this, and the Egyptian pound lost nearly 20% of its value against the dollar during the The Palestinian Territories are a special case. As a result year. of the violent conflict and Israel’s policy of containment the economic and social conditions here have worsened dramat- Against that background the high rates of economic ically. The authorities and towns are having considerable dif- growth of earlier years could not be regained in 2001. ficulties in meeting their current costs. The unemployment Growth of more than 5% was only enjoyed by the oil-export- rate has risen from 10% in the third quarter of 2000 to more ing countries Bahrain, Qatar and Oman. Morocco, Algeria than 50% in 2001. Per capita incomes have halved and at and Tunisia achieved around 4%. In Egypt growth fell back to about 2%, while Saudi Arabia registered around 1%. Jordan, Syria and Lebanon also had to be content with lower growth rates of between 1% and at most 3%. Israel, one of the economic heavyweights in the region besides Egypt and Saudi Arabia, actually had to take a slight contraction of its economy of -0.5% after the upsurges of earlier years.

Population growth is still high with at least 2% - 2.5%, and as a result average per capita incomes are stagnating or actually falling. Only Tunisia has been able to break out of this cycle to a certain extent. For years economic reforms here have been accompanied by a comparatively modern education and health care policy, and this has brought pop- The challenge for the entire region: ulation growth down to around 1.3%. to survive on the border of the desert.

51 • The protection of natural resources and the environment is of great importance in this. So projects for the more efficient use and protection of water and ground resources (reducing loss of water, sewage treatment, waste disposal, drainage) were a main focus of cooperation in this region in 2001 as well, accounting for 56% of the commitments.

• As the markets are opened the competitiveness of local industry must be strengthened. In Morocco, Tunisia, Jor- dan and Egypt FC offers loan programmes in cooperation Sewage flowing from Deir al Balah to Wadi Gaza. with local commercial banks. With their help companies are to invest to improve efficiency, achieve better quality around USD 800 a year on average are only one twentieth of products and observe more stringent environmental Israeli income. More than half the Palestinian population, standards. In 2001 EUR 31 million was committed . and as much as 80% in the Gaza Strip, have to manage on less than USD 2 a day. • Extensive investment in expanding the social infrastructure, like the education system, is needed for the young Egypt signed an association agreement with the EU in and growing population. KfW puts great value on a 2001, and negotiations were concluded on an association labour-intensive method of building when financing agreement between the EU and Algeria. As in Tunisia, Israel, projects in this sector. Moreover, wherever possible local Morocco, the Palestinian Territories and Jordan the agree- firms are to be involved. ment will give better access to the European market, but it also requires these countries to accelerate the improvement Within the various projects KfW agrees organizational in their competitiveness. and economic adjustment measures with the partner institutions. This increases efficiency and helps them to cover more DEVELOPMENT COOPERATION of their costs. That is an important condition for the sustain- WITH NORTH AFRICA AND THE MIDDLE EAST ability of the measures when the FC promotion comes to an end. Increasingly innovative approaches are being agreed in The volume of commitments for Financial Cooperation which private firms are to take over operational tasks. In with this region was slightly below the previous year’s level addition, as in previous years, FC has played a leading role in at EUR 180 million. DEG did not have any new business in the dialogue with the partner governments and institutions 2001, partly due to the difficult conditions for the private in Morocco, Tunisia and Jordan on important reform steps. sector described above.

The aim of FC in the Southern and Eastern Mediter- ranean is still to support the partner countries in their adjustment process, improve the sectoral conditions and cushion social hardship.

52 Country Example: Morocco

contribute only about 3% to GDP and account for 1% of MOROCCO employment, but they are very important as foreign Area: 446,550 sq.km. exchange earners. Population: 29.2 million In the early 1980s Morocco had slid into an almost Population growth: 1.7% p.a. hopeless economic situation, but with the support of the Gross domestic product: USD 32.9 billion World Bank, the International Monetary Fund (IMF) and Economic growth: 4.8% p.a. extensive rescheduling of debt it has been able to achieve Per capita income: USD 1,150 major structural reforms. In the macroeconomic view this Life expectancy; 67 years policy has been a success: the country’s foreign debt is still Literacy Rate 47% high at 58% of GDP, but it is declining and bearable. The trade balance is always in deficit, but this is almost compen- Debt service ratio (2001): 26% sated by the transfer payments from about 1.7 million Poverty ratio (international Moroccans who work abroad, and revenue from tourism. The Poverty line = USD 1/day): 2% budget deficit has been brought down to 3% on average for DAC category: Lower Middle Income Country the last five years and for some years inflation has been in HDI rank (Human Development the low single figure range. Report 2001): 112 out of 162

