Finnfund’s loan of EUR 210 million directly supports priority areas of Finland's development policy

Ministry for Foreign Affairs 8.10.2019 10.00
News item

The Finnish State will grant a loan of EUR 210 million to Finnfund. Finnfund is Finland’s national development finance institution whose responsibility is to promote economic and social development in developing countries by funding viable and responsible companies operating in them.

In Ethiopia, Bahir Dar's oldest school has an own space for girls. There girls have access to information and supplies during menstruation, and a possibility to rest. Photo: Joona Petterson / MFA

Half of the granted loan has been earmarked for targets that strengthen the financial independence of women in developing countries or provide important services for girls and women. The other half of the investments will be aimed at the mitigation of climate change and adaptation to the effects of climate change.

“Achieving the UN Sustainable Development Goals requires substantial private investments in climate action, equality work, and the creation of jobs with fair working conditions. In this work, too, Finland intends to play a bigger role than its size would suggest. I consider it important that we emphasise the position of women and climate action also when making investments,” says Minister for Development Cooperation and Foreign Trade Ville Skinnari.

 

The funding granted to Finnfund has increased considerably over the past few years. Max von Bonsdorff, Director of the Unit for Development Finance and Private Sector Cooperation at the Ministry for Foreign Affairs Department for Development Policy, why has there been a desire to increase funding to Finnfund? 

If we are to achieve the UN’s Sustainable Development Goals, significantly more capital and expertise from the private sector needs to be channelled to the implementation of the goals in the coming years.  National and international development financiers such as Finnfund are needed to finance the private sector in developing countries so that the sector can grow and develop, and create new and better jobs. The financing markets in many developing countries are weak and cannot on their own finance the growth needs of companies. What is needed is publicly funded, “patient” development financiers that can strengthen financing in the private sector in poor countries. Development financiers such as Finnfund also create new investment possibilities in the private sector.

The State has indeed significantly strengthened Finnfund’s operation over the past few years. Among other things, it granted a loan of EUR 130 million in 2016. Although Finnfund’s operation has grown, it is still a relatively small development financier on the European scale.

 

What has been achieved with the funding?

Finnfund’s activities create jobs and support the mitigation of climate change in developing countries through measures such as extensive investments in forests in Africa. One of Finnfund’s main objectives is to focus 75% of its investments on poor countries. It has reached this objective every year between 2016 and 2018. For example, in 2018 the proportion was 89%. More than one half of the investments (67%) were targeted at Africa in 2018. An independent evaluation of Finnfund’s operation was conducted in 2018. The results of the evaluation were good.

Finnfund’s investment in EthioChicken, a company in Ethiopia, is a concrete example of these results. EthioChicken’s goal is to improve food security and reduce malnutrition and poverty in Ethiopia. The company raises chickens, whose eggs and meat help families living in the countryside diversify their diet and earn an income. EthioChicken directly employs more than 700 people, of whom 40% are women. In addition, it works with approximately 1,800 breeders, who employ thousands of people. When the people who finally purchase the chickens are included, it can be estimated that the company had a positive impact on up to 1.3 million households, or on the life of approximately more than six million Ethiopians in 2016.

Finnfund’s operation is based on financing projects that have significant development impacts. However, at the same time it has also provided a route for Finnish companies to participate in the projects. For example, the remote learning technology of the Finnish company Claned Oy has been used in Finnfund’s recently published investment in the education and training sector in Africa.

 

Which results are you especially satisfied with? Where do you see the most need for development?

Over the past few years, Finnfund has developed its activities in various areas of its operation. The results of these investments are now beginning to show in a very concrete manner in poor development countries. For example, between 2016 and 2017, the companies financed by Finnfund employed a total of 80,852 people and Finnfund provided 845,400 loans for the development of agriculture. Seventy-eight per cent of these loans were granted to women. Furthermore, companies funded by Finnfund paid taxes and other tax-like payments to the amount of EUR 757 million.

Ex-post evaluation of its investments has been identified as a challenge for Finnfund and was also highlighted in the evaluation conducted on the company.  In recent years, Finnfund has invested heavily in anticipatory assessment of the impacts of its investments, but it needs to improve its ex-post evaluations. Finnfund is currently investing in this area and has drawn up socio-economic evaluations of some of its projects.

