KfW FÖRDERBANK KfW MITTELSTANDSBANK

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1 ANNUAL REPORT 2008 KfW BANKENGRUPPE KfW ENTWICKLUNGSBANK DEG KfW FÖRDERBANK KfW MITTELSTANDSBANK KfW IPEX-BANK

2 KFW BANKENGRUPPE A VERSATILE PROMOTER KFW BANKENGRUPPE GIVES IMPETUS TO ECONOMIC, SOCIAL AND ECOLOGICAL DEVELOPMENT WORLDWIDE KfW Bankengruppe KfW IPEX-Bank KfW Mittelstandsbank KfW Entwicklungsbank KfW Förderbank As a promotional bank under the ownership of the German Government and the federal states, KfW offers support to encourage sustainable improvement in economic, social and ecological conditions, especially in the areas of small- and medium-sized enterprise, entrepreneurship, environmental protection, housing, infrastructure, education finance, project and export finance, and development cooperation. DEG KfW, as a promotional bank, has a proven business model that can stand the test of time. Firstly, it has a statutory mandate to provide support. This mandate is recognised and protected by the so-called EU Understanding. Secondly, KfW s guarantee from the Federal Republic of Germany enables the bank to refinance itself in the capital market at lower cost than commercial banks. KfW uses this refinancing advantage to the benefit of its promotional support. In challenging times climate change, resource scarcity, globalisation, technology-driven structural change and demographic development as well as in times of particularly hard challenges posed by the financial and economic crisis KfW, assisted by its owners, is working continuously on further developing its promotional programmes in order to keep helping business and society to overcome these challenges.

3 KEY FIGURES OF KFW BANKENGRUPPE Business figures of KfW Bankengruppe ) ) ) ) EUR in billions EUR in billions EUR in billions EUR in billions I. KfW Mittelstandsbank Financings Global loans to commercial banks and Europe Securitisations Advisory support (grants) 3) 0.0 II. KfW Förderbank Financings Global loans to commercial banks, Europe and general refinancing for special credit institutions of the federal states Securitisations Advisory support (grants) 3) 0.0 Investment finance Financings Securitisations III. KfW IPEX-Bank Industry, energy and raw materials Transport and transport infrastructure IV. KfW Entwicklungsbank V. DEG Total volume Financings Loans Financial guarantees Grants ABS SME portfolio Securitisations Advisory support (grants) 3) 0.0 Environmental and climate protection 4) Funding Differences in the totals are due to rounding 1) Calculated according to the old statistical method 2) Calculated according to the new statistical method 3) Inclusion of the item of advisory support as at 1 January Commitments made in previous years are not shown 4) Included in the total volume as general promotional business of KfW Mittelstandsbank and KfW Förderbank

4 K E Y F I G U R E S O F K F W B A N K E N G R U P P E Key income statement figures for the KfW Group EUR in millions EUR in millions Net interest income 2,006 1,755 Interest rate reductions Net commission income Administrative expense Operating result before valuation 1,579 1,357 Risk provisions for lending business 2,139 6,409 Net gains/losses from hedge accounting and other financial instruments at fair value through profit or loss 1,747 1,880 Net gains/losses from securities and investments 1, Operating result after valuation 4,281 7,353 Net other operating income 1,536 1,189 Profit/loss from operating activities 2,745 6,164 Taxes on income 89 4 Consolidated loss 2,657 6,168 Consolidated loss before IRFS effects from hedging 2,092 6,163 Change in Revaluation reserves recognised directly in equity Cost/income ratio before interest rate reductions 22.8 % 23.9 % Key balance sheet figures for the KfW Group EUR in billions EUR in billions Total assets Volume of lending Contingent liabilities 6 6 Irrevocable loan commitments Assets held in trust Volume of business Equity Equity ratio 3.0 % 4.2 % Key regulatory figures for the KfW Group ) EUR in billions EUR in billions Risk position Tier 1 capital Total regulatory capital Tier 1 ratio 7.8 % 9.4 % Total capital ratio 10.1 % 11.9 % 1) Calculated according to Principle I Employees of KfW Bankengruppe ,228 4,003

5 A N N U A L R E P O R T 2008

6 4 CONTENTS 2008 ANNUAL REPORT 31_ KfW Bankengruppe Providing global impetus to economy, society and ecology 37_ KfW Mittelstandsbank Leading the way in the promotion of commercial investments by SMEs 57_ KfW Förderbank Committed to environmental protection, housing, infrastructure and education Key figures of KfW Bankengruppe Letter from the Managing Board 6 Financial reporting 14 Report of the Board of Supervisory Directors 20 Board of Supervisory Directors 23 Managing Board, Directors and Managing Directors of KfW Bankengruppe 24 Compensation and loans to members of the Managing Board and Board of Supervisory Directors Years of KfW History of KfW Bankengruppe 26

7 CONTENTS 5 81_ KfW IPEX-Bank Well positioned in international project and export finance 95_ KfW Entwicklungsbank Resolute in the fight against poverty in developing and emerging countries 111_ DEG Partner for private investments in developing countries BRANDS AND FIELDS OF ACTIVITY KfW Bankengruppe A versatile promoter 31 KfW Mittelstandsbank The name says it all 37 KfW Förderbank Giving credit to commitment 57 KfW IPEX-Bank A strong competitor in international finance 81 KfW Entwicklungsbank Effectively advancing development 95 DEG Our business is development 111 Funding 125 Shareholdings, treasury and services 137 The men and women on our staff 143 Imprint 149 Photographs 149

8 6 DEAR READERS The year 2008 was an unusual and difficult year for KfW Bankengruppe. The predominant theme was the global financial crisis which massively impacted on Germany's banks and economy and which will still have very negative effects in 2009 as well. KfW did not remain immune to the deepest financial and economic crisis since the Federal Republic of Germany was founded, and it was burdened with specific themes resulting from the financial market crisis. These included the rescue and later sale of IKB, which had run into existential problems, done to prevent a loss of confidence in Germany as a financial centre, and the execution of a swap transaction with the investment bank Lehman Brothers shortly after it filed for insolvency. These events led to substantial modifications in the composition of the Managing Board. At the same time, KfW is about to take on major new functions under the economic stimulus packages adopted by the Federal Government, for which it is well equipped thanks to its 60 years of experience in promotional lending business. Nonetheless, in its 60th year the bank can also look back on great successes. Despite the extremely difficult environment of the financial market crisis we were able to match the high promotional business volume which we achieved in the record year of We were even able to commit more financings for the German and European economy than in the previous year. Since it was founded in 1948, KfW has provided around one trillion euros in loans. This shows that, all due self-criticism apart, KfW is doing very good work for the German economy. Especially now, given the crisis of the financial markets and the recession, KfW is more important than ever.

9 LETTER FROM THE MANAGING BOARD 7 DEVELOPMENT OF KFW'S FINANCING ACTIVITIES A total of EUR 70.6 billion was committed for the promotion of the economy, of which EUR 69.0 billion for financing and EUR 1.6 billion for securitisations. We were able to increase the financing volume by around 3.6 % over the previous year and thereby promote the German and global economy with an additional EUR 2.5 billion. Securitisations, in turn, collapsed by more than 90 %, which is not surprising as the securitisation market has dried up. The overall volume of our promotional business volume therefore was 17.4 % lower than in the previous year. KFW MITTELSTANDSBANK KfW Mittelstandsbank committed EUR 14.3 billion last year for the promotion of small- and mediumsized enterprises, 41 % less than in the previous year. Here, too, the drop is principally due to the sharp decline in securitisations and global loans. The volume of actual financing operations almost equalled the high level of the previous year, at EUR 12.7 billion. Given the current cyclical downturn, this is a noteworthy result. KFW FÖRDERBANK We achieved nearly half our promotional business volume through KfW Förderbank. Promotional loans and global loans amounted to EUR 33.8 billion, which actually exceeded the previous year's volume by 5 %. Our top of the range product is and remains our programme family "Energy-efficient construction and rehabilitation", one of the biggest set of promotional programmes in Germany. With it we promote the energy rehabilitation of existing buildings as well as the construction of new energy-efficient buildings on a very high level. These programmes are the best example of how ecological and economic objectives can reinforce each other. Climate protection and employment objectives are dovetailed in these programmes. The investments co-financed since 2006 reduced CO 2 emissions sustainably by 2.4 million tonnes per year. Furthermore, the investments created or safeguarded more than 200,000 jobs in the year 2008 alone.

10 8 KFW ENTWICKLUNGSBANK In 2008 KfW Entwicklungsbank increased its commitment volume in developing and transition countries by around 23 % over the previous year to a new record level it committed a total of EUR 3.7 billion for projects that help to sustainably reduce poverty in these countries and to boost the economy. In 2008 as well, we more than doubled the funds made available from the federal budget for Financial Cooperation by adding funds which we raised in the capital market ourselves. This mixture of KfW funds and budget funds gives us substantial leverage to contribute as a strong partner of the Federal Government to meeting Germany's growing development policy challenges and obligations, expressed primarily by the ODA (Official Development Assistance) targets. Our assistance is directed at establishing and consolidating functioning financial systems in the developing and transition countries, a special focus of our activities. Particularly against the background of the financial market crisis, this promotion is proving to be important and effective. After all, the developing countries are also suffering from the global crisis, and neglecting them now would be fatal. We therefore actively support microfinance institutions in order to quickly counteract a decline in lending. Our subsidiary DEG complements the product range of KfW Entwicklungsbank with financing and advisory services that are tailored to the needs of private companies. Demand for these financings continues strong, so that DEG was able to increase its financing volume for private sector investment in developing and transition countries to EUR 1.22 billion in 2008.

11 LETTER FROM THE MANAGING BOARD 9 KFW IPEX-BANK A year ago we established KfW IPEX-Bank as an independent subsidiary of KfW Bankengruppe. Within KfW Bankengruppe it is responsible primarily for international project and export finance, and its business follows the specific financing mission laid out in the Law concerning KfW (KfW Law). KfW IPEX-Bank is an important generator of earnings for the Group and renders services that are important for the economy. This was most recently confirmed by an expert opinion issued on behalf of the Federal Minister of Economics and Technology. The bank recorded a strong volume of new business totalling EUR 17.6 million, which was much higher than planned. This is an expression of the generally very high demand for financing needed to implement investment and export projects which banks are increasingly reluctant to provide owing to the financial market crisis. FUNDING Despite the difficult conditions, 2008 was a successful year for our funding activities. We raised a total of EUR 75.3 billion in the international capital markets more than ever before in KfW's 60-year history. The fact that we have been able to perform so successfully even in the difficult market environment caused by the financial market crisis confirms our funding strategy. This overall achievement was recently honoured by the "Issuer of the Year" award of the renowned capital markets publication IFR. KfW also received three awards from the weekly Euroweek in recognition of particularly successful issues. For 2009 we expect similar refinancing volumes of around EUR 75 billion in order to be able to fulfil the additional promotional tasks resulting from the Federal Government's economic stimulus packages. Given the difficult current conditions in the capital markets, this will not be an easy task since the capital markets will already be strongly challenged by the high issuing activity of state and state-guaranteed issuers. Nevertheless, we are confident that, not least because of our long-standing reputation as a reliable issuer, we will be able to meet our funding requirements even if the conditions are different from those in the past.

12 10 EXTRAORDINARY CHARGES IN THE YEAR 2008 In the summer of 2007 KfW decided together with the banking associations and the Federal Government to provide protection for IKB Deutsche Industriebank AG, Düsseldorf, which was one of the first banks caught in the maelstrom of the financial market crisis. The aim was to prevent a collapse of IKB and to preserve it as a bank for small- and mediumsized enterprises. Most of all, however, a loss of confidence in Germany as a financial centre was to be prevented and damage to the German economy was to be averted. Fifteen months later, in October 2008, after a difficult but successful stabilisation of the bank, we sold our IKB shares to the private investor Lone Star. Although we sustained high financial burdens from our contribution to the protection measures, the decision to rescue IKB proved to be correct. We also incurred financial burdens from the transfer of funds on 15 September to a subsidiary of the already insolvent Lehman Brothers bank. This regrettable incident has cost us money as well as reputation. Immediately after the incident we drew consequences by suspending responsible officers and making the first structural adjustments. We immediately implemented initial improvements to our risk management. Furthermore, with a view to bringing about fundamental changes we commissioned external consultants who are assisting us in reviewing our risk management in detail and in implementing proposals for improvement. A third critical theme associated with the financial market crisis was our exposure in Iceland. KfW's business in European countries was a deliberate strategic decision because KfW promotes not only the German but also the European economy under its legal mandate, which was confirmed by the EU. We have now entered a discussion process on the scope of our European promotional activities. This must be distinguished from an investment by KfW in certain Icelandic securities. Just as other banks do, KfW maintains a broadly diversified securities portfolio including, among others, Icelandic securities that have hitherto been rated as secure but have declined in value in the course of the financial market crisis.

13 LETTER FROM THE MANAGING BOARD 11 CHANGES ON THE MANAGING BOARD Extensive changes took place on KfW's Managing Board in the reporting year. Ingrid Matthäus-Maier resigned as Speaker of the Managing Board for health reasons on 7 April and retired in September Wolfgang Kroh took over temporarily as acting Speaker. In June 2008 the Board of Supervisory Directors appointed Dr Ulrich Schröder to the newly created position of Chairman of the Managing Board, which he assumed in September. In the course of the Lehman incident in mid-september the Board of Supervisory Directors decided to suspend the Managing Board members Dr Peter Fleischer and Detlef Leinberger with immediate effect for good cause. On 1 November 2008 Dr Günther Bräunig resumed his active work on KfW's Managing Board after serving as the Chairman of the Board of Managing Directors of IKB AG for 15 months. At the Supervisory Board meeting of 22 January 2009 the State Secretary at the Federal Ministry of Finance, Dr Axel Nawrath, was appointed as a new member of the Managing Board. He will direct KfW's domestic promotional business on the Managing Board from April Finally, at its 26 March 2009 meeting the Board of Supervisory Directors appointed Bernd Loewen as the new Chief Risk and Financial Officer, thus filling the last vacant position on KfW's Managing Board. RESULTS FOR FINANCIAL YEAR 2008 The results of operations are marked by the positive development of the operative results on the one hand and by the high burdens from the global financial market crisis and the risk protection for and sale of KfW's interest in IKB on the other hand. The operating result before valuation was EUR 1.6 billion, clearly higher than the previous year's result, by EUR 0.2 million, despite the further increase in interest rate reduction measures. The massive impacts of the global financial market crisis had a contrary effect. As a result of the extreme market developments, despite a conservative investment policy, valuation losses on our securities portfolio totalling EUR 2.0 billion had to be reported, part of which had to be carried directly in equity. In addition, expenses from the Lehman Brothers bankruptcy and the Iceland moratorium totalled EUR 0.7 billion, of which EUR 0.3 billion from securities. The IKB measures impacted the income statement with additional expenses of EUR 1.2 billion in Moreover, the extreme market disruptions led to purely IFRS-induced and not economically reasonable valuation effects in fully closed risk positions of EUR 0.6 billion. Overall, KfW thus recorded a consolidated loss of EUR 2.7 billion.

14 12 OUTLOOK The crisis on the financial markets also harbours considerable downward risks for the real economy. As are most industrialised countries, Germany is heading towards a severe recession. For the first time in the history of the Federal Republic, an economic crisis is directly intertwined with a global financial crisis. Whereas banks and savings banks used to be able to make loans to enterprises during a phase of economic decline, today the finance industry itself is under pressure. The financing situation for enterprises has thus become considerably more difficult. Nevertheless, we are optimistic about the future for KfW because, being a large promotional bank, we can rely on a successful and proven business model. Our explicit state guarantee gives us a funding advantage that enables us to provide promotional funds from our own income. This makes KfW an alternative for economic promotion that spares the national budget. A mere 6 % of our promotional funds comes from public coffers while 94 % is raised on the capital market. At the same time, our statutory mission defines our scope of action. INTERNAL MODERNISATION In 2009 KfW will have to deal with a changed situation. It is being perceived much more strongly by the public and, accordingly, its activities will be monitored intensively. In addition, it will have to conduct its business with scarce resources as a result of the financial burdens from the IKB rescue and the impacts of the financial market crisis. For this reason we have imposed on ourselves an internal modernisation so as to be equipped for the challenges ahead. One aspect is the further development of our risk management. Triggered by the Lehman incident, we have prepared proposals together with external consultants which are now being implemented. A further central theme is the renewal of our internal structures with the goal of achieving more customer orientation and greater efficiency. We will be even more focused on attending to the needs of our ultimate customers. Already last September we introduced a restructuring directed towards this objective and developed a transparent sector profile for the Managing Board in which the front-office and back-office functions are separated more clearly. We have also divided our domestic business into three departments which focus on the customer groups of small- and mediumsized enterprises, private and public customers. Additionally, we have established a central sales and marketing department for the purpose of enabling closer cooperation with the on-lending banks and savings banks, but also with the promotional institutions of the federal states. At the same time we are working to reduce the complexity of the programmes.

15 LETTER FROM THE MANAGING BOARD 13 ECONOMIC STIMULUS PACKAGES We have initiated these modernisations in order to prepare for one of our most important functions in the coming years: the implementation of the economic stimulus packages deployed by the Federal Government. We at KfW consider ourselves to be particularly called upon to intervene in support of the financial market so that an adequate supply of credit will also be available for companies in economically difficult times. The measures which we will be implementing under the economic stimulus packages have a volume of some EUR 50 billion alone. Around EUR 40 billion of this sum will be used to finance German enterprises and some EUR 10 billion will be provided for energy efficiency and infrastructure measures. What is new for KfW is that we will now be promoting big enterprises as well because this is where the impacts of the financial crisis are currently most evident. The current economic situation calls for rapid intervention. Having said this, however, we must bear in mind the long-term structural challenges which our economy and society are facing. KfW has defined sustainable promotion as its guiding principle. KfW will remain indispensable as a promotional bank in the future as well. Dr Ulrich Schröder (Chairman since 1 September 2008) Dr Günther Bräunig (Seat was dormant during appointment as Chairman of the Board of Managing Directors of IKB until 31 October 2008; resumed mandate as a member of KfW's Managing Board on 1 November 2008) Dr Norbert Kloppenburg Wolfgang Kroh (Speaker from 7 April 2008 to 31 August 2008)

16 14 FINANCIAL REPORTING THE COMPLETE CONSOLIDATED FINANCIAL STATEMENTS INCLUDING THE GROUP MANA GE MENT REPORT ARE CONTAINED IN OUR FINANCIAL REPORT, WHICH IS AVAILABLE FOR DOWN LOAD FROM OUR WEBSITE. THE ANNUAL FINANCIAL STATEMENTS AND THE MANAGEMENT REPORT OF KFW ARE ALSO AVAILABLE FOR DOWNLOAD. THE AUDITING FIRM PRICEWATER HOUSE COOPERS AG WIRTSCHAFTSPRÜFUNGSGESELLSCHAFT ISSUED AN UNQUALIFIED AUDITOR'S REPORT ON THE CONSOLIDATED AND THE INDIVIDUAL FINANCIAL STATEMENTS AS AT 9 MARCH MACROECONOMIC CONDITIONS The global economy was subject to considerable burdens in After years of strong growth, production entered a cyclical downturn. The financial market crisis triggered by substantial corrections on the US real estate market resulted in burdens that threatened the very existence of some banks and in a loss of confidence among banks, which in turn nearly halted interbank lending. The collapse of Lehman Brothers made the crisis even worse. Government and central bank bailout packages prevented the crisis from deteriorating further still and the financial system from collapsing. The turbulence in the financial markets increasingly impacted the real economy. Additional measures to support the real economy were implemented to avoid an enduring downward spiral. These developments also caused considerable turmoil in the money and capital markets. The growing problems in the financial sector resulted in significantly higher refinancing costs for the financial as well as the corporate sector. This trend was only partially corrected by slashing key interest rates. MAJOR KFW GROUP DEVELOPMENTS The global financial market crisis is also reflected in the economic development of the KfW Group. Despite these burdens, the Group achieved a very high volume of promotional financing due to improved operating results.

17 FINANCIAL REPORTING 15 HIGH VOLUME OF PROMOTIONAL BUSINESS Total assets and volume of lending EUR in billions Interest rate reductions EUR in millions Total assets Volume of lending Interest rate reductions The Group continued to record a high level of promotional activities in 2008 with a total financing volume of EUR 70.6 billion. While financing rose by 3.6 % to a record EUR 69.0 billion, the securitisation volume at KfW Mittelstandsbank and KfW Förderbank decreased sharply as a direct consequence of the collapse of this market segment. KfW interest rate reductions were increased by 6 % to EUR 606 million. The consolidated total assets of the KfW Group rose by EUR 40.8 billion to EUR billion. Loans and advances (EUR billion), in particular, developed positively with an increase in volume of EUR 27.9 billion. This was largely driven by domestic promotional lending business. Balance sheet growth was mainly funded by increased issuing activities. The volume of certificated liabilities of EUR billion was EUR 42.2 billion higher than in the previous year.

18 16 IN 2008 THE EARNINGS POSITION WAS CHARACTERISED BY a strong operating result the financial market crisis and its effects on earnings additional charges in connection with the risk protection for and the sale of IKB Operating result before valuation, consolidated profit/loss, consolidated profit/loss before IFRS effects from hedging EUR in millions 2,000 1,381 1,564 1,433 1,357 1, ,168 6,163 2,657 2,092 2,000 4,000 6,000 8, Operating result before valuation Consolidated profit/loss Consolidated profit/loss before IFRS effects STRONG OPERATING RESULT With growth of 16 % to EUR 1,579 million, the operating result before valuation developed positively despite the increase in interest rate reduction measures to EUR 606 million. This result also reflects the KfW Group's strong operating position, despite very difficult underlying conditions, with positive growth in net interest income and a further improvement in the cost/income ratio before interest reductions. At the same time, this provides a stable basis to continue promotional activities, which remain at a high level.