Main Focus of German-Moroccan Development Despite the successes there are still considerable struc- Cooperation tural problems, and these are appearing more starkly with • use and management of water resources the difficult conditions of last year (drought, falling growth • environmental and resource protection rates in Europe and the United States, falling tourist figures): • economic promotion • Morocco is behind comparable countries in nearly all its social indicators. The illiteracy rate is 53%. The enrolment Morocco is one of the few countries in North Africa rate at elementary schools is far behind at 77%. The same and the Middle East in which the monarchy grants parlia- applies to life expectancy (67 years) and the infant mor- ment substantial rights of control and codetermination, and tality rate (58 per 1000 live births). Moreover, the coun- allows non-governmental organizations considerable free- try is also suffering from a marked town-country diffe- dom. Nevertheless, loyalty to the King and traditional pater- rential, which has caused extensive migration into the nalist structures are still the main pillars of society. towns.

Agriculture still plays a big part in the Moroccan econ- • Altogether the private sector has not developed the omy and policy. Its contribution to GDP is between 12% and expected dynamic. The savings and investment ratios 20%. However, its importance goes far beyond this, with a persist on a low level. share of 40% of the workforce and 30% of exports. Problems are caused by the fluctuations in output due to weather con- • Economic growth is thus below the country’s potential. ditions, and which affect rural incomes, the processing On average for recent years it has only been slightly industry, exports and not least the state budget. Heavy above the population growth rate. This is all the more industry produces mainly for the domestic market, and most problematic in that the labour force is growing rapidly, at of the enterprises are state-owned; however, they are grad- 3% p.a. Urban unemployment (over 20%) and poverty ually being privatized. The expanding private sector is con- are causing growing social and political problems, which centrated on metal and plastics processing and textiles, are also finding expression in growing pressure to emi- leather and clothing production. The state phosphate mines grate to Europe.

53 Country Example

sectors. But sectoral concentration has been in progress since Spain the early 1990s, recently culminating in the agreement between the German Government and Morocco on priority Rabat areas. DEG does not at present have any projects under way in Morocco. MOROCCO THE USE AND MANAGEMENT OF WATER RESOURCES

In Morocco the people’s health is suffering from the inadequate quality and quantity of water supplies and Algeria sewage disposal. At present only two thirds of the approx. 29 Western million inhabitants of the country have access to safe drink- Sahara ing water all year round. In rural regions regular supplies of Mauritania drinking water are assured for only one third of the 13 mil- Mali lion people who live there. In the city 30% of the population are not yet connected to public sewage collection systems. In rural areas decentralized sewage disposal facilities are still the exception. Municipal or industrial sewage is very inade- • Environmental protection has been neglected in every quately treated, and it is increasingly polluting the limited sphere. The scarce water resources are under threat. water resources. Deforestation and elimination of the vegetation cover and the consequent soil erosion are other acute pro- In view of the evident shortfalls in supply in the rural blems. A change in attitudes here only began to appear areas expanding drinking water supplies in rural regions is a a few years ago. major priority for German FC. In this sub-sector a number of FC projects have been financed to a total of more than EUR So Morocco’s economic and social policy faces huge 250 million. In the past five years support for the Govern- challenges. The association agreement with the EU that has ment of Morocco in executing the PAGER programme to been in force since March 1, 2001 and provides for creation supply drinking water to rural districts has been in the fore- of a free trade zone by 2010 has increased the problems. King ground. The individual components of the systems (wells, Mohamed VI and the Government are trying to increase eco- pumps, pipelines, reservoirs and distribution networks) are nomic growth with extensive reforms and privatize more planned and built in conjunction with the local people. The state enterprises. They are trying to reduce poverty, unem- communities who are using them are solely responsible for ployment, under-development and the backlog in education operating and maintaining the systems. The necessary groups and finally improve environmental protection. But the are built up and promoted while the project is being exe- reforms are only slowly being implemented. cuted. Until the mid-1990s drinking water systems were only financed by the state, but in 1997 it was possible to agree an DEVELOPMENT COOPERATION WITH MOROCCO innovative financing scheme after persistent discussions. Under this agreement the rural communities and users are to Morocco is a priority partner country for German bear 20% of the costs. The contribution the municipalities Financial Cooperation and since Financial Cooperation was and users make has proved to be an appropriate criterion for initiated in 1961 it has received around EUR 1.2 billion. In the selection of suitable individual projects. It enables the addition, KfW has provided around EUR 35 million in market use of the funds to be more efficiently controlled, and this funds for mixed and composite finance projects. In the early scheme has now been adopted by most of the donor organ- decades of cooperation FC promoted projects in numerous izations.

