Report of the Board of Directors

Mission and strategy

Finnfund, formally the Finnish Fund for Industrial Cooperation Ltd, is a development ­finance company in which the Finnish government has a majority holding; it belongs to the administrative sector ­of the Ministry for Foreign Affairs and has a special development policy mission. The mission of the company is to promote economic and social development in target countries by providing financing for priva­te-sector projects involving Finnish interests. Finnfund provides long-term risk capital to complement funding obtained from the financial markets, and it operates on a self-supporting basis. Finnfund targets financ­ing to low-income and lower-middle-income developing countries, builds bridges between Finnish expertise and the need­s of developing countries, and augments the developmental impacts of investments cataly­sed by Finnfund.

In 2013, the strategy of the company was revised in such a manner that Finnfund will strive to target more funding than before to poor countries and projects with good development impact potential. The company has sought added value by placing emphasis on direct investments, collaboration with Finnish companies, increasing risk-taking and an active approach in projects with promising development impact potential, where such a role is needed.

Funding and investments

During 2013, the willingness of Finnish companies to invest in developing countries still remained low. However, the volume of financing activities increased significantly on the previous year­, when projects which had a positive effect on climate change and with excellent development impact potential were identified as targets for Finnfund financing operations, within the renewable energy and forestry sectors in particular.

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In 2013, 20 (18 in 2012) new financing commitments were made, amounting to a total of EUR 90 million (EUR 56 million). Both the number of projects and their average size grew from the previous year. Calculated by value in euros, the growth from the year before can be considered considerable.

Many of the projects that were approved included elements that made them particularly complex to prepare. Indeed, 80 per cent of the projects undertaken were ones where Finnfund participation was considered to provide substantial added value.

Specifically, joint projects with Finnish enterprises principally concerned upper-middle-income developing countries.

The targeting of financing commitments made in 2013 for various income levels is shown in the table below.

Income level	number	%	EUR million	%
Least development countries	5	25	24.8	28
Low-income countries	2	10	30.7	34
Lower-middle-income countries	4	20	5.1	6
Upper-middle-income countries	8	40	23.9	27
Russia	1	5	5	5
Total	20	100	89.5	100

 

Nine (6) of the projects that were approved were equity investments or mezzanine financing that, when calculated according to their value in euros, accounted for an exceptionally high share, slightly over one-half, of all commitments made.

Nine (10) investment loan commitments were made, with a combined value of about one-third of the overall euro-value. Two (3) fund investments accounted for slightly over one-tenth of the total value in euros.

In terms of the number of commitments, most of the financing commitments (9 (6 in 2012)) went to Asia and the second most (7 (4 in 2012)) went to Africa. In monetary terms, however, Africa is clearly the most important area, accounting for almost 60 per cent of the money invested, while the share going to Asia was approximately one-fifth. China was the most popular individual country in terms of number of commitments, with four financing commitments − of relatively low monetary value − allocated to the country.

The volume of disbursements dropped to EUR 34 million from the previous year’s EUR 59 million, reflec­ting the low number of financing commitments made in 2012.

Of this am­ount, EUR 23 million (EUR 28 million) was allocated to low-income countries or the least developed countries, EUR 7 million (EUR 9 million) to lower-middle-income countries, EUR 2 million (EUR 11 million) to upper-middle-income countries, and EUR 1.5 million (EUR 11 million) to Russia.

Finnfund is actively involved in European Financing Partners (EFP), founded in 2004 as a joint financing venture of European development finance institutions and the European Investment Bank (EIB), and in the Interact Climate Change Facility (ICCF) founded by the same actors and the French development funding provider AFD in 2011. ICCF invests in projects aimed at curbing climate change, such as renewable energy and energy efficiency.

At the end of 2013, undisbursed commitments totalled EUR 97 million (EUR 86 million). In addition, EUR 81 million (EUR 60 million) was tied up in investment commitments that had not yet progressed to the agreement stage.

