Managing Director’s report

Finnish news headlines in 2012 were dominated by the European sovereign debt crisis but continents beyond our own were experiencing an upswing. Asia still had the fastest growth but in large areas of Africa, too, economies were growing, poverty was abating and living standards were rising.

Unfortunately alongside production, environmental problems were also growing. Air pollution made news in the metropolises of China and watercourses deteriorated in many lands. Emissions of greenhouse gases rose to a new record and the international community was unsuccessful in agreeing measures to curb global warming.

Despite cutbacks in support, via emissions trading and other ways, for energy savings and renewable energy, investment was spurred by technological development and falling prices. In the countries where lavish subsidies are being pruned, investments in renewable energy are now declining but they are increasing elsewhere. The focus is shifting from Europe to places with more sun, stronger winds or faster-growing energy plants.

In the next few years, substantial opportunities will be created in developing countries by better and cheaper clean technologies, in combination with improved general business conditions. Finnfund intends to seize these opportunities, often working with internationally competitive Finnish companies.

One of our focal areas is renewable energy. In 2012 Finnfund helped to finance small hydropower stations in Honduras and Uganda; a plant that makes biogas from wastewater in Laos; a factory producing pellets from agricultural waste in Indonesia; and thousands of small solar power systems in rural areas of Nicaragua and El Salvador.

Some of the plants are already in use, and the rest will be ready this year and next. On their completion, the projects will produce clean electricity for more than a hundred thousand households and provide more productive work and better living standards – in part directly but mainly by improving the potential for small enterprises – for tens of thousands of people.

In other investments too, we are seeking sustainable growth. We typically finance projects that utilise advanced technology and best practices leading to savings in energy or raw materials, improvements in product quality and reductions in emissions. We usually work in cooperation with Finnish companies that observe and spread advanced Finnish practices.

A relevant example is a steel foundry that was completed in Nigeria at the start of 2013. It uses scrap collected locally to make high-quality construction steel, not previously produced in the country at all. The electricity required is generated from natural gas that is a by-product of oil exploitation. Previously a large part of Nigeria’s gas was flared off, meaning that it was burnt at oil rigs for safety reasons. Ending flaring and exploiting the gas is in line with international environmental accords and Nigeria’s own energy policy.

Because of the uncertain situation in Europe, Finnish companies invested cautiously in 2012 but many were all the more enthusiastic in their pursuit of exports to expanding markets. While most deals and investments are in wealthier emerging markets, from China to Turkey to Brazil, horizons are gradually expanding. There is even nascent interest in Africa. In 2012 many Finnish companies realised that the continent hitherto dependent on development cooperation and disaster relief has in fact become a worthwhile market where Swedish and other competitors are already actively involved.

Finnfund’s investment decisions in 2012 concerned 18 projects and totalled EUR 56 million. Half of these projects were in sectors that will help check climate change: renewable energy and better energy efficiency, as well as projects to prevent deforestation and promote sustainable forestry. Disbursements were about the same value as investment decisions.

In autumn 2012 Finnfund’s Board of Directors outlined a policy to allow the company to seek greater development impacts and more significant value-added, by becoming more actively involved in some of the projects, at an earlier stage and with a greater willingness to take risks than before. The policy was supported by special risk finance approved by the government in 2012, in which the risk can be shared by the State of Finland when risk and potential benefits are particularly large. This arrangement facilitates Finnfund’s participation in high-risk projects without jeopardising its refinancing ability. Special risk financing is mainly intended for the poorest or otherwise challenging countries, as well as for projects that pilot Finnish cleantech innovations.

While still positive, our result last year was distinctly weaker than the year before. The decline in recorded profits is explained by project write-downs and the fact that two profitable exits took place in 2011 but only one in 2012. About a half of the company’s investment portfolio now consists of equity stakes and fund investments, so income is not a steady flow but mostly hard-to-predict capital gains at the time of exit. Annual results will continue to fluctuate in the future in line with the timing of exits and write-downs. It is therefore valuable that we have the strong support of our principal shareholder, the Government of Finland, as exemplified by the EUR 10 million allocated in the budget of 2013 for boosting Finnfund’s equity.

The business partnership programme, Finnpartnership, managed by Finnfund for the Ministry for Foreign Affairs, was evaluated in 2012. The findings were positive and the ministry has announced that it intends to continue the programme, first by extending the contract and then possibly as a permanent part of Finnfund’s operations. The terms of business partnership support were modified and the amount of support targeted particularly at vocational training was increased.

In 2012 Finnfund’s supervision and administrative structure were modernised in line with the recommendations of the Ownership Steering department of the Prime Minister’s Office. Ownership steering was separated from board duties, the company’s general meeting was made responsible for appointing the board annually, financial reporting was increased and a board audit committee was established. To spearhead the administrative reform, Arto Honkaniemi, a financial counsellor from the Ownership Steering department, became chairman of the board. Now that the annual general meeting is scheduled to appoint a new chairman, I want to express my gratitude for his tireless work in developing the company.

My thanks also go to Finnfund’s customers, staff and the other stakeholders that we have enjoyed working with in 2012.

Jaakko Kangasniemi
Managing director, CEO