54 The sustainable use of water is one factor that determines a country‘s future.

Since the end of the 1990s FC has also been financing An essential task in environmental policy is the eco- three sewage treatment programmes to a total of around nomical use of the scarce resource of water in irrigated agri- EUR 50 million. Weaknesses in the legal and administrative culture, for this accounts for around 90% of total water con- systems are still obstacles to a comprehensive solution of the sumption. To increase the efficiency of irrigated agriculture sewage problem on a national scale in Morocco. Efforts are in the future water losses are to be reduced and the legal, therefore being made under FC to make advances in con- institutional and economic conditions are to be improved. junction with other donors and in dialogue with the respon- Since 1990 FC has been promoting three projects for a total sible Moroccan departments. The first partial success was the of EUR 40 million to rehabilitate small irrigation perimeters. amendment to the by-laws of the Office National de l’Eau The irrigation systems cover areas of between 50 and 100 Potable (ONEP), the Moroccan water authority, on the basis hectares, used by between 50 and 150 farmers. At the same of which the ONEP can in future be commissioned by munic- time local groups of users are being given basic and further ipalities to take over operating sewage treatment systems. training so that they can later take more responsibility for operating and maintaining their irrigation systems. So this Thanks to the long-term concentration of FC the Fed- approach is embedded in the policy of decentralizing politi- eral Republic of Germany is the biggest donor in this priority cal decision-making processes that has now been introduced sector. The structural changes that have been achieved and in Morocco. are needed in the future, particularly in the political dialogue, will further improve the chances for success for FC operations.

55 ENVIRONMENTAL AND RESOURCE PROTECTION

A major problem for Morocco is industrial pollution. It is causing deterioration in the quality of water and air and affecting the health of the population, especially those who live near industrial plant. So far there has been scarcely any legal or official pressure on industry to avoid negative effects on the environment from their production processes. But these companies are coming to see that they must invest more in production processes that are more environmentally The protection of the environment and natural resources is an important and resource-friendly, in view of the coming EU association, priority in the cooperation with Morocco. greater export-orientation and the worsening environmental situation in some regions. More use is to be made of regenerative energies. In promoting these projects KfW is making a contribution to FC is promoting environmental protection with the global climate protection and reducing Morocco’s depend- Industrial Environment Fund project, which is intended to ency on imported primary energy sources. Moreover, the reduce harmful emissions and consumption of resources, spread of small photovoltaic systems is also playing an mainly by private industrial and commercial firms. A total of important role in the electrification of rural areas. Renewable EUR 24 million in FC funds is available for the project. The energies are being exploited in Morocco more than in any investment promoted to date has already made a consider- other Maghreb country. Initially, in the 1970s and 1980s, the able contribution to reducing pollution. To ensure that the FC commitment in renewable energies was concentrated on support from the German commitment will have a lasting opening up the hydro-power potential. Today FC is a pioneer effect clear legal conditions must be created and environ- in the spread of new renewable energies, with wind power mental administration strengthened in this sector as well. and photovoltaics. The FC Tanger Wind Park project marked Hence the project is flanked by a complementary measure the start of the use of Morocco’s wind power potential. The which is intended to strengthen the administration units concept for the execution of the first photovoltaic project concerned with the theme of the environment. relies in an innovative way on private companies that will maintain the systems when they are installed. Other wind and hydro-power projects are in preparation.

Working for a reliable water supply.

56 THE EUROPEAN TRANSITION COUNTRIES

KfW is supporting Georgia in renewing the power transmission network.

