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For the good of Finnish firms or developing countries? Government’s commercialisation of development aid

Critics of Finland’s development assistance policy question if more private sector aid funding will benefit developing countries or Finnish business interests.

kumiviljelmiä ja vuori
Finnfund has invested in rubber plantations in Borneo through a fund registered in the Cayman Islands. Image: New Forests

In 2015, citing the need for austerity in light of a prolonged economic downturn, Juha Sipilä’s fledgling government slashed Overseas Development Aid (ODA) funding to Finnish NGOs by 43 percent. At the same time, it increased backing for the state-owned private sector development finance agency Finnfund by some 1,200 percent.

Timo Lappalainen, executive director of Kepa, the umbrella organisation for development assistance NGOs in Finland, told Yle News that the government’s signal on the policy shift was quite dramatic – and worrying.

“I think tied to it was some kind of underlying desire to help Finnish companies find their place in thriving markets in Africa. That confused the pitch right away. Are we talking about the interests of developing countries? Or are we talking about Finland’s interests here?” he asked Yle News.

Nevertheless, the gouging cuts sent NGOs scrambling, with many having to suspend development programmes mid-stride. Finnfund itself was caught off-guard by the massive injection of funding.

“Our members said it has affected around one million people in developing countries altogether. A typical example is a big organisation like Plan Finland that works for women’s and girls’ rights. As a consequence of these cuts they’ve had to drop programmes running in [Central] Africa. In one programme there were thousands of girls and it just fell down – it hit a wall.” Lappalainen added.

Aid money spent in Finland

Helsinki University development aid lecturer and researcher Lauri Siitonen pointed to what he calls the increasing commercialising of aid policy, which he charged is consistent with the current government’s overall ideological push to replace the public sector with the private sector. Siitonen noted that one surprising aspect of Finland’s aid policy is that in recent years, a growing proportion of aid funding has never even left the country.

“An increasing amount of aid funding is being used on refugees in Finland. Ironically, it means that Finland is becoming the leading target of so-called foreign aid,” the researcher explained.

In particular, reception centre operations have accounted for much of Finland's domestic aid spending. In 2016, Finland shelled out over 600 million euros on accommodating asylum seekers, and of that amount, over 500 million was paid out to non-state parties, according to figures from the Finnish Immigration Service, Migri.

As a result, Siitonen said, it is the poor in need of development aid abroad who bear the burden of these policies. “The poorest people pay for this. And it really doesn’t matter how well a poor country follows the conditions set by Finland in terms of democracy, human rights or gender equality, the aid can always be cut depending on what kind of government is in Helsinki.”

Siitonen also noted that among Nordic countries, Finland is unique for its relatively modest spending on development aid. He said that while other Nordic states either meet or exceed the 0.7 percent of Gross National Income (GNI) recommended by the OECD, Finland lags behind its peers in the region.

This year Finland has reserved some 886 million euros for development aid expenditure, or some 0.38 percent of GNI, the lowest level in some time.

Figures show that Finnish development aid spending in 2016 represented 0.44 percent of GNI, down from 0.55 percent in 2015 and 0.59 percent in 2014. In 2017, it was 0.41 percent of GNI.

Kepa noted that recent economic gains mean that the 2018 component is actually more in the region of 0.37 percent of GNI.

Private sector role growing globally

The main beneficiary of the government’s ideological attachment to the private sector, even in promoting development overseas is Finnfund, a state-owned organisation that funnels financing into private sector projects in selected target countries. Its operations are supervised by the Foreign Ministry, which is also responsible for handing out aid money to NGOs.

Finnfund CEO Jaakko Kangasniemi told Yle News that the government’s decision to focus more on private sector development projects reflects a global trend. NGOs have done a great deal in so-called soft sectors such as education and health, but they do not necessarily promote job creation or productive capacity, he added.

“It’s now been realised that especially when you are talking about the poorest countries and the fragile countries, you can’t just sort of go with development cooperation and assume that the private sector will jump in its place. It [the private sector] needs to be encouraged and facilitated with risk-sharing and financing from development financing institutions.”