19 FINANCIAL REPORTING 17 EARNINGS IMPACT DUE TO THE FINANCIAL MARKET CRISIS High risk and liquidity premiums, even for good counterparties, and the fact that meanwhile markets for almost all asset classes had dried up (securitisation products but also financial and corporate bonds, for example) resulted in substantial reductions in market value. Despite the group-wide conservative investment policy, valuation losses totalling EUR 2.0 billion, recognised in part directly in equity, arose from the securities portfolio of around EUR 43 billion. In addition there were charges arising from the Lehman bankruptcy as well as the Iceland moratorium totalling EUR 0.7 billion, of which EUR 0.3 billion was from securities. Market distortions were also responsible for additional charges of EUR 0.6 billion due to purely IFRSrelated effects in connection with the valuation of derivatives, which exclusively serve hedging purposes in closed risk positions. Against this backdrop, the resulting effects on earnings do not have economic grounds and will offset each other in the future. Sufficient risk provisions in the form of portfolio impairments were put in place in 2008 for specific risks arising from the spreading financial and economic crisis, while the KfW Group's conservative risk policy was rigorously maintained. CHARGES IN CONNECTION WITH THE RISK PROTECTION FOR AND THE SALE OF IKB DEUTSCHE INDUSTRIEBANK AG In 2007, the existence of IKB was threatened as a result of problems arising in connection with the US subprime crisis. Together with three associations of the German banking industry, KfW has been providing risk protection to IKB since the end of July KfW also implemented additional capitalisation measures with a volume of EUR 2.3 billion for the benefit of IKB in 2008, as commissioned by the Federal Government and in accordance with the KfW Law. On 21 August 2008 KfW entered into an agreement with the strategic investor Lone Star Funds, Dallas, Texas, USA, for the sale of IKB, thus achieving the central aims of the IKB rescue package. In financial year 2008, the IKB measures had an impact on the income statement of EUR 1.2 billion. The total charges for KfW arising in connection with the rescue of IKB thus amount to EUR 8.4 billion. The risks still remaining for KfW are limited. GROUP INCOME STATEMENT RECORDS NET LOSS The massive impact of the global crisis in the financial markets as well as the charges arising from the IKB rescue resulted in a consolidated loss of EUR 2,657 million for 2008 despite the strong operating result. After adjustment for IRFS charges not deemed economically reasonable, the consolidated loss amounted to EUR 2,092 million.

20 18 DEVELOPMENT OF THE RISK SITUATION Risk control and monitoring activities during the reporting year were mostly characterised by the turbulence in the financial markets. The internal credit ratings of many business partners in the financial sector deteriorated as a result of the negative performance in the international financial markets. The state bailout packages, which were organised largely after the Lehman bankruptcy, and their impact on the international financial sector were on the whole regarded as positive, and they have also had a positive impact on internal credit ratings. In spite of this, however, risks in the financial sector are significantly higher than in previous years. The effects of the economic and financial crisis are also increasing risks in the corporate sector, which is expected to continue in the near future. As a result, KfW has substantially intensified its risk monitoring. During the course of the financial crisis, and after the payment mistakenly made to Lehman Brothers, KfW systematically reviewed its risk management and control workflows to assess whether structural action was required. This process focused on further developing group-wide control processes (e.g. for securities and operational risks), and expanding the real-time decision-orientated reporting system. In addition, the Group is working on increasing its invest ment control and further developing its early risk warning system. It is also reviewing methods of valuing structured products. Activities with regard to these topics started as projects during the reporting year, and will be continued and implemented in The Group continuously develops the rating procedures and models it uses for risk measurement and management. This also includes a systematic validation of the rating systems. Risk management within the KfW Group chiefly serves to preserve the Group's risk-bearing capacity. For an analysis of this capacity, risks must be measured and compared to the economic resources available for risk coverage (available financial resources) by means of a capital requirement calculation. Economic risk-bearing capacity as at 31 December 2008 EUR in millions Credit risk Market price risk OpRisk 8,556 Overall capital requirements 6,722 1, ,929 Available financial resources Capital requirements for stress scenarios 3,500 Other equity components Subordinated liabilities 4,025 3,247

21 FINANCIAL REPORTING 19 As at 31 December 2008, KfW had sufficient economic risk-bearing capacity to satisfy a solvency level of %. This means that the available financial resources cover overall capital requirements. Due to the severity of the international financial crisis and the pressure the Group is under as a result of the risk protection for IKB and the sale of KfW's interest in IKB, potential additional capital requirements for stress scenarios are covered by the available financial resources to only a limited extent. Taking further equity components and the subordinated liabilities into account, there would also be risk coverage including the additional capital requirements for stress scenarios for a solvency level of %. Despite the difficult market environment, KfW's funding situation was not at any time negatively affected. Overall, the concentration of industries and in dividual counterparties in the loan portfolio has increa sed as a result of the international financial crisis. Despite negative changes in ratings, the Group's loan portfolio continues to have a good cre dit quality structure. The KfW Group takes appropriate measures to address all identifiable default risks in its lending business by making risk provisions for loans. OUTLOOK KfW believes that the measures implemented in Germany and worldwide to stabilise the financial markets and revitalise the economy will bring about a certain degree of stabilisation in the second half of Overall, in comparison with 2008, the risks for the global economy have increased substantially. A key factor is regaining trust and re-enabling the capital markets to function fully. To this end, the measures put in place to stabilise the financial markets and to avoid systemic risks are essential. The Group will continue to pursue its business activities at a high level, with a particular focus on the short-term implementation of the Federal Government's economic stimulus packages. It will also intensively continue activities in export and project finance as well as its support to developing and emerging countries. For the years 2009 and 2010 KfW expects stable operating results before valuations throughout the Group. As a consequence of the anticipated intensification of the economic crisis increased risk provisioning in the loan portfolio may be required. In view of the fair value accounting for financial instruments under IFRS, which also results in earnings effects with no economic grounds, the Group's earnings will depend heavily on future developments in the financial markets. Earnings are expected to continue to be highly volatile.

22 REPORT OF THE BOARD OF SUPERVISORY DIRECTORS 20 Peer Steinbrück, Federal Minister of Finance The Board of Supervisory Directors has continually supervised the conduct of KfW's business and the administration of its assets, and it has taken the necessary decisions on the provision of financing and the issuing of guarantees according to the conditions set forth in the Law concerning KfW and the By-Laws. For this purpose the Board of Supervisory Directors held six meetings, the Loan Approval Committee three meetings and the two committees established by decision of the Board of Supervisory Directors in February 2008, the Executive Committee and the Audit Committee, held 10 meetings and three meetings, respectively, in At those meetings the Managing Board provided the Board of Supervisory Directors with information about the business activities and current developments in KfW's individual fields of activity, the Group's net assets, results of operations and risk situation, the respective current state of the risk protection afforded to, and the sale of KfW's interest in, IKB, the consequences to be drawn from the Lehman incident with respect to staff and organisation, and KfW's strategic orientation. In the reports on the activities of the individual fields of business, the primary focus was on the following developments: With regard to the activities of KfW Mittelstandsbank and KfW Förderbank, the Managing Board reported about KfW's "Small SMEs" initiative specifically regarding the promotional windows for small enterprises under the "ERP Regional Promotion Programme" and the "ERP Innovation Programme", as well as the improved mezzanine financing offer under the "Unternehmerkapital" programme and KfW's renewed focal topic of climate and environmental protection. The Managing Board also informed the Board of Supervisory Directors about the KfW Special Programme 2009 and other measures with which KfW supports the Federal Government in the implementation of the agreed economic stimulus measures. Other report topics were the decline in securi tisation business in the current economic environment and KfW's global loan exposure in European countries, particularly in Iceland. In reporting on the activities of KfW Entwicklungsbank the Managing Board described the steadily growing contribution being made from KfW's own funds to achieve the ODA targets set by the Federal Government as well as KfW's role as the leading bilateral financing institution in the area of natural resource and biodiversity protection. For KfW IPEX-Bank GmbH, which has been legally independent since 1 January 2008, a capital increase had to be performed early to account for the above-plan commitment volume of The Board of Supervisory Directors approved the capital increase in two steps at its meetings of 3 December 2008 and 22 January In connection with the Group's net assets, results of operations and risk situation, the Board of Supervisory Directors and the Audit Committee discussed in particular the financial charges resulting from the risk protection afforded to IKB, the burdens from the financial market crisis and the impacts of the IFRS accounting standards which were applied for the first time in For this purpose the Board of Supervisory Directors and the Audit Committee were also

23 REPORT OF THE BOARD OF SUPERVISORY DIRECTORS 21 informed in detail of the development of KfW's securities portfolio against the background of the financial market crisis. A topic that was discussed with particular intensity by the Board of Supervisory Directors and the Executive Committee was the risk protection for and sale of KfW's interest in IKB. The Managing Board always informed the Board of Supervisory Directors and the Executive Committee without delay of the relevant developments and involved them in decision-making as stipulated in the Law concerning KfW and in the By-Laws. Following intensive discussion and after weighing the alternatives the Board of Supervisory Directors, acting on the recommendation of the Executive Committee, accepted the sale of the IKB shares to Lone Star on 18 September Against the background of the financial and economic crisis, the funding conditions, profitability and risk-bearing capacity were presented as the main determinants for KfW's promotional capacity. The business strategy and related planning for the year 2009 were approved by the Board of Supervisory Directors. At the proposal of the Executive Committee, the Board of Supervisory Directors appointed the following Managing Board members in the reporting period: Dr Ulrich Schröder as the Chairman, effective as of 1 September 2008 and, on 22 January 2009, Dr Axel Nawrath, effect ive as of 1 April Ingrid Matthäus- Maier resigned from her position as the Speaker of the Managing Board on 7 April 2008 and retired from the Board on 30 September The Board of Supervisory Directors was also informed by the Managing Board without delay and in detail about the Lehman incident, its analysis with the aid of several internal and external investigations, as well as the resulting measures concerning staff changes and reorganisation. The latter included in particular the improvement of risk management as part of a comprehensive organisational restructuring of KfW under the project "Perspective". As an immediate consequence of the Lehman incident at staff level the Board of Supervisory Directors resolved on 18 September 2008 to suspend the Managing Board members Dr Peter Fleischer and Detlef Leinberger with immediate effect and on 28 September 2008 determined their dismissal as at 29 September The Managing Board also discussed KfW's strategic orientation with the Board of Supervisory Directors. As a measure to further develop KfW's corporate governance, at the proposal of the Executive Committee the Board of Supervisory Directors adopted rules of procedure for the Managing Board. The Managing Board also reported on the planned change of the auditor of the annual financial statements for the financial year 2009, who is appointed by the Supervisory Authority, the Federal Ministry of Finance, at the proposal of the Board of Supervisory Directors and in consultation with the Federal Audit Office. The Loan Approval Committee concerned itself primarily with the loan commitments that have to be presented under the Law and By-Laws, and the Audit Committee with the quarterly and risk reports as well as the annual financial statements of KfW Bankengruppe. It made corresponding recommendations to the Board of Supervisory Directors for the

24 REPORT OF THE BOARD OF SUPERVISORY DIRECTORS 22 preparation of the annual financial statements and the appointment of the auditor. As was agreed, in my capacity as Federal Minister of Finance I assumed the position of Chairman of the Board of Supervisory Directors for 2009 from my colleague Michael Glos, Federal Minister of Economics and Technology. During the reporting period Michael Glos, Oskar Lafontaine, Dr Christopher Pleister, Horst Seehofer and Jürgen R. Thumann resigned from the Board of Supervisory Directors. The Board of Supervisory Directors would like to thank these former members for their work on the Board. Ilse Aigner, Dr Karl-Theo dor Freiherr zu Guttenberg, Gerhard P. Hofmann, Prof. Dr-Ing. Hans-Peter Keitel and Dr Gesine Lötzsch joined the Board of Supervisory Directors. PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft, Frankfurt am Main, who were appointed auditors for the 2008 financial year, have audited the annual financial statements and the management report of KfW as well as the consolidated financial statements and the group management report of the KfW Group, all of which were prepared as at 31 December 2008 by the Managing Board, and issued an unqualified auditor's report thereon. The financial statements and the management report were prepared in accordance with the provisions of the German Commercial Code (HGB) and the consolidated financial statements and the group management report were prepared in accordance with International Financial Reporting Standards (IFRS) as applicable within the European Union. At its meeting on 26 March 2009 the Board of Supervisory Directors approved the financial statements and the consolidated financial statements, both of which were prepared by the Managing Board, as stipulated in Article 9 (2) of the Law concerning KfW following a recommendation by the Audit Committee. Frankfurt am Main, 26 March 2009 THE BOARD OF SUPERVISORY DIRECTORS Chairman

25 MEMBERS AND TASKS OF THE BOARD OF SUPERVISORY DIRECTORS 23 MEMBERS AND TASKS OF THE BOARD OF SUPERVISORY DIRECTORS BOARD OF The Board of Supervisory Directors supervises the conduct of KfW's business and the administration of its assets. It approves the larger loans and the annual financial statements. The Board of Supervisory Directors consists of 37 members. The Chairman is the Federal Minister of Finance and the Deputy Chairman is the Federal Minister of Economics and Technology. Peer Steinbrück Federal Minister of Finance Chairman (from 1 January 2009) Deputy Chairman (until 31 December 2008) Michael Glos Federal Minister of Economics and Technology (until 10 February 2009) Deputy Chairman (from 1 January 2009 to 10 February 2009) Chairman (until 31 December 2008) Dr Karl-Theodor Freiherr zu Guttenberg Federal Minister of Economics and Technology (from 12 February 2009) Deputy Chairman (from 12 February 2009) SUPERVISORY Ilse Aigner Federal Minister of Food, Agriculture and Consumer Protection (from 31 October 2008) Dr Günter Baumann Member of the Board of Managing Directors of the Association of German Chambers of Industry and Commerce (DIHK) Representative of Industry Anton F. Börner President of the Bundesverband German Wholesale and Foreign Trade (BGA) Representative of Trade Dr Uwe Brandl President of the Bayerischer Gemeindetag Representative of the Municipalities Frank Bsirske Chairman of ver.di Vereinigte Dienstleistungsgewerkschaft Representative of the Trade Unions Prof Dr Ingolf Deubel Minister of Finance of the State of Rhineland-Palatinate Member appointed by the German Bundesrat Prof Dr Kurt Faltlhauser Minister of Finance (retired) of the Free State of Bavaria Member appointed by the German Bundesrat Sigmar Gabriel Federal Minister of the Environment, Nature Conservation and Nuclear Safety Heinrich Haasis President of the Deutscher Sparkassen- und Giroverband Representative of the Savings Banks Gerhard P. Hofmann Member of the Board of Managing Directors of the Bundesverband der Deutschen Volks- und Raiffeisenbanken e. V. (BVR) Representative of the Cooperative Banks (from 13 August 2008) Peter Jacoby Minister of Finance of the State of Saarland Member appointed by the German Bundesrat Dr Siegfried Jaschinski Chairman of the Board of Managing Directors of Landesbank Baden- Württemberg Representative of the Mortgage Banks Bartholomäus Kalb Member of the German Bundestag Member appointed by the German Bundestag Prof Dr-Ing. Hans-Peter Keitel President of the Bundesverband der Deutschen Industrie e. V. Representative of Industry (from 1 January 2009) Roland Koch Minister President of the State of Hesse Member appointed by the German Bundesrat Jürgen Koppelin Member of the German Bundestag Member appointed by the German Bundestag Oskar Lafontaine Member of the German Bundestag Member appointed by the German Bundestag (until 31 December 2008) Waltraud Lehn Member of the German Bundestag Member appointed by the German Bundestag Dr Helmut Linssen Minister of Finance of the State of North Rhine-Westphalia Member appointed by the German Bundesrat Dr Gesine Lötzsch Member of the German Bundestag Member appointed by the German Bundestag (from 1 January 2009) Claus Matecki Member of the Executive Board of the Confederation of German Trade Unions Representative of the Trade Unions Dr Michael Meister Member of the German Bundestag Member appointed by the German Bundestag Franz-Josef Möllenberg Chairman of the Trade Union Nahrung-Genuss-Gaststätten Representative of the Trade Unions Hartmut Möllring Minister of Finance of the State of Lower Saxony Member appointed by the German Bundesrat Klaus-Peter Müller President of the Association of German Banks Representative of the Commercial Banks Matthias Platzeck Minister President of the State of Brandenburg Member appointed by the German Bundesrat Dr Christopher Pleister President of the Bundesverband der Deutschen Volks- und Raiffeisenbanken e. V. (BVR) (retired) Representative of the Cooperative Banks (until 15 July 2008) Alexander Rychter Managing Director of the Bundesverband Freier Immobilien- und Wohnungsunternehmen e. V. (BFW) Representative of the Housing Industry Christine Scheel Member of the German Bundestag Member appointed by the German Bundestag Hanns-Eberhard Schleyer Secretary-General of the Zentralverband des Deutschen Handwerks Representative of the Skilled Crafts Horst Seehofer Federal Minister of Food, Agriculture and Consumer Protection (until 27 October 2008) Michael Sommer Chairman of the Deutscher Gewerkschaftsbund Representative of the Trade Unions Gerd Sonnleitner President of the Deutscher Bauernverband e. V. Representative of Agriculture Dr Frank-Walter Steinmeier Federal Minister for Foreign Affairs Ludwig Stiegler Member of the German Bundestag Member appointed by the German Bundestag Jürgen R. Thumann President of the Bundesverband der Deutschen Industrie e. V. (retired) Representative of Industry (until 31 December 2008) Wolfgang Tiefensee Federal Minister of Transport, Building and Urban Affairs Heidemarie Wieczorek-Zeul Federal Minister for Economic Cooperation and Development

26 24 MANAGING BOARD, DIRECTORS AND MANAGING DIRECTORS MANAGING BOARD MANAGING Dr Günther Bräunig (inactive seat until 31 BOARD October 2008 during his appointment as Chairman of the Board of Managing Directors of IKB, from 1 November 2008 resumption of his seat on the Managing Board of KfW) Dr Peter Fleischer (until 29 September 2008) Dr Norbert Kloppenburg Wolfgang Kroh (Speaker from 7 April 2008 until 31 August 2008) Detlef Leinberger (until 29 September 2008) Ingrid Matthäus-Maier (until 30 September 2008; Speaker until 7 April 2008) Dr Ulrich Schröder (Chairman of the Managing Board from 1 September 2008) DIRECTORS DIRECTORS Dr Stefan Breuer Dr Frank Czichowski Dr Lutz-Christian Funke Helmut Gauges Cherifa Larabi Werner Möller (until August 2008) Dr Hanns-Peter Neuhoff Werner Genter (until March 2008) Dr Volker Groß Klaus Neumann Rainer Hartje Werner Oerter (until September 2008) Uwe Ohls Klaus Klüber Christiane Orlowski Doris Köhn Joachim Rastert Ludolf Rischmüller Wolfgang Roßmeißl Dr Jürgen Schneider Dr Bernd Schreiber Dietrich Suhlrie Klaus Weirich Bruno Wenn Dr Christian Zacherl MANAGING DIRECTORS OF KFW IPEX-BANK GMBH MANAGING Michael Ebert Heinrich Heims (Speaker) Christiane DIRECTORS Laibach (from April 2008) Christian Murach Markus Scheer The business areas of project and corporate finance in Germany and international project and export finance were regrouped into KfW IPEX-Bank. Since the beginning of 2008 it has been a legally independent subsidiary of KfW Bankengruppe and subject to the German Banking Act (KWG) and banking super visory regulations. BOARD OF MANAGEMENT OF DEG DEUTSCHE INVESTITIONS- UND ENTWICKLUNGSGESELLSCHAFT MBH Johannes-Jürgen Bernsen (until April 2008) Dr Michael Bornmann Philipp Kreutz (from May 2008) Dr Winfried Polte (Chairman) DEG was founded in 1962 and has been a 100 % subsidiary of KfW Bankengruppe since DEG is one of the largest European development finance institutions for long-term project and corporate financing. For over 40 years DEG has financed investments by private companies in developing and transition countries.