REGIONAL DEVELOPMENT The negative side of the growing integration of the economies of Central and Eastern Europe with those of the The European transition countries have registered eco- EU became apparent in the second half of last year as the nomic growth for the third year in succession now, and at decline in economic activity in Western Europe and the nearly 4.5% their growth in GDP was clearly above the level effects of the events of September 11 also caused falling for the EU countries. However, most of the Central European growth rates in this region after a time lag. and Baltic states, Poland, Lithuania, Latvia, Estonia, the Czech Republic, the Republic of Slovakia, Hungary and Slovenia, The very high level of unemployment of up to 20% in could not regain their former peak figures. One exception the advanced European transition countries like Poland and was Latvia, with growth in GDP of more than 6%. But the the Czech Republic persisted stubbornly in 2001. It is a prob- economies of Russia and Ukraine grew strongly last year as lem that needs much greater attention. The high level of well, by more than 5% and 9% respectively; however in the unemployment and the big regional disparities, even in the case of Russia the rate was slowing down. But in interpret- small Baltic states, are giving rise to growing criticism of the ing these figures the very low level of output in these reform process and opposition to EU membership in these economies after a long downswing must be taken into countries. The tension between the capital cities, where there account. In 2002 growth in Russia and Ukraine is expected to is nearly full employment and a shortage of well trained spe- be lower, as these countries’ currencies have risen again after cialists, and the more remote rural areas that are completely their big devaluation in 1998, and earnings from gas and oil “cut off” is a great danger to social peace and political sta- exports will fall as primary energy prices have fallen. bility. The problem is intensified by the very high open and concealed unemployment in the old heavy industry centres.

57 The reforms of the social systems that are still outstanding Within a very brief time they had drawn up a budget to could further intensify the problem. western standards and started reform projects, like privatization and banking reform. The debt rescheduling and relief The official labour market data issued by the Eastern arrangements negotiated at the end of the year for European countries (Belarus, Moldova, Russia and Ukraine), Yugoslavia (Serbia/Montenegro) will give the country the the Southeast European states (Albania, Bosnia and Herze- necessary scope for action to reorganize its economy and govina, Bulgaria, Yugoslavia, Macedonia and Romania) and integrate in the world market. In Kosovo the regional elec- the transition countries in the Caucasus, which include tions in late autumn 2001 created the first regional parlia- Armenia, Azerbaijan and Georgia, are often very much lower ment. However, the region’s future is still unclear. Kosovo’s and only show a small segment of the reality. Unemployment economic potential is not yet sufficient for an independent is in fact very much higher, particularly in the huge territo- state; at present the country cannot survive without foreign ries of Russia and Ukraine. The income differentials are prob- economic assistance. ably of about the same size as in the advanced transition countries. The social problems in the huge territories are Entry to the European Union (EU) was right at the top made worse by the lower level of incomes and the inefficient of the agenda for the governments of the Central and East- social systems. ern European countries and the Southeast European countries in 2001 as well. The EU has confirmed that the eight The transition indicators given in the Transition Report Central European candidate countries (Poland, Lithuania, by the European Bank for Reconstruction and Development Latvia, Estonia, the Czech Republic, the Republic of Slovakia, (EBRD) indicate further progress in 2001 towards democracy Hungary and Slovenia) have made visible progress in the and the market economy. However, that positive picture is approximation process. It then asked these countries to dimmed by the unrest in Macedonia, which was bordering on intensify their efforts, particularly in the public administra- civil war, and the political instability in Georgia. Belarus, tion and legal security. Poland was subject to criticism for Moldova and the Caucasian states were also unable to keep only under-average efforts at reform during the past year step with the development in the other European transition and it has fallen back to seventh place in the negotiations on states. entry. The example of Poland clearly showed last year that the adjustment processes that still have to be faced to bring The example of Macedonia and tensions that still per- these countries into line with the EU are causing much resist- sist in Kosovo and Bosnia and Herzegovina show that the ance, too. dangers in the Balkans have not been decisively reduced in 2001 either. To minimize these risks it is still important to The Caucasus countries are still suffering from political take appropriate steps to block the potential for unrest in the instability and totally inadequate economic conditions. The multi-ethnic states like Macedonia and Bosnia and Herze- conflict between Armenia and Azerbaijan over Nagorny- govina, reduce the frictional losses between states and open Karabach is still smouldering and the struggles between the up opportunities for economic development for these coun- President of Georgia and his parliament show that lasting tries. political stability in the region could not be achieved last year either. After the strong economic downslide following The last year has shown how crucial a Federal Republic the collapse of the Soviet Union the three economies are of Yugoslavia, evolving into a democracy with a market growing again, and Armenia and Azerbaijan have actually economy, is for the peaceful development of this region. Ser- achieved growth of more than 5% p.a. But the level of out- bia is playing a constructive part in solving the problems on put and incomes is still very low in these countries. In Geor- its borders with Kosovo and in Macedonia. The regional for- gia, for example, the average income has risen back above eign trade agreement initiated by the Stability Pact is also the poverty line only since the year before last. The unwilling important for the Balkan states. The reform tempo of the and corrupt administrations are still in office and as a con- young Serbian government team was impressive last year. sequence a large part of the domestic product in these coun-

