Strategic — Sustainable — Innovative
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https://english.bdi.eu/publication/news/time-for-Zeitenwende-in-development-policy
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The context in which development policy takes place has changed fundamentally. The dream of the supposed end of history has faded. The new reality is characterised by the struggle for a new world order. At its core is a global systemic competition between autocratic regimes and democratic states. It is determined by political power manoeuvres using military and economic means. In addition to solving global challenges, international cooperation is now about geostrategic interests, securing raw materials and technological leadership.
In the battle for a new world order, many countries are sounding out their positions. The reactions to the war in Ukraine and the terrorist attack by Hamas on Israel show: Fewer and fewer emerging and developing countries support Western positions or want to choose sides. Germany and Europe must find a strong and attractive response to the new self-image of the countries in the so-called Global South and their positioning. For development cooperation, it means that the “Zeitenwende“ in security policy should be followed by a “Zeitenwende“ in development policy.
It is time to objectively take stock. The development policy of past decades has not fulfilled enough of our hopes. Around 85 per cent of the Sustainable Development Goals (SDGs) adopted by the United Nations in 2015 are not expected to be achieved by 2030 as planned. The coronavirus pandemic has set many countries back economically. However, achieving the SDGs was already questionable before the pandemic. What the populations of developing countries desire the most, is still lacking in too many regions: Educational opportunities and adequate healthcare, jobs, functioning infrastructures and prospects for the next generation.
State development policy repeatedly reaches its limits or is even counterproductive when it releases local governments from their responsibilities (Moss et al. 2006).1 The multitude of development cooperation instruments and administrative requirements prevents effective and efficient action in too many places (IDOS 2017). The Federal Ministry for Economic Cooperation and Development (BMZ) too rarely draws overarching strategic conclusions from evaluations (OECD 2021). In addition, the pressure to fully use the allocated funds in state development programmes often requires ad hoc expenditures at the end of a project or year. This thwarts the approach of achieving long-term goals as efficiently as possible.
Public budget consolidation could be a chance for development cooperation if the necessary savings are seen as an incentive for more efficient policy actions and for a more results-oriented management.
Private investment is part of the solution. However, companies and private investors only act where they see opportunities for success. German companies only make long-term commitments in developing countries if the underlying conditions are sufficiently competitive.
1 There is a controversial debate in the academic literature about the effectiveness of development cooperation, e.g. with regard to poverty reduction or economic growth, see for example Arndt et al. (2009) or Groß & Nowak-Lehmann Danzinger (2022).
Therefore, investments in infrastructure, raw material extraction and processing, technologies, energy systems and industrial development need to be given greater awareness and support. More concrete financing offers and risk protection for private activities in the so-called Global South are needed - also in the sense of a strategic diversification of companies‘ sales and procurement markets.
Countries such as China, but also OECD members such as Japan, South Korea and the USA, are already utilising smart combinations of development financing and foreign trade promotion. After all, the intense competition on the global market is increasingly being decided by attractive and customised financing offers and not just by the best quality. Germany is lagging behind. Anyone who seriously intends to mobilise private capital for the SDGs, should catch up in the “enhanced coordination“ efforts and leave any mistrust of the private sector behind.
In short, a “Zeitenwende“ is necessary because development cooperation in its current form falls short of including economic cooperation so that the majority of SDGs will not be achieved by 2030, because fewer budget funds will be available in the future, calling for a more efficient approach, and because the global systemic competition does not allow for “business as usual“ anymore.
In view of these challenges, the BDI proposes the following measures, among others:
• Reducing bureaucracy and increasing competition in the DC system: The current legal framework stipulates that German development cooperation is primarily implemented by a development agency and a development bank. Greater competitive pressure through more tenders and competition in the awarding of contracts and commissions would increase cost efficiency and innovation in development policy.
• More funds for financing support and risk protection for private capital: Tentative initial approaches to dovetailing foreign trade promotion and development cooperation should be translated into effective measures and instruments.
• Ending the allocation of ODA funds to suppliers that engage in market-distorting practices, e.g. unfairly subsidised Chinese (state-owned) enterprises: Development funds must finally be used in such a way that - whenever possible - German and European bidders have a fair chance to profit from them in international procurement procedures.
• Promoting entrepreneurship, innovation and new technologies: German development cooperation should focus on growth drivers in partner countries and specifically promote industry-related startups and business incubators as well as the use of new technologies such as satellites that - for example - bring fast internet to remote regions.
It is time for a new start. This policy paper provides approaches and recommendations for action from German industry for the urgently needed “Zeitenwende“ in development policy.
In many developing and emerging countries, a race for political and economic influence has begun, particularly for access to raw materials and markets. Above all, China has massively increased its activities in the so-called Global South as part of its “Going Global Strategy” from 1999 and the “Belt and Road Initiative” from 2013. By 2030, China could replace the EU as Africa’s most important trading partner (KPMG 2023). With major investments in infrastructureoften financially supported by the government - China is contributing to the industrial development of countries and at the same time securing strategic raw materials. Due to non-transparent Chinese contracts, quite a few African countries have gotten into a veritable debt problem. Development cooperation funds from OECD countries come into play when these debts are cancelled as part of the “Highly Indebted Poor Countries” (HIPC) initiative set up by the IMF and World Bank.
In addition to securing political power, Russia is interested in African markets for wheat and weapons. India is already the second largest investor in sub-Saharan Africa after China (KPMG 2023). The Gulf States and NATO member Turkey are also marketing themselves on the continent, while systematically expanding their influence. For example, the Turkish government has almost quadrupled the number of its embassies on the African continent in recent years, operates a military base in Somalia and is realising infrastructure projects in many places.
