Journal of Cleaner Production 11 (2003) 699–701www.cleanerproduction.net

Financing cleaner production in the framework of financial co-operation: activities and experiences of KFW

G. KraftKfW, Palmengartenstraße 5-9, 60325 Frankfurt, Germany

Received 28 August 2002

Kreditanstalf fur Wiederaufbau (KfW) was foundedby law in 1948 as a corporation under public law domi-ciled in Frankfurt/Main. Its statutory functions are thoseof a promotional bank for the domestic economy and adevelopment bank for the developing countries. Its capi-tal is held by the Federal Republic and by the FederalLander. With a balance sheet total of around EUR 223billion it is among Germany’s large banks. In 2000, loancommitments covered EUR 36 billion, including EUR23.5 billion for domestic finance, EUR 11 billion forexport- and project finance, and EUR 1.5 billion for fin-ancial co-operation with developing countries.

Support for Cleaner Production (CP) is included inKfW’s promotion programmes. In domestic economypromotion, there are specific programmes for environ-mental protection measures and for supporting develop-ment of innovative technological solutions. In FinancialCo-operation with developing countries, special environ-mental credit lines have been introduced. KfWimplements the Financial Co-operation with developingcountries on behalf of the Federal Government. Theactivities and experiences of KfW in this field can besummarised as follows.

KfW has two main objectives in promoting CP withinthe framework of Financial Co-operation. It aims toreduce pollution and/or resource consumption especiallyby small and medium sized enterprises (SME’s), and itaims to deepen and broaden the financial sector by intro-ducing new finance products. The mechanism throughwhich KfW carries out its funding in the framework ofFinancial Co-operation is summarised in Fig. 1.

The salient features of KfW’s environmental creditlines or funds, include the combination of grants withlong-term loans at market rates and/or concessionalloans, the determination of creditworthiness by commer-cial banks with liability, the broad definition of eligibleenterprises (with limits on the size of the investment orsubsidy) and feasibility studies carried out by the appli-

0959-6526/03/$ - see front matter 2003 Elsevier Science Ltd. All rights reserved.doi:10.1016/S0959-6526(02)00165-8

cants along with the appraisal by the partner bank. Inparallel the financial and technical–environmental qual-ity of an investment proposal are appraised.

In financing CP in the framework of Financial Co-operation with developing countries, KfW’s activitiesare based on its co-operation with development banks.There are different driving forces, initiatives, and admin-istrative structures for these activities. It allows for thecontinuation of traditional SME financing with a newfocus on the environment. A National EnvironmentalAuthority may be the driving force as new environmen-tal legislation requires investments, and as a result, thiscan create a new co-operation with a development bank;financial support to industries for compliance audits mayalso be required. National Cleaner Production Centrescan offer new sector approaches (cluster of industries).Established networks of industries and NGOs maybecome partners for financing CP. Advertising of pro-motion programmes may be done by a nominatedadvisor or by a hired consultant, by the partner banks orthe environmental authorities.

Certain elements for financing CP are required byKfW in its financing set-up. These include:

real positive interest rates for SME as the minimumrequirement,introduction of long-term financing through provision oflong repayment periods,partial grants given to SME for feasibility studies andother investment related activities carried out by the con-sultants,technical assistance in appraisal, promotion and monitor-ing,financing contribution from enterprises (minimum20%) andpay-back of loans used for further loans or grants, thuscreating revolving funds.

700 G. Kraft / Journal of Cleaner Production 11 (2003) 699–701

Fig. 1. Small and medium sized enterprises—SME.

The motives of enterprises who are interested ininvesting in environmental protection can either be cat-egorised as classical or neo-classical. The ‘classical’motive is defined by the government setting standards,authorities specifying demands in regulations, theenterprise therefore complying to avoid sanctions (finesor closure) and this compliance be monitored. The ‘neo-classical’ motive is defined by the government settingthe standards but enforcement and consecutive action isweak, with the exception of certain enterprises who actu-ally do care and do something to improve their environ-mental performance, due to neighbourhood complaints,community relations, civil litigation, export orientation,product standards, protection of reputation and modern-isation, to name a few.

However, concessional money needs a certain justifi-cation, since it should not undermine the ‘polluter pays’principle, and should not lead to a distortion of compe-tition. Enterprises in developing countries often expectthe government to combine obligations with offers ofmoney, and respective funds do not leave authoritiesempty-handed in such a situation. It is clear that withoutdefined standards and enforcement the environmentallyactive take on an extra burden, and are in need of sup-port. And where pollution and resource consumption aredefined as a traditional right, the abrogation requires acompensation.

KfW’s main eligible sub-borrower projects are withexisting companies/plants including integrated measures(determination of environmental costs required), energysaving, water saving, fuel switch, remaining end of pipeinstallations, waste management and improvement ofoccupational health in companies. No funding is pro-vided for new enterprises or plants to comply with exist-ing legislation but support may cover common effluenttreatment plants, recycling plants, environmental labora-tories and the relocation of plants from residential andcongested zones.

It is important to understand that the high effluentstandards (copied from EU and US regulations) alsooften require end of pipe treatment in addition to theimplementation of cleaner production measures and thatthe authorities normally require full adherence within ashort time.

In promoting and financing CP, there is no substitutefor regulations; the government must set the standards,it must set up markets of wastes, charge environmentalcosts, and it must control compliance. There is, as well,no substitute for a proper pricing of resources (input),especially energy and water, and wastes (outputs) mak-ing CP investments financially more viable. Viable CPinvestments are real investment opportunities and cannormally be considered as modernisation and rationalis-ation.

Funding of environmental credit lines is always comp-lemented by a set of implementing measures includingfor example:

Training of Bank staff in questions of environmentalprotection and cleaner production and cash-flow analysisFinancing based on audits and consultancy studiesCo-operation with the Chamber of IndustriesCo-operation with NGO’sLists of eligible investmentsCeiling of grants and creditsReview of credit applications and technical documentsby KfW.

It is KfW’s general observation that many improve-ments in companies do not need investments but rather

701G. Kraft / Journal of Cleaner Production 11 (2003) 699–701

an improved management approach. Environmentalinvestment (not only CP but full compliance) usuallydoes not pay, at least in a short term perspective; the‘win–win’ result is an exception. However, loss ofmaterial and waste of resources can be high and yieldpotential for profitable improvements. Integrated sol-

utions which require investments and financing are rarefor existing plants, and, finally, transnational companiescan be helpful in introducing new, and cleaner pro-duction technologies as this may present a standard forproduction within the whole group.