27 COMPENSATION AND LOANS TO THE MANAGING BOARD AND BOARD OF SUPERVISORY DIRECTORS 25 COMPENSATION AND LOANS TO MEMBERS OF THE MANAGING BOARD AND BOARD OF SUPERVISORY DIRECTORS OF KFW Compensation to members of the Managing Board and Board of Supervisory Directors Change EUR in thousands EUR in thousands EUR in thousands Members of the Managing Board 2,653 2, Members of the Board of Supervisory Directors Former members of the Managing Board and their surviving dependents 3,617 3, Total 6,487 6, The following table provides details on the compensation paid to the Managing Board in financial year 2008: Annual compensation 2008 Monetary compensation Other compensation 1) EUR in thousands EUR in thousands EUR in thousands Dr Ulrich Schröder (Chairman of the Managing Board) (since 1 Sept. 2008) Dr Günther Bräunig 2) Dr Peter Fleischer (until 29 Sept. 2008) Dr Norbert Kloppenburg Wolfgang Kroh Detlef Leinberger (until 29 Sept. 2008) Ingrid Matthäus-Maier (until 30 Sept. 2008) Total 2, ,653 1) Other compensation mostly comprises the use of company cars and insurance premiums and the taxes and social security payments on these amounts. 2) Resumption of tasks as an active member of the Managing Board on 1 November 2008 Total The compensation to the members of the Board of Supervisory Directors is composed as follows: Compensation for the Chairman of the Board of Supervisory Directors: EUR 13 thousand p. a. (previous year: EUR 13 thousand) Compensation for the Deputy Chairman: EUR 10 thousand p. a. (previous year: EUR 10 thousand) Compensation for the members of the Board of Supervisory Directors: EUR 5 thousand p. a. (previous year: EUR 5 thousand) Compensation for membership of the Loan Approval, Executive and Audit Committees: EUR 0.6 thousand p. a. (previous year: EUR 0.6 thousand) Members who join during the year receive their compensation on a pro-rata basis. Provisions in the amount of EUR 41,052 thousand had been set up at the end of the financial year for pension obligations for former members of the Managing Board and their surviving dependents (previous year: EUR 41,311 thousand). The ongoing compensation totalled EUR 3,617 thousand. The total amount of loans granted to members of the Managing Board was EUR 104 thousand as at year-end (previous year: EUR 187 thousand). Interest rates were between 2 % p. a. and 5 % p. a.

28 26 60 YEARS OF KFW THE HISTORY OF KFW BANKENGRUPPE IS CLOSELY RELATED TO THE DEVELOPMENT OF THE GERMAN ECONOMY. INITIALLY IT SUPPORTED RECONSTRUCTION PRIMARILY USING THE FUNDS FROM THE MARSHALL PLAN. AS A PROMOTIONAL BANK OF THE FEDERAL GOVERN MENT AND THE FEDERAL STATES, KFW HAS REDEFINED ITS PRIORITY SUPPORT AREAS OVER THE YEARS IN REACTION TO CHANGING POLITICAL AND SOCIETAL NEEDS. IN ITS 60TH YEAR OF EXISTENCE, THE BANKING GROUP IS EUROPE'S LARGEST BANK IN THE FIELD AND HAS AN IMPRESSIVE PROMOTIONAL TRACK RECORD. OUR HISTORY SIX DECADES OF FINANCING 60 YEARS OF KFW Starting in 1948, the year of its formation, KfW supports change and advances future-orientated ideas under its legal mandate in Germany, Europe and around the world. To this end, it will grant loans totalling nearly EUR 1 trillion in the course of 60 years.

29 60 YEARS OF KFW 27 CONTINUOUS DEVELOPMENT KFW BECOMES A BANKING GROUP GERMANY'S ECONOMY AND SOCIETY ARE MARKED BY CONSTANT CHANGE. KFW'S TRANSFORMATION REFLECTS THIS CHANGE. Germany still lay largely in ruins when, on 16 December 1948, KfW took up its work. With equity of one million Deutschmarks and the Marshall Plan funds available after 1950 in the amount of EUR 971 million (DM 1.9 billion), it was to solve a monumental task under the leadership of the "founding fathers" Dr Otto Schniewind and the legendary Dr hc Hermann Josef Abs: supporting the reconstruction of the German economy while simultaneously integrating millions of refugees. The small team addressed this challenge with great commitment. Within only a few months, work was underway to rebuild West Germany's energy supply with the help of KfW loans. Another priority support area is promoting housing construction. Some cities suffered destruction of up to 90 %. Millions of refugees poured into the West. In 1950, KfW achieved a financing rate in housing construction of 12 %. It was not to attain such a high percentage again until 40 years later with Germany's reunification. 3.2 million flats in the new states, nearly half of all flats available, were modernised between 1990 and SMES GAINING IMPORTANCE From the very start, KfW has been committed to promoting small- and medium-sized enterprises initially, primarily in structurally weak areas. Support to SMEs was heavily increased at the beginning of the 1970s. KfW's promotion of SMEs underwent another change after reunification, when extensive funds were made available to support the business boom in the new federal states after the fall of the Berlin Wall. This was a success. Today, 99 % of all businesses in eastern Germany are SMEs. 1950s RECONSTRUCTION AND THE MARSHALL PLAN The D-Mark already exists; the Federal Republic of Germany will follow suit in a few months' time. KfW is established on 18 November 1948 as a brainchild of the Allies. The word "Wiederaufbau" or "reconstruction", which KfW also bears in its name, is the agenda. 1950s THE "GOLDEN FIFTIES" The "golden fifties" are the years of charting a future course also for KfW. By the middle of the decade, the years of hardship and hunger of the post-war period are finally over. The bank assumes new responsibilities in providing financing for environmental protection and SMEs in the second half of the 1950s. These still belong to its core business today.

30 28 The reunification is a prime example of how KfW uses its promotional instruments to drive change, while adapting to changes itself at the same time. Take globalisation as the financing situation of German SMEs became more difficult, KfW designed innovative financing instruments to improve the overall financing conditions for the SME sector. Global loans, promotion of the private equity market, reduction in lending costs and securitisation of SME loans have become new objectives. Finally, as a result of the merger of Deutsche Ausgleichsbank (DtA) with KfW in the year 2003, both institutions pooled their products under the brand names of KfW Mittelstandsbank and KfW. In reaction to declining start-up figures and the special difficulties facing small enterprises, KfW Mittelstandsbank launched its "Small SMEs" initiative in EXPORTS ON THE RISE International demand for German products rose at the beginning of the 1950s. KfW reacted to this situation by boosting cross-border investments with favourable financing. The commitment volume in this area grew rapidly, reaching EUR 2.9 billion (DEM 5.6 billion) by the end of the 1980s. As of 1 January 2008, project and export financing was bundled in KfW IPEX-Bank, the legally independent subsidiary. KfW IPEX-Bank has over 50 years of experience and a portfolio of more than EUR 60 billion, making it one of the leading financiers in international project and export finance. Its earnings play a key role in helping KfW Bankengruppe fulfil its official mission to provide support. FINANCING DEVELOPMENT On behalf of the Federal Government, a new business area was opened up at the beginning of the 1960s capital assistance for developing countries. Initially the focus was on major infrastructure projects in the fields of energy supply, transport and irrigation. Moreover, local development banks received credit lines to support their local clients. Starting in 1970 development assistance began focusing more on local small projects to improve the living conditions of the people living in these countries. With the rising share of 1960s THE WAY INTO THE WORLD The 1960s are a time of setting out in a new direction for Germany and for KfW. The international community also expects the Federal Republic, which is still young but gaining in economic strength at this stage, to assume increasing responsibility in development aid. In 1961, KfW receives the legal mandate to do so. 1970s REORIENTATION TO DOMESTIC PROMOTION Two oil crises as well as a sustained period of high interest rates result in considerable economic turmoil. The realignment of international competitiveness requires new paths to be taken in promotional policy as well. Economic policy begins to focus on SMEs. Energy savings and innovation become the order of the day. Demand for KfW and its loan programmes grows ever stronger.

31 60 YEARS OF KFW 29 microfinance, even the poorest people are given an opportunity to develop a livelihood of their own initiative. Today, the work of KfW Entwicklungsbank is tailored to the specific needs of its partner countries and their local populations. To achieve this, KfW is increasingly using funds it raises itself in the capital markets. FOCUS ON ENVIRONMENTAL FINANCE Just how much KfW mirrors the changes that are going on while at the same time expediting these changes can be seen in the development of its financing activities in the field of environmental and climate protection. Back in the 1950s and 1960s KfW was already financing measures to dispose of sewage and to prevent water and air pollution. After reunification the bank provided considerable funds to reverse the environmental damage in the chemical and lignite mining districts in the new federal states. As climate protection became a major issue, KfW responded with its first environmental programme that specifically caters to small- and medium-sized businesses. SUPPORTING PILLAR CLIMATE PROTECTION Supporting environmental and climate protection has, over time, become a new priority for KfW. In 2004, for instance, Continuous growth Development of KfW's total assets from 1950 to KfW's Carbon Fund set a milestone for dovetailing economic activity and ecological necessity EUR in billions; Source: KfW Annual Reports 1980s EXPANSION OF PROMOTIONAL PRIORITIES The international debt crisis heavily burdens development policy. The concept of deve l- opment policy changes capital assistance becomes Financial Cooperation (FC). Funding also receives a new face. Increasing internationalisation of the capital markets opens up completely new funding opportunities for KfW. 1990s REUNIFICATION Reconstruction of the east ("Aufbau Ost") the name becomes the agenda. The largest promotional programme in German history is a joint venture, in which KfW and DtA initially participate separately. By the middle of the 1990s, around 70 % of domestic economic promotion is flowing to the new states.

32 60 YEARS OF KFW 30 In 2006 KfW, on behalf of the Federal Government, launched the "Housing, Environment, Growth" initiative, which primarily funds building rehabilitation measures that lead to energy savings and the construction of new, low-energy homes. The initiative was highly popular from the start. In the years 2006 and 2007 promotional loans totalling EUR 32.9 billion were granted for such modernisation measures. CO 2 emissions were able to be reduced permanently by 1.6 million tonnes annually, solely through the investments sparked by this initiative. Currently KfW is investing 20% of its entire financing volume in national and international environmental projects. It has since become one of the world's largest investors in renewable energies. With its services KfW has long been one of the pillars supporting the German economy. The volume of its commitments to boost the economy both in Germany and beyond its borders will remain at a high level in the years to come. With a refinancing volume of around EUR 75 billion more than ever before KfW is, in its 60th year of existence, one of the heavyweights in the international capital markets " GERMANY NEEDS A STRONG KFW MORE THAN EVER TO SUPPORT THE ECONOMY AND THE GERMAN FINANCIAL CENTRE WHILE ENSURING PROSPERITY". Dr Ulrich Schröder, Chairman of the Managing Board of KfW Bankengruppe NEW CHALLENGES As part of its legal mandate, KfW Bankengruppe will continue to be responsible for helping to shape the constant change in economy and society through future-minded promotional programmes and individual advisory services. In so doing, it will follow the guiding principle of sustainability, integrating aspects that are important to the economy, the environment and societal cohesion CHANGE AND INNOVATION The new millennium also marks a new era for KfW. The bank undergoes the biggest institutio nal transformation in its history. Kreditanstalt für Wiederaufbau (KfW) becomes KfW Bankengruppe.

33 K F W B A N K E N G R U P P E 31 KFW BANKENGRUPPE A VERSATILE PROMOTER KFW BANKENGRUPPE KFW BANKENGRUPPE GIVES IMPETUS TO ECONOMIC, SOCIAL AND ECOLOGICAL DEVELOPMENT WORLDWIDE. AS A PROMO TIONAL BANK OWNED BY THE FEDERAL REPUBLIC AND THE FEDERAL STATES, IT SUPPORTS SUSTAINABLE IMPROVEMENT IN ECONOMIC, SOCIAL AND ECOLOGICAL CONDITIONS PARTICULAR LY IN THE AREAS OF SMES, START-UPS, ENVIRONMENTAL PROTEC TION, HOUSING, INFRASTRUCTURE, EDUCATION FINANCE, PROJECT AND EXPORT FINANCE AS WELL AS DEVELOPMENT COOPE RA TION. TO THIS END, IT FOLLOWS A TRIED AND TESTED BUSINESS MODEL WITH FUTURE VIABILITY. FIRSTLY, IT HAS A LEGAL PRO MOTIONAL MANDATE WHICH IS RECOGNISED AND PROTECTED UNDER THE SO-CALLED EU UNDERSTANDING. SECONDLY, THANKS TO THE GUARANTEE BY THE FEDERAL REPUBLIC OF GERMANY, KFW IS ABLE TO REFINANCE IN THE CAPITAL MARKET AT LO WER RATES THAN COMMERCIAL BANKS. THIS FUNDING ADVANTAGE IS IN TURN USED FOR THE BENEFIT OF PROMOTION. KFW BANKENGRUPPE

34 32 MANAGING BOARD OF KFW BANKENGRUPPE from left to right: Dr Norbert Kloppenburg, Dr Ulrich Schröder (Chairman from 1 September 2008), Dr Günther Bräunig (inactive seat until 31 October 2008 during his appointment as Chairman of the Board of Managing Directors of IKB, from 1 November 2008 resumption of his seat on the Managing Board of KfW), Wolfgang Kroh (Speaker from 7 April 2008 until 31 August 2008)

35 K F W B A N K E N G R U P P E 33

36 34 KFW BANKENGRUPPE IN WAS CHARACTERISED BY THE ALL DOMINANT FINANCIAL MARKET CRISIS AND ITS IMPACTS. IN ITS 60TH YEAR OF EXISTENCE, KFW CONTINUED TO EXTENSIVELY PROMOTE THE GERMAN ECONOMY DESPITE THE DIFFICULT ENVIRONMENT. 60 YEARS OF PROMOTING THE GERMAN AND EUROPEAN ECONOMY The KfW Law went into effect in 1948, paving the way for sustainable promotion of the German economy. Shortly thereafter, the Kreditanstalt für Wiederaufbau, today known as KfW Bankengruppe, took up its promotional activities. Since its existence, KfW has granted nearly EUR 1 tril lion in loans in around 30 currencies. While promotional activity relied almost exclusively on public funds initially, 94 % of the refinancing of KfW's promotional business volume today comes from the capital market and only 6 % from the German federal budget. KFW BEGAN A SUSTAINABLE INVESTMENT PROCESS FOR FINANCIAL ASSETS In the first quarter of 2008, KfW started to apply sustainability criteria to realign the management of its securities portfolios. KfW had committed to this approach by signing the United Nations initiative "Principles for Responsible Investment" (PRI) in INGRID MATTHÄUS-MAIER RESIGNED AS SPEAKER OF THE MANAGING BOARD In the meeting of the Board of Supervisory Directors on 7 April, Ingrid Matthäus-Maier resigned as Speaker of the Managing Board, announcing that she would retire in September Ingrid Matthäus-Maier had been a member of the Managing Board of KfW since July 1999 and its speaker since October 2006.

37 KFW BANKENGRUPPE 35 IKB RESCUE CONCLUDED KFW SOLD ITS SHARES TO LONE STAR After IKB's considerable difficulties as a result of subprime investments, KfW along with the banking associations and the Federal Government provided risk protection and assumed a major portion of its risks. The main goal of the rescue was to keep IKB from collapsing and to retain it in its role as an SME bank. At the same time, the intention was to prevent destabilisation of Germany's financial market and to avert any resultant damage to the economy. These goals were achieved with the sale of the IKB shares to the private investor Lone Star in October DR ULRICH SCHRÖDER NEW CHAIRMAN OF THE MANAGING BOARD Dr Ulrich Schröder assumed the office of Chairman of the Managing Board of KfW Banken gruppe on 1 September. In this function, Dr Schröder replaced Wolfgang Kroh as Speaker of the Managing Board; Wolfgang Kroh had temporarily assumed this function in April 2008 upon Ingrid Matthäus-Maier's resignation. Dr Ulrich Schröder was previously Chairman of the Managing Board of NRW.BANK. KFW LEARNT A LESSON FROM THE LEHMAN COLLAPSE On 15 September 2008, KfW transfered EUR 319 million from a swap payment to a subsidiary of Lehman Brothers Special Financing, New York, just after it declared bankruptcy. The KfW Board of Supervisory Directors discussed the case and resolved to terminate the contracts with Board members Dr Peter Fleischer und Detlef Leinberger for good cause with immediate effect. Both structural and personnel-related consequences were thus taken. Measures to improve risk management were implemented immediately; external consultants were hired to evaluate a need for general changes.

38 KFW BANKENGRUPPE 36 KFW SUSTAINABILITY INDICATOR Germany will have to struggle to keep future generations from having to shoulder tremendous burdens from the past. This is shown by the sustainability indicator that KfW has calculated for the second time. All in all, Germany has made progress in sustainable development, however there is still a lot of room for improvement in many areas. AWARD-WINNING RESULTS FOR KFW CAPITAL MARKET ISSUES In 2008, KfW Bankengruppe received a number of awards for its successful capital market issues. The magazine "International Financial Review" presented KfW with the "IFR Award 2008 Issuer of the Year" in the Supranational / Sovereign / Agency / Regional category. Moreover, KfW earned awards for "Deal of the Year 2008" in three currency categories from Euroweek magazine. These awards showcased particularly successful and innovative bond issues. ON THE WAY TO A "NEW KFW" KfW's business model is tried and tested, as well as successful. In order for KfW to be able to continue to successfully offer financing, it is undergoing an internal modernisation process under the "Perspective for KfW" programme. The focus is on creating a stronger customer focus and increasing efficiency.

39 K F W M I T T E L S T A N D S B A N K 37 KFW MITTELSTANDSBANK THE NAME SAYS IT ALL KFW MITTELSTANDSBANK KFW MITTELSTANDSBANK BRINGS TOGETHER ALL THAT KFW OFFERS BUSINESS START-UPS, SELF-EMPLOYED PROFESSIONALS AND SMES, THUS PROMOTING COM MERCIAL INVESTMENTS OVER THE ENTIRE LIFE CYCLE OF AN ENTERPRISE. ITS FINANCING PRODUCTS ARE STRUCTURED ACCORDING TO THREE PILLARS: LOANS, MEZZANINE AND EQUITY CAPITAL. KFW MITTELSTANDS BANK ALSO OFFERS RELEVANT ADVISORY SERVICES. IN PROMOTING INVESTMENT BY GERMAN ENTERPRISES IN GERMANY AND ABROAD, KFW MITTELSTANDSBANK ACTS AS A BANK BEHIND CREDIT INSTITUTIONS, WORKING WITH THEM AS A PARTNER. KFW MITTELSTANDSBANK IS CONTINUOUSLY DEVELOPING ITS PROMOTIONAL INSTRU MENTS AND ADJUSTING THEM TO CHANGES IN THE MARKET. KFW MITTELSTANDSBANK

40 38 VERY VERSA-TILE The design graduate Barbara Steinmann from Bielefeld has added many strings to her artistic bow over the years, both as a freelance artist and muralist, and as a ceramic tile-maker, studying in great depth the uniqueness of various glazes and clay-firing effects as well as their fascinating artistic potential. She makes all her tiles herself, rolling them by hand and cutting them into the desired shape with the help of templates. By the by, Barbara Steinmann also somehow found the time to pick up the necessary business know-how to launch her own manufacturing company in January 2008 Manufaktur Steinmann.

41 K F W M I T T E L S T A N D S B A N K 39 Since then, her exclusive clientele has been queuing for her latest creations. Whether in kitchens or bathrooms, extravagant living rooms, or in luxurious spa retreats and hotel lobbies, her creations really do set the tone. The reaction to her work can only mean one thing: brimming order books after only a couple of months in business. With the help of a "KfW-StartGeld" loan, Barbara Steinmann has invested in a new studio and showroom, where a brand-new kiln is now also helping the young entrepreneur to continue her success story.

42 40 PLAYING THEIR CARDS RIGHT BU HEADLINE Aquis Cash is ad still er the sed name er at.ugiat. of the Lendre game when eumsan it comes augi. to Amconsenim small purchases. quat. The Wisi. exchange Diam, velit of notes lute dunt and coins nostrud at sales mod magnis stands, however, am in henis definitely alis euipsusto puts a dampener doloreet, quatem on the proceedings, zzrit ut nulpute especially te del at ullaorper big sporting iurem events, inim in where el exerci large tie crowds eugiat have luptat. to be Ut served vel eraestinisit a very volenis short space nit wis of am time. diam. Cologne's Aquis ad football er sed stadium, er at.ugiat. the Lendre RheinEnergieStadion, eumsan augi. Amconsenim has tackled this quat. problem Wisi. Diam, head-on velit by lute introducing dunt nostrud a cashless mod magnis payment am in system. henis With alis euipsusto the help of doloreet, Munich-based quatem zzrit payment ut nulpute solution te AG, del ullaorper itself supported iurem inim by KfW in el Mittelstandsbank's exerci tie eugiat luptat. ERP Start Ut vel Fund, eraestinisit Cologne volenis fans now nit wis have am even diam. more Aquis of ad a home er sed advantage er at.ugiat. Lendre sales stands. eumsan The augi. new Amconsenim strategy is quat. working, Wisi. with Diam, the velit payment lute dunt cards not only being accepted in Cologne, but also in other stadiums and arenas. The Rhine Neckar Arena, the new home of 1899

43 K F W M I T T E L S T A N D S B A N K 41 BU HEADLINE Aquis Hoffenheim, ad er sed for example, er at.ugiat. is one Lendre of a eumsan number augi. of stadiums Amconsenim to introduce quat. payment Wisi. Diam, solution velit lute AG's dunt innovative nostrud payment mod magnis system. am Yet in Thomas henis alis Maier, euipsusto CEO of doloreet, payment quatem solution zzrit AG, is ut not nulpute only challenging te del ullaorper the competition iurem inim at in major el exerci football tie eugiat stadiums, luptat. but Ut now vel also eraestinisit at concerts volenis and other nit wis large am diam. events. Aquis For the ad Franz er sed Josef er at.ugiat. Strauss Lendre Airport eumsan in Munich, augi. payment Amconsenim solution quat. AG Wisi. has developed Diam, velit the lute MUC dunt customer nostrud card, mod which magnis can am be in used henis in alis all participating euipsusto doloreet, food outlets quatem and zzrit shops. ut nulpute At the end te del of ullaorper the day, this iurem payment inim in system el exerci is not tie just eugiat for luptat. sausage Ut stands vel eraestinisit at football volenis matches. nit wis am diam. Aquis ad er sed er at.ugiat. Lendre eumsan augi. Amconsenim quat. Wisi. Diam, velit lute dunt

44 42 KFW MITTELSTANDSBANK IN 2008 KFW MITTELSTANDSBANK SERVES AS A PARTNER FOR BUSINESS START UPS, SELF EMPLOYED PROFESSIONALS AND SMES, OFFERING LONG TERM PROMOTIONAL LOANS AND INNOVATIVE FINANCING INSTRUMENTS. NEW "KFW-STARTGELD" LOAN PROGRAMME FOR SMALL START-UPS As of January 2008, the two previous programmes "Mikro-Darlehen" (microloan) and "Start- Geld" (start-up funds) were combined into one product, the "KfW-StartGeld" loan. The new "KfW-StartGeld" programme brings together the advantages of its predecessors and will create more transparency in this product segment. The product also has a new focus aimed at improving financing conditions for business start-ups and small businesses. In order to make it easier for on-lending commercial banks to grant loans to small businesses and start-ups, KfW is conti nuing to offer them 80 % exemption from liability. A guarantee funded under the Competitiveness and Innovation Framework Programme of the European Union was used to partially hedge the risks incurred by KfW. THE GERMAN EQUITY FORUM POWERED BY KFW MITTELSTANDSBANK AND DEUTSCHE BÖRSE AG 50 young and innovative businesses used the German Equity Forum held on 22 April in Mainz to learn more about the private equity market and make contact with potential investors. The forum is Europe's top networking opportunity for the sector and is used by venture capital investors, financial advisors and business angels. Again in the reporting year, the majority of bu sinesses looking for investors were from innovative sectors such as IT, biotechnology and en vironmental technology. The German Equity Forum has been a collaboration between KfW Mittelstandsbank and Deutsche Börse AG for the last 12 years. Co-host of this year's spring forum, where the focus is traditionally on providing tech companies with early-stage financing, is Investitions- und Strukturbank Rheinland-Pfalz (ISB) GmbH.