All in all, the BRICS countries increasingly provide “SouthSouth cooperation” - without having to adhere to the standards and practices agreed in the OECD’s Development Assistance Committee (DAC) (IP 2009). The increasingly self-confident countries of the so-called Global South thus have the choice of who they work with. Germany and Europe should make the more attractive offer. The BMZ’s efforts to focus development policy activities more strongly in geographic and thematic terms have so far been “sobering” (DEval 2022). An overarching strategic direction with a clear overall vision is lacking (OECD 2021).
Credibility towards our partners is only possible if our intentions and interests are transparent - be it access to markets with the aim of strategic diversification or access to raw materials such as rare earths, cobalt, natural gas or hydrogen.
The BDI understands strategic development policy to be a coherent, interdepartmental policy whose goals are long-term, take into account the needs of partner countries and at the same time serve the own geostrategic interests.
The EU and its 27 member states together provide around 46 per cent of international development aid, making them the world’s largest donor (BMZ 2023b). German bilateral development cooperation commitments from budget funds alone have more than quadrupled between 2000 and 2020 after adjusting for inflation (DEval 2022). However, the projects are often too inefficient, not visible enough and not coordinated enough (IDOS 2017; KAS 2023). If the projects end, the successes too often end too. More longterm programmes and investments are needed (FAZ 2023).
For example, greater involvement of the German private sector is viewed favourably in most partner countries. After all, German companies stand for high-quality products and services, system solutions, the involvement and training of local partners, the creation of jobs with consecutive value creation in the partner countries as well as compliance with internationally agreed labour, social and environmental standards or technical norms.
However, companies can only contribute to the sustainable achievement of development goals if they are sufficiently competitive and generate profits. It is important to focus on concrete financing options and risk protection and to ensure competitiveness in international procurement procedures by taking greater account of qualitative criteria.
In addition, the coordination effort for public-private cooperation in the development sphere, e.g. regarding negotiation structures, must be significantly reduced. The more long-term the publicprivate cooperation is, the greater the efficiency gains and the more positive the effects in the partner country (DEval 2021).
Development policy, together with its federal implementing organisations, must become more dynamic and innovative. This would help to utilise the available funds as effectively as possible. The great security mentality of the ministries and implementing organisations towards the Federal Audit Office (Bundesrechnungshof) leads to a lot of cumbersome, paper-based bureaucracy, for example in the context of project accounting. This has long been outdated. The law regulating public grant-giving is in urgent need of reform.
Reducing bureaucracy would also increase “effectiveness, flexibility and adaptability to the needs of partner countries” (OECD 2021).
So far, the BMZ has lacked the courage for large innovative technology projects, which would be particularly important on the African continent: A rapid digital transformation is taking place here with a large number of new innovative technology start-ups. The expansion of digital, wired infrastructures is lagging behind this trend in many regions due to low population densities (GIZ 2022). This hinders productivity increases, equal opportunities and access to education and information.
The GIZ Evaluation Report 2022 shows that project cycles are often too short to complete comprehensive digital change processes and implement necessary infrastructural measures. In the years 2018 to 2021, an average of only 0.2 per cent of total bilateral German ODA commitments went to communication infrastructures (BMZ 2023a).
For example, satellite constellations could help to bring fast internet to remote regions. In addition, the use of earth observation data from space can help to apply fertilisers or pesticides in a more targeted manner and thus significantly increase the yields of agricultural products.
Such innovative possibilities and solutions would increasingly come to light in competition, i.e. in the context of project tenders.
Overall, development policy should integrate the enormous developmental benefits of new technologies much more strongly into its actions. It is time for new approaches and new solutions, not least in order to be able to tackle the consequences of climate change more quickly and efficiently.
German development cooperation should focus on growth drivers in partner countries and specifically promote industry-relevant start-ups, incubators, FabLabs or MakerSpaces and thus entrepreneurship. Moreover, German companies should be more involved in the conception of development programmes, for example via intergovernmental negotiations. Development cooperation should utilise their interest in new business networks, know-how exchange and skilled workers as well as their role as sparring partners.
The result is sobering: 85 per cent of the Sustainable Development Goals are not expected to be achieved by 2030.
With the 2030 Agenda, 193 member states of the United Nations have set themselves 17 goals for sustainable development. They link the principle of sustainability with economic, ecological and social development.
Multiple crises, above all the corona pandemic, have made implementation more difficult in recent years, so that the mid-term review is sobering. The global community is on the right track for only 15 per cent of the 140 sub-goals backed by sufficient data. Although progress has been made on around half of the targets, this is not enough to achieve the SDGs by 2030. For more than a third of the goals, there has been no change or even regression compared to 2015 (UN 2023).
There are also massive financing gaps in developing and emerging countries, which have widened due to the coronavirus pandemic in particular. According to the World Investment Report, the gap has risen from USD 2.5 trillion in 2015 to USD 4.3 trillion per year (UNCTAD 2023).
Where do we stand?
Source: UN (2023).
On Track
Moderately or serverely off track
Stagnation or regression
“Unless we act now, the 2030 Agenda will become an epitaph for a world that might have been.”
António Guterres Secretary-General of the United Nations
The gross domestic product (GDP) per capita has risen by an average of one per cent per year in Africa since 1990, compared to five per cent in India and eight per cent in China (McKinsey Global Institute 2023).
Although African countries have received significantly more development aid over the years, they have by no means been able to keep up with the dynamics in Asia, especially those of China. The reasons for Africa’s slower development and unsatisfactory economic conditions are manifold and are mainly due to the unwillingness of the respective governments to reform. However, a lack of international development aid is not the problem.
