National Development Banks and Sustainable Infrastructure: The case of KfW

KfW, a German state-owned investment and development bank, was initially founded in 1948 to finance the reconstruction of war-torn Germany after World War II but has expanded significantly over the years. It has become the second largest commercial bank in Germany and plays a substantial role internationally. Its large scale and function as a German government instrument to implement a clear energy strategy has allowed it to play a key role in Germany to finance major energy transformations in Europe and beyond. The KfW, through working in a German government framework, has contributed in a major way to the design, implementation and financing of the green strategy in the international sphere.

A working paper by Stephany Griffith-Jones analyzes lending by KfW for sustainable infrastructure, instruments used and projects funded by the KfW, and environmental standards. The paper also provides policy lessons and implications for expanding lending activities within KfW within Europe and in emerging and developing economies.

Two important takeaways are the importance of clear strategic government policies with a supporting legal framework, as well as the role that the national bank can play in helping fund such a strategy. The author determines that it is also valuable that KfW mainly uses fairly simple, even “old-fashioned” financial instruments. This reduces transaction costs and hidden risks that can lead to future losses. It also allows greater focus on the real engineering and design of projects themselves. The paper explains that KfW insists on equivalent environmental standards for different categories of countries, even the poorest ones. For other development banks in low-income countries, a more flexible approach may be more appropriate. Ultimately, many valuable lessons can be drawn from the KfW experience.