Public Sector Investment Facility
The Public Sector Investment Facility (PIF) for developing countries is one of the finance instruments in Finland's development cooperation policy. Its objective is to support the public sector investments in developing countries that comply with the sustainable development goals of the UN and utilise Finnish expertise and technology. The new form of funding will replace the previously used concessional credits.
Investment projects must be based on the target country's national development needs, and the target country holds the main responsibility for the project's total expenses and the arrangement of funding. Through the instrument, development cooperation funds are used to support the investment project's purchase price and interest, whereby expenses incurred to the developing country from the investment are markedly reduced. The Ministry for Foreign Affairs is responsible for issuing grants from the PIF funds. Acting as Finland's official export credit agency, Finnvera, in turn, is in charge of granting buyer credit guarantees to investment credit. Receiving Finnish support stipulates clear developmental impacts.
PIF is also one of the Team Finland instruments administered by the Ministry, and it is used in close cooperation with other organisations taking part in Team Finland.
According to the UN World Investment Report 2014, achieving sustainable development goals by 2030 requires investments in developing countries in the range of $3.3 trillion to $4.5 trillion per year. With the new instrument, Finland is on board to meet these investment needs.
Principles of support:
The Public Sector Investment Facility is regulated by the Act (1114/2000) and Government Decree (1253/2000) on concessional credits granted to developing countries, the Act on the State's Export Credit Guarantees (422/2001) and OECD guidelines on export credit.
It allows funding for public sector projects in countries listed by Finnvera as eligible for export credit guarantees in the least developed (LDC), low income (LIC) and lower middle income (LMIC) categories.
PIF investment credits are listed internationally among the so-called mixed credits which combine development cooperation funding and export credits. Prerequisites for PIF funding include that the project is implemented by a company registered in Finland, and the project has been approved by Finnvera to have sufficient Finnish content. The developing country takes a loan guaranteed by Finnvera from a commercial bank to fund the investment. The Ministry for Foreign Affairs covers the loan's interest payments and part of the purchase sum in order to satisfy the 35% to 50% concessionality level required by the OECD for publicly funded export credit.
PIF projects must be economically, socially and ecologically sustainable and compatible with the target country's national development programmes. The instrument is used to fund investments that support the target countries' activities toward achieving the sustainable development goals of the UN (Agenda 2030).
Support can be given for investments focusing on, for example, the social, water supply, energy, cleantech or other sectors suitable for development cooperation. Projects must be compatible with Finland's development policies (incl. guidelines on human rights and the results-based approach).
How to proceed
In the preliminary preparation stage, the project idea and basic information can be presented to the Ministry for Foreign Affairs as a so-called concept paper. The paper may come from either a Finnish company interested in implementing the project, a public sector party in the target country, a financial institution interested in funding the project, or a company based in a third-party country.
The Ministry for Foreign Affairs announces on its website the yearly schedule for processing and issuing opinions on preliminary project ideas.
The latest round of appraisals closed on October 1st, 2017.
The exporter or credit institution delivers an application for buyer credit guarantee to Finnvera. The application and information on buyer credit guarantee are available on the Finnvera website.
The Ministry for Foreign Affairs evaluates the project's viability, supervises the procurement procedure and makes the decision on granting PIF funding. Credit risks are guaranteed by Finnvera.
The creditors may be licensed credit institutions from Finland or elsewhere in the European Economic Area. OECD export credit arrangement principles are followed when issuing credits. According to them, credit may be issued to projects that are financially unprofitable.
For a project to be financially unprofitable, it must incur the debtor with such expenses that it would not be able to perform the charges required for a commercial credit. A project may also be unprofitable if there is no commercial funding available for it.
Questions and answers about the Public Sector Investment Facility (PIF) for developing countries
How does the PIF differ from concessional credits?
The PIF was created for investment needs related to the achievement of sustainable development targets in developing countries.The new instrument will be used to finance investments in the least developed countries (LDC), while concessional credits were suited to the financing of slightly richer countries. The economic resilience required for financing to be granted will be ensured using Finnvera’s OECD credit rating, IMF’s debt sustainability assessments and the overall assessments of development policies carried out by Finnish embassies.
A round of comments will be arranged twice a year for concept papers regarding the new instrument. This means companies will know early on whether their project is suitable for PIF funding.
The maximum share of construction expenses has been set at 20 per cent in PIF projects. The minimum level of funding for boosting capacity and ensuring the overall sustainability of the investment has been raised to 10 per cent.
How will the new instrument ensure development impacts?
The development impacts of PIF projects will be thoroughly evaluated. They constitute the basic requirement for funding decisions. The impacts will be reinforced by the partnering countries’ strong ownership and the allocation of PIF credits to projects that help developing countries achieve sustainable development targets and the targets set out in their national development plans. Human rights, social and environmental impact assessments will be carried out for the projects. The assessments will involve both external experts and development cooperation resources of the foreign affairs administration.
The maximum level set for construction expenses will reduce the risk of corruption in local subcontracting, while the minimum funding for capacity strengthening will improve the long-term sustainability of investments.
What does the involvement of Finnish competence mean in connection with PIF projects?
The company implementing the project must be registered in Finland, and the Finnish project content must meet the level approved by Finnvera, a state-owned specialised financing company. The level is determined in Finnvera’s effective set of norms.
At present, it usually means that around one-third of the content must be of Finnish origin.
What size of projects can receive funding through the new instrument?
PIF projects will be funded with loans granted by commercial banks to the administrations of developing countries. Owing to transaction costs, banks do not grant loans under 5 million euros, which thus defines the minimum size of projects. The budget of the Ministry for Foreign Affairs, in turn, sets the maximum size at some 30 million euros.
What are typical examples of projects suitable for PIF funding?
PIF funding is available for projects that are profitable for the national economy but unprofitable from a business perspective. Projects whose implementation would most likely benefit from Finnish competence include rural electrification; the construction of solar, hydro and wind power plants, waste management plants and water supply in poor regions; equipment needed for education and health care; and ICT networks in rural areas. Special skills are also required for coastal surveillance radars to combat piracy, as well as for logistics devices, weather radars and dredging equipment for opening waterways and satisfying the needs of fishing.