Independent assessment: development financier Finnfund’s work most impactful in agriculture and forestry sector
Development financier Finnfund has succeeded in investing more and more in the world’s poorest countries and most difficult sectors, while also maintaining its commercial viability. The most positive development impacts can be seen in the company’s investments in agriculture and forestry. This information comes from an independent assessment of the company’s activities.
The Ministry for Foreign Affairs has commissioned an independent assessment of the activities of development financier Finnfund. Underlying the commissioning of the assessment are a EUR 130 million loan granted to the company by the Finnish Government in 2016 and preliminary plans to grant a new government loan.
With its investment portfolio of around EUR 600 million, Finnfund is one of the smallest national development financiers in Europe – even after the government loan. Despite this, it is still subject to the same requirements as larger development financing companies: the company’s activities must be profitable, while also serving development policy objectives, such as overcoming electricity shortages or bringing better services, employment opportunities and infrastructure to developing countries.
“The investments that produce the most positive development effects are quite often also the most financially challenging due to their high risks. Finnfund appears to have been very successful in this balancing act – in other words, it has managed to invest more and more in the poorest countries and most difficult sectors while also maintaining its commercial viability,” says Stephen Spratt, who headed the international assessment team.
Spratt’s team recommends that Finnfund make improvements to its evaluation of development impacts over the entire lifecycle of investments. Finnfund currently has good conditions for evaluating development impacts before making its investments, but not for sufficient assessments during the investment period or afterwards.
“It is difficult to determine to what extent the creation of jobs and payment of taxes by the companies funded by Finnfund is due to Finnfund’s involvement. Finnfund may have had – and in many instances probably has had – a significant impact on this. More work should be done to demonstrate Finnfund’s contribution.”
Increased impact, compounded risks
According to the assessment, Finnfund’s involvement provides the greatest added value in the forestry sector, as the company has special expertise in the field and forestry is a sector where it is otherwise difficult to secure financing. Finnfund’s activities in the agriculture sector are also particularly valuable due to the relative poverty of the people benefiting from the business activities and of the countries they live in, such as Ethiopia and Tanzania.
However, both of these sectors are commercially demanding and have significant risks. When it comes to agriculture, many other development financiers have withdrawn from investing in the sector due to the long-term nature of the investments and the risks posed by weather conditions and the political situations in the target countries.
Finnfund’s strategy for 2018–2025 focuses on agriculture and forestry and renewable energy production, which are integral areas for mitigating and adapting to climate change, along with financial services. The main goal is to double the amount of financing and triple the development impacts.
“Achieving these objectives is possible, but the financial risks increase as the company concentrates more and more on the poorest countries and on sectors that do not produce rapid gains. It is clear that the company needs more public and private funding in order to implement its ambitious strategy, and the way that this is structured will be crucial in this regard”, Spratt argues.
Assessment of Finnfund
- In its report, German consultancy company Particip assessed Finnfund's investment activities starting from 2008 as well as its strategy for 2018–2025 in order to help inform corporate governance and decision-making at the Ministry for Foreign Affairs.
- During the evaluation period 2008-2018 Finnfund’s investments have undergone a major change in composition, e.g. Africa’s share rose from 29 % to the current 45 %. The share of Least Developed Countries (LDC –countries) rose from 13 % to 32 %. The figures for 2018 are from September and they include investments made and investment decisions that have not been disbursed yet.
- According to the assessment, Finnfund consistently complies with, and sometimes even exceeds, the corporate responsibility requirements of the IFC, the World Bank Group’s private sector branch.
- Taking into account the sectors and countries that are the target of Finnfund’s investments, the assessment finds that the investments are likely to have led to significant development impacts, such as improvements in the number and quality of employment opportunities and good relationships with communities.
- Although the results vary, Finnfund has also had a positive impact on the development of companies’ business activities and corporate responsibility.
- The portion of funding Finnfund receives from the state is smaller (around 40%) than that of similarly sized development financiers, because the company also takes loans from the markets for its investments and always reinvests its profits.
- The assessment draws attention to the fact that the sustainable development goals require massive private investments, which is why European countries have tripled the assets of their development financiers over 2010–2016.
Inquiries: Max von Bonsdorff, Director of Unit for Development Finance and Private Sector Cooperation, +358 295 351 720, +358 50 344 1014.
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