58 On-site inspection for the rehabilitation of the district heating supply in Belgrade. tries is earned in the shadow economy. Estimates are for up case KfW is given a mandate to implement specific projects. to 50% of total value added. It is to be feared that the At present the bank is supporting several countries in build- reforms of the system will progress only slowly. ing up promotional banks and financing transport, sewage and energy projects in the region with commercial funds. In DEVELOPMENT COOPERATION 2001 the Balkan Development Fund had about EUR 170 million. Total commitments by the KfW Group for cooperation with this region amounted to EUR 338.3 million in 2001, of The main focus of FC in the Southern Caucasus coun- which EUR 83 million was mobilized by DEG. In addition, EUR tries is on infrastructure projects to supply drinking water 44.6 million was committed under mandates. In 2001 KfW and energy and on promoting the private sector by building worked under mandates from the Federal Government, play- up a long-term viable and efficient banking system. Alto- ing a major part in the coordination and implementation of gether FC funds totalling around EUR 326 million had been the TRANSFORM Programme for Central and Eastern Euro- made available for the three countries by 2001. A further pean states. Of the total of EUR 40.9 million provided by the EUR 10 million in FC funds has been made available to date Federal Government more than half the funds, EUR 22.7 mil- under the Caucasus Initiative to strengthen regional cooper- lion, was channelled through KfW for more than 180 proj- ation. ects. The main focus of the promotion was on improvements to general conditions in the transition countries, to DEG’s involvement is concentrated on the Stability strengthen the private corporate sector, promote the finan- Pact countries of Southeastern Europe, especially the succes- cial sector and prepare the advanced reform countries for sor states to the former Socialist Federation of Yugoslavia, entry to the EU. with the emphasis on Croatia. In Eastern Europe and the Caucasus the financial sector predominated. DEG also On the initiative of the Federal Government the inter- stepped up its operations in Turkey to cushion some of the national community has created an overall regional promo- effects of the financial crisis there. tion concept in the Stability Pact for Southeast Europe, which nearly 50 states have now joined. Even before the act of establishment of the Stability Pact was signed the Balkan Development Fund was set up following a proposal from KfW to finance rapidly effective emergency aid and supplies and investment that will be economically viable over the long term. The basic stock of the Balkan Development Fund consists of funds provided by the Federal Government under FC and the Stability Pact, and capital market funds raised by KfW. The bank is also increasingly successful at mobilizing complementary EU funds from the EU and individual countries, like Switzerland, the Netherlands and Austria. In each

