Export financing yields extensive benefits – read how financing projects generate growth in cruise ship building and telecommunications
When talking about export financing, the topics that often come up include the total exposure related to export credit guarantees that has increased during the past few years as well as the concentration of financing in a couple of sectors. In Finland, those sectors are cruise ship building, telecommunications and network technology, and the forest industry. Nevertheless, the impact of export financing extends beyond individual projects as different sectors form clusters that generate growth and create jobs in a large group of enterprises.
The impact of export financing has been studied by the Research Institute of the Finnish Economy (Etla), among others. Its report that was published in the Government analysis and publication series in autumn 2018. Etla reviewed Finnvera’s largest export financing projects, related to Nokia and Meyer Turku and their clients.
According to the report, a EUR 1 billion export credit guarantee project for Meyer would mean that, in Finland, Meyer and its value chain would create added value amounting to EUR 635 million and its total impact on employment would be approximately 9,100 jobs.
Calculated with the input-output model, added value illustrates the cascade effects that the investment produces as tax revenues and other payments, for instance, to the home country.
“One billion euros is a good gauge. Cruise ships are large individual projects, and strong demand for financing in the past few years, especially in the cruise ship sector, is a key factor behind the rapid increase in Finnvera’s exposure related to export credit and special guarantees and the need for raising financing authorisations. Globally, large cruise ships are hardly ever sold without state export credit guarantees, and Finland’s competitor countries offer these guarantees actively. Added value amounting to more than EUR 600 million and an impact on employment totalling nearly 10,000 jobs show how significant cruise ship projects with their positive cascade effects are,” says Finnvera’s Executive Vice President Jussi Haarasilta.
Finnvera’s export financing is not gratuitous, and operations are funded with income from clients. With export credit guarantees and, to an increasing extent, buyer financing granted to foreign buyers, Finnvera contributes to the competitiveness of Finnish export companies in international markets.
“From the point of view of competitiveness, it is clear that the benefits of a EUR 1 billion shipbuilding or telecommunications project for Finland do not amount to EUR 1 billion. Enterprises maintain their international competitiveness by organising procurement and production in the most cost-efficient manner considering the sector in which they operate. However, as Etla’s study shows, the value chain yields significant benefits for Finland,” notes Haarasilta.
Financing and its impact extend over years
The Finnish maritime industry cluster is large even on a global scale and it is comprised of up to 3,000 enterprises, with a combined turnover of EUR 13 billion. Roughly one-third of the companies are located in Southwest Finland, with Turku Shipyard at the core of the cluster.
The impact report published last year by the University of Turku and Meyer Turku describes how the shipyard creates jobs in its surroundings. Its immediate procurement network consists of 1,220 direct suppliers, nearly 1,000 of them Finnish. In addition, the effects can be seen in subcontracting networks, also at the international level. Approximately 800 enterprises take part in building a single cruise ship, and roughly 80 per cent of the ship’s value is contributed by the work carried out by the enterprises in the networks. The economic impact also includes the investments in production plants and equipment made by the shipyard and its supplier network, exceeding EUR 200 million.
The shipyard and its networks employ up to 7,000 people. According to the shipyard’s estimate, this figure will gradually grow to up to 20,000 by 2023, which goes to show that there will be projects in the pipeline for years to come.
The current financing agreements are signed for a long term and associated with ship projects that will completed in several years’ time, which is also typical of export credit guarantee activities. In September 2018, the latest cruise ship project was published, with Finnvera granting an export credit guarantee that amounts to more than EUR 500 million. The project is the latest Mein Schiff ship that Turku Shipyard will build for the Tui Cruises shipping company. The scheduled handover to the buyer is in 2023.
A year ago, Finnvera participated in the financing of two cruise ships ordered by Royal Caribbean Cruises by providing the shipping company with buyer credit financing and an export credit guarantee, amounting to more than EUR 2.5 billion. This buyer financing was related to the shipbuilding agreements published by the shipping company and Meyer Turku Ltd in 2016.
“Export financing guarantees are an absolute pre-requisite for getting these large and long-term cruise ship orders to Finland. Without an arrangement like this, no large cruise ships would be built in Finland. As our operations rely heavily on the surrounding maritime industry network, guarantees yield benefits for an extremely large group of enterprises in Finland,” comments Tapani Pulli, Deputy to the Managing Director at Meyer Turku.
Export financing provides Finnish export companies with competitive solutions
Similarly to cruise ship projects, telecommunications network projects are extremely large, but there are differences in their nature. The telecommunications sector is a high-tech field, with many points of contact with the technological development in society. This can also be seen in the impact of export financing: by providing guarantees for high-tech export projects, enterprises are encouraged to conduct their R&D activities in Finland. Another important aspect is the ability to respond to export financing services offered by competitor countries, such as Sweden, in order to ensure that the sector has equal development opportunities in Finland.
In 2017, Finnvera was involved in the largest individual financing transaction in its history. The transaction took place in the telecommunications sector: Finnvera facilitated Nokia’s telecommunications equipment deliveries to Verizon, the largest network operator in the United States, by providing an export credit guarantee and buyer credit financing, with Finnvera’s total exposure amounting to approximately EUR 1.3 billion.
This year, Finnvera has been involved in a project of nearly equal magnitude, arranging a USD 1.25 billion, or more than EUR 1 billion, export credit guarantee for a delivery contract between Nokia and AT&T, the second largest operator in the United States.
“In network business, succeeding in international competition requires that the enterprise has similar opportunities for export credit guarantees and financing arrangements as its main competitors. The fact that teleoperators are increasingly turning to export credit agencies and financial institutions is partially a result of banks’ stricter capital adequacy regulations. In a similar vein, large, financially solid operators in the United States, for instance, want to diversify their sources of long-term financing. There is no change in sight with regard to this trend as 5G investments have started around the world. For Nokia, competitive export credit guarantee and financing arrangements are important for business success,” says Nokia’s CFO Kristian Pullola.
Etla estimates that the EUR 1 billion deliveries within the scope of Nokia’s export credit guarantees and export financing create EUR 320 million in added value in Finland, with one fifth created by other enterprises in Nokia’s value chain. All in all, Nokia has approximately 700 suppliers in nearly 70 municipalities in Finland, and the total impact of Nokia’s export credit guarantees on employment in Finland is approximately 2,600 jobs.
Everything is based on risk management
Increased export financing authorisations and exposure have raised questions about potential risks. This has been analysed in several independent studies last year and this year.At the same time, Finnvera develops risk management and its reinsurance operations, for instance, as a part of the risk management strategy. The goal for Finnvera’s operations is for them to be self-sustainable. This defines the limits for risk-taking and risk management. In the long term, profits from operations must exceed expenses and potential credit losses.
“With export financing, Finnvera carries out its basic task. Our task is to help Finnish export companies win markets and to ensure competitive export financing. Financing decisions are always based on careful analysis, risk assessment and self-sustainability,” says Jussi Haarasilta.
More information on this topic:
A study looked into the impact of export financing (in Finnish)