The African population will almost double by 2050 - to around 2.5 billion people (McKinsey Global Institute 2023). The focus of all development cooperation activities should therefore be on job creation - through investment promotion, targeted industrialisation, comprehensive infrastructure expansion as well as strengthened foreign trade and entrepreneurship. As the developments in China and Vietnam, for example, have shown, traditional Western development aid has contributed relatively little to their economic successes.
Source: World Bank (2023a)
Exports of goods (current USD)
Source: World Bank (2023a)
GDP per capita (current USD)
Source: World Bank (2023a)
Share of the population with access to safe sanitation
Source: World Bank (2023a)
Life expectancy at birth
Source: World Bank (2023a)
Why doesn‘t Germany derive more strategic benefits from its pioneering role in development policy?
Financial cooperation
Objective: Investment promotion in partner countries
MAIN ACTORS
SELECTION OF OTHER PLAYERS
KfW Development Bank
Financial Cooperation with state institutions
Deutsche Investitions- und Entwicklungsgesellschaft mbH (DEG)
Private investment financing in developing and emerging countries
KfW IPEX-Bank
Project financing and loans for the German and European economy
Source: BDI
Technical cooperation
Goal: “Capacity development“of people, organisations and societies in partnercountries
Deutsche Gesellschaft für internationale Zusammenarbeit GmbH (GIZ) Service provider of international cooperation for sustainable development
sequa gGmbH
Development organisation focused on the promotion of the private sector
Federal Institute for Geosciences and Natural Resources (BGR)
National Metrology Institute of Germany (Physikalisch-Technische Bundesanstalt, PTB)
1. Why does Germany not derive more strategic benefits from its pioneering role in the field of development cooperation?
With around 28 billion euros in 2021, Germany is the world’s second largest donor in the OECD’s DAC behind the USA (BMZ 2023a). Although around a third of the funds go to multilateral organisations, Germany’s importance in the United Nations, for example, remains relatively low.
2. Is the ODA quota still up to date? Shouldn’t the efficiency of measures matter more than the total amount spent?
The internationally agreed but not legally binding ODA quota of 0.7 per cent of gross national income is based on calculations from the 1960s. Since then, circumstances and requirements have changed fundamentally, meaning that the target value is of political nature. Germany reached the target for the first time in 2016 - mainly due to high expenditures for the care of refugees in its own country (Bundestag 2023).
3. Why does the BMZ award the majority of projects directly to the GIZ without a call fortenders?
More competition is needed in development policy in order to finally act more cost-efficiently. Alternative organisations such as sequa gGmbH, private companies and NGOs should have a chance to become more involvednot only as subcontractors. More competition would awaken the spirit of innovation and, for example, put courageous technology projects on the radar. Furthermore, one could question why the BMZ funding programme develoPPP is now only offered by GIZ and DEG, but no longer by sequa gGmbH.
4. Why is there no stronger coordination between different donor institutions and development cooperation actors on the ground and no clear overarching EU strategy?
There is room for improvement in the cooperation between various development institutions. Particularly in the area of training, dialogue and information measures, many partners criticise the sometimes uncoordinated German offerings. Embassies operate alongside the German Chambers of Commerce Abroad, GIZ structures and non-governmental organisations. Further implementation of the SDGs requires an integrated approach and a cohesive approach, in line with SDG 17.
5. Why is there only slow progress in interlinking the instruments of development cooperation with those of foreign trade promotion?
New approaches to mobilising private capital for developing countries are still lacking. Adequate and more competitive financing and risk hedging instruments for a larger number of target countries should be developed - in close coordination between BMZ and BMWK (see Chapter 4). Moreover, the KfW should be given the opportunity to act with less bureaucratic hurdles.
Chamber and Association Partnership Programme
In KVP projects funded by the BMZ and implemented by sequa gGmbH, German chambers and associations contribute their expertise and know-how, enabling direct cooperation with non-governmental organizations in partner countries, and embracing initiatives from the private sector. For example, new services for local companies are developed and the condititons for doing business abroad are strengthened through new policies. These projects have proven to be successful, practical and effective and should be expanded further. The cooperations are often continued independently by the involved stakeholders even after the funded projects come to an end.
Take the automotive industry, for example: As part of a partner Africa project funded by the BMZ, the German Association of the Automotive Industry (VDA) maintains a KVP project with the African Association of Automotive Manufacturers (AAAM). The aim is to support the development of the partner association as well as of a sustainable automotive industry on the continent including new mobility concepts. In addition, local solutions for vehicle financing are being developed and research into alternative drive systems is being supported. Both associations work closely with the secretariat of the African Continental Free Trade Area (AfCFTA) and support its implementation. In numerous countries (including Egypt, Ghana, Kenya, Ethiopia and the Ivory Coast), the first policy strategies for the establishment of a domestic automotive industry have been successfully developed.
Figures in per cent.Source: KPMG (2023).
Figures in USD million.Source: OECD (2023a).
6. Why has the “Wirtschaftsfonds Afrika”, which was already planned for 2021, still not been realised?
The threshold above which loans are granted to companies is often too high and ignores the needs of SMEs for so-called “small tickets”. The financial structure of the “Wirtschaftsfonds Afrika” should be finalised as quickly as possible in a joint coordination of the ministries so that - in addition to traditional export credit guarantees - funds are available for strategic projects of German companies. at the BMWK. In the government’s draft for the 2023 federal budget, only ten million euros a year were earmarked for the fund. This sum urgently needs to be increased to make more projects competitive through the offering of a grant element. This could also provide an answer to the requirements of sustainable lending (see chapter 4).
7. Is it desirable if geostrategic competitors, above all Chinese companies, are regularly awarded international development contracts and financing?