Development and priorities

In autumn 2013, Finnfund published its second corporate social responsibility report in accor­dance with the Government Resolution on State Ownership Policy adopted on 3 November 2011. In 2013, corporate social responsibility reporting was developed on the basis of feedback received from stakeholder groups. The report is available on the company’s website.

In autumn 2013, the Board of Directors adopted a revised environmental and social­ policy, which is available on the company’s website. The wo­rk for developing the operating methods and process for environmental and social impact assessment and reporting continued throughout the year under review.

The development of the assessment tool for development impact, developed in the previous year and introduced in the assessment of all projects in 2013, was continued during the year under review.

Co-operation with other members of the European Development Finance Institutions (EDFI) continued as in earlier years, through both concrete projects and the sharing and harmonisation of operating methods. Concrete examples of such cooperation include the above-mentioned joint financing ventures EFP and ICCF, and Afrinord, a joint venture owned primarily by Nor­dic development financiers that fina­nce hotel projects in Africa. Finnfund also co-operated on various significant individual projects.

In autumn 2013, the Board of Directors adopted a new ICT strategy for 2014−2016. In addition, the company’s data security and remote access policies were renewed in 2013, and systems and operating methods have been developed accordingly to better meet the needs of mobile work.

The Finnpartnership programme

Finnfund administers a business partnership programme called Finnpartnership. Launched in June 2006, it is finan­ced by the Ministry for Foreign Affairs. In spring 2013, the Ministry for Foreign Affairs appointed a working group to prepare an amendment to the Act on a Limited Liability Company named Teollisen yhteistyön rahasto Oy (Finnfund), with the aim to make Finnpartnership a permanent part of Finnfund operations. The validity of the agreement concerning the administration of Finnpartnership was extended until the end of 2015, by which time Finnfund aims to have the amended Act enter into force.

Finnpartnership provides advisory services and business partnership support for the planning, development and implementation of commercially viable projects carried out by Finnish companies and other Finnish actors targeting developing countries; for technology and solution pilot projects; and for education and training.

Finnpartnership provides a matchmaking service for companies in developing countries, helping them find Finnish business partners. The matchmaking service has also been us­ed by Finnish companies that are seeking business partners in developing countries.

In 2013, the demand for business partnership support and matchmaking services grew clearly from the previous year. The resources for the matchmaking service and its activity were increased notably in 2013, which resulted in strong growth in the demand for the service. Some adjustments were made to the conditions of business partnership support, and Team Finland cooperation was enhanced.

In 2013, a total of 121 (97) business partnership support applications were processed. Of these, 96 (77) applications were approved. Total support granted amou­nted to EUR 3.5 million (EUR 2.4 million).

Business partnership support was paid out to 80 (55) projects, totalling EUR 1.3 million (EUR 1.0 million).

In 2013, the matchmaking service received 245 (129) business initiatives from companies in developing countries.

Risk management

The Finnfund Board of Directors confirms the company’s risk management principles and instruments. The company’s management is responsible for the practical implementation of risk management on the basis of the guidelines confirmed by the Board of Directors. The company guidelines on asset and risk management were updated in 2013, regarding short-term investments in particular, but no substantial changes were made to the risk management principles.

Owing to the nature of its activities, the company is exposed to greater than average risks. Risk management includes risk identification, hed­ging, and reporting to the company’s administrative bodies.

Finnfund’s business concept involves active risk-taking in projects. This is taken into consideration in the terms and conditions of financing and in the active monitoring and control exercised during the investment period. Taking risks also means that some investments inevitably lose money, but the aim is to price all investments so as to hedge against risks and to diversify them so as not to compromise the opera­tion of the company. The risk classification system developed by Finnfund and in use since 2005 is a key instrument in the assessment and monitoring of project risks. A risk assessment is conducted on all projects in the Finnfund investment portfolio at least once a year, and more often if necessary, if it is estimated that the risk level has changed.

On 8 October 2012, the Ministry for Foreign Affairs decided on the intro­duction of special risk financing to share investment risks between Finnfund and the Finnish government. The special risk financing is provided on the basis of a loss compensation commitment adopted by the government on 20 September 2012, whereby the government undertakes to compensate Finnfund for a maximum of 60 per cent of credit losses and investment losses in projects covered by special risk financing during the validity of the commitment. The loss compensation commitment and the related Ministry for Foreign Affairs decision are valid until 31 December 2015.