45 KFW MITTELSTANDSBANK 43 "SMALL SMES" INITIATIVE Since the beginning of July 2008, KfW Mittelstandsbank has been offering SMEs particularly favourable conditions under many of its loan and mezzanine programmes. This is because the smaller companies are, the greater the financial difficulties they may often have to face. Small enterprises, in particular, are expected to benefit from the optimised product range. With the exception of the newly launched "KfW-StartGeld" programme, all loan and mezzanine programmes offered by KfW Mittelstandsbank are aimed at promoting the further development of businesses. Key components of the programmes are the establishment of special financing windows with favourable conditions for SMEs or small businesses, the addition of a five-year loan to its existing range of loan terms, and improvements to the financing conditions offered under the programme family "Entrepreneur Capital". KFW INCREASES ADVISORY SERVICES FOR PREVIOUSLY UNEMPLOYED START-UP ENTREPRENEURS Since October 2008, KfW Mittelstandsbank has been offering a specialised form of start-up coaching sponsored by the German Federal Ministry of Labour and Social Affairs. Entrepreneurs who seek self-employment following a period of unemployment can now receive more substantial grants for advisory services (up to a maximum of EUR 3,600), which they can use when they start up a business. The programme, which is co-financed by the European Social Fund (ESF), promotes coaching measures to increase the competitiveness of commercial start-ups and freelance trades. According to the KfW start-up monitor 2008, 17 % of all start-up entrepreneurs were previously unemployed. In 2007 alone, just under 150,000 jobless people made the daring step into self-employment, 63 % of them because they had no other alternative. This and the high discontinuation rate (41 % after 36 months at the latest) suggest that the need for advis ory services is particularly high among this group.

46 44 HIGH FINANCING VOLUME DESPITE DIFFICULT CIRCUMSTANCES AFTER A STRONG START, KFW MITTELSTANDSBANK'S BUSINESS DIPPED SLIGHTLY IN THE SECOND HALF OF THE YEAR, REFLECTING THE FIRST SIGNS OF THE GLOBAL FINANCIAL MARKET CRISIS. TAKING THESE DIFFICULT CONDITIONS INTO CONSIDERATION, HOWEVER, THE OVER ALL PICTURE IS POSITIVE. OVERVIEW OF KFW'S SME SUPPORT In 2008, KfW Mittelstandsbank was unable to generate the volume of business recorded in the prior year. As a result of the financial market crisis, the securitisation market practically came to a standstill. The lion's share of the decrease in KfW Mittelstandsbank's overall volume is therefore attributable to SME loan securitisations. KfW Mittelstandsbank's financing activities also declined. Loan financing, in particular, was below the prior-year level, exclusively on account of global loans to commercial banks, which fell considerably in the reporting year. Classic promotional loans for business start-ups, self-employed professionals and SMEs, on the other hand, were on a par with the prior-year record level. KfW's "Entrepreneur Loan" programme, its basic promotional programme for SMEs, performed slightly better year-on-year. Overall, the bank therefore achieved very good results. Mezzanine financing commitments were up slightly on the prior year, the reason being the greater demand for the "ERP Innovation Programme". This programme supports the financing of close-to-market research and the development of new products, procedures and services. In terms of equity finance, however, commitments were down year-on-year. KfW Mittelstandsbank's investments in the ABS SME portfolio nonetheless remained at 2007 level.

47 K F W M I T T E L S T A N D S B A N K 45 Promotion of the German and European economy by KfW Mittelstandsbank Programmes ) 2007 Purpose EUR in millions EUR in millions EUR in millions Volume of promotional funding 14, , ,248.3 KfW Mittelstandsbank 1. Financing KfW Mittelstandsbank 12, , ,226.0 a) Loan financing 10, , ,211.8 Unternehmerkredit (Entrepreneur Loan) 9, , ,992.1 Investment financing for start-ups and SMEs Global loans to commercial enterprises , ,437.0 in Germany and Europe Global loans to banks to finance SMEs KfW Acquisition Finance Financing for corporate takeovers StartGeld (start-up funds) Financing for start-ups and small enterprises and Mikrodarlehen (microloan) ERP Programmes Improvement of the regional economic structure, funds for guarantee banks b) Mezzanine financing 1, , ,214.0 Unternehmerkapital (Entrepreneur Capital) Mezzanine finance to support start-ups and SMEs ERP Innovation Programme Mezzanine finance to support innovative projects by small- and medium-sized enterprises c) Equity finance KfW Venture Capital Programme (financing for equity participation funds) Participations in enterprises through venture capital funds co-financed by KfW ERP Programmes Private equity for small- and medium-sized enterprises Other Financing for corporate takeovers, profit participation capital, venture capital d) Promotional loan guarantees Hedging of promotional loans e) ABS SME portfolio Investments in securitisation transactions of SME loans 2. Securitisations KfW Mittelstandsbank 1, , ,022.3 Hedging and securitisation of SME loans 3. Advisory support (grants) 31.1 Differences in the totals are due to rounding. 1) As of 2008, statistics no longer include the contract volume when a loan is granted but the individual tranches when they are drawn. The figures for 2007 have been recalculated on this basis for the sake of comparability.

48 46 REGIONAL BREAKDOWN As expected, the regional focus of KfW Mittelstandsbank's promotional activities lies in the heavily populated larger states of Baden-Württemberg, North Rhine-Westphalia and Bavaria. More than half of its programme commitments are attributable to these three states alone. Compared to the prior year, loan commitments in the new federal states rose by more than 10 %. Commitments of KfW Mittelstandsbank in 2008 by federal state 1) Federal state Volume EUR in millions 2) Baden-Württemberg Bavaria Bremen Hamburg Hesse Lower Saxony North Rhine-Westphalia Rhineland-Palatinate Saarland Schleswig-Holstein 2, , , Western Germany 9,689.3 Berlin Brandenburg Mecklenburg-Western Pomerania Saxony Saxony-Anhalt Thuringia Eastern Germany 1, ) Not including global loans to commercial banks/ ABS SME portfolio/securitisations 2) Differences in the totals are due to rounding. 3) Not attributable to a federal state Other 3) Total ,340.6

49 KFW MITTELSTANDSBANK 47 "KFW-STARTGELD" NEW PROMOTIONAL PROGRAMME FOR BUSINESS START-UPS AND YOUNG ENTERPRISES Start-ups and young enterprises are important for increasing competition, supporting economic structural change as well as promoting growth and job creation. That is why KfW Mittelstandsbank considers them one of its key target groups, keeping a close eye on them and tailoring its promotional programmes to their needs. The KfW start-up monitor 2008 showed that startup activities in Germany in 2007 were at their lowest level since the turn of the millennium, despite the very favourable economic conditions still prevailing at the time. Although robust growth had a positive effect on start-up conditions and opportunities, the sound economic environment led to more people seeking dependent employment. Thus, on balance, fewer potential start-up entrepreneurs decided in favour of self-employment. As a result, the number " THE SUSTAINABILITY OF BUSI NESS START UPS HAS IMPROVED IN GE NE RAL". of start-ups by people faced with no other alternative also fell. At the same time, the sustainability of ex isting start-ups increa sed, with the average size of projects and the re spective financing requirements also expanding considerably. In order to provide business start-ups with optimum financing support, KfW launched the new "KfW-StartGeld" initiative in early This programme is an amalgamation of the previous "Mikro-Darlehen" (microloan) and "KfW-StartGeld" (start-up capital) programmes and offers even better conditions. KfW-StartGeld is an instrument with which KfW Mittelstandsbank can promote business start-ups, self-employed professionals and small enterprises that have been in business for no longer than three years and whose debt financing requirements do not exceed EUR 50,000.

50 48 THE KEY PRODUCT FEATURES OF "KFW STARTGELD" Maximum loan limit of EUR 50,000 with a five-ten-year term and the option of a one-or two-year grace period Eligible to apply for loans are start-ups and young enterprises/self-employed professionals who have been in business for up to three years as well as part-time businesses that plan to operate full-time in the medium term. Monthly interest and principal payments to ease companies' financial planning and liquidity management Prepayment possible at any time at no extra charge Possibility for several entrepreneurs to each receive the maximum loan amount for a joint project The new "KfW-StartGeld" loans are also governed by the relationship banking principle. Entre preneurs submit applications to their own bank and not directly to KfW. These banks have an on-lending function. In order to mitigate the particularly high financing risks incurred by the banks and savings banks in the start-up phase, KfW is continuing to offer these on-lending institutions 80 % exemption from liability. Overall, the launch of the new "KfW- StartGeld" programme was very successful. " IN 2008, KFW MITTELSTANDSBANK HELPED 5,400 ENTREPRE NEURS GET THEIR START UPS OFF THE GROUND WITH 'KFW STARTGELD' LOANS TOTALLING AROUND EUR 160 MILLION".

51 KFW MITTELSTANDSBANK 49 IMPROVED FINANCING SUPPORT FOR SMES Not only business start-ups but also small enterprises complain with comparatively greater frequency in many KfW loan and mezzanine programmes. have been offered particularly favourable conditions about difficulties in obtaining loan financing. This is shown very clearly in the latest company survey 2008, which is carried out once a year by KfW together with trade associations. Figures show that, on average, small enterprises mainly apply for " THE SMALLER COMPANIES ARE, THE GREATER THE FI NANCIAL DIFFICULTIES THEY MAY OFTEN HAVE TO FACE". relatively small loans. Despite the increasing level of In areas where promotional programmes are particularly important, relevant financing windows with standardisation being implemented, the processing costs for small loans are disproportionately high, preferential interest rates have been set up for small making this segment less attractive for banks and enterprises. These include the "ERP Regional and savings banks. Innovation Promotion Programmes", which provide even more support to small enterprises with an annual turnover of up to EUR 10 million and a maximum of 50 employees. A further financing window was set up for the "KfW Entrepreneur Loan" programme to make it an attractive offer for SMEs with At 37 %, the percentage of small enterprises with a turnover of up to EUR 1 million that are disgruntled at an annual turnover of up to EUR 50 million. Ultimately, they account for around 80 % of all the com- how much harder it has become to borrow capital is around three times that of large enterprises with a turnover exceeding EUR 50 million. panies promoted by way of a "KfW Entrepreneur Loan". The further development of the "KfW Entrepreneur Loan" is also in line with the modifications currently being made to EU state aid law. With the introduction of the SME financing window, KfW will be able This is exactly why KfW considers small enterprises to continue offering attractive interest rate conditions in general promotional business in the future. to be a second key target group for its SME support. For this reason, the "Small SMEs" initiative launched Outside the parameters of the SME financing window, the KfW Entrepreneur Loan also serves as a in the prior year is being continued and the support offered to SMEs developed further. Since the beginning of July 2008, companies with a turnover of up investments and resources for enterprises of almost flexible financing instrument for a wide range of to EUR 50 million and a maximum of 250 employees all sizes and walks of industry.

52 50 SUPPORT THE KEY IMPROVEMENTS TO SME SUPPORT Establishment of special financing windows for SMEs or small businesses with favourable interest rates, bringing financing conditions more in line than before with the size of the enterprise. Addition of a five-year loan to its existing range of loan terms as well as the introduction of a quarterly repayment schedule in its loan and mezzanine programmes, thus tailoring KfW's support better to the financing requirements of SMEs and small businesses. Improvements and simplifications to the mezzanine products in the entrepreneur capital programme family, particularly by way of a higher debt financing component in the "ERP Capital for Start-ups" programme. The overall transparency of the programme range is being improved. Programme-independent types of the entrepreneur loan, for example, will be integrated in the "KfW Entrepreneur Loan" and special rules in the mezzanine programmes will be abolished. " BOOSTING GROWTH TO SECURE JOBS" PROGRAMME The "Boosting growth to secure jobs" programme launched by the German Government is to be backed by KfW Mittelstandsbank with a commitment of some EUR 15 billion earmarked in the KfW Special Programme The aim of the government programme is to secure lending, in particular to SMEs, and also to secure jobs. Financing opportunities for innovative enterprises are also to be improved, thereby creating positive impulses for Germany as a development location. The loans contain a highpercentage liability exemption option for on-lending banks. The "Stability and Employment Pact", the second programme launched by the Federal Government, will also receive backing from the existing KfW Special Programme, which is to be made more flexible and extended to A further EUR 25 billion is earmarked for larger companies for 2009 and 2010.

53 KFW MITTELSTANDSBANK 51 COOPERATING WITH "LANDESFÖRDERINSTITUTE" KfW and the "Landesförderinstitute" promotional institutions in the German federal states have been working closely together for many years. German SMEs benefit from this cooperation in particular, as the pooling of financial support offered by KfW and these institutions improves the conditions under the individual state programmes. The collaborative funding of promotional products is also clearly communicated to customers, who are told who is behind the favourable financing of their investment projects. The parties to the global loan agreements consist of 14 such promotional institutions, all of which are committed to promoting commercial investments. The cooperation with the promotional institutions from the economically strong states of Baden-Württemberg, Bavaria and North Rhine-Westphalia is of key importance in this regard, but so, too, is the work with the other federal states, together with which KfW has provided SMEs with considerable support. TO DATE, KFW HAS CONCLUDED GLOBAL LOAN AGREEMENTS WITH PROMO TIO NAL INSTITUTIONS IN THE GERMAN FEDERAL STATES FOR A VOLUME OF EUR 22.9 BILLION, AROUND EUR 5.0 BILLION OF WHICH WAS UTILISED IN HARDLY ANY GLOBAL LOANS WITH COMMERCIAL BANKS IN GERMANY AND WESTERN EUROPE In 2008, KfW was very restrained as regards its global loan business with commercial banks in Germany and western Europe. With banks increasingly tightening their lending limits, KfW gave priority to its predominantly reduced-interest programme loans business.

54 52 GLOBAL LOANS IN CENTRAL AND EASTERN EUROPE AS A MEANS OF STABILISING LOCAL FINANCIAL SECTORS As in previous years, KfW continued to pursue its valuable promotional activities in Central and Eastern Europe in financial year A particular focus of these activities was on extending global loans to commercial and promotional banks, which prima rily help SMEs meet the challenges of the European market. To promote SMEs in Central and Eastern Europe, global loan commitments totalling EUR 73 million were made in EU FINANCING FACILITIES IN CENTRAL AND EASTERN EUROPE Promotional programmes on behalf of the EU contin ue to form a key part of KfW's promotional activities. The cooperation between KfW, the European Commission and the Council of Europe Development Bank (CEB), which is helping to improve the loan offering to SMEs in the new EU Member States with an SME financing facility, has been in place since The "Preparatory Action Plan" promotes the extension of microloans to the lower end of the company size range, thus exclusively supporting local banks in the new EU Member States. In 2008, a new project was implemented under this programme in Estonia. These facilities are a key component of the support offered to SMEs across the whole of Europe. FINANCING FACILITIES IN FIGURES As regards its financing facilities for SMEs, KfW works together with 41 partner banks in 13 different countries. To date, EUR 800 million in global loans combined with EUR 92 million in EU grants have been implemented. In 2008, three new projects were concluded in Bulgaria, Estonia and Turkey.

55 KFW MITTELSTANDSBANK 53 SECURITISATIONS IN THE FINANCIAL MARKET CRISIS The securitisation markets were also engulfed by the international financial market maelstrom, with key market players disappearing from view and not expected to return for the foreseeable future. These include monoliners and insurance companies (guarantors), but also conduits and structured investment vehicles (investors). As a result, there were only a very small number of public transactions. Originators used securitisation mainly as a means of procuring short-term liquidity from the European Central Bank or the Bank of England. In this very subdued environment, two transactions were executed via the PROMISE platform to support SME loans. The asset class "German SMEs" gave another solid performance in As regards the outstanding PROMISE transactions, the credit default losses remain minimal. As KfW usually places its credit risks in the capital markets, no losses were incurred by the bank. The solid performance of the PROMISE transactions is primarily attributable to the fact that classic SME securitisations via PROMISE are based on loans that are extended and managed in line with current banking standards. If certain quality criteria are upheld, securitisations will continue to be an economically valuable instrument, not least because a lack of securitisation opportunities will make SME lending even more difficult. For this reason, KfW will continue supporting the securitisation market to curb the adverse effects of the financial market crisis. With banks mostly needing liquidity in the current market environment, KfW is planning to use its securitisation structures to offer funding options as well. In addition, KfW will rigorously maintain its current course towards establishing simple and transparent securitisation structures with high quality standards. In order to develop the quality standards for the German securitisation market further, KfW plans to work together with True Sale International GmbH (TSI), among others a company that has stood for quality and transparency since its foundation. Ultimately, the German securitisation market already has numerous standards in place that many are now calling for as a lesson to be learnt from the financial market crisis. PROMISE PROMISE SECURITISATION PLATFORM Two transactions totalling around EUR 1.6 billion were executed via the PROMISE platform to support an underlying volume of SME loans to the tune of EUR 3.0 billion. The credit default losses remained minimal at 0.13 % of the securitised lending volume for all PROMISE transactions.

56 54 COMPREHENSIVE: KFW'S ADVISORY SERVICES KfW Mittelstandsbank offers a comprehensive range of advisory services. It provides key assistance covering all stages of business development: from the start-up and growth phases to succession issues and crisis management. The KfW Mittelstandsbank Internet portal The key source of information for business start-ups, enterpri ses and self-employed professionals remains KfW Mittelstandsbank's Internet portal at Visitors to the virtual start-up centre have received many practical tips on becoming self-employed or studied examples of financing through the loan programmes offered by KfW Mittelstandsbank. A STRONG NETWORK KFW ON THE WEB The good response to the KfW Mittelstandsbank website is evidenced by the renewed increase in the number of visitors. In 2008, almost 14 million people visited the website, marking an increase of 20 %. Promotional business accounted for more than 80 % of the 111 million or so page views (+ 30 %). Almost 1.1 million people visited the virtual start-up centre (+ 7 %). INFOCENTRE THE DIRECT LINE The Infocenter processed 123,000 queries in Approximately 2,800 callers half of whom were KfW Mittelstandsbank customers attended a personal consultation. A further 2,200 people attended the KfW open days for consultation. KfW consultants provided individual information regarding financing issues at 180 specialist events. Around 5,200 young entrepreneurs took part in the start-up coaching programme. Another 1,750 start-up entrepreneurs who were previously unemployed made use of the special coaching on offer. Almost 3,000 ailing businesses utilised the "round table" advisory services. 700 of those businesses benefited from the follow-up "turn around" advisory services.

57 KFW MITTELSTANDSBANK 55 ADVISORY SERVICES IN BERLIN, BONN AND FRANKFURT KfW Mittelstandsbank offers advisory services at its various Advisory Centres. KfW Mittelstandsbank also offers advisory services in Advisory Centres located in Berlin, Bonn and Frankfurt. These services were used by a total of around 2,800 customers in About half of them were customers of KfW Mittelstandsbank. KfW Mittelstandsbank also offers personal financial advice during the open days for consultation held nation-wide at more than 50 locations. These sessions are carried out together with chambers of industry, commerce and trade and business promotion associations, and the promotional institutions in the federal states. The service is aimed at business founders and young entrepreneurs but also at companies that have already been active in the market for quite some time. It was used in a total of 2,200 cases last year. KfW consultants also presented promotional products at more than 180 events throughout Germany and were available for individual consultations. CUSTOMISED: START-UP COACHING IN GERMANY The success story of the "Start-up coaching in Germany" programme launched in October 2007 in association with the German Federal Ministry of Economics and Technology (German abbreviation: BMWi) has continued. In 2008, a total of around 5,200 young start-up entrepreneurs benefited from the tailored advisory services. Start-up coaching programme extended in 2008 In October 2008, the programme was extended to provide special assistance to start-up entrepreneurs who were previously unemployed. This was initiated by KfW Mittelstandsbank in association with the German Federal Ministry of Labour and Social Affairs (German abbreviation: BMAS). The entrepreneurs receive a more substantial grant financed by the European Social Fund (ESF) if they seek advice from consultants accredited by KfW in their first year of business. Nearly 1,750 of these grants have been awarded since the start of the programme.