There should be greater scrutiny and public discussion on where development funds and financing go. In recent years, the EU has lost relevant market shares and important geopolitical projects in developing countries to China. The Chinese government is often strengthening. the attractiveness of its companies through market-distorting combinations of export and development financing from the China Development Bank, the China Exim Bank and the national export credit agency Sinosure (“blended finance”). For example, Chinese companies regularly win relevant EU and multilateral development tenders - directly or indirectly equipped with ODA fundsand use them to promote themselves in the partner countries. 75 per cent of Chinese construction projects in Africa are financed from non-Chinese sources (GTAI 2020).
Germany‘s and Europe‘s development policy should focus on the geostrategically important areas of securing and processing raw materials, infrastructure and energy.
It is time for development policy to play a strategic role in the competition for access to critical raw materials.
African countries in particular are in the spotlight due to their wealth of resources. The enormous demand for raw materials is being driven by the dual transformation of decarbonisation and digitalisation. According to the International Energy Agency, the number of mining projects worldwide is currently only sufficient to extract two thirds of the metals needed to achieve the goals of the Paris Agreement.
The exports of Africa’s extractive sector are dominated by unprocessed raw materials which only creates few jobs. Therefore, the countries are prone to volatile prices. China has identified the importance of raw materials for its own value creation early on and has secured itself long-term access to mines.
China invests in local mining, but typically transports the materials to China for processing, creating enormous dependencies for other countries. Germany’s import share of rare earths from China is greater than it has ever been for oil and gas from Russia. Most recently, China has de facto reduced exports of gallium, germanium, graphite and rare earths by introducing export controls. It cannot be ruled out that China will increasingly use its control over raw material supply chains as a geopolitical instrument in the future. Development policy must recognise this threat and make its own contribution to averting a raw material shortage crisis.
Germany’s opportunity lies in supporting the local processing of raw materials such as lithium, cobalt and bauxite in Africa, thereby helping to cover its own demand while also contributing to the industrialisation of the continent. The developmental benefits of increased local value creation would be enormous and should justify the use of development co-operation funds. German companies are ready to support the development of production capacities - both with machines and technical expertise. However, they need the right political backing in order de-risk those activities. After all, sustainable, diversified local economic structures in partner countries also have relevant advantages for Germany. Direct sourcing from sub-Saharan Africa and other resource-rich developing and emerging countries, such as in Latin America (see chart), would reduce dependencies on China and diversify value chains.
• By dovetailing technical and financial development cooperation with specific raw material extraction and processing projects, that are relevant to German industries, policymakers could support a more sustainable and diversified supply while promoting a higher value added in the partner country.
• As part of a joint package, European and African collaboration in the raw materials sector should be deepened and integrate the topics of energy, infrastructure as well as financing, i.e. instruments such as Untied Loan Guarantees.
The table shows the share of global extraction and the share of global reserves of individual raw materials located indifferent Latin American countries.
Infrastructures are the basis of all economic development. They supply energy and water, allow goods to be transported between producers and customers, offer people physical and digital networking opportunities, influence location decisions and enable the diversification of supply chains.
Investments in economic infrastructures in the German and European development policy have been too inconspicous so far. While Japan has used 37 per cent of its bilateral financial commitments for energy, water and transportation infrastructure in 2021, only 7 per cent of German bilateral ODA has been dedicated to these sectors. And of the funds disbursed by the EU in 2022 (17.15 billion euros) only about 9 per cent went towards traditional infrastructures (EU 2023a).
Functioning transport and telecommunication systems, as well as energy, health and education systems, are of great benefit to local populations, international investors and our own strategic interests. Reliable transport routes facilitate the supply of raw materials, for example, and are a prerequisite for successful free trade zones.
The desire for industrialisation in many developing countries should be taken seriously. The “Agenda 2063: The Africa We Want” published by the African Union lists numerous infrastructure projects. As part of infrastructure projects, Germany can support partner countries in implementing the projects environmentally friendly and with relatively low emissions.
The Global Gateway Initiative as Europe’s strategy for upgrading infrastructures in the digital, energy and transport sectors rightly addresses this issue. The implementation as “Team Europe”, i.e. in close cooperation between the EU, its member states and their financial and development institutions, is also to be welcomed. However, it has not yet been possible to exploit Global Gateway’s potential as a central programme for diversification and new strategic partnerships in the infrastructure sector. The realisation of concrete projects is making slow progress, partly due to the lack of new guarantee and hedging instruments.
• Large infrastructure projects, starting as development projects, can form the basis for long-term partnerships. The BMZ should intensify its measures for the development of physical infrastructure via the KfW and significantly increase its share of total expenditure. In addition, lending procedures should be accelerated and German companies should be actively involved in planning, construction and operation. At EU level, the BMZ should work to improve the networking and coherence of development cooperation and foreign trade promotion (see Chapter 4).
• Infrastructure projects as part of the Global Gateway Initiative need an overarching strategy. Individual projects in the areas of green hydrogen, solar parks and wind energy are not powerful enough. The potential of German industry in the areas of transport, water (power) and wastewater is too rarely used, although the global demand is enormous. It is important to broaden the perspective and also integrate strategic raw material securing and processing as a central element. In addition, transport connections should be strengthened across all modes of transport and prepared for new requirements, such as the transport of hydrogen and sustainable fuels.
Many countries, particularly in Africa, require massive investments in power generation and electricity grids. Without a stable energy supply, it is virtually impossible to increase productivity. According to the BMZ, energy demand will increase by 70 per cent by 2050 in view of rapid population growth and newly emerging industries in developing and emerging countries.