59 STATISTICAL APPENDIX

1. PROMOTION OF THE DEVELOPING COUNTRIES KfW GROUP COMMITMENTS BY COUNTRIES IN 2001 IN EUR MILLION Rank Country Budget Market FC DEG Total funds funds1) promotional Financings (ODA) (ODA) loan 1 India 115.65 68.10 55.28 13.30 252.33 2 People’s Rep. China 74.39 73.37 – 15.14 162.90 3 Egypt 102.26 – – – 102.26 4 Serbia 33.49 51.13 – – 84.62 5 Indonesia 68.62 14.83 – – 83.45 6 Turkey 63.81 – – 15.57 79.38 7 Brazil 12.78 – – 56.20 68.98 8 Vietnam 49.08 13.29 – – 62.37 9 Chile 7.67 17.90 – 29.32 54.89 10 Mexiko – – 28.38 17.57 45.95 11 Sri Lanka 13.04 31.44 – – 44.48 12 Thailand – – 14.09 26.13 40.22 13 Senegal 17.90 – – 20.00 37.90 14 Jordan 37.68 – – – 37.68 15 Mozambique 11.50 – – 18.00 29.50 16 Georgia 18.15 – 4.34 2.30 24.79 17 Domin. Republic – – – 24.30 24.30 18 Tunisia 17.33 6.14 – – 23.47 19 Afghanistan 21.99 – – – 21.99 20 Armenia 20.45 – – – 20.45 21 Kenya 15.34 – – 4.70 20.04 22 Côte d’Ivoire 7.67 – – 11.37 19.04 23 Croatia – – – 18.00 18.00 24 South Africa 15.34 – – 2.65 17.99 25 Africa, supraregional – – – 17.69 17.69 26 Benin 17.42 – – – 17.42 27 Costa Rica – – 11.12 5.43 16.55 28 El Salvador 15.34 – – – 15.34 29 Bosnia and Herzegovina 12.27 – – 3.00 15.27 30 Tanzania 9.71 – – 4.74 14.45 31 Ethiopia 14.39 – – – 14.39 32 Guinea 13.29 – – – 13.29 33 Albania 12.02 – 1.12 – 13.14 34 Pakistan 12.02 – – 0.98 13.00 35 Bangladesh – – – 12.97 12.97

60 1. PROMOTION OF THE DEVELOPING COUNTRIES KfW GROUP COMMITMENTS BY COUNTRIES IN 2001 IN EUR MILLION Rank Country Budget Market FC DEG Total funds funds1) promotional Financings (ODA) (ODA) loan 36 Burkina Faso 11.76 – – – 11.76 37 Montenegro 10.23 – 1.53 – 11.76 38 Corea, Republic – – – 11.45 11.45 39 Argentinia – – – 11.40 11.40 40 Mali 11.38 – – – 11.38 41 Zambia 11.25 – – – 11.25 42 Bulgaria – – – 11.23 11.23 43 Nigeria – – – 11.08 11.08 44 Europe, supraregional – – – 10.43 10.43 45 Kyrgyzstan 10.23 – – – 10.23 46 Kazakhstan – – – 10.00 10.00 47 Cameroon 8.69 – – 0.30 8.99 48 Yemen 8.69 – – – 8.69 49 Niger 8.69 – – – 8.69 50 Kosovo 7.41 – – 1.20 8.61 51 Romania 4.60 – – 3.60 8.20 52 Laos 8.18 – – – 8.18 53 Sierra Leone 7.85 – – – 7.85 54 Cambodia 7.67 – – – 7.67 55 Russ. Federation – – – 7.50 7.50 56 Ukraine – – – 7.50 7.50 57 Palest. Territories 7.16 – – – 7.16 58 Bolivia 6.34 – – – 6.34 59 Uzbekistan 6.29 – – – 6.29 60 Mauritania 5.62 – – – 5.62 61 Nicaragua 5.62 – – – 5.62 62 Mongolia 5.32 – – – 5.32 63 Macedonia 5.11–––5.11 64 Rep. Moldova 5.11–––5.11 65 Uganda 4.35 – – – 4.35 66 Nepal 4.09 – – – 4.09 67 Chad 3.83 – – – 3.83 68 Guatemala – – – 3.54 3.54 69 Southeastern Europe 3.49 – – – 3.49 70 Ecuador 3.07–––3.07

61 1. PROMOTION OF THE DEVELOPING COUNTRIES KfW GROUP COMMITMENTS BY COUNTRIES IN 2001 IN EUR MILLION Rank Country Budget Market FC DEG Total funds funds1) promotional Financings (ODA) (ODA) loan 71Colombia3.07–––3.07 72 Gambia 2.56 – – – 2.56 73 Central African Republic 2.56 – – – 2.56 74 Slovakia – – – 2.50 2.50 75 Rwanda 1.53 – – – 1.53 76 Central Asia NA 1.28 – – – 1.28 78East Timor1.02–––1.02 79 Namibia 0.77 – – – 0.77 80 Malawi 0.51–––0.51 81 Supraregional – – – 0.41 0.41 82 Morocco 0.33 – – – 0.33 83 Asia, supraregional – – – 0.30 0.30 84 America, supraregional – – – 0.22 0.22

