History of Finnfund
Year 2000 marked 20 years from the date when Finnfund launched its operations which was also commemorated with a special book. Mr Matti Karhu wrote an article below about the history of Finnfund.
The Lima Declaration approved by the United Nations Industrial Development Organisation UNIDO in March 1975 set as its goal the raising of the developing countries’ share of the world’s industrial production from seven percent to 25percent by the end of thecentury.
It was a difficult starting point: in 1970 the economic structures of the poorest developing countries were poorly developed and mainly based on agriculture and production of basic raw materials. Of the overall production of the poorest countries, only 13 percent was in industry and even among the medium income developing countries, the share of industry was only 24 percent. In the industrialised countries that figure was 27 percent already then. The share of the developing countries in world trade was quite modest.
Finnish companies had not been very interested in the developing countries at that time. In 1975 Finnish investments in developing countries amounted to only 2.6 million dollars. In the same year the Swedes invested 82 million dollars, the Danes had 20 million and even Norwegian companies invested nearly 17 million dollars in the developing countries. The Finns hardly knew the market, and risk money was not easily available. The closed nature of the economy also meant that meagre resources were aimed at safe nearby areas, or preferably the domestic market.
However, direct investments by Finnish industry began to grow in the 1970s, and in 1980 they were already 58 million markka.
The greatest amount of investments were made in Brazil, Saudi Arabia, Mexico and Argentina.
Finnish development aid policy (the term development cooperation came into use only later) was quite modest, but a goal was set at 0.7 percent of Gross Domestic Product. The poorest of countries were identified as the main targets of direct and public development aid. But in the early 1970s the idea of a different kind of development cooperation began to take hold. Other countries had already had experiences of a model for financing aimed at raising the industry of developing countries to its feet through special development and risk financing projects, as well as industrial cooperation. Moves were initiated to get such a fund for Finland as well.
A proposal was initiated by a working group set up by the Ministry for Foreign Affairs, which began its work in August 1976. The work was led by Director General Pekka Malinen. The Industrialisation Fund of Finland conducted a study on the question, which was completed in May 1977. The study, and the report by the Foreign Ministry working group, which was completed a month later, both recommended the establishment of the Finnish Fund for Industrial Development Cooperation Ltd.
In its study, the Industrialisation Fund asked 200 Finnish companies if they would be able and willing to invest in developing countries.
Most were willing to do so in principle, and the greatest interest was shown by companies with a certain amount of experience of operations in the developing world. The establishment of the Industrial Development Cooperation Fund was seen to promote the development of Finnish engineering skills and the internationalisation of Finnish companies. The officials of developing countries interviewed for the study also took a positive attitude. Representatives of development banks, for their part, assured those who conducted the study, that they have been mostly satisfied with cooperation with other equivalent institutions. The Finns were therefore welcome in the developing countries, too. At the same time it was pointed out that Finnish companies had lost many projects because there was no risk funding available from an industrial development fund.
The study also contained information from existing development funding institutions. Under examination were the Danish IFU, the German DEG, the Dutch FMO and the British CDC. Their experiences were considered positive. The study recommended that the administration of the fund to be established in Finland should be organised in the same way: most of the funding would come from the state, and supervision and management should include representatives of both the State and the corporate sector.
The recommendation in the study was somewhat broad: “A fund for industrial development cooperation is to be established with the goal:
a) to promote economic growth and welfare in the developing countries by directing intellectual and material resources toward the development of business activities in these countries, and
b) to advance the possibilities of Finnish companies to operate in developing countries, and in this way to utilise more extensive markets and resources for factors of production.”
“Funding decisions must be based on the profitability of the projects, their financial viability, and their overall economic desirability. The conditions of financing must be competitive and in accordance with international development banking practice. All projects must include a significant Finnish interest.”
The main function of the fund was to be the financing of joint ventures and project studies aimed at their establishment. In addition, recommended tasks included the relaying of information about possibilities for cooperation. There was no intention to place geographical restrictions on the operations, but the study noted that the operations should always be in line with Finland’s official development cooperation, and foreign policy. On the administrative level, the new fund was to be linked with the Industrialisation Fund. The name that was recommended, was Finnish Fund for Industrial Development Cooperation Ltd., which was seen to be in line with international practice.
Support for the project was far from extensive or unanimous. The media took a largely sceptical view, and there was resistance on the political level as well. The most frequent objection was that the fund would primarily benefit Finnish companies, and would not advance “pure” development aid. The key principle of Finnish development aid policy at that time was to help the poorest countries, and industrial cooperation was not seen to fit that idea. The most zealous critics even denounced the project as a two faced game in which the lust for profits by Finnish companies was masked behind the pleasant veil of development aid.