58 KFW MITTELSTANDSBANK 56 A HELPING HAND FOR COMPANIES IN ECONOMIC DIFFICULTY The "round table" is a nation-wide advisory service offered free of charge to companies experiencing economic difficulties. Continuing the trend, almost 3,000 companies made use of this service in the reporting year. As a follow-up to this service, companies can also seek help offered by the "turn around" advisory service. Almost 700 companies used this follow-up ser vice last year. SPECIAL ADVISORY SERVICES German Equity Forum the ideal forum for start-up entrepreneurs and investors The Internet platform offers advice on all issues related to company succession. Innovative, fast-growing start-ups can present themselves at the German Equity Forum. It offers the ideal forum for finding potential equity in vestors. The startothek can be used by start-up advisors as a reliable source of information for all legal issues relevant to founding a company. The 1,000th licence was issued for the startothek in August The KfW Consultant Exchange enables SMEs to find the right consultant for their business from a pool now consisting of 14,000 specialists. It was developed in association with the German Federal Ministry of Economics and Technology (BMWi). KFW ACADEMY In 2008, the KfW Academy hosted its 200th event since its foundation in The events are organised exclusively for KfW's multipliers to provide them with expert knowledge on all aspects of KfW Mittelstandsbank and KfW Förderbank. Last year alone, over 2,000 people attended the 37 KfW Academy lectures.

59 K F W F Ö R D E R B A N K 57 KFW FÖRDERBANK GIVING CREDIT TO COMMITMENT KFW FÖRDERBANK KFW FÖRDERBANK PROVIDES FINANCING IN THE AREAS OF ENVIR ONMENTAL PROTECTION, HOUSING, INFRASTRUCTURE AND EDUCATION. FUNDS ARE AVAILABLE TO MUNICIPALITIES, ENTERPRISES AND PRIVATE INDIVIDUALS IN GERMANY. KFW FÖRDERBANK PROVIDES FUNDS FOR THE REHABILITATION OR RENOVATION AND MODERNISATION OF RESIDENTIAL PROPERTY, AS WELL AS FOR THE CONSTRUCTION OF BOTH NEW LOW-ENERGY HOUSES AND OWNER-OCCUPIED RESIDENTIAL BUILDINGS. IN THE "KFW ENVIR ONMENTAL PROTECTION PROGRAMME" AND THE "ERP ENVIR ONMENTAL PROTECTION AND ENERGY SAVING PROGRAMME", SUPPORT IS PROVIDED FOR ENVIRONMENTAL PROTECTION IN VESTMENTS BY SMALL- AND MEDIUM-SIZED EN TER PRISES. KFW FÖRDERBANK ALSO SUPPORTS INVESTMENTS IN RENEWABLE ENERGIES. IN THE FIELD OF INFRASTRUCTURE, FINANCING IS PROVIDED FOR ALL TYPES OF MUNICIPAL INVEST MENT, INCLUDING INVESTMENTS MADE BY NON-PROFIT INSTI TUTIONS. THE BANK ALSO FINANCES BOTH ACADEMIC STUDIES AND FURTHER VOCATIONAL TRAINING FOR PRIVATE INDIVIDUALS. KFW FÖRDERBANK

60 58 EFFICIENCY IS IN OUR NATURE Having a solid energy concept is already half the battle this also applies when it comes to owning your own flat. With this in mind, AGB Frankfurt Holding has its sights fully set on heat efficiency in its latest major project, CAMPO. Frankfurt's popular Bornheim district will house 85 rented flats, as well as 55 individually owned flats, built according to passive house standards. The comprehensive energy-saving concept means that owners will incur only a fraction of the usual heating costs: the flats will require at least 75 % less heating than standard new buildings as a rule. Under the future-minded energy concept, climate and resource protection issues play a role in the construction project, too. Nevertheless, one area in which the "CAMPO am Bornheimer Depot" project

61 K F W F Ö R D E R B A N K 59 certainly will not be scrimping is the buildings architectural allure. The new development will be carefully incorporated into an area characterised by "Gründerzeit" buildings of the late 19 th century. Three different renowned architectural firms have put their respective styles into practice to create a modern living environment that encompasses a range of properties from upmarket flats to luxury penthouses. The project was financed under the KfW "Ecological Construction" programme. With a commitment of EUR 4.25 million, KfW Förderbank laid the financial foundation for the construction of the properties. Managing Director Frank Junker is impressed by the quality of his new passive houses, and is committed to actively promoting the standard in the future.

62 60 GIVE US THIS DAY OUR DAILY BREAD Thomas Grundner is not an entrepreneur of modest pretensions, which is why the company director invested in the family-run company. Two new technical tours de force now ensure high quality and competitive prices for bread, rolls, pretzels, pastries and cakes: a heat recovery system for the oven and a new cooling device. The Moosburg-based company achieved this using funds from KfW Förderbank's "ERP Energy Efficiency Programme". And the investment paid off. The new facilities are saving enormous amounts of energy. The Grundner bakeries have cut the amount of CO 2 they lose through their chimneys every year by a whopping 50,000 kilogrammes. The energy consumption of the cooling device is now 33 % and the oven even 35 % below the sector

63 K F W F Ö R D E R B A N K 61 average. These investments have allowed the second-generation family business owner to make a key contribution not only to protecting the environment, but also to safeguarding jobs. After all, the baker and master confectioner ensures that around 80 employees can earn their daily bread. And the workforce is growing. The Moosburg branch now supplies a total of eight shops with fresh bakery products on a daily basis. As many as 3,500 clients ensure that the high-quality goods sell like hot cakes.

64 62 KFW FÖRDERBANK IN 2008 KFW FÖRDERBANK IS COMMITTED TO PROMOTING ENVIRONMENTAL PROTECTION, CON STRUCTION, HOUSING, INFRASTRUCTURE AND EDUCATION, THE FOCUS BEING ON INVEST MENTS THAT IMPROVE THE QUALITY OF LIFE IN THE LONG TERM. "KFW STUDENT LOAN" LAUNCHED MORE THAN TWO YEARS AGO: WIDESPREAD ACCEPT- ANCE AMONG STUDENTS The "KfW Student Loan", which was launched in April 2006, has met with widespread acceptance among students. Since April 2006, 52,000 loans have been granted to students, helping them to finance their living expenses during their studies either in full or in part. Taking stock of the situation at present, more than two years after the programme was launched, students have an average of EUR 477 paid out to them every month. The "KfW Student Loan" enjoys a market share of around 47 % among loans designed to finance living expenses. In helping to boost the number of people completing higher education, the "KfW Student Loan" is having a positive economic impact, too, as academic studies mean better qualifications, resulting in increased labour productivity at both personal and macroeconomic level, as well as in higher growth. "KFW AWARD 2008" FOR EXEMPLARY JOINT PROJECTS BY PRIVATE BUILDERS For the sixth time KfW Förderbank granted the "KfW Award" for innovative and forward-looking projects by private builders and homeowners. This year, the motto for the award, which is worth EUR 27,000, was "Building and living in community in the city creative and cost-effective approaches to home ownership". The projects that were honoured with the KfW Award saw idle land being revitalised, traditional buildings undergoing energy rehabilitation measures, gaps between buildings being closed and, in one particular case, an old factory building being rescued from decay. The jury selected projects that have mastered the challenges faced by city-based construction projects in an exemplary manner.

65 KFW FÖRDERBANK 63 ONE MILLIONTH PROMOTIONAL LOAN GRANTED FOR RESIDENTIAL PROPERTY OWNERSHIP By the first quarter of financial year 2008, KfW Förderbank had helped a new total of one million builders and buyers turn their dream of their own four walls into reality with help from the "KfW Home Ownership Programme". In the period between the launch of the programme twelve years ago and early 2008, together with banks and savings banks a lending volume totalling almost EUR 50 billion was approved. These loans serve to finance a proportion of the costs involved in building or purchasing owner-occupied houses or flats in Germany in the long term and at low interest rates. KfW provides support not only for the construction and purchase of new houses and flats, but also for the purchase of existing properties, which now account for 70 % of the financing volume. BUDGET FUNDS FOR ENERGY-EFFICIENT CONSTRUCTION AND REHABILITATION TOPPED UP BY EUR 500 MILLION In 2008, homeowners and housing companies made considerable investments in energy efficiency, which is testimony to their deep sense of responsibility for climate protection. There is huge demand for loans under KfW s programmes for energy-efficient construction and rehabilitation. The figure for the previous year had been matched, and in some areas even exceeded, by as early as the end of July In order to ensure continued encouraging development in the second half of the year, too, the Federal Government decided in August to top up the budget funds earmarked for reducing interest rates for energy-efficient construction and rehabilitation programmes by EUR 500 million. This enabled more than 260,000 residential units to undergo energy makeovers as part of these programmes in 2008 alone. This means that KfW helps finance more than 25 % of the estimated total energy rehabilitation projects implemented each year.

66 64 KFW FÖRDERBANK GIVING PROJECTS A FINANCIAL BOOST KFW FÖRDERBANK PROVIDES SUPPORT IN THE FIELDS OF HOUSING, ENVIRONMENTAL PROTEC TION, INFRASTRUCTURE AND EDUCATION, ENSURING THAT BOTH PRIVATE AND PUBLIC-SECTOR PROJECTS CAN BUILD ON A SOUND FOUNDATION. Promotion of the German and European economy by KfW Förderbank Programmes ) 2007 Purpose EUR in millions EUR in millions EUR in millions Volume of promotional financing KfW Förderbank 33, , , Promotional loans KfW Förderbank 33, , ,592.6 a) Environmental protection investments 7, , ,203.1 KfW Environmental Protection Programme 2, , ,507.3 Environmental protection projects ERP Environmental Protection and Energy Saving Programme Solar Power Generation / KfW Programme to Promote Renewable Energies 2, , ,031.3 Environmental protection projects in Germany Photovoltaic systems/measures to promote renewable energies b) Housing 14, , ,642.4 Housing Modernisation 3, , ,278.3 Modernisation and rehabilitation of housing KfW Home Ownership Programme 4, , ,262.5 Construction and purchase of owner-occupied housing CO 2 Building Rehabilitation Programme 2, , ,926.5 Packages of measures to reduce CO 2 emissions in old residential buildings Ecological Construction 2, , ,101.2 Construction of new low-energy houses Global loans for housing in Germany and Europe 1, , ,900.0 Global loans to banks to finance housing investment c) Municipal infrastructure 2, , ,111.8 KfW Municipal Loan/Social Investment/ Municipal Investment KfW Municipal Loan/ Social Investment/ Energy Rehabilitation Global loans for infrastructure abroad 2, , ,043.8 Infrastructure measures by municipalities, non-profit organisations and municipal enterprises Energy rehabilitation and energy conservation measures in municipally-owned buildings, non-profit organisations and municipal enterprises Global loans to promotional and commercial banks in Europe d) Education 1, , ,314.3 Initial and further training e) Global credit lines to promotional institutions in the federal states 8, , ,321.0 Global loans to fund the special credit institutions of the federal states 2. Securitisations KfW Förderbank 8, ,933.4 Hedging and securitisation of mortgage loans 3. Advisory support (grants) 6.2 Energy efficiency advisory services Differences in the totals are due to rounding. 1) As of 2008, statistics no longer include the contract volume when the loan is granted but the individual tranches when they are drawn. The figures for 2007 have been recalculated on this basis for the sake of comparability.

67 KFW FÖRDERBANK 65 LEVEL OF SUPPORT PROVIDED REMAINS AT HIGH LEVEL As far as its promotional loans are concerned, KfW Förderbank actually managed to surpass the excellent result achieved in the previous year. In 2008, the fact that the total promotional business volume was down year-on-year was due only to the considerable decline in securitisations. The environmental segment, housing investments and the general funding of the promotional institutions in the German federal states made a substantial contribution to the solid result. Commitments of KfW Förderbank in 2008 by federal state 1) Federal state Environmental financing Housing investments Municipal infrastructure Total Share Share of population EUR in millions EUR in millions EUR in millions EUR in millions in % in % Baden-Württemberg 1, , , Bavaria 1, , , Bremen Hamburg Hesse , Lower Saxony , , North Rhine-Westphalia 1, , , Rhineland-Palatinate , Saarland Schleswig-Holstein , Western Germany 5, , , , Berlin Brandenburg Mecklenburg-Western Pomerania Saxony Saxony-Anhalt Thuringia Eastern Germany 1, , , Outside Germany Total 7, , , , Differences in the totals are due to rounding. 1) Not including global loans to commercial banks/abs SME portfolio/securitisations " THE ENVIRONMENTAL SEGMENT AND HOUSING INVESTMENTS MADE A SUBSTANTIAL CONTRIBUTION TO THE SOLID RESULT".

68 66 ATTRACTIVE PROMOTIONAL INITIATIVE CREATES INVESTMENT INCENTIVES German homeowners and builders are still making substantial investments in energysaving measures. Together with the Federal Government, KfW uses reduced-interest loans and grants to promote energy rehabilitation measures for existing buildings and the construction of new homes in line with state-of-theart ecological standards. This initiative, "Housing, Environment, Growth", which was launched by KfW and the Federal Government in 2006, can now look back on a success story spanning three years. In addition to energy rehabilitation, the initiative covers the promotion of municipal infrastructure, as well as KfW s other housing programmes. Demand for promotional loans is still strong in the third year of the promotional initiative. The loan volume was just shy of the prior-year level a considerable achievement in light of the excellent result posted in Housing investments accounted for what was by far the lion s share of this amount. % THE "HOUSING, ENVIRONMENT, GROWTH" INITIATIVE In 2008, around 230,000 loans accounting for a volume of EUR 15.6 bil lion were awarded under the "Housing, Environment, Growth" initiative. These loans were used to finance investments to the tune of EUR 29.0 billion. Housing investments accounted for 86 % of the loan commitments. PROMOTING INCREASED EFFICIENCY IN HOUSES A considerable incentive to invest in energy efficiency is provided through the loan terms and conditions (interest rate and repayment bonus). KfW s energy-efficient construction and rehabilitation activities primarily cover the "CO 2 Building Rehabilitation", "Housing Modernisation (ECO PLUS)" and "Ecological Construction" programmes. These programmes provide a considerable incentive for investments in energy-saving measures in the form of the loan terms and conditions (interest rate and repayment bonus), which are more attractive the higher the energy savings. In 2008, KfW Förderbank made a considerably larger number of commitments as part of these programmes than in These commitments related predominantly to the "CO 2 Building Rehabilitation" and "Housing Modernisation (ECO PLUS)" programmes, i. e. to investments to finance energy-saving measures and reduce CO 2 in existing residential properties. At present, around 2.2 % of residential properties undergo energy rehabilitation measures every year, corresponding to approx. 880,000 residential units in Germany. KfW helped finance a considerable proportion of these renovation measures. It also supported the construction of energy-efficient buildings, such as KfW low-energy homes and passive houses, as part of the "Ecological Construction" programme. The number of co-financed investments was up once again on what was a very good prior-year level.

69 KFW FÖRDERBANK 67 EFFECTIVELY PROMOTING CLIMATE PROTECTION In 2008, KfW Förderbank granted loans worth EUR 6.7 billion as part of its "Energy-Efficient Construction and Rehabilitation" programmes. This figure is up by 34 % on 2007, and allowed more than 226,000 residential units to undergo energy rehabilitation measures. This means that KfW helped finance more than 25 % of the estimated rehabilitation projects carried out in Furthermore, KfW provided support corresponding to a loan volume of EUR 2.4 billion for a further 54,000 residential units as part of its "Ecological Construction" programme. These loans were used to finance investments totalling EUR 8.6 billion, meaning that KfW is involved in financing a substantial proportion of newly built flats. STUDY BEARS TESTIMONY TO EFFECTIVENESS OF FINANCING PROGRAMMES Promotional programmes often provide the key initial impetus for necessary investments. Both the construction of low-energy and passive houses, as well as energy rehabilitation measures play a key role in helping to reduce CO 2 emissions, thus putting a halt to climate change. They also protect homeowners and tenants against rising energy prices. This has also been confirmed by the latest study conducted by the Bremen-based energy institute (Bremer E nergie Institut/BEI), which was commissioned by KfW Förderbank, in consultation with the German Federal Ministry of Transport, Building and Urban Affairs, to evaluate the impact of the "CO 2 Building Re habilitation Programme". The study shows that the investments which the "CO 2 Building Rehabilitation Programme" helped to finance in 2007 allowed jobs to be secured or created particularly in small- and medium-sized construction companies and in the crafts industry. Furthermore, the "Energy-Efficient Construction and Rehabilitation" programmes both protect the climate and reduce the consumption of fossil fuels. This means that the successful continuation of the "Energy-Efficient Construction and Rehabili tation" promotional programmes in 2008 made a key contribution to the Federal Government's energy and climate agenda, making it an indispensible component of Germany's climate protection endeavours. The federal budget funds to be made available for the "Energy-Efficient Construction and Rehabilitation" programmes in the period from 2009 to 2011 have been given a considerable lift as part of the Federal Government's "Boosting growth to secure jobs" programme. These funds will ensure that the high level of support provided can be maintained during this period as well.

70 68 CLIMATE PROTECTION CREATES JOBS The expert opinion evaluates a number of issues, including the reduction in CO 2 emissions achieved. The projects financed under the "CO 2 Building Rehabilitation Programme" in 2007 alone resulted in a sustained annual reduction in CO 2 of around 330,000 tonnes. All in all, the investments kick-started as part of the "Energy-Efficient Construction and Rehabilitation" programmes in the period leading up to the end of 2007 resulted in a sustained reduction in annual CO 2 emissions of around 1.6 million tonnes (preliminary estimate for the period leading up to the end of 2008: 2.4 million tonnes). In addition, the investments co-financed by the "CO 2 Building Rehabilitation Programme" in 2007 allowed heating costs totalling an estimated EUR 65.5 million to be saved in 2008 alone, reducing energy consumption in the renovated buildings by just short of 50 %. Based on a life cycle of 30 years, the total heating costs saved thanks to the investments promoted in 2007 come in at around EUR 1.6 billion. As a result, around 75 % of the investment costs incurred will be financed by the heating cost savings alone. And that is not all: the investments co-financed by the "CO 2 Building Rehabilitation Programme" in 2007 created or secured around 35,000 jobs. In 2007, the "Energy-Efficient Construction and Rehabilitation" programmes secured or created a total of 180,000 jobs for at least one year (preliminary estimate for 2008: 220,000 jobs). FINANCIAL SUPPORT FOR OWNER-OCCUPIED HOUSING As the proportion of owner-occupied housing rises, the housing quality of a city's districts tends to improve concomitantly. Owner-occupied housing makes a substantial contribution to upgrading city centres and therefore to urban development. This is because owner-occupiers tend to invest more in maintaining their properties than tenants do. Experience has shown that the housing quality of a city's districts improves as the proportion of owner-occupied residential properties rises. This means that increasing the proportion of owner-occupied properties is not just in the interest of the individual, but in the public interest, too. This is also the idea behind the KfW Award, which was offered for the sixth time in 2008 and which the bank uses to give credit to innovative home design and construction projects implemented by private builders and owners. The motto of the 2008 competition was "Building and living in community in the city creative and cost-effective approaches to home ownership". KfW was pleased to receive a large number of entries, highlighting the fact that many homeowners have managed to make affordable city-based construction and living a reality.

71 KFW FÖRDERBANK 69 INVESTMENT IN OWNER OCCUPIED PROPERTIES Credit In 2008, a total of 83,000 promotional loans accounting for a volume of EUR 4.7 billion were granted for the construction or purchase of owner-occupied housing. Around 70 % of the projects for which support was provided related to the purchase and modernisation of existing properties. LOCAL IMPETUS: MUNICIPAL INFRASTRUCTURE Municipalities' investments in regional infrastructure form a key basis for future growth in Germany. Well-developed infrastructure is considered to be one of the key prerequisites for a country's economic prosperity. Municipalities and their investment in regional infrastructure therefore form a key basis for future growth in Germany. In addition to technical networks such as water, energy and transport, educational and research institutions, as well as social infrastructure in the form of child care facilities, hospitals, but also sport and cultural facilities, are becoming increasingly decisive in determining how attractive a location is. Despite the huge importance of these projects, an investment backlog has built up over the past few years particularly as far as the energy rehabilitation of municipal buildings is concerned. There is still considerable potential for reducing CO 2 emissions and saving energy costs in this respect. As part of KfW s efforts to restructure its municipal programmes, 31 December 2008 saw the discontinuation of the "KfW Municipal Loan" and "KfW Municipal Loan Energy-Saving Building Rehabilitation" programmes. Since 1 January 2009, KfW has been offering its new municipal programmes "KfW Investment Loans for Municipalities" (German abbrevi ation: IKK) and "KfW Investment Loans for Muni cipalities flexible" (IKK-Flex), which take the manifold needs of the public-sector applicants into even greater account. These programmes now allow the loan term, fixed interest rate period and interest and principal payment cycle to be adjusted to suit a customer's needs based on a corres ponding interest rate. The other new programme "Energy-Efficient Rehabilitation Municipalities" (German abbrevi ation: ESK) offers modified options for energy rehabilitation measures, and now also permits the provision of financial support for individual energy-related measures. As part of the programme launched by the Federal Government, KfW Förderbank has been offering loans at particularly attractive conditions as part of its "Infrastructure investment offensive for structurally weak municipalities" initiative since early These loans are to be used for specific investments in municipal and social infrastructure in order to improve the regional economic framework in structurally weak regions of Germany. By enabling investments to be made earlier than planned, this initiative is helping to support economic development in Germany.