Finnish development policy seeks to create good jobs, improve access to energy and food, to help developing countries generate income and tax revenues and empower women – and all of that happens through Finnfund, Kangasniemi said.

But Kepa’s Lappalainen noted that the countries most in need of development aid, the ones with the weakest institutions, may not attract private sector projects or investments.

“When you think of the least-developed countries where the infrastructure is rather poor and institutions are not very effective, the private sector just doesn’t want to go there and invest in very fragile conditions. So therefore those investments seem to be directed at middle-income countries and from the development policy perspective they are not the target.”

Story continues after photo.

Mies pyöräilee tiellä puiden siimeksessä.
A reforestation project in Uganda. Image: Petteri Juuti / Yle

Åbo Akademi researcher Dr. Faith Mkwesha said that while development programmes delivered by NGOs can help people in distressed situations in the short term, in the long term they are a double-edged sword.

"But they also create a dependency syndrome and hamper people's creativity and long term development of nations. Also, the ideological framework of NGOs comes from the colonial mentality of white saviour and the discourse is about saving poor people or hungry people or uncivilised people," she declared.

Mkwesha endorsed Kangasniemi's view that the private sector could play an important role in developing communities and creating jobs. "Finnfund would be more productive [than NGOs] in terms of developing infrastructure and creating jobs, and not creating dependency. Also the business model -- if they work in partnership and provide skills -- has better political, economic and social impact in a more productive way. But, it also depends on the scale [on which] this is done," she added.

The researcher said that what works for Africa is investments that create jobs and develop industries to process raw material locally into products for export. However she pointed out that governments need to balance support for both the private sector and civil organisations "as there is a desperate need in most countries for food and basic needs."

Tax avoidance, worker rights issues

But some NGOs in Finland say they are concerned about the potential traps that face private companies investing in development projects. In the past, Finnfund has come under intense scrutiny for what some see as a lack of transparency in how it moves money around to service its aim of investing in profitable and sustainable investments. In late 2017, as part of its reporting on the leaked Panama Papers data trove, Yle wrote that the agency had cycled some eight million euros invested in a forestry project in Asia by way of the Cayman Islands, a known tax haven.

The NGO Finnwatch describes itself as an organisation focusing on global corporate responsibility, keeping track of the activities of Finnish corporations and their international operations. Finnfund came into the NGO’s crosshairs over the Cayman Islands caper.

According to Finnwatch executive director Sonja Vartiala, in 2017, more than 75 percent of Finnfund’s funds were located in tax havens. The New Tropical Asia Forest Fund (TAFF) was just one such project where Finnwatch found that financing arrangements aimed to bypass tax liability in both Finland and in the development targets in Asia.

“We found very aggressive tax schemes that were used in the fund. Also what we believed to be tax avoidance that we reported to the Finnish tax authorities. And also when it comes to human rights issues such as land grabbing, decent work conditions, wage levels, freedom of association, these are not in the indicators that the Ministry of Foreign Affairs is looking into,” Vartiala declared, adding that generally, there was much room for improvement in the transparency of Finnfund’s investments.

Finnfund chief executive Kangasniemi acknowledged the criticism, and noted that the agency adopted a new tax policy in early January which requires target firms to pay taxes locally.

“We assess the tax responsibility and we review the corporate, finance and ownership structures of the projects we finance. We also investigate the backgrounds of co-investors and the ultimate beneficiaries – although we cannot be responsible for where our co-investors pay their own taxes,” Kangasniemi countered.

In spite of Kangasniemi’s assurances, Finnwatch’s Vartiala said she wants Finnfund to abide by the same rules for transparent reporting applied to NGOs – including monitoring of factors such as labour conditions, land grabs, the right of workers to associate and other contemporary corporate social responsibility requirements.

Kepa’s Timo Lappalainen said that Finnwatch’s vigilance has been rewarded by stricter guidelines from the Foreign Ministry on Finnfund’s development activities. But at the same time, he noted that he would like to see recent economic gains reflected in an easing of the purse strings when it comes to overseas development aid.

“When Finland is on the ropes economically, we see spending cuts, but when the economy recovers there is still no action. This comes down to political will and I would like the politicians to remember the 2030 development goals we have all committed to,” he pointed out.

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