Nevertheless, the project moved forward in spite of the opposition. The Ministry for Foreign Affairs established a new working group in June 1978, headed this time by another Ministry official, Secretary of State Matti Tuovinen. This group worked quickly, and completed its report already in August. Now the government had plans ready to bring the issue before Parliament.
On the basis of the draft law it was noted that the developing countries have also clearly expressed their desire to initiate industrial cooperation as a complement to traditional development aid.
The developing countries need appropriate technology, investment capital and business management skills. A development finance company would be needed to channel these. The Government proposed the establishment of a company, in which the State would have a majority of shares, and which would be under the administrative control of the Ministry for Foreign Affairs. The proposed share capital was 80 million markka, of which 90 percent would be under direct State control. The rest would be under the control of the Finnish Export Credit, the Industrialisation Fund, which were state-owned.
A small minority ownership was offered to the Confederation of Finnish Industries.
The law was passed by Parliament and it came into force on April 1, 1979. The founding document of the fund was signed on November 26, 1979. During the signing ceremony, the Minister for Foreign Affairs Paavo Väyrynen pointed out that the developing countries’ need for capital is enormous: at that time, the OECD’s estimate was that the need would be 285 billion dollars a year in the mid-1980s and as much as 470 billion dollars in 1990. It was estimated that the amount of public development aid would decrease, and private investments would increase. Väyrynen also mentioned the goal set for the developing countries, which was very much in the forefront at the time, that by the turn of the millennium, they would account for a quarter of the whole world’s industrial production.
Now we know that those countries have fallen far short of this goal.
Finnfund began operations the following year. Social Democratic Parliamentarian Jermu Laine was chosen to head the supervisory board, and he has continued in this post throughout Finnfund’s 20 year history. The first Chairman of the Board was Wilhelm Breitenstein, a department head at the Ministry for Foreign Affairs.
Graduate engineer Matti Salimäki was named the first Managing Director. At first, the number of staff was quite small: after a year and a half of operations, six employees worked for Finnfund.
Finnfund made its first decision on taking part in an industrial project already in its first year of operations, 1980. The project was the construction of a tractor factory in Tanzania. The Finnish partner was Valmet, which worked with the Tanzanian State Motor Corporation.
The initial goal was the manufacture of 300 tractors a year. However, the project ran up against difficulties from the very beginning. When the actual company for the manufacture and marketing of tractors was established a couple of years later, the conditions had changed to such an extent that Finnfund did not take part in its financing.
In the second year of operations there were six new projects: a plywood factory in Ecuador, mining, glue, and electronics industry in Mexico, the manufacture of silver products in Sri Lanka and a plywood factory in Peru. Latin America was well represented also on the list of investments for 1982: sawmill industry in Ecuador and the manufacture of prefabricated housing in Peru.
Then eyes turned toward the Far East. Investment targets of 1983 still included Mexico, as well as Zimbabwe and Morocco, but at the same time Finnfund also started to finance the prefabricated housing industry in Malaysia and the manufacture of elevators in India.
The following year investments were made in the plastic pipe factory established by the Vaasa-based Oy Wiik & Höglund Ab in Thailand, and a plywood factory by Oy Raute Ab in the People’s Republic of China.
The year 1984 was significant in other ways as well. Finnfund was able to move into its own building in Helsinki. The number of personnel grew to 14. There was a new Chairman of the Board: the Ministry for Foreign Affairs appointed Undersecretary of State Martti Ahtisaari to the post.
From the beginning of its operations, Finnfund had drafted numerous reports on projects and investment plans. In this way it started to amass the assets of know-how that are indispensable for a finance company. At that time investment seminars were held in interesting target countries. Finnfund’s representation in Finnish trade delegations became the normal course of action from the very first years of operations. Finnfund also began to seek cooperation with other development finance companies, and established close contacts with the World Bank Group from the very beginning.
The entire decade of the 1980s was a difficult time for the developing countries. Their economic prospects got significantly worse in the first years of the decade and the debt problem deteriorated rapidly.
Worst hit was Latin America, and this was also felt in the operations of Finnfund. Investments began to dwindle. In other areas as well, results were initially modest. Finnfund’s first five years were a time of building and establishing operations, an apprenticeship of sorts. Nevertheless, the Finnish Government felt that it was important to continue the operations and supported Finnfund past the difficult times. At the end of 1986 Finnfund had investments in 15 countries worth a total of 130 million markka. At the same time, the overall interest of Finnish companies toward developing countries seemed to wane. The markets of EFTA and the EC seemed more lucrative.
Finnfund’s management changed when Martti Ahtisaari left the post of Chairman of the Board to take up a position with the United Nations (and a decade later was elected President of the Republic of Finland). He was replaced in 1987 by Kai Helenius, Undersecretary of State at the Ministry for Foreign Affairs. In 1986 Markku Pekonen, who had worked as head of research at Finnfund, was named the Managing Director.