The BMZ supports selected partner countries through bilateral climate and development partnerships as well as plurilateral partnerships within the framework of the G7 (Just Energy Transition Partnerships) (BMZ 2023c). Germany’s industry is well positioned to support the transformation of partner countries with a wide range of climate protection and energy transition technologies and expertise. Germany should drive forward and promote the use of these technologies in the Global South more strategically.
It should also be ensured that the understanding of a “just transition” in the so-called Global South corresponds to Germany’s or Europe’s approach. According to the BMZ, “just transition” combines the areas of climate protection, sustainable economic development and social progress. In some African countries, however, “just transition” is associated with global justice (KAS 2023). African countries are thus claiming their right to economic growth and are also demanding financial support from industrialised countries for measures to reduce emissions, for climate adaptation and for loss and damage as part of climate negotiations with reference to their “historical responsibility”.
In view of rapid population growth and the emergence of new industries in developing and emerging economies, the demand for energy will rise by 70% until 2050 according to the BMZ.
For Germany’s industry, hydrogen is essential as an alternative energy source for processes that are difficult to electrify. A climate-neutral transformation of the steel and glass industry, for example, cannot succeed without green hydrogen. Moreover, considerable quantities of green fuels are required to achieve the climate targets in the transport sector. In order to meet the enormous demand for hydrogen and electricity-based fuels (PtX), Germany and Europe will have to rely on imports in the foreseeable future. The German government’s National Hydrogen Strategy rightly emphasises developing and emerging countries as production locations (BMZ 2023d).
For many regions, participation in hydrogen value chains offers a great opportunity, especially for African countries. Thanks to the climatic and meteorological conditions, several types of renewable energy are often available, for example combinations of solar energy, wind energy and hydropower. This offers great potential, not least for investment and new jobs. Many African countries are already engaged in dialogue with Germany and Europe, for example as part of the “Compact with Africa”.
German companies can support the market ramp-up of hydrogen production locally. Their innovative strength, technological expertise and global presence offer the opportunity to play a leading role in the production, conversion and use of hydrogen. However, German companies are always dependent on stable framework conditions that allow them to weigh up costs and risks in the relevant markets more reliably -especially for commitments over several decades.
In addition, international standards for sustainability and quality criteria, international certificate trading (book & claim procedure) and international guidelines for the inclusion of sustainable fuels in the carbon footprints of users and their customers are decisive levers for a rapid ramp-up of green molecules in transport.
By founding the Green Hydrogen Business Alliance, the BMZ has taken an important step towards combining the expertise and innovative strength of the private sector with development policy instruments (BMZ 2023e). The alliance supports companies entering the hydrogen market in countries such as Brazil, South Africa, Morocco, Algeria and Tunisia.
In addition to the development of business scenarios, analyses and studies as well as the organisation of networking and dialogue events, needs-based financing mechanisms are being set up as part of the alliance. Examples include H2Global and KfW’s PtX development fund. The latter aims to promote investments in PtX projects with a mixture of grants and other financing instruments from KfW Bankengruppe, thereby supporting the financing options for the production, transport and use of green hydrogen in the partner countries (KfW 2023a).
• The BMZ should take into account that there is not just one path to climate neutrality. Instead, individual requirements and needs must be taken into account. For example, in the Kigali Communiqué “Ensuring a Just and Equitable Energy Transition in Africa“, ten African countries advocate the use of gas resources as a bridging technology (MININFRA 2022).
• It should be questioned why the BMZ is restricting itself to promoting green hydrogen. From a development policy perspective in particular, the desire of many countries for alternative, low-emission hydrogen colours (blue/turquoise) should be recognised as a practical bridging technology, at least until the expansion of locally available renewable energies is sufficiently advanced. This applies in particular to contexts in which bottlenecks on the electricity market are common.
For many regions, participation in hydrogen value chains offers a great opportunity, particularly for African countries.
In view of the intense geostrategic competition for systems, influence, markets and technological leadership, an interlocking of the instruments is more pressing than ever.
It is often emphasized that private capital is urgently needed to achieve the SDGs and must be leveraged. The fact that - in many cases - private capital only reaches the countries in question through the instruments of foreign trade promotion is not recognised enough. It is only thanks to export credit and investment guarantees that German companies can export the latest technology or implement infrastructure projects and thus lay the foundation for economic development locally. In 2022, the federal government issued export credit guarantees totalling 14.9 billion euros. Around 83 per cent of the covered volume went to emerging and developing countries (BMWK 2023).
For decades, German industry has been calling for closer integration of development cooperation with foreign trade promotion. In view of the intense geostrategic competition for systems, influence, markets and technological leadership, this issue is more pressing than ever.
China as a non-OECD member and players within the OECD (e.g. Japan, South Korea, USA, France) are already bundle various instruments and provide their companies with decisive advantages in market entry and expansion through a financing mix that also includes de facto tied development funds. As a benchmark study by the Association of German Mechanical and Plant Engineering (VDMA) shows, Germany can learn from other countries on how to successfully introduce innovative combinations of export and development financing (VDMA 2023).
If the German economy falls further behind its international competitors, the diversification of supply chains and sales markets will be jeopardised. In addition, the industry would lose value creation power at home and further market shares abroad. Last but not least, this would have an impact on the economic and environmental developments in our partner countries, as German technologies are subject to particularly high standards in international comparison. If, for example, competitors with less sustainable technologies take over the retrofitting of plants abroad, we lose out on climate protection opportunities. Germany finally needs innovative, creative and flexible solutions to support its investors and exporters on the global market and enter into sustainable partnerships with the socalled Global South.
