The aim of concessional credits is to support the economic and social development of developing countries with the assistance of the know-how and technology offered by businesses. The interest subsidy is a financial instrument, in which the funding of export directed to developing countries is supported by subsidising the granted export credit with interest paid from the Finnish Government’s development cooperation funds. The credit is interest-free for the borrower. Concessional credits may be granted to low income and low average income countries.
Finland’s new Development Policy Programme outlines the development of new forms of cooperation to replace the use of concessional credits. The work will be carried out in cooperation with the private sector. During the transitional period, the Ministry for Foreign Affairs will not process new project applications, but will concentrate on the handling of pending applications.
Decisions made by the foreign ministry, risks guaranteed by Finnvera
The granting of concessional credits is regulated by act 1114/2000 and the Council of State’s decree 1253/2000. Finnvera receives the applications for buyer credit guarantee. The Ministry for Foreign Affairs is responsible for the evaluation of projects, monitors the procedures of procurement and decides on the granting of interest subsidy on a concessional credit. Concessional credits are guaranteed by Finnvera (the official Export Credit Agency of Finland). All banks operating in the European Economic Area can act as lenders. The lender is chosen by the exporter. The granting of credits is done in compliance with principles stated in the OECD Arrangement on Guidelines for Officially Supported Export Credits. According to these principles, credit may only be given to financially non-viable projects. This means that the borrower should not have such financial gain from the project that the costs of a commercial credit could be covered or that commercial credit is not available. The projects are in general projects of the public sphere. Tied aid cannot be granted to least developed countries (LDC-countries) and must involve a concesionality level of at least 35 %.
The projects receiving an interest subsidy must be economically, environmentally and socially sustainable. The Council of State’s 2007 development policy programme aims to make the interest subsidy more effective and versatile and improve its influence on development. What is most important is the development influence the project has regardless of the sector. Compatibility with the partner country’s own development strategy is verified in the preparation and evaluation of projects.
New guidelines in 2008
New guidelines concerning the use of concessional credits are being updated in 2008 based on the government's development policy programme of 2007. The guidelines define the procedures by which interest subsidies may be productively used in development cooperation through the implementation of high quality projects, which are appropriate for the needs of the recipient country.
The use of concessional credits has become more versatile, and the aim is to increase cooperation with more countries based on interest shown by businesses. According to international commitments, half of new development cooperation funds are to benefit Africa. For concessional credits this means that an effort is made to expand the cooperation and the range of partner countries in Africa. The use of interest subsidy is essential in transition countries, where cooperation is being developed towards normal economic relations.
The 2007 development policy programme requires that the use of concessional credit be focused especially on supporting investments in the environment- and infrastructural sector based on national development plans. The strict linkage with operations originating from Finland will be loosened. Instead, during the acceptance process, the projects are examined in a wider context in terms of how they realise Finnish interest.
The policy operates as a set of general guidelines to all interest subsidy parties: the foreign affairs administration, other officials, businesses, finance providers and partners.
Attention to project preparation and monitoring
Greater attention is given to project preparation, for example, by providing technical support. The aim of the measures used to make the instrument more effective, is to ensure the development influences of the projects. Monitoring of projects is strengthened through the cooperation between the Ministry and relevant diplomatic representations. Thus, stronger cooperation with the partner country’s officials is secured.
In the administration of projects special effort is put into preventing fraudulent means of being used to acquire the acceptance of a project funded with Finnish interest subsidies. For this purpose memorandums of understanding are signed by both parties.
The disbursements of interest subsidy for concessional credits have fallen after the peak years of 1994–1995, both quantitatively and especially in relation to the simultaneous increase in total development cooperation disbursements. The reason for this is the total reimbursement of large industrial projects, which had been approved before the Helsinki- package came into effect. In 2004-2007 the disbursements declined somewhat compared to previous years mostly due to a decrease in approved projects. At the moment there are many projects under development, but the preparation of each project takes a long time. In Vietnam alone 22 interest subsidy projects are in preparation.
In 2006-2007, eight new projects were approved. Four projects were approved for China, two of which fell into the agricultural sector, one was a cold storage project and the last one a central heating project. One hospital equipment project and one an electricity supply project were approved for Vietnam. In the Philippines one project for the restoration of waterways and in Namibia one hospital project was approved. A total of some 33 million Euros were committed to new projects.
The credit may be granted by Finnish or other licensed credit institutions operating within the European Economic Area. During 2007, Nordea Bank, HSH Nordbank and BNP Paribas granted credits for concessional credit projects. The exporter has the right to choose the financier.
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