Germany's KfW shifts focus to urban development

Raises concerns over rapid fall in solar power project bidding prices

The German government-owned development bank, KfW has churned its India funding strategy. It is phasing out its commitments for the support of the financial sector in India and shifting its priorities to funding sustainable urban development.

Over the last ten years, KfW had three focus sectors in India: energy, environment and natural resources, and financial systems or sustainable economic development. Last year, there was a shift in focus areas, which will result in an increasing role of sustainable urban development within Indo-German bilateral development cooperation, according to a senior official at KfW. This is in keeping with Prime Minister Narendra Modi's focus on urban development under the Smart City project.

'We were working a lot with development banks in India, helping them set the banking structures. We were doing a lot of SME support, basically providing credit lines to development banks, which they passed on to the SMEs. We see that Indian banking sector has developed tremendously over the past decades. Basically, it is a matter of setting priorities. The German government, together with Indian government, has come to the conclusion that urban development is one of the top priorities.' Nils Medenbach, country manager, India, KfW Development Bank to Business Standard.

Over the past ten years, the total commitments of KfW in the energy sector in India have been about 3 billion euros, while that in the financial sector has been around 1.6 billion euros. In the environment and efficient use of resources, the commitments have been about 600 million euros. The commitments under the sector have been lower compared to the other sectors, as the majority of projects under it are grant funded and fully financed by German budget funds. Most commitments in the other sectors are subsidised loans.

In the urban development vertical, which is a new focus area for KfW, the commitment so far has been about 700 million euros, made almost exclusively in the past two years.

Under the sustainable urban development, KfW is working on developing climate-friendly urban transport projects and sustainable urban infrastructure. The three partner cities of Germany under the Smart City Project are Kochi, Bhubaneswar and Coimbatore.

'Smart City is a very ambitious project. At the same time, we completely share the view that sustainable urban development is a need in India. Infrastructure is not keeping pace with growth in the cities. At the same time, we are getting contacted over issues like resettlement. We are getting most requests for projects that we are doing in cities,' said Medenbach.

In the years between 2014 and 2016, KfW has disbursed 1.7 billion euros of promotional funds for development cooperation projects with India.

Falling bidding prices of solar panels a concern

Falling prices of solar power tariffs have come up as a concern for KfW, as rock-bottom prices indicated compromise in quality. The KfW has taken this up with the Indian government is also working with India for setting standards in the solar power sector.

Under the bilateral cooperation framework, India will receive 1 billion euros as soft loan from Germany for developing 'Green Energy Corridors'.

'Development in solar power is very fast, so far it can be rated as success. What perhaps is the danger that given the volume, the quality may be compromised. For example, in recent tenders for solar parks, there is a system of e-reverse bidding, and these bid prices have continuously gone down over the last 10-15 years. This to a large extent reflects strong decrease in the prices of panel and installation. The bid prices have reached a very low level, and they cannot be met without compromise in quality. This is a danger, and the bidding structure should set clear quality standards. We continuously take this up with the Indian government. The problem is there are no set quality standards for solar panels. This is one area we are working closely and trying to establish quality standards. We are working with German and Indian institutes to set quality standard,' said Medenbach.

Notably, In May 2017, India's solar power tariff hit a new low of Rs 2.44 per kilowatt-hour (kWh) at the auction of 500 megawatt (MW) of capacity at the Bhadla solar park in Rajasthan. The tariffs were around Rs 11 per kWh in 2010.

KfW is also assessing the possibility of work with small finance banks for providing specialized line of credit for solar rooftop panels and eduction.

'We are assessing if we can work with small finance banks in our priority areas. One very high priority right now is solar rooftop, apart from education. The lines of credit will be for specific purposes and could be provided with specific conditions. Banks can pass on preferential terms which we are providing to them' said Medenbach.

The Indian Government has also up-scaled the target of renewable energy capacity to 175 GW by the year 2022 which includes 100 GW from solar, 60 GW from wind, 10 GW from bio-power and 5 GW from small hydro-power.

The cumulative capacity of solar panels was 9.2 GW for the year ended March 31, 2017, according to data from Ministry of New and Renewable Energy (MNRE).

Germany's Energiewende programme, or shift to low carbon energy supplyis hailed as benchmarks towards transition to clean energy.