Background The modernisation of the OECD Consensus in July 2023 was a first step in the right direction to counter unfair competition within the OECD. The new set of rules limits unregulated export support. The adjustments strengthen the planning security and competitiveness of German exporters, particularly in the case of “green“ projects.
• An unbureaucratic and competitive toolbox with national export credit guarantees, a European financing facility and development financing is needed. There is no common strategy at EU level so far. The EU Global Gateway Initiative and the “Team Europe“ approach could provide the basis for a common, so-called “whole-of-government approach“. A simple dovetailing of the instruments can be achieved, for example, by development banks financing certain additional investment for projects that are already covered by an export credit guarantee. Such measures could be systematically integrated in development budgets.
• In addition to incentives for “green“ projects, policymakers should consider to accompany projects that have a particularly high social benefit, create a particularly large number of good local jobs or integrate comprehensive training initiatives in the partner country, with benefits from the development sphere, e.g. back them with specific technical cooperation programmes.
• The possibilities of an EU export credit strategy to complement national facilities have already been analysed as part of a feasibility study and backed up with clear recommendations (EU 2023b). It is up to the German government to advocate for the resolute implementation of the proposed measures in Brussels.
• The instruments of foreign trade promotion should not be overloaded with eurocentric requirements, but should take the conditions and needs in developing countries into account while being technology-neutral. Local transformation processes should be given much greater consideration - in addition to our own strategic interests.
• If German products are demanded by state customers in heavily indebted countries, transactions often fail due to. the OECD‘s “Sustainable Lending“ requirements. The requirements limit the borrowing of state institutions in 72 countries, mainly in Africa (e.g. Ghana and Kenya), but also in Cambodia, Myanmar, Uzbekistan and Honduras, for example (OECD 2023c). Here it is necessary to be able to receive grant elements from the BMZ‘s financial cooperation budget. This would allow projects to be driven forward without having to wait for the official call for tenders, and German Companies would be competitive again. Moreover, implementation of the “Wirtschaftsfonds Afrika“ is urgently needed.
• In view of the inflation trend alone, larger volumes are needed for the Africa CIRR, the fixed-interest component for government customers in African markets.
The Africa CIRR is a fixed-interest programme for which the German government provides budget funds. The KfW IPEX-Bank was commissioned by KfW to manage the programme.
The Africa CIRR programme promotes loans to finance German exports to African countries of larger volumes. German exports to African buyer countries. Under the programme, eligible banks can grant loans to buyers of German export goods or to banks in the African buyer country at the minimum CIRR (Commercial Interest Reference Rate) set by the OECD. KfW provides the authorised credit institutions with refinancing options (KfW 2023b).
Export credit guarantees usually require a certain percentage of the total order value to be generated in Germany. The aim is to strengthen the country’s own companies and make them internationally competitive. In contrast, development aid is traditionally untied in order to avoid distortions of competition. Tied aid is generally only permitted if it contains a high grant element - in other words, if it is very expensive for the donor country. Many geostrategic competitors strategically utilise the principle of tied aid.
The BRICS countries founded their own development bank, the New Development Bank, back in 2014, which mainly finances infrastructure in the BRICS countries and almost exclusively permits deliveries from its own ranks (EU 2023b).
In other OECD countries, too, even the official untied aid is often de facto tied. For example, the Japanese government requires a Japanese general contractor for infrastructure projects financed by ODA loans (see STEP programme). The US National Development Finance Corporation (DFC) and its “Build Back Better World” initiative, which is supported by the G7, also deliberately combines support for developing countries with the promotion of their own American exporters and investors (EU 2023b).
In 2019/2020, for example, Japan, the USA, France and the UK de facto awarded 60 to 85 per cent of their total bilateral ODA volume to domestic companies, although they reported ODA-eligible development expenditure as largely untied (OECD 2022). This has serious implications for the level playing field within the OECD.
In comparison, German companies benefit to a much lesser extent from state-financed development cooperation projects. During this period, Germany awarded only eleven per cent of the volume as de facto “tied”.
• Germany should utilise all the scope for tied aid. The BDI welcomes the fact that the OECD is already in the process of reviewing the rules on tied aid and is in favour of a new regulation that takes global systemic competition into account. Open bidding competition (“untied aid“) is no longer appropriate in many areas.
• Germany should structure their international tenders more strategically and use tied aid whenever possible. This also applies to all tenders in the framework of the EU‘s Global Gateway initiative.
Overview of de facto tied ODA contracts and volumes
Source: OECD (2022).
German companies can always be particularly successful in the context of development cooperation if, in addition to price, qualitative criteria are decisive in tenders. After all, the high quality of products, technological maturity and high standards of labour, environmental and consumer protection are key success factors for German industry.
These skills and criteria are still not demanded enough in the partner countries’ procurement procedures. All too often, geostrategic competitors come out on top due to more favourable cost structures.
Overall, the BRICS countries in particular benefit enormously from awards with “untied” ODA from OECD countries. For example, the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA) as institutions of the World Bank, for which Germany is one of the largest donors, awarded contracts totalling USD 52.4 billion to BRICS companies in the period from 2010 to 2019, but only USD 23.6 billion to the EU 27 in the same period (EU 2023b).
Especially competition with Chinese state-owned companies that do not have to make profit and often benefit from high subsidies, is highly problematic. They can dominate international tenders with dumping prices. As a result, in some cases German companies shy away from the effort of preparing a bid and do not even enter the competition.
Greater consideration of sustainability criteria such as life cycle analyses is a decisive competitive factor for German companies and a geostrategic must in view of the ever-increasing international competition. In addition, fair procurement practices are desirable in terms of development policy benefits. Only if German companies are competitive and have a fair chance in winning a contract, they get the opportunity to promote environmentally friendly processes or secure the compliance with high labour standards on site.
