Development policy investments
Since 2016, part of Finland’s development cooperation has been provided in the form of development policy investments. They are used to support, for instance, developing countries’ own private sector activities. Development policy investments differ from grant-based support in that in the former the invested capital will return to the investor.
The Government of Finland decided to introduce development policy investments to complement grant-based development aid in 2016. They can be in the form of investments or loans.
Development policy investments aim to achieve development impacts in the partner countries. At the same time, however, the funds must yield revenue and the invested capital must be returnable, that is, it is expected to eventually reflow back to Finland. This is important to enable the inclusion of development policy investments in the Budget as deficit neutral. It is one of the conditions for this form of appropriation.
The channelling of investments to specific ends is guided by four priorities, each of which plays an important role in all of Finland’s development cooperation. Additionally, the investments must meet the official development assistance (ODA) criteria of the OECD/Development Assistance Committee (DAC).
Development policy investments aim, among other things, at increasing opportunities to start business activities in developing countries. Investments are primarily made in the poorest countries. This makes investment activities challenging, because the operational environment is often difficult and markets are underdeveloped.
One objective is to bring about financial leverage, that is, to stimulate the flow of also other public or private money to the same target of investments.
Even though development policy investments are partly governed by the same principles as grant-based development aid is, there are differences. These arise from the yield and reflow expectations.
The preparation of development policy investments is a slow process. The Ministry for Foreign Affairs conducts thorough consultations with the parties representing the target of investment in order to make sure that the required criteria are met. At the same time, the Ministry for Foreign Affairs works in close cooperation with the Ministry of Finance and Statistics Finland.
The value of development policy investments in 2016 totalled EUR 140 million. They were channelled via two different routes.
The majority of the funds were channelled to Finnfund in the form of a long-term loan. Finnfund is Finland’s national development finance institution (DFI), of which the majority is owned by the State of Finland. It offers long-term risk finance and investment loans to companies for their projects in developing countries and in Russia. Finnfund must repay its loan within 40 years.
Part of the development finance funds in 2016 were channelled in the form of general capital increase to the Inter-American Investment Corporation (IIC), administered by the Inter-American Development Bank (IDB). The IIC’s mission is to support the private sector and state-owned enterprises through financing in the form of loans, equity investments and guarantees. It aims to promote economic development by supporting the private sector in the region.
In 2017, development policy investments will be channelled to climate finance and to the strengthening of small and middle-sized businesses. The appropriation is EUR 130 million. A total of EUR 114 million of it is channeled into a new Finland–IFC Climate Change Program.
The charting of investments for 2018–2019 is under way.