https://truthout.org/articles/why-germany-leads-in-renewables-it-has-its-own-green-bank/
Why Germany Leads in Renewables: It Has Its Own Green Bank
By
Ellen Brown,
Web of Debt Blog
Published
January 31, 2019
The Green New Deal endorsed by Alexandria Ocasio-Cortez and more than 40
other US Representatives has been criticized as imposing a too-heavy
burden on the rich and upper-middle-class taxpayers who will have to pay
for it, but taxing the rich is not what the Green New Deal resolution
proposes. It says funding will come primarily from certain public
agencies, including the Federal Reserve and “a new public bank or system
of regional and specialized public banks.”
Funding through the Federal Reserve may be controversial, but
establishing a national public infrastructure and development bank
should be a no-brainer. The real question is why we don’t already have
one, like China, Germany, and other countries that are running circles
around us in infrastructure development. Many European, Asian and Latin
American countries have their own national development banks, as well as
belonging to bilateral or multinational development institutions that
are jointly owned by multiple governments. Unlike the US Federal
Reserve, which considers itself “independent” of government, national
development banks are wholly owned by their governments and carry out
public development policies.
China not only has its own China Infrastructure Bank but has established
the Asian Infrastructure Investment Bank, which counts many Asian and
Middle Eastern countries in its membership, including Australia, New
Zealand, and Saudi Arabia. Both banks are helping to fund China’s
trillion-dollar “One Belt One Road” infrastructure initiative. China is
so far ahead of the United States in building infrastructure that Dan
Slane, a former advisor on President Trump’s transition team, has
warned, “If we don’t get our act together very soon, we should all be
brushing up on our Mandarin.”
The leader in renewable energy, however, is Germany, called “the world’s
first major renewable energy economy.” Germany has a public sector
development bank called KfW (Kreditanstalt für Wiederaufbau or
“Reconstruction Credit Institute”), which is even larger than the World
Bank. Along with Germany’s non-profit Sparkassen banks, KfW has largely
funded the country’s green energy revolution.
Unlike private commercial banks, KfW does not have to focus on
maximizing short-term profits for its shareholders while turning a blind
eye to external costs, including those imposed on the environment. The
bank has been free to support the energy revolution by funding major
investments in renewable energy and energy efficiency. Its fossil fuel
investments are close to zero. One of the key features of KFW, as with
other development banks, is that much of its lending is driven in a
strategic direction determined by the national government. Its key role
in the green energy revolution has been played within a public policy
framework under Germany’s renewable energy legislation, including policy
measures that have made investment in renewables commercially attractive.
KfW is one of the world’s largest development banks, with assets as of
December 2017 of $566.5 billion. Ironically, the initial funding for its
capitalization came from the United States, through the Marshall Plan in
1948. Why didn’t we fund a similar bank for ourselves? Apparently
because powerful Wall Street interests did not want the competition from
a government-owned bank that could make below-market loans for
infrastructure and development. Major US investors today prefer funding
infrastructure through public-private partnerships, in which private
partners can reap the profits while losses are imposed on local governments.
KfW and Germany’s Energy Revolution
Renewable energy in Germany is mainly based on wind, solar and biomass.
Renewables generated 41% of the country’s electricity in 2017, up from
just 6% in 2000; and public banks provided over 72% of the financing for
this transition. In 2007-09, KfW funded all of Germany’s investment in
Solar Photovoltaic. After that, Solar PV was introduced nationwide on a
major scale. This is the sort of catalytic role that development banks
can play, kickstarting a major structural transformation by funding and
showcasing new technologies and sectors.
KfW is not only one of the biggest but has been ranked one of the two
safest banks in the world. (The other is also a publicly-owned bank, the
Zurich Cantonal Bank in Switzerland.) KfW sports triple-A ratings from
all three major rating agencies, Fitch, Standard and Poor’s, and
Moody’s. The bank benefits from these top ratings and from the statutory
guarantee of the German government, which allow it to issue bonds on
very favorable terms and therefore to lend on favorable terms, backing
its loans with the bonds.
KfW does not work through public-private partnerships, and it does not
trade in derivatives and other complex financial products. It relies on
traditional lending and grants. The borrower is responsible for loan
repayment. Private investors can participate, but not as shareholders or
public-private partners. Rather, they can invest in “Green Bonds,” which
are as safe and liquid as other government bonds and are prized for
their green earmarking. The first “Green Bond – Made by KfW” was issued
in 2014 with a volume of $1.7 billion and a maturity of five years. It
was the largest Green Bond ever at the time of issuance and generated so
much interest that the order book rapidly grew to $3.02 billion,
although the bonds paid an annual coupon of only 0.375%. By 2017, the
issue volume of KfW Green Bonds was $4.21 billion.
Investors benefit from the high credit and sustainability ratings of
KfW, the liquidity of its bonds, and the opportunity to support climate
and environmental protection. For large institutional investors with
funds that exceed the government deposit insurance limit, Green Bonds
are the equivalent of savings accounts, a safe place to park their money
that provides a modest interest. Green Bonds also appeal to “socially
responsible” investors, who have the assurance with these simple and
transparent bonds that their money is going where they want it to. The
bonds are financed by KfW from the proceeds of its loans, which are also
in high demand due to their low interest rates; and the bank can offer
these low rates because its triple-A ratings allow it to cheaply
mobilize funds from capital markets, and because its public
policy-oriented loans qualify it for targeted subsidies.
Roosevelt’s Development Bank: The Reconstruction Finance Corporation
KfW’s role in implementing government policy parallels that of the
Reconstruction Finance Corporation (RFC) in funding the New Deal in the
1930s. At that time US banks were bankrupt and incapable of financing
the country’s recovery. Roosevelt attempted to set up a system of 12
public “industrial banks” through the Federal Reserve, but the measure
failed; so he made an end run around his opponents by using the RFC that
had been set up earlier by President Hoover, expanding it to address the
nation’s financing needs.
The RFC Act of 1932 provided the RFC with capital stock of $500 million
and the authority to extend credit up to $1.5 billion (subsequently
increased several times). With those resources, from 1932 to 1957 the
RFC loaned or invested more than $40 billion. As with KfW’s loans, its
funding source was the sale of bonds, mostly to the Treasury itself.
Proceeds from the loans repaid the bonds, leaving the RFC with a net
profit. The RFC financed roads, bridges, dams, post offices,
universities, electrical power, mortgages, farms, and much more; and it
funded all this while generating income for the government.
The RFC was so successful that it became America’s largest corporation
and the world’s largest banking organization. Its success may have been
its nemesis. Without the emergencies of depression and war, it was a
too-powerful competitor of the private banking establishment; and in
1957, it was disbanded under President Eisenhower. The United States was
left without a development bank, while Germany and other countries were
hitting the ground running with theirs.
Today some US states have infrastructure and development banks,
including California; but their reach is very small. One way they could
be expanded to meet state infrastructure needs would be to turn them
into depositories for state and municipal revenues. Rather than lending
their capital directly in a revolving fund, this would allow them to
leverage their capital into 10 times that sum in loans, as all
depository banks are able to do. (See my earlier article here.)
The most profitable and efficient way for national and local governments
to finance public infrastructure and development is with their own
banks, as the impressive track records of KfW and other national
development banks have shown. The RFC showed what could be done even by
a country that was technically bankrupt, simply by mobilizing its own
resources through a publicly-owned financial institution. We need to
resurrect that public funding engine today, not only to address the
national and global crises we are facing now but for the ongoing
development the country needs in order to manifest its true potential.