The decision to enter a particular project under special risk financing is made by the Finnfund Board of Directors. In order to be eligible for special risk financing, a project must have extremely high developmental impact potential and be aimed at a low-income or lower-middle-income country; it must also be too risky to otherwise qualify for Finnfund financing.

In 2013, the Board of Directors decided to enter 6 (2) projects under special risk­ financing. The aggregate value of the commitments is EUR 41.8 million (EUR 5.7 million). The government is responsible for EUR 21.3 million (EUR 2.4 million), or 51 per cent (42 per cent) of the investment risk. The loss compensation ceiling is EUR 50 million, and a maximum of EUR 5 million in compensation may be applied for in any given year.

The objective with regard to interest and exchange rate risks is to identify and hedge against any risks. Since the company’s investments are targeted at developing countries and are often made in the local currency, managing exchange rate risks is exceptionally chall­enging. The objective is to cover the interest and exchange rate risks associated with lending fully and over the entire investment period. Managing exchange rate risks associated with equity and fund investments is more complicated. Here, the obje­ctive, on a case-by-case basis, is to cover currency positions that are certain or at least likely, and that can be hedged at a reasonable cost in relation to the benefits gained.

In order to manage its liquidity risk, Finnfund maintains liquidity that is adequate in view of the anticipated volume of disbursements. To cover future disbursements and maturing financing debts, in September 2013, Finnfund issued a EUR 50 million private placement bond with a maturity of five years, intended for Finnish investors. In addition, Finnfund ha­s a committed credit facility of EUR 50 million at Nordea Bank, non-committed ­facilities in Nordic banks, and a commercial paper programme totalling EUR 100 million set up in 2010, which was not used at all at the end of 2013.

The refinancing risk associated with borrowing is managed by maintaining a sufficiently extensive group of financiers and a versatile range of instruments. The range of instruments is further increased by the bond issue mentioned above. An additional aim is that at least half of the borrowing should be long-term financing. At the end of the year under review, the average time to maturity of interest-bearing debt was 3.7 years.

In 2013, the company continued the action initiated in 2012 to improve its capacity for identifying, controlling, and combating data security risks.

Financial result and balance sheet 

In 2013, Finnfund made a profit of approximately EUR 2.7 million (approximately EUR 1.2 million). The result was significantly higher than the year before and above budget.

The operational result is shown in the table below. Income from financing activities stood at EUR 11.9 million (EUR 10.7 million) and the result before value adjustment items, sales and taxes was EUR 5.7 (EUR 5.0 million).

No exits from projects occurred during the reporting period. However, income from fund investments was significantly higher than the year before and above budget. The administrative expenses increased over the year before, but they came in under budget.

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Operational result, EUR 1,000	2013	2012	Change EUR	Change %
Financial income	13,558	12,301	1,257	10
Financial expenses	-1,643	-1,568	-75	5
Income from financing activities	11,915	10,733	1,182	11
Other operating income	1,558	1,203	355	30
Administrative expenses, depriciation and other expenses	-7,797	-6,977	-820	12
Result before value adjustment items, sales and taxes	5,676	4,959	717	14
Value adjustment items and sales	-2,946	-3,332	386	-12
Income taxes	-29	-387	358	-93
Net profit	2,701	1,240	1,461	118

Income

Dividend income was EUR 1.6 million (EUR 3.1 million). The dramatic drop in dividend income derives from the significant decrease in payment of dividends in one of the project companies.

Interest income from investment loans came to EUR 6.4 million (EUR 6.6 million), and other interest income was EUR 0.6 million (EUR 0.3 million). Overall interest income amounted to EUR 7.0 million (EUR 6.9 million). Other interest income consisted primarily of interest income from liquid assets, and this increase was due to the increase in liquidity.