At that time, Finnfund was growing rapidly. More preparations for new projects were underway than ever before, and in 1987 Finnfund got permission from its owners to expand operations from manufacturing to the service sector. At the same time it developed its operations toward the establishment of joint ventures, and toward offering corporate management know how and training in target countries and companies. One of the new target countries was Turkey. The great upheaval in the world, and in Finland occurred at a time in which Finnfund’s first decade was coming to a close.
After the collapse of communism, the countries of Eastern Europe began decisively to move toward a market economy. At the same time the Finnish economy plunged into an unprecedented recession. Foreign investments by Finnish companies still grew by nearly a third in the year 1991. The entire second half of the 1980s was a time of powerful expansion for Finnfund, but now it had to reconsider its own operations.
The results of the ten years of operations were assessed in a report by independent experts. The conclusion was that Finnfund has succeeded well in establishing a flexible framework for its rapidly expanding operations. The report emphasised that success in investment operations directed at developing countries depends above all on the sustainability of the business idea and on the genuine desire of the Finnish project partner to make a lengthy commitment.
The management, marketing and financing of the joint venture play a key role. These are no small demands in business operations in developing countries.
At the turn of the decade, Finnfund’s investments had grown to 337 million markka in 20 countries. Ilkka Ristimäki, Undersecretary of State at the Ministry for Foreign Affairs became the chairman of the Board of Directors. In 1991, Parliament amended the Finnfund Law, allowing Finnfund to begin operations in the countries of Central and Eastern Europe as well. In the same year Finnfund opened an office in Malaysia, because developments in Asia appeared to be promising, and there was a great interest among Finnish companies in the area. The name also changed; it became shorter, when the word “development” was dropped. The new name was Finnish Fund for Industrial Cooperation Ltd., Finnfund.
Operations in Eastern Europe, which were permitted by the new law, began quickly. The first investments in Estonia, Bulgaria and Hungary were made in 1992. The biggest of these was the Paulig coffee roasting plant in Estonia, in which Finnfund made an investment of ten million markka. In the same year Finnfund entered a new field: it got the first loan from the international capital market when Chemical Bank arranged a loan of 20 million dollars. The personnel had grown to 32 by this time. The Undersecretary of State at Foreign Ministry changed again and from the beginning of 1993, the new Chairman of the Board at Finnfund was Mauri Eggert.
Finland recovered from the recession and the rise was rapidly reflected in corporate investments. They were directed more powerfully than before toward the developing countries, above all, Asia, but at the same time, also at the transitional economies of nearby areas: the Baltic Republics, eastern Central Europe, and Russia. At this stage Finnfund was already involved in extensive cooperation with international development financiers, such as the European Bank for Reconstruction and Development, the International Finance Corporation, which is a part of the World Bank Group, and the Nordic Investment Bank.
Finnfund had survived the Finnish economic recession and the crisis in the financial sector well. At the end of 1994 only one percent of the loans granted by Finnfund were non-performing, and investment values were depreciated only by two percent. Confidence among international financiers was clearly demonstrated in February 1995 when Finnfund was granted a long term credit of 20 million markka from Japan’s capital market. Japan’s most important insurance companies contributed to this loan. Finnfund was one of the few Finnish financial institutions whose operations maintained a good solvency rate through the difficult years of the crisis.
Finnfund’s project reports and investments continued to grow powerfully in the late 1990s. Conditions were not at all favourable, because economic crises swept through the world from Asia to Russia, and to Latin America. Nevertheless, Finnfund’s finances remained strong, and at the same time, previous investments started bringing in more revenue, when Finnfund managed to disengage from its investments according to exit plans, in most cases with a profit.
Another important change in the second decade of operations was Finnfund’s participation in the operations of finance companies, development banks, and funds. In this way Finnfund has joined networks of public and private investors in areas near Finland and in Asia and Africa. At this stage the Finnish Government began thinking about revamping its special finance institutions. Finnfund was involved in the discussions, but the final result was that Finnfund was kept as an independent development finance company under the administration of the Ministry for Foreign Affairs. When Finnvera was formed out of the Finnish Guarantee Board, and Kera Corporation, the Finnish Government also decided that Finnvera would have a 20 percent holding in Finnfund.
In the second half of the 1990s, the Foreign Ministry’s representatives on the Board of Directors of Finnfund were Undersecretaries of State Antti Hynninen, Leif Fagernäs and Kirsti Lintonen.
During its two decades of operations, Finnfund has grown to be a significant finance company with a good rate of solvency. Its finance commitments are already more than a billion markka. It has developed from being a single developing country fund into a versatile finance administration organisation, with responsibility for the administration of both public and private funds.