1) Market funds of Mixed Finance, Composite Finance, Market Fund Initiative Southeast Asia and Interest Subsidies

2. PROMOTION OF THE DEVELOPING COUNTRIES KfW GROUP COMMITMENTS BY REGIONS IN 2001 IN EUR MILLION Country Budget Market FC DEG Total funds funds promotional Financings (ODA) (ODA) loans Total 1,026.26 276.20 115.86 411.98 1,830.30 Sub-Saharan Africa 203.91 – – 90.51 294.42 Asia/Oceania 397.59 201.03 69.37 90.26 758.25 Europe/Caucasus 197.42 51.13 6.99 82.83 338.37 Latin America 53.89 17.90 39.50 147.96 259.25 North Africa/Middle East 173.45 6.14 – – 179.59 Supraregional – – – 0.41 0.41

62 3. FINANCING COMMITMENTS OF DEG 1997–2001* Average 1997 1998 1999 2000 2001 1997–2001 Sectors EUR % EUR % EUR % EUR % EUR % EUR % million million million million million million Total 368 100 369 100 358 100 343 100 360 100 412 100 Producing Sector 159 43 165 45 151 42 151 44 128 35 202 49 Agriculture, Fishery, 28 8 18 5 30 8 47 14 27 7 20 5 Forestry Manufacturing, Raw Materials, 131 36 147 40 121 34 104 30 101 28 182 44 Mining, Construction Economic 41 11 30 8 48 14 31 9 37 10 60 15 Infrastructure Energy 15 4 22 6 18 5 12 4 21 6 0 0 Transport and 19 5 8 2 30 8 12 4 16 4 28 7 Storage Communications 8 2 0 0 0 0 6 2 0 0 32 8 Social Infrastructure 6 2 0 0 14 4 7 2 2 1 9 2 Water Supplies and Waste Water/ 2 1 0 0 9 3 0 0 0 0 0 0 Solid Waste Disposal Education 2 0 0 0 0 0 0 0 0 0 8 2 Health Care 3 1 0 0 4 1 7 2 1 0 1 0 Public Administration 0 0 0 0 0 0 0 0 1 0 0 0 Financial Sector 144 39 153 41 111 31 138 40 187 52 130 32 Other Services 18 5 21 6 34 9 16 5 6 2 11 3 Trade and Tourism 13 4 15 4 32 9 8 2 5 1 6 1 Real Estate, Leasing, 4 1 6 2 2 0 8 2 1 0 5 1 Service Enterprises

* Figures may not add up to totals due to rounding

63 4. PERSONNEL SUPPORT MEASURES OF KfW 1997–2001 1997 1998 1999 2000 2001 EUR Number EUR Number EUR Number EUR Number EUR Number million million million million million Fund for Project 4.17 174 6.80 207 4.81 182 8.90 239 11.18 267 Preparation Studies 14.56 64 25.56 104 16.17 59 12.40 54 15.71 55 Complementary 16.72 23 27.87 28 13.09 15 15.07 21 13.47 15 measure Training Measure 7.62 10 10.38 23 5.62 18 12.22 18 14.05 26 Total 43.07 70.61 39.69 48.59 54.41 In % of FC 2.48 5.08 2.43 5.24 4.18 commitments

5. FINANCING COMMITMENTS OF KfW 1997–20011) (AT PREFERENTIAL TERMS) Average 1997 1998 1999 2000 2001 1997–2001 Sectors EUR % EUR % EUR % EUR % EUR % EUR % million million million million million million Total 1,398 100 1,737 100 1,390 100 1,634 100 927 100 1,302 100 Producing Sector 94 7 88 5 124 9 74 5 51 5 135 10 Agriculture, Fishery, 91 7 87 5 123 9 74 5 40 4 130 10 Forestry Manufacturing, 3 – – – 2 – – – 10 1 5 – Raw Materials, Mining, Construction Economic 552 40 799 46 429 31 778 48 186 20 570 44 Infrastructure Energy 279 20 480 28 275 20 275 17 67 7 298 23 Transport and 263 19 315 18 132 9 498 30 107 12 263 20 Storage Communications 10 1 4 – 21 2 5 – 11 1 10 1 Social Infrastructure 482 34 616 35 501 36 404 25 481 52 408 31 Water Supplies 300 21 358 21 328 24 215 13 333 36 265 20 and Waste Water/ Solid Waste Disposal Education 56 4 71 4 90 6 31 2 37 4 49 4 Health Care 42 3 73 4 35 2 66 4 14 2 22 2 Population Policy 34 2 46 3 31 2 14 1 38 4 39 3 Other Social Services 51 4 68 4 17 – 78 5 59 6 33 3 Financial Sector 143 10 148 8 150 11 187 11 114 12 118 9 Cross-sectoral 87 6 56 3 119 9 100 6 93 10 67 5 Commodity Aid 24 2 12 1 54 4 53 3 3 ––– Structural Aid 15 1 18 1 13 1 38 2 –– 4 – Cross-Cutting Areas: Environmental 541 39 766 44 418 30 426 26 394 43 700 54 Protection and Resource Conservation Poverty Reduction 723 52 726 42 766 55 1,011 62 520 56 592 46