Other income from long-term investment amounted to EUR 3.8 million (EUR 3.3 million), and this consisted of gains from fund investments (in 2012 gains from fund investments were EUR 1.1 million). No capital gains from sales were entered as income during the year under review, which was due to a delay in the exit from a specific project (in 2012, the capital gains from sales were EUR 2.2 million).

Other financial income without foreign exchange gains, at EUR 1.3 million (EUR 1.0 million), mainly consisted of arrangement fees, commitment fees, and other financing fees.

Investment income before taxes totalled EUR 13.6 million (EUR 14.4 million).

Foreign exchange gains amounted to EUR 5.0 million (EUR 5.7 million) and losses to EUR 5.0 million (EUR 5.5 million).

Other operating income amounted to EUR 1.6 million (EUR 1.2 million) and this comp­rises fees received for the administration of the Finnpartnership programme and other income from fe­es and charges.

Impairment losses

New recognised individual impairment losses amounted to EUR 9.1 million (EUR 6.9 million), representing about 3.6 per cent (2.5 per cent) of the balance sheet value of investment assets at the end of the year­ under ­review.

Reversals of previously recognised individual ­impairment­ losses amounted to EUR 12.8 million in 2013 (EUR 1.2 million). This was partly due to the positive change in the value of certain investments and partly due to the entry of previously recognised individual­ impairment losses as final losses, and the reversal of the individual impairment losses previously recognised for them.

Impairment­ losses ­recognised for specific asset categories allocated to investments with reimbursement before 2005 were no longer processed (EUR 0.5 million) in 2013.

Expenses

Interest expenses were EUR 0.8 million, slightly down on the previous year (EUR 1.1 million). Interest expenses were incurred through borrowing in US ­dollars, which is used to refinance Finnfund investment loans denominated in US dollars, and through euro-denominated commercial papers issued in 2012 and the bond issued in autumn­. The decrease in interest expenses was largely a result of the reduction in liabilities and the low interest rate.

Other financial expenses were EUR 0.8 million (EUR 0.5 million), including management fees of EUR 0.5 million (EUR 0.3 million) associated with fund investments. These fees were incurred for funds whose investment ­period has ended.

Investment losses amounted to EUR 6.6 million (EUR 0.4 million), which is almost exclusively attributable to previously recognised individual impairment losses.

Administrative expenses totalled EUR 7.8 million (EUR 7.0 million). The increase in expenses consists of several smaller items and is partly due to the substantial increase in project preparation activity.

Taxes recorded in the profit and loss account, totalling EUR 0.03 million (EUR 0.4 million), consist of those paid to the target countries on divi­dends received.

Balance sheet

The balance sheet total stood at EUR 311.0 million (EUR 312.4 million) as at the end of the year under review.

The balance sheet value of investment assets was EUR 250.0 million (EUR 274.1 million) as at the end of the year under review. Investment assets decreased by 8.8 per cent, as expected. The decrease in investment assets was a result of the repayments of investments being gre­ater than reimbursements in new investments. However, the number of undisbursed commitments and decisions was much higher at the end of 2013 than at the end of 2012, on which basis the reduction is estimated to be temporary.

Loans (including subordinated loans and other mezzanine instruments) accounted for EUR 114.5 million or 46 per cent (141.7 million, 51.7 per cent), equity investments for EUR 64.4 million or 26 per cent (44.4 million, 23.5 per cent), and fund investments for EUR 71.0 million or 28 per cent (68.1 million, 24.8 per cent). The breakdown of investment assets by instrum­ent changed over the course of the year, with the percentage of equi­ty and fund investments growing while that of loans decreased substantially.

Liquidity stood at about EUR 55.1 million (EUR 33.4 million) at the end of the year, showing an increase of some 65 per cent on the previous year-end total. The increase in liquidity was a result of the bond issue of EUR 50 million in autumn 2013. The liquid assets are invested in dome­stic money-market instruments in accordance with the asset and risk management guidelines.

At the end of the financial period, the company’s equity (share capital and retained earnings) totalled EUR 215.3 million (EUR 202.6 million) or ­69 per cent of the balance sheet total (65 per cent).

