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, which means that it is expected to eventually reflow back to Finland. This is important because in the Budget development policy investments are estimated to be deficit neutral (to pay for themselves over the budget period). It is one of the conditions for this form of appropriation.
The channelling of investments to specific ends is guided by four priorities, each playing 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 boost business activities
Development policy investments aim, among other things, at increasing opportunities for setting up new business activities in developing countries. Investments are primarily made in the poorest countries, which 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.
Development policy investments in 2016–2019
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 long-term loans. Finnfund is a state majority-owned development finance institution. 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.
In 2016, part of the development finance funds 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 were channelled to climate finance and to the strengthening of small and middle-sized businesses. The appropriation was EUR 130 million, and EUR 114 million of it was channelled into a new Finland–IFC Climate Change Program. In addition, EUR 16 million was allocated to FCA Investments (FCAI), which is a subsidiary of Finn Church Aid (FCA), for its activities aiming to strengthen small businesses in developing countries.
Of the appropriation for 2018, EUR 50 million was granted as a loan to the International Fund for Agricultural Development (IFAD). Furthermore, Finnfund, climate action, and projects promoting the position of women received a sum from the 2018 appropriation and the appropriation for 2019 (which totalled EUR 210 million in all).