 

In your opinion, how well have the objectives set for Finnfund’s funding so far been achieved?

The Ministry for Foreign Affairs monitors Finnfund’s operation closely and sets objectives for the company’s development policy and governance on an annual basis in a memorandum on government ownership steering. These objectives emphasise investments in the poorest developing countries, investments in climate projects, financing of SMEs and the creation of jobs, with special attention to employing women. In the past few years, Finnfund has achieved all of the objectives set for it in development policy, which has been particularly encouraging. Recently, it has also considerably strengthened its policy steering in line with the goals of Finland’s development policy and outlined a new tax, equality and human rights policy. It is currently drawing up a sustainability policy.

An objective that Finnfund has not been able to fully achieve recently is return on equity. The company’s operation has been profitable over the past few years, but it has not quite reached the return target of two per cent. The company’s financial standing is good, however, and its operation is sustainable. Nevertheless, it is one of the objectives considered in government ownership steering.

 

What added value does Finnfund’s new loan provide?

The new loan is extremely important for Finnfund as it enables the company to continue development in line with the strategic objectives set for it. Without the loan, Finnfund would practically have to stop the preparation of new projects for the coming years, reconsider the objectives of its operating strategy and set them to a considerably lower level.

 

How are the priority areas of Finland’s development policy visible in the loan?

With this loan, Finnfund will directly respond to two important objectives set for development policy in the Government Programme. The loan will be used to finance investment targets that reinforce the economic independence of women in developing countries or provide services that are important to girls and women. The loan will also be used to finance investments targets that mitigate climate change or support adaptation to climate change. EUR 105 million will be invested in both themes.

 

How has the sustainability of the investments been guaranteed?

Finnfund prepares all of its investments carefully in compliance with international standards such as the principles of IFC (International Finance Corporation), a member of the World Bank Group, and the Principles of Responsible Financing of Sustainable Development of European development finance institutions. Over the past few years, Finnfund has also increased its evaluation resources. It is currently preparing a new sustainability policy which describes in detail the principles and operating practices the company undertakes to follow in its investment activities. The new sustainability policy is currently openly available for comments on Finnfund’s website. In addition, Finnfund organises stakeholder meetings with civil society actors.

 

There has been discussion about the transparency of Finnfund’ operation and tax responsibility over the past few years. Has the company reacted to this and how?

These themes have been highlighted in the government ownership steering of Finnfund and the company has started to tackle these challenges in a very positive way. Over the past few years, Finnfund has made significant progress in these areas and there has been considerable improvement in its cooperation with different stakeholders. Finnfund’s policies are now drawn up in a more open and participatory manner. The current process of drawing up the sustainability policy is a good example.

Tax responsibility is also an area in which Finnfund has invested significantly. One of the development policy objectives monitored by Finnfund is the amount of tax paid on its projects in developing countries.

In addition, Finnfund outlined a sustainable tax policy in line with government ownership steering in January 2018. In the policy, attention is also paid to aggressive tax planning. Furthermore, when investments are made in funds, the background and tax obligations of the management companies are investigated.

 

Finnfund’s loan is part of Finland’s development policy investments. What are development policy investments and what are they aimed at?

In principle, a development policy investment is another development cooperation appropriation alongside the “actual development cooperation” appropriation that has been budgeted. The major difference between financial investments and other development cooperation is that financial investments are subject to yield and reflow expectations. Financial investments also do not increase the government deficit in the national accounts.

Like all development cooperation, financial investments support the objectives and priority areas of development policy. Climate funding and Africa are special priority areas. In line with the Government Programme, the appropriation for financial investments is used to promote Finland’s climate policy objectives, to strengthen and supplement Finland’s international climate funding as a whole and to promote the objectives of Finland’s development policy in Africa.

The financial investment appropriation is especially well suited to funding targets and programmes aimed at strengthening the private sector in developing countries and at mobilising other private funding. The objective is therefore also to enhance private investments that promote equality and the creation of decent jobs in developing countries. At the same time, efforts are made to promote the participation of Finnish operators in the investments.