Special risk financing instrument reintroduced

On 20 September, Ministry for Foreign Affairs made a public announcement that the Cabinet Finance Committee has 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.

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.

Altogether, 81 per cent of these 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.

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.

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 (10%) of all investments. The shares are clearly larger than among, for instance, other European development financing companies on average.

• New special risk financing shifts Finnfund’s investment focus towards poorer countries (Ministry for Foreign Affairs 20 September 2018)
• Evaluation: The focus of Finnfund’s investment activities successfully shifted to the poorest countries (Ministry for Foreign Affairs, 28 February 2018)
• Evaluation of Finnfund’s special risk financing completed – the focus successfully shifted to the poorest countries (News release, 28 February 2018)

For more information, please contact:
Helena Arlander, Director, Risk Management and Impact, helena.arlander(a)finnfund.fi, tel. +358 50 561 1516
Jaakko Kangasniemi, Managing Director, jaakko.kangasniemi(a)finnfund.fi, tel. +358 40 577 7676