72 70 In financial year 2008, KfW's infrastructure programmes provided financial support for a total of more than 1,300 projects implemented by municipalities, municipal enterprises and social institutions accounting for a volume of around EUR 2.2 billion. This figure included loans of more than EUR 90 million for energy rehabilitation projects. SUSTAINABLE INVESTMENT: INDUSTRIAL POLLUTION CONTROL AND CLIMATE PROTECTION KfW finances pollution control as well as climate and resource protection measures applied by industry and commerce under the "ERP Environmental Protection and Energy Saving Programme" and the "KfW Environmental Protection Programme". The co-financed projects range from energy-saving measures to the use of renewable energy sources all the way to investment in air pollution control, sewage treatment and solid waste prevention. "ERP ENVIRONMENTAL PROTECTION AND ENERGY SAVING PROGRAMME"/"KFW ENVIRONMENTAL PROTECTION PROGRAMME" The loans granted under the "ERP Environmental Protection and Energy Saving Programme" and the "KfW Environmental Protection Programme" were up by 5 % yearon-year to total EUR 4.8 billion in Furthermore, non-repayable grants totalling EUR 63 million were issued for the acquisition of low-emission, heavy commercial vehicles accounting for an investment volume of EUR 1.7 billion. On 21 February 2008, the German Federal Ministry of Economics and Technology (BMWi) and KfW launched the joint initiative entitled "Special Fund for Energy Efficiency in SMEs", which helps small- and medium-sized companies to tap new energy saving potential. The aim is to take some of the burden off of these companies by reducing their energy costs in the medium and long term, enabling them to improve their competitive position. The special fund forges a close link between financing and advice. KfW provides grants for qualified energy advice in order to better inform SMEs on the available energy saving potential. KfW provides reduced-interest loans to finance commercial investments aimed at saving energy.

73 KFW FÖRDERBANK 71 SPECIAL FUND FOR ENERGY EFFICIENCY By 31 December 2008, as many as 558 loans accounting for a loan volume of EUR 315 million had already been approved, and commitments made for advisory support in around 3,200 projects, under the "Special Fund for Energy Efficiency in SMEs". In order to make KfW s industrial pollution control and climate protection programmes more transparent, the KfW and ERP environmental finance offers were restructured with effect from 1 January The reorganisation measures have resolved overlaps as regards the target groups and areas for which the financial support is available, and brought improved visibility to the financial support available for renewable energies. In addition, the changes have made a considerable improvement to the financing available to small businesses. In the future, general environmental protection measures will be promoted as part of the new "ERP Environmental Protection and En- ergy Efficiency Programme". These measures include, by way of example, waste prevention and sewage treatment, but also energy efficiency measures implemented by large companies that were previously co-financed under the "ERP Environmental Protection and Energy Saving Programme" and the "KfW Environmental Protection Programme", as well as the financing of energy efficiency measures as part of the "Special Fund for Energy Efficiency in SMEs". The new KfW "Renewable Energies" programme bundles all of the activities relating to the promotion of renewable energies. MORE SUPPORT FOR RENEWABLE ENERGIES ON THE HEATING MARKET In August 2008, the European Commission approved the guidelines on the market incentive programme for renewable energies. This paved the way for a substantial improvement in the financial support available for renewable energies on the heating market as part of the KfW "Renewable Energies" programme. The programme offers particularly attractive conditions for innovative measures. " THE PROGRAMME OFFERS PARTICU LARLY ATTRACTIVE CONDITIONS FOR INNOVATIVE MEASURES". In 2008, low-interest loans totalling EUR 4.2 billion were granted for renewable energies, marking an increase of 11 % over 2007.

74 72 EVALUATION OF KFW'S PROMOTIONAL PROGRAMMES FOR RENEWABLE ENERGIES KFW BANKENGRUPPE PERFORMED A DETAILED EVALUATION OF ITS PROMOTIONAL ACTIVITIES FOR RENEWABLE ENERGIES PROJECTS IMPLEMENTED WITHIN GERMANY IN THE CENTRE FOR SOLAR ENERGY AND HYDROGEN RESEARCH BADEN WÜRTTEMBERG (ZENTRUM FÜR SONNENENERGIE UND WASSERSTOFF FORSCHUNG BADEN WÜRTEMBERG/ZSW) WAS COMMIS SIONED TO CONDUCT THE STUDY, WHICH EVALUATED THE IMPACTS OF THE "ERP ENVIRONMEN TAL PROTECTION AND ENERGY SAVING PROGRAMME", "KFW ENVIRONMENTAL PROTECTION PRO GRAMME", "SOLAR POWER GENERATION" AND THE KFW "RENEWABLE ENERGIES" PROGRAMME. SCOPE OF THE INVESTMENTS SUPPORTED In 2007, KfW's programmes to promote renewable energies financed investments totalling EUR 5 billion in Germany. By way of comparison: a total of around EUR 11 billion was invested in this area nation-wide in Almost half of the investments made in Germany to expand the use of renewable forms of energy were supported by KfW. ENERGY IMPORTS AVOIDED The regenerative facilities financed by KfW in 2007 alone allowed energy imports worth almost EUR 5 billion to be avoided. This calculation is based on an average life of 20 years. The funds that remained in Germany as a result have helped not only to boost domestic demand, but also to ensure reliable energy supplies. CO 2 REDUCTION The climate protection effects of the investments promoted are also considerable. The facilities supported in 2007 alone have brought about CO 2 savings of around 4.6 million tonnes p. a. EFFECTS ON EMPLOYMENT The production and construction of the facilities promoted in 2007 secured and/or created over 40,000 jobs, not to mention the additional jobs involving the operation and maintenance of the facilities. The financial support provided by KfW therefore makes a substantial contribution to promoting the renewable energies sector as an employment engine, and creates impetus for innovation in an export-oriented economy. SMALL- AND MEDIUM-SIZED ENTERPRISES More than 70 % of the jobs created and safeguarded were in small- and medium-sized enterprises with a workforce of less than 500, and around 33 % in small companies with fewer than 50 employees. This means that KfW s promotional programmes support investments by SMEs in particular.

75 KFW FÖRDERBANK 73 CARBON FUND PHASE 2 OF EUROPEAN EMISSIONS TRADING 2008 marked the beginning of the first commitment period for the signatory states to the Kyoto Protocol. As far as the European emissions trading scheme is concerned, the second phase is already underway. This phase has introduced more stringent requirements for the companies involved, and means, for the first time, that emission allowances are no longer granted completely free-ofcharge. Some of these allowances are sold by KfW in line with the requirements set out by the Federal Government, with particular importance being attached to a transparent, market-friendly procedure, which can be guaranteed in full by the regular sale of the allowances via stock exchanges. Germany KYOTO sold more allowances than any other country in 2008, putting it in pole position among the EU member states. The main function of the KfW Carbon Fund is to purchase emission certificates from foreign projects. The certificates are purchased in the interest of companies so that they can use them to fulfil their obligations under the European emissions trading scheme. The sale of certificates serves as an additional source of income for these projects, without which they would generally not be feasible. DEMAND FOR EMISSION CERTIFICATES UNABATED Around 10 million emission certificates were purchased in 2008, benefiting around 20 projects, primarily in the renewable energies and energy efficiency sectors. As regards the second purchase programme launched in cooperation with the European Investment Bank (EIB), agreements in the amount of EUR 88.2 million in total were concluded with purchasers in 2008.

76 74 The "Post 2012 Carbon Fund" was launched in spring 2008 as scheduled as a joint effort between KfW and the European Investment Bank (EIB), in cooperation with other European promotional banks. The Fund is already making targeted purchases of emission certificates that will be generated in the years following As a result, the "Post 2012 Carbon Fund" offers the certificate providers the planning reliability that they urgently need. In addition, the initiative sends out a clear signal to build the confidence of the commercial actors on the market. The KfW Carbon Fund will continue its activities as part of KfW Entwicklungsbank from 2009 onwards. This will allow the acquisition of emission certificates from projects to take place even more effectively in the future. The use of synergies with financing business in the host countries will also further expand and diversify promotional potential for climate protection projects around the world. KfW will thus continue to be a partner for German and European companies that want to use these certificates to fulfil their obligations in European emissions trading. EDUCATION STUDENT LOANS INDISPENSIBLE The Student Loan allows KfW to play a role in boosting the level of education of the population at large. More than two years after the launch of the "KfW Student Loan", the story so far has been a successful one. The support provided by KfW not only makes an appreciable contribution to increasing student numbers and allowing them to study more efficiently, the programme is also helping to boost the level of education of the population at large, creating a solid basis for Germany's competitiveness as an educational centre. KfW's other education finance programmes, which are implemented on behalf of the Federal Government and the federal states, also continued to show positive development in These include, in particular, the "Meister-BAföG" state grant system, one of the main tools used to promote further education in Germany. The Education Loan, which finances students nearing the end of their studies, has also helped to set a positive trend in the number of people completing both school and university education in Germany. INVESTMENTS IN EDUCATION Since April 2006, a total of over 52,000 students have taken out a KfW Student Loan. More than 40,000 loans were granted under the "Meister-BAföG" programme in 2008, which serves to provide assistance for master craftsman trainees. This corresponds to a volume of EUR 200 million, a figure that is up considerably on 2007 (+12 %). In its twelve-year history, the "BAföG" programme has provided support for more than 410,000 further education measures accounting for a total value in excess of EUR 2.1 billion. Over 12,000 loans accounting for a volume of around EUR 62 million were granted in 2008 as part of the Education Loan scheme, which finances students nearing the end of their studies. Under KfW s other education finance programmes, more than 12,000 loans, accounting for a volume of EUR 0.6 billion, were granted last year.

77 KFW FÖRDERBANK 75 COOPERATION WITH PROMOTIONAL INSTITUTIONS IN THE FEDERAL STATES: ACHIEVING GOALS TOGETHER KfW Förderbank cooperates closely with the promotional institutions in Germany's federal states, concluding corresponding global loan agreements on the basis of the KfW programmes. By way of ex ample, promotional measures for housing construction, infrastructure and energy-efficient building rehabilitation are made more favourable. In addition, KfW Förderbank passes on global loans for general funding via the promotional institutions in the federal states. By offering this financial support outside of the framework of the KfW loan programmes, KfW has successfully established itself as a key refinancer of the promotional institutions in the federal states, in particular for smaller partners. The wide acceptance of KfW s funding offering among the promotional institutions in the eastern federal states is particularly positive. Billion 35.6 COOPERATION WITH PROMOTIONAL INSTITUTIONS IN THE FEDERAL STATES KfW Förderbank has concluded 116 global loan agreements accounting for a total volume of EUR 35.6 billion with the promotional institutions in the federal states, around EUR 9.6 billion of which was utilised in In 2008, EUR 1.7 billion of the global loan volume was attributable to the funding offering for the promotional institutions in the new federal states. Across Germany, KfW has provided the promotional institutions in the federal states with general funding to the tune of EUR 25.2 billion since HARDLY ANY GLOBAL LOANS WITH COMMERCIAL BANKS IN GERMANY AND WESTERN EUROPE In 2008, KfW was very restrained as regards its global loan business with commercial banks in Germany and western Europe. With banks increasingly tightening their lending limits, KfW gave priority to its predominantly reduced-interest programme loans business.

78 76 EU PROMOTIONAL LOANS IN CENTRAL AND EASTERN EUROPE The EU has set itself the goal of promoting municipal infrastructure and energy efficiency in Central and Eastern Europe. KfW is cooperating with the European Commission and the Council of Europe Development Bank (CEB) in order to achieve this objective. While the energy efficiency facility is being used, in particular, to finance investments designed to cut CO 2 emissions and to promote rational energy use in Bulgaria, Romania and Croatia, the financing facility for municipal infrastructure is available to all new EU member states and accession countries. To date, the EU financing facility for municipal infrastructure projects has been implemented with nine partner banks in seven countries saw two new projects being launched in Poland and Slovakia. In both facilities, the CEB and KfW combine their funds with EU grants. 190 As part of the financing facility for municipal infrastructure projects in Central and Eastern Europe, a loan volume totalling EUR 190 million and a grant volume of EUR 18 million has been committed to date. SECURITISATIONS The crisis in the financial market has had a considerable impact on the securitisation market, too. In 2008, securitisations were used in Europe mainly as a means of obtaining short-term liquidity from the European Central Bank or the Bank of England. In this difficult environment, KfW Förderbank did not execute any securitisation transactions via its PRO- VIDE platform in Irrespective of this, KfW Förderbank's outstanding securitisation transactions generally performed well. This is thanks mainly to the fact that the PROVIDE securitisations are based on loans which German and European banks granted to their customers in the private housing sector and infrastructure finance against stringent lending standards. In Germany, for example, all of the key process steps tend

79 KFW FÖRDERBANK 77 One of the greatest challenges facing Europe is the creation of robust infrastructure. The EU is using its JASPERS initiative to support the new EU member states in preparing large-scale infrastructure projects. The projects must, however, be eligible for support from the EU Structural Funds and the EU Cohesion Fund. The projects will be implemented in the 2007 to 2013 support phase. JASPERS provides free advisory services to help the national and local authorities prepare for their projects. In July 2008, KfW became the fourth partner to join the JASPERS initiative, toto remain the reserve of the lending banks by sole virtue of the regulatory framework. This applies to client relationship management and servicing, in particular, with a close relationship maintained between bank and customer. This is because, in the German "Hausbank" system, under which business is conducted via one main bank, it is unusual to delegate responsibility for customer relationships. If at all, this happens only for non-performing loans. Furthermore, no signs of overheating have emerged in the German property market over the past few years as they have in other European countries, for example. This fundamental framework had a positive overall effect on the performance of the PROVIDE transactions based on German mortgage loans in particular. Most of the PROVIDE transactions still have a high rating stability. KfW will continue to provide support in the securitisation market in 2009, too, in order to cushion the blow of the crisis in the financial market for its target groups. After all, what the banks need most in the current market environment is liquidity. As a result, KfW will continue to offer funding options with its securitisation structures in the future, too. JASPERS INITIATIVE EXPLOITING FINANCIAL EXPERTISE FOR THE WHOLE OF EUROPE gether with the European Commission, the EIB and the EBRD. It makes a substantial contribution to the success of the initiative with its experience in financing transport, environmental and energy projects. The KfW employees allocated to the JASPERS project assist to the existing teams of experts in the regional JASPERS offices in Warsaw, Vienna and Bucharest. The project initiators that receive support from JASPERS can then also opt to apply for a loan for their projects from the EIB, the EBRD or KfW. JASPERS = Joint Assistance in Supporting Projects in European Regions = European Investment Bank EIB EBRD = European Bank for Reconstruction and Development

80 78 ADVICE AS A KEY TO SUCCESS WITH THE INTERNET, TELEPHONE CONTACT THROUGH OUR INFOCENTER AND WITH PRIVATE DIS CUSSIONS AT KFW'S ADVISORY CENTRES, KFW MAKES USE OF ALL POSSIBLE CHANNELS TO PRO VIDE INFORMATION ABOUT ITS PROMOTIONAL PROGRAMMES AND FINANCING OPPORTUNITIES. At visitors can obtain full information on construction, housing, energy saving, environmental protection, education and infrastructure. The Advisory Centres in Berlin, Bonn and Frankfurt also offer KfW customers the possibility of personal financing advice in their locality. Financing experts present KfW s products, and are available for individual consultations with private clients, builders, architects, energy consultants and bank advisors at numerous construction and housing fairs and training and information events throughout Germany. Exclusive information is also available for business partners at (in German only). INFORMATION IN FIGURES In addition to KfW s housing programmes, industrial pollution control was another topic that met with keen interest on the Inter net. But interactive offers such as the "promotional advisor" (Förderberater), and the repayment and grant calculation tools are also proving popular. In 2008, KfW Förderbank s Infocenter provided advice to a total of 585,000 customers and business partners over the telephone or in writing. With around 265,000 contacts, housing advice was widely sought, as was advice on KfW's education finance products, which was the reason for over 320,000 enquiries. In the reporting year, around 1,600 customers, mainly private individuals, sought direct advice on the housing programmes and the "KfW Student Loan". KfW Förderbank s financing experts attended around 270 specialist trade fairs to talk to, and answer queries for, customers and interested individuals alike.

81 KFW FÖRDERBANK 79 SPECIAL ADVISORY SERVICES FOR MUNICIPALITIES AND THE HOUSING SECTOR Institutional investors such as the municipalities or the housing sector are provided with intensive support saw KfW Förderbank continue to offer its tailored advisory services as part of its "Housing, Environment, Growth" initiative. Municipalities, municipal associations and non-profit organisations are provided with specific advice on the "Energy-saving financing windows", which were launched in 2007 as part of the "KfW Municipal Loan" and "Social Investment" programmes. Housing companies, as well as operators of care and nursing homes for senior citizens are provided with detailed information on the special features of the "CO 2 Building Rehabilitation", "Housing Modernisation" and "Ecological Construction" housing programmes. This special service is provided at regional conferences, numerous information events and in the course of one-on-one advisory talks. The regional conferences for municipal clients also served as an occasion to provide these clients with information on the revamped promotional products for infrastructure projects, which were introduced on 1 January SAW KFW FÖRDERBANK CONTINUE TO OFFER ITS TAILORED ADVISORY SERVICES AS PART OF ITS "HOUSING, ENVIRONMENT, GROWTH" INITIATIVE. At a total of more than 160 regional conferences and information events, KfW presented its promotional products in various locations across Germany. Potential investors seized the opportunity to meet KfW's loan experts face-to-face.

82 KFW FÖRDERBANK 80 SUCCESSFUL LAUNCH OF ENERGY EFFICIENCY ADVISORY SERVICES FOR SMES February 2008 saw the launch of the "Special Fund for Energy Efficiency in SMEs", a joint initiative with the German Federal Ministry of Economics and Technology (BMWi). The aim of the programme is to provide SMEs with expert advice in order to identify potential for energy savings, and to enable them to make the necessary investments by providing them with lowinterest loans. After all, SMEs in particular are often unaware of " FEBRUARY 2008 SAW THE LAUNCH OF THE 'SPECIAL FUND FOR ENERGY EFFI CIENCY IN SMES', A JOINT INITIATIVE WITH THE GERMAN FEDERAL MINISTRY OF ECONOMICS AND TECHNOLOGY (BMWI)". the huge potential their companies have for saving energy. A two-tier advisory system (initial and detailed advice) is used to identify weaknesses in the companies energy consumption habits, and to make suggestions, or propose specific measures allowing them to make improvements that can save both energy and costs. The independent advice is provided by qualified experts who are listed in KfW's Consultant Exchange. Around 3,200 companies took KfW up on its offer of funded advice last year, and received grants to be put towards the advisory costs. 3,200 companies sought funded advice in The keen interest in energy efficiency is also reflected in the issues addressed by the KfW Academy. This year, a total of 14 seminars on issues relevant to KfW Förderbank focused on the "Special Fund for Energy Efficiency in SMEs".

83 K F W I P E X - B A N K 81 KFW IPEX-BANK A STRONG COMPETITOR IN INTERNATIONAL FINANCE KFW IPEX-BANK KFW IPEX-BANK GMBH IS IN CHARGE OF KFW'S BUSINESS UNIT OF PROJECT AND EXPORT FINANCE. THIS BUSINESS UNIT PROVIDES EXPORT AND TRADE FINANCE, ASSET AND PROJECT FINANCE, AS WELL AS LEASING AND ACQUISITION FINANCE TO COMPANIES FROM GERMANY AND OTHER EUROPEAN COUN TRIES. IN DOING SO, THE BANK, IN LINE WITH KFW'S LEGAL MANDATE, SUPPORTS PROJECTS THAT ARE IN THE INTEREST OF BOTH GERMANY AND THE COMMUNITY OF EUROPEAN NA TIONS. IN THIS RESPECT, IT COMPETES WITH INTERNATIONAL BANKS AND OTHER FINANCING INSTITUTIONS. KFW IPEX-BANK

84 82 ON AN ECO-FRIENDLY COURSE Papenburg launches innovations. The Meyer shipyard has built an extremely eco-friendly cruise liner on behalf of the internationally renowned cruise company Royal Caribbean Cruises Ltd. The vessel consumes some 30 % less energy than comparable ships thanks to highly energy-efficient components such as a photovoltaic system, optimised hydrodynamics and a particularly efficient underwater coating. KfW IPEX-Bank was also on board, providing a major portion of the funds for the project. Its contribution made big waves because the Celebrity Solstice is the largest cruise liner ever built in Germany with 122,000 t and an overall length of 317 meters. It accommodates 2,850 guests on 13 of its 17 decks and provides entertainment in 10 restaurants and cafés,

85 K F W I P E X - B A N K bars and shops, exercise and wellness areas, pools, a theatre, a night club and a casino. Bernhard Meyer, the managing partner who gave the shipyard its name, turned over command of the ship to Richard Fain, CEO of Royal Caribbean Cruises and Captain Panagiotis Skylogiannis. Meyer and his team delivered the vessel ahead of schedule, enabling the luxury liner to set sail in October 2008 earlier than planned. This was enough to convince Richard Fain. Royal Caribbean Cruises ordered another four ships of this series to be built in Papenburg. Both companies are now well on course for success.