The company executed two share issues in 2012, the latter of which was registered after the end of the financial period, on 3 January 2013. As a result of the share issue, the share capital was increased by EUR 4,999,870, standing at EUR 128,949,590, with 758,­527 shares after the increase, with the Finnish government accounting for 694,191 (91.5) shares, Finnvera Plc for 63,349 (8.4 per cent) shares, and the Confederation ­of Finnish Industries EK for the remaining 987 (0.1 per cent) shares. Finnvera plc and the Confederation of Finnish Industries EK and did not subscribe to any of the new shares they were offered.

In 2013, the company executed one share issue. In the share issue, a maximum of 64,275 new shares were offe­red to existing shareholders, in proportion to their existing holdings, at the issue price of EUR 170 per share. ­The subscription period was 11 April to 7 June 2013. As a result of the share issue, the share capital was increased by EUR 10,014,190, with the Finnish government accounting for EUR 9,999,910 and the Confederation of Finnish Industries EK for the remaining EUR 14,280. A total of 58,907 new shares were issued pursuant to the issue decision. Finnvera plc did not subscribe to any of the new shares it was offered.

At the end of the financial period, the company’s registered share capital stood at EUR 138,963,780 with 817,434 shares, with the Finnish government accounting for 753,014 shares (92.1 per cent), Finnvera plc for 63,349 shares (7.8 per cent), and the Confederation of Finnish Industries EK for the remaining 1,071 shares (0.1 per cent).

The company’s shares have no nominal value. The equivalent value of a share in bookkeeping is EUR 170.

At the end of the year under review, the company’s long-term interest-bearing debt stood at EUR 74.0 million (EUR 45.0 million) and short-term interest-bearing debt at EUR 20.0 million (EUR 63.0 million), totalling EUR 94.0 million (EUR 108.0 million). Long-term interest-bearing debt includes the bond issue of EUR 50 million in autumn 2013. In other respects, the interest-bearing liabilities are mainly denominated in US dollars, used to re­finance Finn­fund investment loans denominated in US dollars.

The long-term debt as a percentage of all financing debt increased during the period under review with the bond issue and reversal of short-term debt, to about 78.7 per cent at the year-end. Financing liabilities decreased by some 13 per cent on the previous year.

Guarantee commitments totalled EUR 0.08 million (EUR 0.2 million) at the end of the year.

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Key figures

	2013	2012	2011
Financial income, EUR million	18.5	20.0	30.0
Net profit, EUR million	2.7	1.2	9.2
Return on equity, %	1.3	0.6	4.9
Equity ratio, %	69.2	64.8	67.0

Formulae:

Return on equity = Result before extraordinary items – taxes x 100 %
                                                          Equity

Equity ratio =                           Equity                               x 100 %
                        Balance sheet total – advances received

 
Administration and personnel 

In 2013, the Supervisory Board met five times, the Board of Directors met 13 times, and the audit committee of the Board of Directors met five times.

The Annual General Meeting, held on 11 April 2013, addressed the matters listed in Article 11 of the Articles of Association and decided to increase the company’s share capital.

Members of the Supervisory Board at the Annual General Meeting for the period 2013−2016 were elected as follows: Eija Hietanen, Director of Strategy and Administration, Central Organisation of Finnish Trade Unions SAK; ­­Pertti Salolainen, Member of Parliament; Seppo Toriseva, entrepreneur; Tapani Tölli, Member of Parliament; and Maria Lohela, Member of Parliament for the period 2013−2015 in place of Pirkko Mattila, Member of Parliament, who resigned­, for the remaining term of office.

Members of the Board of Directors elected at the Annual General Meeting:

Ritva Laukkanen, Partner, Sagacitas Finance Partners Oy Ltd., Chair
Kari Alanko, Deputy Director General, Ministry for Foreign Affairs, Vice Chair
Tuukka Andersén, Director of Finance, Finnvera plc
Tuuli Juurikkala, Special Advisor, Ministry of Finance
Nora Kerppola, Managing Director, Nordic Investment Group Oy
Riikka Laatu, Deputy Director General, Ministry for Foreign Affairs
Päivi Leiwo-Svensk, Chairman of the Board, Oilon International Oy
Markus Pietikäinen, Vice President, Wärtsilä Oyj Abp

The members of the Board of Directors do not have deputy members.

