Managing Director’s report

A record-warm winter in 2013–14 reminded us in Finland of the threat from climate change. At the time of writing, a group of prominent corporate executives has been calling for more investment in renewable energy, and a study into whether Finland could be the first country in the world to stop using coal for generating power.

The underlying intention, and a worthy one, is to promote Finland’s image as a front runner in clean technology. At the same time, though, it is worth examining what the most efficient ways are of stopping changes in the climate.

At Finnfund we believe that the finest prospects for curbing climate change lie in the developing world. That is where even the most obvious investments in energy efficiency are usually neglected, and the greatest opportunities for renewable energy and preventing deforestation are disregarded.

Finnfund’s mission is not to curb climate change but to reduce poverty through profitable business. In the past few years, however, our primary objective has steered us increasingly towards the financing of climate-related projects in the developing countries. In a world where natural resources are dwindling and energy prices are rising, renewable energy, energy efficiency, recycling and sustainable forestry appear to be profitable investments and efficient ways of reducing poverty.

Naturally, we also study how projects aimed at promoting development will impact the climate. The figures suggest that the effects are staggeringly great. We have financed many projects that achieve an annual reduction in carbon dioxide emissions equivalent to the average annual emissions of tens of thousands of cars. For a few projects, the savings amount to the annual emissions of hundreds of thousands of cars.

There are two distinct explanations for the large numbers. Firstly, a typical climate-related investment in a developing country produces or saves more power than an equivalent investment in Finland or elsewhere in Europe. Where no investments of this type have been made, we can select the “low-hanging fruits”. We only invest in wind power stations where the wind blows strongly all year long. In bioenergy we choose projects where there is an existing flow and stockpile of fuel in the form of waste from a processing plant. In energy efficiency we can finance in the developing countries investments that resemble those made in Finland decades ago. The projects vary but on average we can probably count on doubling the impact; equipment financed by Finnfund to use renewable energy or to boost efficiency generates or saves twice as much power in the developing world as it would in Finland.

The other explanation for the large climate benefits stems from the fact that the power sector in developing countries is inefficient. In the rich world, the energy generated from renewable sources or saved through improvements in efficiency typically replaces some of the output of a large, fairly efficient power station that burns fossil fuels. In developing countries the avoided alternative is far more expensive and far more dirty power from old and inefficient power stations or even more wasteful backyard generation. Nigeria, for example, uses several million small diesel generators that are estimated to emit three times as much carbon dioxide per unit of electricity as modern natural gas plants. On average, the difference between Finland and many low-income countries may be a factor of about two: by replacing the poor options currently in use, a project financed by Finnfund to produce or save power eliminates twice the amount of emissions that it would eliminate in Finland.

When double the output is combined with twice the emission reductions per unit of output, the result is astonishing. A typical investment by Finnfund in the developing countries to promote energy savings or renewable energy will curb climate change approximately four times as efficiently as the corresponding investment in Finland.

Via multiplier effects the impact can be even greater. Finnfund’s largest investment decision in 2013 was for a 310 MW wind farm to the east of Lake Turkana, Kenya, which will probably be the largest wind power project in Africa when it is completed. Thanks to the strong, steady winds that blow across this area, the utilisation rate for turbines at Lake Turkana is expected to be more than twice the typical European rate. This means low generating costs, especially after the project’s power lines, roads and other infrastructure have been built. It therefore seems likely that, once it starts running, Lake Turkana Wind Power will be followed by many other projects. As a result, a large amount of coal-burning power capacity will not be built.

Another, farther advanced example is a pellet factory that started up last year in Indonesia. The project, developed by Finnish entrepreneurs, produces pellets from agricultural waste that was previously dumped in the sea. The pellets are exported and used to substitute for coal. Financed by Finnfund, Dovre Plc of Finland and others, it is the country’s only large pellet plant and the only one in the world to use this kind of waste stream. Encouraged by this model, several similar plants are now under development in Indonesia.

Finnfund has financed other pioneering climate-related projects in recent years, the success of which will serve as trail blazers and thereby achieve disproportionally great effects in curbing climate change, creating jobs and strengthening the tax base. Finnish clean technology and advanced practices are involved in several of these. We intend to cooperate ever more closely with Finnish clean tech experts and their partners in the developing countries.

In 2013 Finnfund took decisions to invest in 20 projects with a total value of EUR 90 million. Most of the investments were in renewable energy, improving energy efficiency, recycling and sustainable forestry. Some of the projects, although assessed as having excellent development impacts, were regarded as high-risk and were made possible by the special risk finance arrangement agreed with the Finnish government in 2012.

Although no capital gains were recorded in 2013, the company’s result was better than in the previous year. Disbursements were fewer than repayments and the investment portfolio shrank. The dip will probably be brief, because more investment decisions were made than in the previous year and the stock of undisbursed investments rose.

Many of the capital investments made by Finnfund in 2013 are not expected to produce a steady return but will generate most of their yield as capital gains at the time of exit. This trend will be partly counterbalanced by the special risk finance arrangement, by the fact that several projects will move this year from the construction phase to production, and by the recent decision to focus somewhat more on lending at the expense of equity investments. Nevertheless the company’s annual results over the next few years will fluctuate considerably in line with the timing of exits and write-downs.

It is therefore valuable for the company to have the strong backing of its main shareholder, the Finnish government. The government budget for 2014 allocates EUR 10 million for raising Finnfund’s equity. It has also been agreed that some of the income received by Finland from emissions trading last year will be allocated to development cooperation, a decision approved by parliament at the end of the year. This will provide the company with an extra capital injection of EUR 8 million. Although Finnfund has more debt than its Nordic peers, these capital increases will allow more investments in poor countries and in climate change mitigation without jeopardising access to refinancing.

I would like to thank Finnfund’s customers, staff and other stakeholders for their support in 2013.

Jaakko Kangasniemi
CEO