86 84 FINANCING WITH SUN PROTECTION FACTOR BU HEADLINE Aquis The investors ad er sed were well at.ugiat. disposed Lendre to the eumsan Spanish augi. province Amconsenim of Zamora. quat. With Wisi. a global Diam, irradiance velit lute of dunt 1,759 nostrud KWh/mod 2 it magnis one of am Europe's in henis highest-yielding alis euipsusto doloreet, locations quatem for solar zzrit power. ut nulpute The project te del company ullaorper Inversiones iurem inim Recursos in el exerci Solares tie S.L., eugiat which luptat. was Ut created vel eraestinisit specifically volenis for the nit planning, wis am building diam. Aquis and ad operation sed er of at.ugiat. the two Lendre photovoltaic eumsan plants, augi. found Amconsenim its place quat. in the Wisi. sun Diam, here. KfW velit IPEX-Bank lute dunt nostrud set a shining mod magnis example am by in serving henis alis as a euipsusto financial doloreet, services provider quatem for zzrit the ut project. nulpute As te the del ullaorper sole lender iurem it arranged inim in and el exerci structured tie eugiat the luptat. complete Ut vel financing. eraestinisit Yet the volenis solar nit farm wis does am diam. not only Aquis light ad er up sed the er Spanish at.ugiat. economy. Lendre eumsan German augi. manufacturers Amconsenim of quat. solar modules Wisi. Diam, and velit silicon lute solar duntcells in particular are also enthusiastic about the brilliant business prospects the project holds for them. Miguel Ferrer, chief

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88 86 KFW IPEX-BANK IN 2008 KFW IPEX BANK HELPS THE GERMAN AND EUROPEAN ECONOMY TO SECURE AND EXPAND ESTABLISHED POSITIONS ON THE MARKET, AND TO OPEN UP NEW MARKETS ACROSS THE GLOBE. "RAILPOOL" JOINT VENTURE A NEW ASSET MANAGER IN THE RAIL TRANSPORT SECTOR The prospect of the further liberalisation and privatisation of Europe's railways will mean growing demand for rolling stock, particularly among private railway operators. It was with this idea in mind that KfW IPEX-Bank and HSH Nordbank set up Railpool GmbH in summer This new asset manager leases freight locomotives and passenger trains to rail operators. In doing so, Railpool is setting new standards for rail transport services as the first full-service provider in this field. 58 locomotives had already been ordered from Bombardier, to be manufactured in the company's Kassel-based factory, by the end of In addition, a leasing agreement spanning a period of several years was concluded with the Danish state rail operator for 45 double-decker railcars shortly after the company was set up. Railpool invested a total of EUR 280 million in the first few months of its existence a successful start for the new business model. PLANT EXPANSION MEASURES FOR VOLKSWAGEN As well as being responsible for the local distribution of vehicles manufactured by the Volks wagen Group, VW Argentina is a key component of the global Volkswagen (VW) production network with facilities in Pacheco and Córdoba. The gearbox plant in Córdoba, which was financed back in 2001 by KfW IPEX-Bank, is a successful exporter and one of the VW Group's most important facilities for gearbox manufacturing worldwide. VW Argentina currently employs a workforce of around 5,600 employees, making it a key employer for the South American country. Thanks to the solid order intake for the MQ 200 five-speed manual gearbox, the production capacity at this plant had to be topped up in 2008 from 1,100 units to a current total of 2,100 units per working day. KfW IPEX-Bank is financing the necessary expansion measures by offering export finance in the amount of EUR 50 million with an eight-year term, allowing VW Argentina to create around 420 new jobs.

89 KFW IPEX-BANK 87 MODERNISATION AND EXPANSION OF DELHI AIRPORT Together with 17 other banks, KfW IPEX-Bank is financing the modernisation and expansion of Indira Gandhi International Airport in Delhi. As part of this project, KfW IPEX-Bank is supporting the German Fraport AG, which as sponsor holds a 10 % stake in the project company DIAL. The project will involve the construction of a new runway, a new terminal and the expansion of the existing terminal at India's second-largest airport, whose passenger handling capacity is around 24 million. KfW IPEX-Bank is providing USD 27 million over a term of 13.5 years. The new runway has already been operational since September 2008, and the plan is for the first phase of the project to be completed in full in time for the 2010 Commonwealth Games. By then, the airport will be in a position to handle as many as 37 million passengers. "SUPERFAST I" NEW FERRY FOR THE ADRIATIC SEA The Attica Group has further increased its ferry operations on the line linking Greece and Italy, and has been using a new 8,300 dwt RoPax ferry, financed by KfW IPEX-Bank to the tune of EUR 48 million, on this route since October With an increased volume offering parking capacity for 170 heavy goods vehicles, the new ferry is more focused on the freight traffic between Italy and Greece, a field of business that is relatively stable throughout the year. This means that products from the Mediterranean can now make their way to their respective sales markets even faster than before. The ferry offers a % reduction in operational fuel consumption, making it far more energy-efficient than the ferries used to date. It was built by the Italian Nuovi Cantieri Apuania shipyard, with the gear technology in the broader sense based on German technology. The Attica Group is the leading ferry company in its main markets comprising the Adriatic Sea (Greece Italy) and the Aegean Sea (the Cyclades the Dodecanese islands).

90 88 KFW IPEX-BANK: A SEPARATE BRAND BECOMES A LEGALLY INDEPENDENT SUBSIDIARY KFW IPEX BANK GMBH HAS BEEN ACTING AS A LEGALLY INDEPENDENT BANK SINCE 1 JANU ARY AS A 100 % SUBSIDIARY OF KFW, IT REMAINS AN INTEGRAL PART OF KFW BANKEN GRUPPE, AND RETAINS RESPONSIBILITY FOR INTERNATIONAL PROJECT AND EXPORT FINANCE. EXPERIENCE SPANNING MORE THAN FIVE DECADES AN ESTABLISHED BANK IN ITS FIELD KfWIP EX-Bank can look back on more than 50 years ofex perience in international project and export finance business. KfW IPEX-Bank GmbH is by no means new to the business. It can look back on more than 50 years of experience in international project and export finance business. The legal separation was the result of an understanding reached between the European Commission and the Federal Republic of Germany in This called for the restructuring of the promotional bank landscape in Germany, and the separation of KfW's traditional promotional activities, which are aimed at supporting the German and European economy, and commercial finance. This understanding was implemented in the Promotional Bank Restructuring Act (Förderbankenneustrukturierungsgesetz). KfW IPEX-Bank has already been operating based on the principles set out in this legislation since early It sees itself as an integral part of KfW Bankengruppe, and is committed to promoting German and European economic interests. In this respect, it not only generates substantial income for KfW, but also makes a key contribution to the transfer of expertise among KfW's individual business areas. This means that KfW IPEX-Bank is responsible for all lending operations that compete with those of other financial services providers. It also arranges all project and expert finance classified as promotional business under EU Understanding II. KfW IPEX-Bank now executes these transactions on a trust basis on behalf of KfW. BUSINESS PERFORMANCE A SUCCESSFUL YEAR KfW IPEX-Bank was faced with considerable demand for finance at the beginning of the year. From September onwards, on the other hand, business started to slow as a result of the turbulence in the international financial markets, and it became increas- ingly difficult for companies to obtain finance. Despite this difficult environment, however, KfW IPEX-Bank fulfilled its role as a reliable financing partner, and can look back on an operationally successful 2008, all in all.

91 KFW IPEX-BANK 89 Billion The new business volume totalled EUR 12.6 billion. In addition, the bank generated EUR 5.0 billion as part of its trust business activities, which it performs on behalf of KfW. GLOBAL OPERATIONS KfW IPEX-Bank is one of the leading ports-of-call for international project and export finance. It performs its business activities in line with KfW's legal mandate. As an integral part of KfW Bankengruppe, it supports the German and European economy by providing tailored finance for exports and investment projects in Germany and abroad. KfW IPEX-Bank boasts broad-based sector and market expertise, covering a whole range of different areas from shipping and aviation, rail and road transport to ports, airports, real estate and the construction industry, including public-private partnerships (PPP). KfW IPEX-Bank also provides financing to the basic industries, manufacturing, retail and health sectors, and is active in the energy, environmental, telecommunications and media industries. As a specialist, the bank has been working closely with renowned German and European companies from these sectors for decades. In the reporting year, the business sectors of shipping, rail and road transport, manufacturing and basic industries as well as energy made particularly sizeable contributions to the overall financing volume. New commitments by business sector EUR in billions Shipping Rail and Road Manufacturing Industries, Retail, Health Power, Renewables and Water Basic Industries Aviation Telecommunications, Media Financial institutions, Trade & Commodity Finance Ports, Airports, Real Estate, Construction Industry/PPP 0 LBO Leveraged Finance, Mezzanine, Equity Total EUR 17.6 billion

92 90 KfW IPEX-Bank's core business activities lie in the provision of medium- and long-term loans. The bank has now also expanded its product range by adding short-term trade finance. A new department was set up to deal with this business, providing financing for trade transactions in developing and emerging mar- kets in a range of sectors worldwide, as well as for projects pursued by corporate customers from the export and import sectors. The bank's leasing product profile was also optimised. In July 2008, KfW IPEX- Bank and HSH Nordbank formed the Railpool GmbH leasing company as an asset manager for railcars. NEW BUSINESS BY REGION KfW IPEX-Bank takes care to ensure the balanced distribution of its portfolio in regional terms. It follows its customers in their respective markets, which, as experience has shown, tends to result in around one third of the business being attributable to Germany, the rest of Europe, and countries outside of Europe, respectively. New business by region Region Share in % Germany 32 Europe (excl. Germany) 42 Other regions 26 Total 100 OVERVIEW OF THE YEAR In 2008, domestic business accounted for EUR 4.2 billion of new commitments. The bank's German business focused on financing for German shipping companies. Finance for the manufacturing industries and retail also accounted for a high proportion of the bank's domestic business. Financing transactions in Europe accounted for new commitments of EUR 7.2 billion. Financing in the rail and road transport sector, in the basic industries and in the shipping and energy sectors made a particular contribution to this new business volume. As far as the new commitments totalling EUR 6.1 billion destined for regions outside of Europe are concerned, the focus was on both transport financing and energy projects.

93 KFW IPEX-BANK 91 FINANCIAL SERVICES WITH A LOCAL PRESENCE It is vital for any international project and expert financier to be represented in its customers' local target markets. As a result, over the past few years the bank has established a network of foreign representative offices in key sales markets for German and European industry in order to support new customer acquisition and to assist existing customers. In 2008, the representative office in London was converted into a branch office. From this branch offi ce, KfW IPEX-Bank runs its lending business, helping primarily German customers to position themselves on major sales markets. London is also Europe's leading financial centre for syndication business. The network of representative offices was also expanded to include an office in Johannesburg, and another is currently being set up in Abu Dhabi. KfW IPEX-Bank abroad As at 31 December 2008 London Moscow New York Istanbul Abu Dhabi* Bangkok Mumbai São Paulo Johannesburg Branch office Representative office (* under development) KfW representative offices to be successively transferred to KfW IPEX-Bank

94 92 THE BANK'S BALANCED LOAN PORTFOLIO From the perspective of risk, KfW IPEX-Bank's loan portfolio is still well diversified. It derives its quality from a combination of solid corporate credit ratings, valuable collateral and state guarantees for export financing, as well as for the financing of direct investments made by German companies abroad. Nevertheless, KfW IPEX-Bank attaches a great deal of importance to the active management of its loan portfolio so that it can minimise the inevitable impact of losses. RESPONSIBILITY FOR ENVIRONMENTALLY AND SOCIALLY SOUND LENDING KfW IPEX-Bank continues to take responsibility for environmentally and socially sound lending. On 1 March 2008 the bank adopted the "Equator Principles". However, it made a commitment to its own demanding environmental and social guidelines, which set out clear rules for the bank's operating business, in as early as These have been revised on seve ral occasions to reflect the latest developments in the international debate on corporate social responsibility. " SINCE 1 MARCH 2008 KFW IPEX BANK HAS BEEN FOLLOWING THE EQUATOR PRINCIPLES". THE ABCS OF ENVIRONMENTAL PROTECTION All loan applications are assigned to one of three environmental and social categories: category A and B projects entail, by definition, a considerable environmental and social impact which is irreversible in some cases, and in others, can be controlled with the right technical measures. These projects include, by way of example, raw materials projects, thermal power plants and some transport infrastructure projects. All projects that are not to be implemented in an EU country, or in another OECD country with established environmental legislation and practice and a stable social order are subject to an in-depth assessment by KfW IPEX-Bank. In all of the cases subject to such in-depth vetting, KfW IPEX-Bank made sure that any financing commitment went hand-in-hand with an obligation to adhere to internationally accepted environmental and social standards. In 2008, 16 KfW IPEX-Bank projects were allocated to category A, and a further 14 to category B. Category C covers projects involving aircraft, ships, telecommunications facilities and standard products of the investment goods industries, which meet gene rally accepted standards and do not require a separate assessment.

95 KFW IPEX-BANK 93 COMMITTED TO THE ENVIRONMENT Out of the total commitments made in the reporting year, projects accounting for around EUR 2.6 billion can be classified as making a contribution to sustainable development. The main focus of these financing operations was on investments in rail projects. These were financed with loans totalling more than EUR 1.9 billion. More than EUR 0.6 billion was made available for projects involving renewable energies. These included a solar farm in Spain and a wind farm in Taiwan. Furthermore, EUR 0.1 billion was made available to finance waste disposal projects. THE FIRST YEAR OF INDEPENDENCE A SUCCESSFUL 12 MONTHS KfW IPEX-Bank's business volume totalled EUR 63.7 billion as at 31 December 2008, up by 15 % on the opening balance sheet as at 1 January The bank's volume of lending (loans and advances including financial guarantees and irrevocable loan commitments) amounts to EUR 34.4 billion. A further EUR 25.3 billion is attributable to the trust activities handled on behalf of KfW. From an operating perspective, KfW IPEX-Bank can look back on an excellent result compared with the prior years. The bank's net interest and commission income, as reported in the individual financial statements, totals EUR million. Nevertheless, the bank has not escaped the global financial crisis unscathed. Valuation discounts had to be applied in the bank's liquidity portfolio, and risk provisions had to be set up as a result of the economic slowdown, which had a considerably negative impact on the individual financial statements of KfW IPEX-Bank. The bank's net income for the year after tax totals EUR 5.1 million. In addition to this net income for the year, KfW IPEX- Bank also made further contributions to the overall financial result of KfW Bankengruppe as part of its overall responsibility for project and export finance. These include the refinancing spread that KfW IPEX- Bank pays KfW, where it obtains refinancing in line with market conditions, as well as the interest income on KfW's fixed-income investments with KfW IPEX-Bank, and the interest and commission income on the transactions executed for KfW on a trust basis. Accounting for a total of EUR 222 million, the project and export finance business unit plays an effective role in supporting KfW's promotional capacity.

96 KFW IPEX-BANK 94 OPERATING SUCCESS From an operating perspective, KfW IPEX-Bank can look back on an excellent result. This, and other aspects, allowed the project and export finance business unit to make a key contribution to the overall financial result in 2008, and thus to KfW Bankengruppe's promotional capacity. KFW IPEX-BANK COMMITTED TO KFW BANKENGRUPPE'S LEGAL MANDATE The international crisis on the financial markets already hit the real economy hard in the course of This situation will persist in While those sectors of the economy that are key to KfW IPEX- Bank's business performance, such as commodities, energy, transport and industrial production, continued to show positive development in the reporting year, the bank expects an increasing number of customers to postpone planned investments, or abandon them altogether. This will mean less demand for financing, too. However, the bank also expects the amount of medium- and long-term financing available to remain limited due to the crisis in the financial markets. In as early as mid-2008, it started to become increasingly difficult to secure financing partners for larger projects. As part of KfW Bankengruppe, KfW IPEX- Bank, however, remains committed to KfW's legal mandate, which is to provide finance in the interest of the German and European economy, even under the current conditions. As a result, the bank will continue to actively offer project and export financing in the difficult environment that looks set to characterise On the basis of the overall situation described above and bearing in mind that all plans are subject to a certain degree of uncertainty the bank expects to see its volume of new business slide year-on-year to around EUR 8 10 billion in 2009.

97 KFW ENTWICKLUNGSBANK EFFECTIVELY ADVANCING DEVELOPMENT K F W E N T W I C K L U N G S B A N K 95 KFW ENTWICKLUNGSBANK KFW ENTWICKLUNGSBANK WORKS TO PROMOTE THE ESTABLISHMENT OF A SOCIAL AND ECONOMIC INFRA STRUCTURE IN DEVELOPING AND TRANSITION COUNTRIES WITH THE AIM OF EFFECTIVELY TARGETING POVERTY IN THESE PARTS OF THE WORLD. ITS EFFORTS ARE FOCUSED ON CLIMATE AND ENVIRONMENTAL PROTECTION, THE CREATION OF WELL-FUNCTIONING FINANCIAL SYSTEMS AND ON THE WATER SECTOR. WITH THE AIM OF SECU RING LONG-TERM IMPROVEMENTS IN THE LIVING CON DITIONS IN ITS PARTNER COUNTRIES, KFW ENTWICK LUNGSBANK IS ALSO INVOLVED IN REFORM PROCESSES THAT ARE CRE ATING THE BASIC PARAMETERS NEEDED TO PROMOTE DEVELOPMENT. TO SUPPLEMENT THE FUNDING PROVIDED BY THE GERMAN GOVERNMENT, KFW PRO VIDES FUNDS OF ITS OWN ON A SIGNIFICANT SCALE, THEREBY HELPING THE GOVERNMENT TO MEET ITS DEVELOPMENT POLICY TARGETS. KFW ENTWICKLUNGSBANK

98 96 THREADS OF HOPE Acts of violence frequently follow the same pattern. A history of power-crazed elites, corrupt officials and cruel militia leaders are the threads running through one of the most complex conflicts in Africa. The acts of civil war in the Democratic Republic of the Congo, too, were closely interwoven with attacks on the population at large. To offer this country, which has been ravaged by civil war, a sense of hope for the future and in order to support the peace process, the German Government set up a peace fund, worth up to EUR 50 million and financed via KfW Entwicklungsbank. The main beneficiaries of this fund are those women and girls who have been victims of sexual violence. The Congolese aid organisation Heal Africa is operating on the ground even in rebel areas and

99 K F W E N T W I C K L U N G S B A N K 97 working under the most difficult conditions imaginable. However, it is also achieving great success. Since the project was launched in 2005, it has been able to look after and help more than 10,000 women in Maniema and North Kivu. One such woman is Zawadis, who, at the age of 14, was kidnapped by soldiers during the war and held as a sex slave for two years. During this time Zawadis also brought a child of rape into the world. Luckily, she was able to escape. Her story is a source of hope, as with the help of international aid programmes, she has found her way back to a humane existence. She is currently learning the trade of seamstress.

100 98 WATER A PRECIOUS RESOURCE BU HEADLINE Aquis The West ad er Bank sed city er at.ugiat. of Nablus, Lendre with its eumsan approximately augi. Amconsenim 200,000 inhabitants, quat. Wisi. is Diam, one of velit the lute largest dunt conurbations nostrud mod in magnis the Palestinian am henis autonomous alis euipsusto area. Underemployment, zzrit long-term ut nulpute isolation te del and ullaorper the Israeli-Palestinian iurem inim in el conflict, exerci tie but eugiat also internal luptat. political Ut vel eraestinisit instability, volenis have brought nit wis the am economy diam. Aquis to its ad knees. er sed Nablus er at.ugiat. is the doloreet, quatem Lendre perfect eumsan example augi. of how Amconsenim fragile the quat. region's Wisi. social Diam, and velit political lute dunt foundations nostrud mod still magnis are. And am yet, in sometimes, henis alis euipsusto things happen doloreet, that quatem make the zzrit prospect ut nulpute of better te del ullaorper times ahead iurem a bit inim more in likely. exerci Take tie the eugiat district luptat. of Rafidia, Ut vel eraestinisit where 8,000 volenis people nit have wis am benefited diam. Aquis to date ad from er sed the er first at.ugiat. phase Lendre of a KfW eumsan Entwicklungsbank augi. Amconsenim programme Wisi. to Diam, reduce velit water lute loss. dunt Despite the difficult basic conditions (including the Intifada) the programme was implemented within a relatively short quat. period

101 K F W E N T W I C K L U N G S B A N K 99 BU HEADLINE Aquis of time. ad The er sed plan er is at.ugiat. to reach a Lendre further eumsan 180,000 augi. people Amconsenim in the other quat. districts Wisi. of Diam, the velit city during lute dunt a second nostrud project mod phase. magnis Extreme am in henis drought alis and euipsusto the conflict doloreet, over quatem water rights zzrit ut Israel nulpute uses te a large del ullaorper proportion iurem of the inim joint water el exerci resources tie eugiat have luptat. led to Ut major vel eraestinisit water shortages volenis on nit the wis Palestinian am diam. side. Aquis Problems ad er sed are er also at.ugiat. caused Lendre by the outdated eumsan augi. water Amconsenim pipes, with a quat. third Wisi. of the Diam, water velit simply lute leaking dunt nostrud out of mod the system magnis and am going henis to waste. alis euipsusto The result doloreet, is that quatem many districts zzrit ut of nulpute Nablus te have del ullaorper access to iurem drinking inim water in el from exerci the tie pipeline eugiat luptat. network Ut only vel eraestinisit two days a volenis week. nit Thanks wis am to the diam. involvement Aquis ad er of sed KfW, er at.ugiat. the scarce Lendre water eumsan resources augi. are Amconsenim now being quat. protected Wisi. more Diam, effectively velit lute dunt leaks are being traced and pipes repaired. The local people are delighted about the initial success. The more reliable supply of water has eliminated the problem of water becoming contaminated after being stored in roof tanks.