At the Extraordinary General Meeting held on 3 October 2013, Counsellor Pekka Hukka was elected as permanent member of the Board of Directors in place of Riikka Laatu, who resigned on 20 September 2013.

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The Board of Directors has an audit committee, with the following members since 25 April 2013:

Markus Pietikäinen, Vice President, Wärtsilä Oyj, Chair
Tuukka Andersén, Director of Finance, Finnvera plc
Tuuli Juurikkala, Special Advisor, Ministry of Finance

The company’s auditors are PricewaterhouseCoopers Oy, authorised public accountants, with Juha Wahlroos APA as the Principal Auditor.

The company CEO is Jaakko Kangasniemi PhD (Agricultural Economics).

During the year under review, the company employed an average of 49 people (49). At year-end, the number of employees in contractual employment was 51 (52), of whom 47 (46) worked full-time. Of the 52 employees, 37 were women and 14 were men.

Total wages and salaries paid to personnel in 2011-2013 were as follows:

	2013	2012	2011
Average number of personnel	49	49	49
Total wages and salaries, EUR 1,000	3,840	3,636	3,414

The final accounts for­ 2013 include a provision for incentive bonuses earned in 2013, amounting to 6.71 per cent of payroll expenses (5.89 per cent). Incentives are partly based on mee­ting performance targets at company and function level, and partly based on individual performance.

In 2013, operation in the new organisation structure became established after the reorganisation implemented in 2012.

Outlook for 2014

In accordance with the development policy programme adopted by the government in February 2012, and with the goals set for the company by the Ministry for Foreign Affairs, Finnfund aims to improve the positive developmental impacts of its financing and to focus pri­marily on low-income and lower-middle-income developing countries. Finnfund aims to continue to work in close co-operation with Finnish enterprises in these countries in particular. In the future, investments in upper-middle-income developing countries will only be made selectively, mostly in projects that are estimated to generate significant environmental and developmental impacts, and to the achievement of which Finnfund can contribute sub­stantial added value. In accordance with its strategy as updated in autumn 2013, Finnfund is prepared to assume a more active and risk-oriented role to provide a catalyst in some of its projects. To diversify and bala­nce its portfolio, Finnfund will also participate in joint ventures, where risks and work can be shared with other development finance institutions, for example.

The amount of new investment commitments is estimated to remain at approximately the same level as in 2013. Since the number of undisbursed commitments and decisions was much higher at the end of 2013 than at the end of 2012, the number of disbursements is expe­cted to increase clearly in 2014 and the investment assets to take a clear upward turn after the drop in 2013.

Liquidity will probably remain good in 2014. The supplementary budget confirmed at the end of 2013 and the budget for 2014 include an appropriation totalling EUR 18 million for an increase in the share capital of Finnfund in 2014. Company liquidity will be further enhanced by the bo­nds issued in 2013. Terms for Finnfund borrowing are estimated to remain reasonable.

The special risk financing approved by the Ministry for Foreign Affairs in 2012 improves Finnfund’s chances of financing projects with a high level of financial risk, but with significant developmental impacts if success­ful.

The outlook for 2014 is moderate. The company’s financial performance will be crucially affected by how the estimated value of its investment assets changes during the financial period and whether any profi­table exits from projects occur. These are usually difficult to anticipate, although at the beginning of the year, one significant exit has advanced far enough to render the forecast profitable.

The administration of the Finnpartnership programme will continue as before. In 2014, preparation measures will be launched with the aim to incorporate the programme as a permanent part of Finnfund operations by the end of 2015.

Proposal of the Board of Directors for the distribution of profit 

The company recorded a profit of EUR 2,701,933.38 in 2013. The Board of Directors proposes that the profit be transferred to the retained earnings account and set aside for disposal in accordance with Article 2 of the Articles of Association.