New special risk financing shifts Finnfund’s investment focus towards poorer countries
According to the Government’s ownership steering policy, the investment portfolio of the State’s development financing company Finnfund must invest in the poorest countries in particular, as well as in high-risk projects that have significant development impacts. In line with this policy, the Government has decided to reintroduce the special risk financing instrument worth EUR 75 million.
On 20 September, the Cabinet Finance Committee endorsed the adoption of a EUR 75 million special risk financing scheme by the State’s development financing company Finnfund for 2018–2023. The sum includes a previously granted EUR 50 million loss guarantee, which makes the total sum of the new commitment EUR 25 million.
With special risk financing, potential credit or investment losses incurred by Finnfund’s investments could be partly covered with the loss guarantee granted by the State. The guarantee is necessary for Finnfund to be able to make high-risk investments that nonetheless have significant development impacts. Factors affecting the risk level include, for instance, the destination country, the investment volume and the industry.
“There is a dire need for reasonably priced long-term investment in poorer and economically frail countries, which has created a significant bottleneck for business activities that would create jobs and pave the way for development. For example, the energy shortage in Africa is dramatically stalling economic and social development,” says Max von Bonsdorff, Director of the Unit for Development Finance and Private Sector Cooperation at the Ministry for Foreign Affairs.
Special risk financing is part of the Government’s action plan to ensure the efficacy of Finnfund. According to the Government’s policy, 75 percent of new investments must be targeted at lower-middle economy or poorer countries. In addition, Finnfund is steered towards favouring investments that help curb climate change and support developing countries’ ability to adjust to climate change.
Special risk financing was used in 2012–2015
Special risk financing was in use from 2012 until 2015 and it was restricted to EUR 50 million. The loss guarantee covers 16 corporate projects, 14 of which have been launched without any credit or losses from investment so far.
The Ministry for Foreign Affairs commissioned KPMG to carry out an external evaluation on special risk financing. According to this evaluation, published in February 2018, special risk financing proved a highly viable instrument. An increasing proportion of Finnfund’s investment portfolio focuses on the poorest countries and high-risk projects that have significant development impacts.
One example is the first ever mobile money transfer and payment service operating in Ethiopia. The application allows poor and rural communities as well as aid organisations operating in the country to transfer funds securely and at a significantly lower cost than previously.
Over 80 percent of the investments made under special risk financing were made in the least developed countries (LDCs).
Fact: Finnfund shifts its focus
- Of the investment decisions made by Finnfund last year, 87 percent were targeted at lower-middle economy or poorer countries.
- Of Finnfund’s total investment portfolio, slightly less than 50 percent was directed to either LDCs (34%) or other low-economy countries (10%). The shares are clearly larger than among, for instance, other European development financing companies on average.
- Of all Finnfund investments, 37 percent have been made in lower-middle economy countries, such as Kenya.
- The shift in Finnfund’s focus towards the poorest countries was boosted by special risk funding in 2012–2015. The evaluation of the special risk funding scheme is available on the website of the Ministry for Foreign Affairs (in Finnish).
Further inquiries: Max von Bonsdorff, Director, Unit for Development Finance and Private Sector Cooperation, tel. +358 (0)50 344 1014.
The Ministry for Foreign Affairs’ e-mail addresses are in the form firstname.lastname@example.org