102 100 KFW ENTWICKLUNGSBANK IN 2008 TACKLING POVERTY, PROTECTING THE CLIMATE, SECURING PEACE AND SHAPING GLOBAL ISATION SO THAT PEOPLE IN POORER REGIONS OF THE WORLD IN PARTICULAR CAN BENEFIT. KFW ENTWICKLUNGSBANK ADVISES ON AND ACCOMPANIES DEVELOPMENT PROJECTS ACROSS THE WORLD. LENDING FRESH IMPETUS TO CLIMATE PROTECTION Together with the Federal Government, KfW Entwicklungsbank further intensified its climate protection activities in It was, for example, involved in the "Initiative for Climate and Environmental Protection" (German abbreviation: IKLU) in cooperation with the German Federal Ministry for Economic Cooperation and Development (German abbreviation: BMZ). This initiative helps developing countries to fund the huge investment required in this area by providing lowinterest loans. In addition to renewable energy and energy efficiency, the areas covered by the IKLU include industrial pollution control, energy-saving mobility and the ecological design of conurbations. KfW has already committed to sixteen projects, providing loans of EUR 650 million with federal funding in the amount of EUR 100 million. The IKLU is supplemented by the "International Climate Initiative" (German abbreviation: IKI) launched by the German Federal Ministry for the Environment and funded by revenues from emission certificates. KfW allocated about EUR 60 million of this money to the reduction of CO 2 emissions and adjustments to climate change in 2008, providing additional funds of its own to bring the total to EUR 350 million. A HALF CENTURY OF GERMAN DEVELOPMENT COOPERATION WITH INDIA The year 2008 marked a particular milestone in the partnership between India and Germany. For fifty years now, German Development Cooperation efforts have been supporting the subcontinent in its fight against poverty. More than EUR 7.5 billion primarily in the form of Federal Government funding but also including some EUR 1.2 billion from KfW has been made available. The successes achieved are impressive. India is now a dynamic country for doing business with robust levels of growth. KfW has always adapted its work on behalf of the BMZ to India's particular needs. Initially, the focus was on supporting industrialisation by facilitating the transfer of technology, strengthening the financial sector and promoting small- and medium-sized enterprises. The focus later shifted to infrastructure and such issues as the supply of water to rural areas and health programmes for the poorer population groups. Today, German Financial Cooperation with India is increasingly dominated by the themes of environmental and climate protection. Nevertheless, the aim of combating what remain very high poverty levels even today will never be relegated to the sidelines.

103 KFW ENTWICKLUNGSBANK 101 MORE SMALL LOANS FOR CRAFTSMEN AND BUSINESS PEOPLE IN AFGHANISTAN The situation in Afghanistan, seven years after the fall of the Taliban regime, remains difficult but not without hope. The country is still too weak to help itself. This is why KfW Entwicklungsbank, working on behalf of the Federal Government, has been involved in the Hindu Kush region since With commitments totalling EUR 294 million, KfW has also helped to rebuild and stabilise a financial sector that had been completely shattered. The opening in 2004 of First Micro Finance Bank in Kabul, the first such Afghan institution, sparked a wave of investment across the country from which craftsmen and traders alike have benefited. For many people, loans of between USD 200 and USD 2,000 are often the first important step towards a new livelihood. In light of the huge success 80,000 micro loans have been awarded since then KfW further intensified its activities in the microlending sector in Funding was increased from EUR 4 mil lion to the current level of EUR 10.4 million, giving even more Afghans the chance to embark on a new life and break free from the vicious circle that is poverty and violence. POOLING RESOURCES IN THE FIGHT AGAINST HIV In many developing countries the rapid spread of HIV/AIDS is a threat to the development success notched up in practically every area. The worldwide epidemic can only be halted through joint actions. With this in mind, in December 2008 KfW Entwicklungsbank and UNAIDS signed a framework agreement on the more efficient pooling of their resources in the fight against the spread of HIV. This agreement strengthens the existing cooperation on HIV prevention between UNAIDS and KfW, and extends the reach of the joint efforts from Central America and the Caribbean to Central and Western Africa. In the context of existing cooperation, more than 20 million condoms were distributed or sold in 2006 alone. Public information campaigns in the form of social marketing programmes reached approximately 750,000 people. This more intensive cooperation is being implemented at a time when despite positive results in the global fight against HIV/AIDS the epidemic is still not under control in any part of the world.

104 102 AN OVERVIEW OF KFW'S PARTNERS KFW ENTWICKLUNGSBANK WORKS ON BEHALF OF THE FEDERAL GOVERNMENT TO REALISE GERMANY'S DEVELOPMENT COOPERATION AIMS. IN 2008 KFW HANDLED APPROXIMATELY 1,700 PROJECTS IN MORE THAN 100 COUNTRIES. Tackling poverty, protecting the climate, securing peace and shaping globalisation so that even people in poorer regions of the world can benefit these are the overriding aims of Financial Cooperation. KfW gears its work to the needs of the partner countries, firmly rooting its commitment in their development strategies. It finances, advises on and supports development projects across the globe. Working toge ther with other states and international organisations, as well as with the institutions on the ground, KfW Entwicklungsbank helps to realise long-term improvements in people's basis of life. Over time, KfW has acquired particular expertise in three areas, namely climate and environmental protection, water supply and sanitation, and financial systems conducive to growth. By supplementing federal money with its own funds, which it raises in the capital mar ket, KfW helps the Federal Government to achieve its targets with regard to raising its Official Development Assistance (ODA) quota. THE FULL SCOPE OF SUPPORT By increasing financial support, the record result of the previous year was exceeded in The developing countries have not been left untouched by the financial crisis. They, too, are suffering from the volatility in the financial markets and the subdued growth prospects albeit to differing degrees from one region to another. Whilst some parts of Africa have been less affected by the global crisis to date due to their lower level of integration into the world economy, the emerging countries and parts of Eastern Europe have been hit a great deal harder. They will not, for the time being, be able to build on the robust economic development recorded over recent years. One reason for this lies in the lack of access to long-term capital to finance development measures. As a result, these countries are more dependent than ever on reliable support. In 2008 KfW Entwicklungsbank did everything it could to further expand its financial support for the benefit of its partner countries. With new development projects in Asia, Europe and the Caucasus, Africa, the Middle East and Latin America, it was even able to improve on the record result posted during the previous year. Investments focused on climate and environmental protection, the water sector and the development and expansion of the financial sector. However, other areas, too, such as the fight against HIV/AIDS, education and municipal development, al so represented high priorities.

105 KFW ENTWICKLUNGSBANK 103 NEW COMMITMENTS REACH ALL TIME HIGH 3.7 With new commitments of around EUR 3.7 billion, the financial support provided by KfW Entwicklungsbank has reached its highest level in the history of Financial Cooperation. KFW ENTWICKLUNGSBANK SERVICES PROVIDED Germany's development bank is firmly rooted in KfW and practical help throughout the entire life cycle of Bankengruppe. From its base in Frankfurt and operating out of its 60 foreign offices, the bank cooperates in the process of eliminating any structural barriers each individual project, and is naturally also involved with developing countries around the world. The to progress, in other words creating the necessary Federal Ministry for Economic Cooperation and Development (BMZ) provides most of the necessary itical, legal and organisational framework that is basic parameters in terms of the developmental, pol- means for this. However, the issue of Financial Cooperation is also becoming an ever more important cepts, KfW Entwicklungsbank closely coordinates needed. An integral part of the BMZ's strategic con- its " OUR SUCCESS IS MEASURED IN TERMS OF WHAT OUR EFFORTS HAVE ACHIEVED FOR THE PEOPLE CONCERNED OVER THE LONG TERM". work with the activities of other development organisations, both German and international. In this way, the bank ensures that the money being spent is being used issue among other ministries. These include the Federal Ministry for the Environment, as a tool for cli- needs. Success is measured in terms of what Devel- properly and effectively in line with the recipients' mate protection, or the Federal Foreign Office, in the opment Cooperation has achieved for the people context of peacebuilding and crisis prevention. concerned over the long term. The bank advises the Federal Government in all specialist areas of development policy, supporting the responsible partners on the ground as they realise their development projects. One of the key guiding principles of the bank's work lies in promoting the indivi dual responsibility and capacities of the partners con cerned. At the same time, the bank assumes co-responsibility for the success of the development mea sures. It is therefore on hand to provide advice KfW Entwicklungsbank supplements the money provided by the Federal Government for Financial Cooperation with its own funds on a significant scale. These funds are raised in the capital market. This means that the bank benefits from a substantial lever age effect, with which it can support the Federal Government to a very considerable extent in the implementation of its development policy targets.

106 104 KfW funds totalled EUR 2.1 billion in 2008 and, at 58 %, once again accounted for more than half of total funding. The bank funds the Financial Cooperation projects with a tailored combination of grants, low-interest, long-term loans and loans offered at conditions close to those available in the capital market as well as equity investments. The conditions of the funding depend on the character of the project, the economic situation of the partner country in question, the state of development, the country's ability to participate in foreign trade and the level of government debt. More able partner countries that, due to their development progress, are no longer reliant on grants, have access to a broad range of low-interest financing alternatives. In addition to standard FC loans this also includes promotional and development loans at conditions close to market. The use of KfW funding in these countries provides the Federal Government with the necessary freedom to allocate scarce and non-repayable grants to particularly poor countries, for instance in Africa, to an even greater extent. Commitments by KfW Entwicklungsbank in EUR in millions EUR in millions EUR in millions EUR in millions EUR in millions KfW Entwicklungsbank FC grants 1) FC standard loans FC development loans 1, Budget funds KfW funds FC promotional loans 1,314 1, Delegated funds Total FC 3,681 3,002 2,445 1,881 1,934 Memo item: Interest grants Differences in the totals are due to rounding. 1) Differences compared with previous years due to interest grant adjustments

107 KFW ENTWICKLUNGSBANK 105 FINANCING AT RECORD LEVEL Financing commitments by KfW Entwicklungsbank in 2008 greatly exceeded the record level achieved in As well as being the result of an increase in budget funds, this rise is attributable to the increased deployment of KfW funds, which is reflected in another clear rise in development and promotional loans. KFW ENTWICKLUNGSBANK REGIONS OF SUPPORT After the region of Asia/Oceania, the largest share of federal funding was once again allocated to the region of Sub-Saharan Africa, ahead of North Africa/the Middle East. Measured in terms of total commitments, the region of Europe/Caucasus was for the first time the largest recipient but received only a small proportion of federal funding. This highlights the major leverage effect of using KfW funds. The additional KfW funds enable the Federal Government to focus its scarce grant funds to an even greater extent on the countries that need them the most. PRIORITY DEVELOPMENT SECTORS During 2008 KfW Entwicklungsbank expanded its involvement in the financial sector in particular, with the areas of economic and social infrastructure being the next most significant. Investments in economic infrastructure predominantly related to the ener gy and transport sector, and were highly relevant to climate protection. In terms of social infrastructure, the focus was on the water sector, followed by projects devoted to health, family planning, the development of a state and a civil society, and education. The projects supported in 2008 also made a key contribution to achieving the important core aims of German Development Cooperation. Over half of the projects and programmes helped, directly or indirectly, to tackle poverty and to promote gender equality. Over one third of the projects benefited environmental protection and the conservation of natural resources.

108 106 COMMITMENTS BY KFW ENTWICKLUNGSBANK DISBURSEMENTS BY KFW ENTWICKLUNGSBANK Financing commitments by KfW Entwicklungsbank totalled approximately EUR 3.7 billion in 2008 (2007: EUR 3.0 billion). Federal budget funds accounted for EUR 1.4 billion (2007: EUR 1.2 billion). KfW Entwicklungsbank funds totalling EUR 2.1 billion (2007: EUR 1.7 billion) were deployed over the course of the year. In the reporting year KfW Entwicklungsbank disbursed EUR 2.8 billion for projects and programmes in developing and transition countries. This represented a yearon-year increase of 38 % (2007: EUR 2.0 billion). Of this sum, EUR 1.4 billion was financed from federal budget funds (2007: EUR 1.1 billion). Commitments by region in 2008 Budget funds Total commitments EUR in millions in % EUR in millions in % Asia and Oceania , Sub-Saharan Africa North Africa and Middle East Europe and Caucasus , Latin America Total 1, , Differences in the totals are due to rounding. Commitments by priority sector in 2007/ EUR in millions in % EUR in millions in % Financial sector 1, Social infrastructure Economic infrastructure Production sector Other Total 3, , Differences in the totals are due to rounding.

109 KFW ENTWICKLUNGSBANK 107 DEBT RESTRUCTURING AND CANCELLATION Under certain conditions, the Federal Government grants highly indebted partner countries relief on the repayment of Development Cooperation loans. This is generally done in the form of debt restructuring or cancellation. The foundation for this is provided by an arrangement with the international donor community in the Paris Club, for instance within the framework of the "Heavily Indebted Poor Countries Initiative" (HIPC). This initiative receives assistance from the International Monetary Fund. KfW participates in the negotiations on the German side. The developing countries are exempted from repayment if the money saved in this way has been used to tackle poverty, for environmental protection, for education, or in the fight against HIV/AIDS, and provided that the corresponding projects have actually been implemented. In 2008, KfW, on behalf of the Federal Government, signed debt restructuring and cancellation agreements with Cameroon and Liberia worth a total of EUR 543 million. During the same period, KfW Entwicklungsbank agreed on debt conversions worth EUR 111 million with Egypt, Ecuador, Kenya, Monte negro and Pakistan. Additionally, Germany was able, also on the basis of various agreements from earlier years, to cancel debt of around EUR 70 million after these countries had implemented the corresponding projects. IMPROVED COOPERATION FOR GREATER IMPACT The year 2008 marked an important milestone for the donor community and the developing and emerging countries alike, with a status update on the over arching aims of the development policy agenda. The effectiveness of development cooperation and the way in which this is financed, both of which are key prerequisites for the achievement of the UN millennium goals, were under scrutiny. The Accra Agenda for Action adopted in September 2008 by more than 100 donor country and partner country representatives fleshed out the details of the 2005 Paris Declaration for greater effectiveness of development cooperation, acknowledging the fact that, although tangible progress has been made, there are still many areas in which joint efforts are required. Above all, perhaps, these include the assumption of more responsibility by the partners and a more efficient division of labour among the donors. This involves alignment based on the strategies of the partner countries, their structures and processes, and a focus on impact and transparency. As far as KfW Entwicklungsbank is concerned, most of these requirements have already been implemented in dayto-day activities. So that these activities can be better coordinated with other donors, KfW Entwicklungs bank is further developing its concepts, instruments and processes. These include, for example, sector-wide approaches but also basket or budget financing. With an organisation structure extending to 60 different locations, the bank guarantees intensive dia logue with its partners and other donors. Having been certified by the European Commission in 2008, KfW Entwicklungsbank can now also increasingly take on development projects by means of delegated cooperation arrangements. A division of labour akin to this has already been established practice for many years among bilateral donors such as France, the Netherlands, the UK and Austria.

110 108 " INNOVATIVE METHODS OF DEVELOPMENT FINANCING MORE IN DEMAND THAN EVER" Considerable efforts are still required to achieve the millennium goals, since sufficient means and inno vative financing instruments for development finan cing must be made available. This was reaffirmed by donors and partner countries in early December 2008 under the auspices of the United Nations in Doha at the Monterrey follow-up conference. In light of global problems such as climate change, volatile energy and food prices, and the financial market crisis, the challenges have not diminished. The Doha consensus therefore requires that the global community adhere to its international development financing commitments. KfW Entwicklungsbank feels that these results confirm that its actions are the KfW supports the right ones. By deploying its own funds, the bank is Federal Government, supporting the Federal Government and helping it helping it to provide to provide more funding for developing countries funding to the without overstretching the federal budget. At the developing countries. same time, it is using its expert knowledge to embark on innovative methods of financing. The Initiative for Climate and Environmental Protection (IKLU) laun ched on behalf of the Federal Government in 2008 and the International Climate Initiative (IKI), in the context of which revenues from emissions trading are being used for development cooperation for the first time, are pioneering examples that set an international benchmark.

111 K F W E N T W I C K L U N G S B A N K 109 Commitments by country in 2008 Ranked by BMZ budget funds Rank Country BMZ budget funds KfW funds Other budget funds / funds of other donors EUR in millions EUR in millions EUR in millions EUR in millions 1 Afghanistan ) Palestinian Territories Pakistan PR of China Kenya India Yemen ) DR Congo ) Syria Egypt Tajikistan Georgia ) Mozambique Bangladesh Uganda ) Ghana Bolivia Guinea Peru ) Morocco Tanzania Brazil ) Jordan Vietnam ) Turkey ) Lebanon Liberia Senegal Cambodia Mongolia Namibia Serbia Republic of Kosovo Ethiopia Nepal Benin Total

112 K F W E N T W I C K L U N G S B A N K 110 (cont.) Rank Country BMZ budget funds KfW funds Other budget funds / funds of other donors Total EUR in millions EUR in millions EUR in millions EUR in millions 37 Niger Chile Albania ) Bosnia and Herzegovina Madagascar Sierra Leone Azerbaijan Burkina Faso Paraguay Armenia Laos Croatia Zambia Kazakhstan South Africa Uzbekistan Cameroon Moldova Ukraine Tunisia ) Montenegro Mexico Philippines El Salvador Ecuador Nicaragua Costa Rica Panama Papua New Guinea ) Belarus ) 2.51 Supra-national ), 2) Other ) Total 1, ) 2, , Memo item: interest grants EUR 90 million (BMU: EUR 46 million, BMZ: EUR 44 million ) Differences in the totals are due to rounding. 1) Funds of the Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (German abbreviation: BMU) 2) Funds of other donors (incl. other budget funds) 3) Deviations from total budget funds, as only BMZ funds

113 D E G 111 DEG OUR BUSINESS IS DEVELOPMENT DEG DEG (DEUTSCHE INVESTITIONS- UND ENTWICKLUNGSGESELL SCHAFT MBH), A COMPANY OF KFW BANKENGRUPPE, IS A FI NANCE INSTITUTION COMMITTED TO PROMOTING THE PRIVATE SECTOR IN DEVELOPING AND EMERGING COUNTRIES. IT OFFERS PRIVATE COMPANIES AND BANKS LONG-TERM INVESTMENT FI NANCE AT CONDITIONS CLOSE TO MARKET. PROJECTS THAT ARE CO-FINANCED BY DEG MUST BE VIABLE IN TERMS OF DE- VEL OP MENT POLICY AND COMMERCIALLY SOUND, AND MUST ALSO BE BOTH ENVIRONMENTALLY AND SOCIALLY ACCEP TABLE. IN THIS WAY DEG HELPS TO STRENGTHEN A SOCIALLY ORIENTED MAR KET ECONOMY IN THE PARTNER COUNTRIES. THE PROJECTS ARE DISTRIBUTED ACROSS ALL ECONOMIC SECTORS THAT ARE OPEN TO PRIVATE ENTERPRISE. IN DIALOGUE WITH ITS CLIENTS, DEG DESIGNS SOLUTIONS THAT ARE TAI LO RED SPECIFICALLY TO EACH INDIVIDUAL PROJECT, THE CURRENT MARKET SITUATION AND THE RISK SITUATION IN THE RESPECTIVE COUNTRY. DEG

114 112 A COMPANY GETS THINGS MOVING You need good connections to set something in motion. Millicom Ghana Ltd ought therefore to be one of the most talked about companies in Ghana. With its Tigo brand this mobile telecommunications provider has become one of the most sought-after companies in the country. To make sure its customers continue to get a good deal, the company is investing in infrastructure. This is not just a case of plugging gaps in reception, however. Rather, the company is systematically expanding the fibre optic network so that even more people can gain access to the Internet. DEG has assumed a share of USD 27.5 million of the financing and is also coordinating the contributions from the other development financiers. This commitment is strengthening the further development

115 D E G 113 of the telecoms sector, which currently accounts for around 6 % of Ghana's economic output. The parent company Millicom International Cellular SA has already made a name for itself in developing countries across the world. Poorer population groups in particular make use of the prepaid mobile service. In addition to being a major taxpayer, Millicom is also increasing its clout as an employer. A further 500 people are due to be hired as a result of the planned investments, working under Millicom managers Patricia Obo-Nai, Diego Gutierrez and Sarah Hakeem. Many Ghanaians are also finding work selling prepaid cards, enabling them to make a living for themselves.

116 114 PLANTS AGAINST POVERTY Only a few companies can reap such rich harvests as a result of their efforts on the ground. This is the case in many respects for the company Danper. A Danish/Peruvian joint venture, Danper grows asparagus and artichokes for export in the Andes in Peru, taking advantage of the perfect climate there. The produce is sold to the world's leading supermarket chains. It is the poor rural population that benefits to a particular extent. More than 800 unskilled workers, among them Juan Manuel Alfaro Tapia, who harvests the crops, have found a way of earning a sustained income for themselves and their families. The company, managed by Arne Hensel Berg, the Dane who founded the company, and his two Peruvian partners Jorge Arangurí and Rosario Bazán, pays

117 D E G 115 above-average wages, supports the drinking water supply to neighbouring villages, and has renovated the village school and improved the quality of waste disposal services. Danper is also certified in accordance with internationally recognised hygiene, environmental and social standards. Not least for this reason, DEG supplies the project with liquid funds in its capacity as one of the largest European providers of development finance. DEG also casts the odd glance across the border, since it has been operating for around 20 years elsewhere in the Andes, too in Bolivia, Ecuador and Columbia. A DEG office was opened in Lima in 2007 to ensure that the company has a permanent presence for its customers and partners in the region.