Evaluation: The focus of Finnfund’s investment activities successfully shifted to the poorest countries
An increasing share of the investment portfolio of the State’s development financing company Finnfund is now invested in the poorest countries and in high-risk projects that have significant development impacts, reveals a recent evaluation.
The evaluation of the development financing company Finnfund’s special risk financing, commissioned from the consulting and auditing company KPMG by the Ministry for Foreign Affairs, has been completed.
“The evaluation indicates that special risk financing has worked out as planned—that is, shifted the focus of the company’s investment portfolio to the poorest countries and to high-risk projects with significant development impacts that would otherwise find it difficult to get financing,” says Satu Santala, Director General at the Ministry for Foreign Affairs.
“In the post-financial crisis, low-interest rate world, the availability of short-term loans has improved even for developing countries. However, the bottleneck has been loan funding and equity funding that tolerate risks, are invested for a long term and promote sustainable development. Finnfund has been able to tackle this challenge,” Santala goes on to say.
In practice, special risk financing meant that potential credit or investment losses incurred by special risk financing investments could be partly covered with the loss guarantee granted by the State. The loss compensation commitment was valid for 2012–2015 and restricted to EUR 50 million. The guarantee covers 16 corporate projects, 14 of which have been launched without any losses so far.
Altogether, 81 per cent of investments are in LDC countries, 6 per cent in other lower income countries and 13 per cent in lower middle income countries. Ten investment projects are located in Africa, five in Asia and one has Latin America as its target area. Many of the investments are allocated to sustainable forestry and renewable energy projects.
“The share of investments in the least developed countries has been approximately 2.5 times higher than in 2008–2011, the four-year period preceding the special risk financing period. This is something to be proud of,” says Santala.
The guarantee was needed to enable the company to make investments that involved different risk levels but also exceptionally good development impacts. Factors affecting the risk level include, for instance, the destination country, the investment volume and the industry. Finnfund had carried out similar projects before special risk financing but now the company could increase their volume.
“For instance, without special risk financing, Finnfund could not have been involved in financing Africa’s largest wind power park at Lake Turkana in Kenya. It would have been too large a project in relation to the rest of Finnfund’s investment portfolio,” Santala notes.
Since the 2000s, Finnfund has shifted the focus of its investment activities to the poorest countries, a development that has been accelerated by special risk financing. Currently, LDC countries account for approximately a third (34%) and other low income countries for roughly a fifth (18%) of all investments. The shares are clearly larger than among, for instance, other European development financing companies on average.
Further information: Team Leader Oskar Kass, tel. +358 295 351 943
English summary of Finnfund’s special risk financing evaluation by KPMG (PDF, 492 kb, 25 pages).
Published originally in Finnish on 27 February 2018