KfW has already developed a toolbox with methods and procedures to place a stronger focus on sustainability criteria. They also offer sample tender documents with specific requirements and regulations.
Since September 2023, the World Bank has also been using mandatory qualitative criteria (“Rated Criteria”) for most international procurements (World Bank 2023b). It is guided by the three pillars of sustainability: economic, environmental and social. This is good news for German industry, if it is ensured that qualitative criteria are taken into account. The World Bank thus strengthens the idea of fair competition.
These innovative approaches should also be utilised to a greater extent in the awarding of contracts by European institutions, such as the European Investment Bank (EIB) and the European Commission. The Federation of the European International Contractors (EIC) and the European Federation of Engineering Consultancy Associations (EFCA) have already developed a “Toolkit for Sustainable Infrastructure Procurement”, which the BDI supports.
• Mechanisms should be introduced to screen out unusually low or qualitatively and ecologically inferior offers. In the context of government negotiations on financing agreements with partner countries, the German government should push for binding, sustainable tendering procedures, i.e. project awards should focus more on the quality and sustainability of tenders and less on the price level. Procurement practices should always be in line with the principle of fair international competition.
• The ownership structures of supposedly local companies should be scrutinised in detail, as should a general exclusion of subsidised Chinese state-owned companies from contracts awarded via financial cooperation. The US development agency Millennium Challenge Corporation (MCC) is already doing this (Global Times 2020). After all, 89 per cent of contracts under China’s “New Silk Road” also go to Chinese companies (BGA 2022). Chinese financing is usually only accessible by EU companies as subcontractors.
The German Act on Corporate Due Diligence Obligations in Supply Chains entered into force in January 2023. It regulates corporate responsibility with regard to human rights and environmental standards in supply chains and therefore has a decisive impact on the global business activities of German companies.
Instead of facilitating market entry, the law increases the risks of corporate involvement in the so-called global south by the threat of sanctions. The design of the European supply chain regulation “Corporate Sustainability Due Diligence Directive” (CSDDD) threatens to further increase these risks and intensify unintended effects.
If supply chains are relocated back - for example, because the costs of monitoring are too high - this not only threatens the diversification efforts of German companies, but also the sales of affected exporters in developing countries (IfW Kiel 2021). Yet it is precisely the connections via international trade relations that promote economic growth and new prospects locally.
In fact, almost a quarter (23%) of the companies directly affected by the law from January 2023 onwards stated in a DIHK survey that they were ending international trade relations or planning to withdraw from risk countries (DIHK 2023). This achieves the opposite of the actual aim of the requirements: to stay and improve local conditions (“stay and improve”). Withdrawal is also regrettable in view of the high labour and social standards of German companies in international comparison.
Another effect is that German companies consolidate their supply chains and tend to rely on larger suppliers who are able to bear the additional costs, for example for audits or employee training. This counteracts Germany’s development commitment to strengthening local SMEs.
• Companies in the so-called Global South must be empowered to comply with the regulations of the EU internal market to the best of their ability - be it regarding supply chain regulations or the Carbon Border Adjustment Mechanism. More development cooperation funds should be used for this purpose. Last but not least, the diversification efforts of German and European companies will also benefit if the markets in developing and emerging economies are adapted to the requirements of the EU. Trade and development policy should pull much more strongly together in this respect. The sustainability requirements in free trade agreements should be linked to specific development programmes coordinated by “Team Europe“.
The German industry can support the transformation in developing and emerging economies with modern and efficient technologies, for example via satellite constellations that provide fast internet access to remote regions.
While Chinese and European investments in developing countries are largely focused on raw materials and energy projects, Germany’s highly diversified manufacturing industry with its strong SME sector has the potential to drive industrialisation in developing countries in a targeted manner. German industry can provide support with the latest technologies and is available for innovation partnerships.
To date, the contribution of development cooperation to digital transformation in partner countries has been small. Instead of developing isolated solutions with many different projects, the goal should be to support sustainable, transformative change processes (GIZ 2022).
This also includes an offensive for industry-related startups. The current approaches to promoting local start-ups fall short and do not sufficiently incorporate the experience of German industrial companies. It is important to inspire innovations “bottom up”, promote entrepreneurship and ultimately scale them up.
Many new tech companies are already emerging, particularly in African cities such as Nairobi, Lagos and Accra. Digital business models will accelerate the process of catching up with industrialised and emerging countries through leapfrogging.
The “Business Innovation Hubs” planned by the BMZ are a first step. They should be established in significantly more countries than the six envisaged. By building and operating the hubs, Germany could be an international pioneer and significantly increase its visibility as a relevant player in major African, South American and Asian cities. It is crucial that capital-generating structures are expanded and stabilised in parallel.
The “Westerwelle Startup Houses” in Kigali, Arusha and Tunis, run by the foundation of former Foreign Minister Guido Westerwelle, could serve as a model. They offer unbureaucratic, low-threshold services for young companies. They serve as a fully equipped, modern coworking space with a secure internet connection, as a production facility for industrial prototypes or as a venue for joint events, workshops and training courses.
Alongside this, the development of special economic zones, industrial parks and clusters should also be part of the focus. German companies are available as sparring partners, as they are also interested in new links in their value chains.
In the “Least Developed Countries”, only 26 per cent of the rural population had internet access in 2023 and even in cities only just over half of the population used the internet. NewSpace, the commercialisation of space and its increasing linkages with the non-space economy, has enormous potential to close these digital gaps.
Source: ITU (2023).
Satellite constellations can bring high-speed internet to remote regions and thus improve access to education and information, enable participation in global value chains and create new business opportunities.