1) Figures may not add up to totals due to rounding

64 ABBREVIATIONS ADF Albanian Development Fund HIPC Heavily Indebted Poor Countries AfD Agence Française de Développement HIV Human Immunodeficiency Virus BDF Balkan Development Fund ICT Information and communication technologies GDP Gross domestic product IMF International Monetary Fund BMZ German Ministry for Economic Cooperation and LDC Least Developed Countries Development LGED Local Government Engineering Department CIP Community Infrastructure Programme NGO Non-governmental organization DED Deutscher Entwicklungsdienst OA Official Assistance DEG Deutsche Investitions- und Entwicklungsgesellschaft mbH ODA Official Development Assistance EBRD European Bank for Reconstruction and Development OECD Organization for Economic Cooperation and Development EU European Union p.a. per annum, per year EUR Euro PPP Public-private partnership DC Development Cooperation PRS(P) Poverty Reduction Strategy (Paper) FC Financial Cooperation SWAP Sector-wide approach GEF Global Environment Facility TC Technical Cooperation GTZ Deutsche Gesellschaft für Wirtschaftliche Zusammenarbeit USD US dollar CIS Commonwealth of Independent States WTO World Trade Organization

IMPRINT

Published by: KfW, Corporate Communication Department

Edited by: Secretariat of International Credit Affairs – a

Graphic design: Brönners Druckerei Breidenstein and KfW, Frankfurt am Main

Typesetting and printing: Brönners Druckerei Breidenstein, Frankfurt am Main

Photos: DEG photo archives, p. 27; Philip Hankin, Mangochi, pp. 4, 42; Chantal Hovens, p. 20; KfW photo archives, pp. 38, 40, 57; Nepal Electricity Authority, p. 24; WWF Georgien, p. 12.

Photographs by the following members of our staff were used from the KfW photo archives: Richard Avédikian, pp. 22, 51, 56; Wolfgang Bichmann, p. 8; Lisa Engelhardt, p. 43; Marc Engelhardt, pp. 9, 59; Markus Faschina, p. 19; Arne Gooss, p. 23; Gerhard Jorde, pp. 16, 44, 46, 47; Peter Kampe, p. 55; Volker Karl, pp. 5, 41; Norbert Kliver, p. 21; Werner Neuhauß, p. 48; Thomas Peter, p. 17; Barbara Pirich, p. 29; Dr. Martin Raschen, p. 37; Boris Sakrauski, p. 32; Matthias Schlund, p. 56; Dr. Jürgen Welschof, p. 52; Eva Witt, p. 50; Burghard Wünsch, p. 43. 183402 DEG –DeutscheInvestitions-undEntwicklungsgesellschaftmbH Palmengartenstrasse 5-9,60325FrankfurtamMain,Germany Phone (+49-1801) 4355 335577,Fax(+49-69)7431-6 Postfach 11 11 41, 60046FrankfurtamMain,Germany Phone (+49-221) 4986-0,Fax(+49-221) 4986-290 Phone (+49-69) 74 31-0, Fax(+49-69)7431-29Phone (+49-69)7431-0, 44 Charlottenstrasse 33/33a,10117 Berlin, Germany Belvederestrasse 40,50933Köln,Germany Phone (+49-69) 74 31-44 00 Phone (+49-69)7431-44 Phone (+49-30)202 64-0 e-mail: [email protected] Information Centre www.deginvest.de Press Department Berlin Branch www.kfw.de June 2002 KfW