Space can also be utilised in the area of information and data procurement in line with the SDGs, for example for climate change adaptation measures. New space can help with the monitoring of natural disasters such as droughts, floods and forest fires. Satellite images and data analyses can be used to develop early warning systems and deploy resources more efficiently. Moreover, data from space can be used to improve agricultural practices, predict crop yields and optimise the use of water and soil resources. This can help to move away from project-based support for small farmers, increase agricultural productivity overall and strengthening food security in the long term.
In addition, a new industry of its own is already emerging in Africa with NewSpace. The sector offers great potential for meeting partner countries on an equal footing. Germany should therefore work to ensure that the planned EU satellite constellation IRIS2 covers as many developing countries as possible.2
Companies can assume responsibility within the scope of their possibilities, whether in the areas of health, food and water safety or education.
Health, food and water security as well as educational opportunities are fundamental prerequisites for social and economic development, alongside peace, legal certainty and functioning, reliable administrative institutions. Development cooperation projects in these areas are extremely important.
Global health is one of the most important challenges of the 21st century. The COVID-19 pandemic has impressively demonstrated how closely the health of all people worldwide is interlinked and how much it depends on functioning health systems, international cooperation and global solidarity.
Due to the lack of production capacity, many African countries in particular had problems supplying their populations with vaccines. In order to avoid bottlenecks in the future, the African Union set the goal to increase vaccine production in a way that by 2040, 60 percent of the continent’s demand can be met (McKinsey.Global Institute 2023). Germany should support Africa in developing a pharmaceutical industry - through research, innovation and the transfer of expertise.
The private sector can help to reduce the risk of infectious diseases by investing in water and sanitation. In addition, laboratory capacities and health information systems should be developed and expanded in order to improve the diagnosis and ultimately the treatment of diseases.
Both financial and technical cooperation should provide. greater support. Synergies need to be created between the provision of health infrastructure and financing and the accompanying institutional counselling and training.
The effects of climate change on health and the topic of women’s health should also be considered. Furthermore, digitalisation and innovation are important aspects where Germany can support its partner countries with adapted solutions through development cooperation.
In order to improve healthcare, long-term “health partnerships” should be implemented.
Health partnerships
• Health partnerships are political partnerships with countries with the aim to strengthen healthcare systems. Priorities are defined together with the partner country and then jointly implemented and supported by politics, business and civil society.
• Health partnerships dovetail German expertise in the strengthening of health systems with investments and know-how of the German economy. They are therefore an attractive instrument of German foreign, trade and development policy.
The grain supply crisis, triggered by the Russian attack on Ukraine, has highlighted the great dependence of many countries on external food supplies. At the same time, the effects of climate change have devastating consequences for water and food security. Sub-Saharan Africa in particular lacks the capacity to adapt. The scarcity of water and arable land is leading to conflicts and migration movements.
In addition, according to United Nations estimates, the world’s population will grow from 8 billion today to an expected 9.7 billion by 2050. Around a quarter of humanity will live and feed itself in sub-Saharan Africa. Agricultural productivity urgently needs to increase and water use needs to be as efficient as possible.
Development policy should develop industrial agricultural economies in much closer cooperation with the private sector and promote access to expertise and innovative products, services, machinery and new (digital) technologies. The German economy has a lot to offer in this area, including modern “smart farming”. Development cooperation should be bolder in promoting and utilising new technologies. Satellite-based support from space can, for example, help to better predict crop yields, optimise the use of water and soil resources and make the application of seeds and fertilisers more efficient.
Support for local investments and access to adequate financing are key to ensuring that innovative technologies and suitable services can be utilised throughout the value chain. There is also a need for more large-scale projects, such as new facilities for desalinating seawater.
The enormous population growth in many regions posesmajor challenges for local labour markets. Overall, development policy should place a stronger focus on getting the young population in developing and emerging countries into education and work outside the informal sector.
On a positive note, the BMZ has been promoting vocational training partnerships with the German private sector since 2010. Within this framework, German chambers and associations, their vocational training centres and further education providers contribute their expertise to development cooperation projects.
Germany’s traditional, industry-driven vocational education and training, which enjoys a high reputation in many countries, must be incorporated even more systematically and training programmes must be geared even more closely to the needs of the local labour market. Only those who offer well-trained skilled labour will attract further foreign direct investment to their country.
For example, the “Skilled Labour for Africa” initiative of the VDMA, Germany’s mechanical and plant engineering association, is highly recognised by African partners. Together with local partners, the VDMA has set up training centres in various African countries (Botswana, Kenya, Nigeria) to qualify local workers as service technicians and employees of key African customers are trained in the use of machines. The BMZ should categorise this type of initiative as a relevant development policy measure and support it accordingly.
In addition, coordination with GIZ projects and other local programmes must be improved. This would also be the right step from a strategic point of view. Ultimately, it is about meeting the need for qualified experts to achieve our own goals in the partner country. For example, the development of a hydrogen infrastructure can only succeed with well-trained local specialists for installations, maintenance, production of electrolysers and fuel cells as well as for the transport of the energy source to other African regions and to Europe.
Satellite-based support from space can help to better predict crop yields, optimise the use of water and soil resources and make the application of seeds and fertilisers more efficient.
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The BDI conveys the interests of German industry to political decision-makers. In this way, it supports companies in global competition. It has an extensive network in Germany and Europe, in all important markets and in international organisations. The BDI provides political support for international market development. It also provides information and economic policy advice on all industry-relevant topics.
The BDI is the umbrella organisation of German industry and industry-related service providers. It speaks for 39 industry associations and more than 100,000 companies with around eight million employees. Membership is voluntary. 15 state organisations represent the interests of industry at regional level.
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