R E S T R I C T E D

Report No. T 0-284a

This report was prepared for use within the Bank. It may not be publishednor may it be quoted as representing the Bank's views. The Bank accepts noresponsibility for the accuracy or completeness of the contents of the report.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

APPRAISAL OF FINNISH WOODWORKING PROJECTS - 1961

FINLAND

July 28, 1961

Department of Technical Operations

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CURRENCY EQUIVALENTS

$1.00 =Fmk 320Fmik 1 =$. 003125Fmk 1 million =$3, 1Z5

All quantities are given in metric m4easurements.

APPRAISAL OF

FINNISH WOODWORKING PROJECTS - 1961

TABLE OF CONTENTS

Paragraphs

S1ITMARY AND CONCLUSIONS i - viii

I. I,TRODUCTION 1 - 4

II. TIE B(ALROWER 5 - 7

III. THE FINN'UISH WkODYIORKING INDUSTRY 8 - 22

General 8 - 12

Technical Level of the Industry 13

Organization of the Industry 14 - 16

Recent Development of the Industry 17 - 22

IV. TIIE EXPANSION PROGRAli (Incl. Hap showinglocation of the projects) 23 - 26

V. IMA =KES 27 - 38

VI. RESCLJRCES 39 - 51

Wood 39 - 46

Power 47 - 48

Labor 49

Transportation 5o - 51

VII. THE PROJECTS 52 - 71

General 52

Financial Requirements 53 - 55

Availability of Domestic Equipment 56 - 58

Domestic Financing 59

Description of the Projects 60 - 68

Economic Benefits 69

General Aspects of the Projects 70 - 71

A P&MD L

The Mortgage Bank of Finland Oy

APPRAISAL OF FI'NIS,-cIO.Di^.i?iziG PROJECTS - 1961

SUhKLRY AND CONTCLUSIONS

i. The Bank has been asked to consider making a loan to finance theuncovered needs of a number of projects of the Finnish woodworking in-dustry, which represent a major part of the industry's investment pro-gram over the next few years.

Seven projects have been found suitable for Bank financing int,he total amount of $24.67 million equivalent. The projects selected andt,he amounts of the proposed loan allocations to each of them are asfollows:

Million $Equivalent

Sulphate Pulp

Kymiene Ab 5.02Cy Kaukas Ab 3.00Joutseno Pulp Cy 2.19

Newsprint and Printing Papers

United Paper Mills 4.00Kajaani Oy 5.78

Kraft Paper

Oy Schauman Ab 3612

Rationalization (SulDhite Pulp)

Serlachius Oy 1.56

Total $24.67

iii. The projects selected have been investigated in the field byBank staff members. They are all of high economic priority. The mainpurpose in all cases is the expansion and/or modernization of productionfacilities to enable the enterprises to maintain or improve their posi-tion in the export markets on which they depend. The projects wouldresult in increases of 375,000 tons in annual capacity for the produc-tion of sulphate pulp, 172,000 tons of newsprint and high-grade printingpapers and 80,000 tons of kraft paper. One project would concentrateo,n the rationalization of sulphite pulp production. Sufficient pulpwood is available for the proposed planned expansion although a gradualdiversion to the pulp industry of some of the wood now being used forother purposes would be required. World demand for the Finnish pulpand paper products is expected to grow sufficiently to absorb the bulk

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of the additional production. All the companies are sufficiently strongfinancially to withstand a temporary decline in demand for their products.

iv. With the eXception of one company, all the enterprises havebeen beneficiaries under previous Bank loans, three of them under themost recent loan to the Finnish woodworking industry (Loan 222-FI). Tw4oof the projects have already been started, three others are resdy tostart and some further detailed planning work is necessary for the tworemaining projects. The engineering for all the projects is in goodhands and the managements of the companies involved are efficient.Satisfactory arrangements have been made to provide the funds which wouldbe needed in addition to the proposed Bank loan.

v. Contracts for major items would be placed as in the past onthe basis of international bids. Although the amount required for localpurchases of equipment cannot be determined precisely until final ordersare placed, it is estimated that the total foreign exchange requirementsfor carrying out the projects would exceed the amount of the Bank loanrequested.

vi. It is proposed that the loan be made to the 11iortgage Bank ofFinland Oy, a subsidiary of the Bank of Finland, with the guarantee ofthe Finnish Government. The Mortgage Bank would in turn conclude a:Loan agreement with each of the companies concerned. The terms andconditions of these loan agreements would be subject to Bank approval.The industrial concerns would bear t-e foreign exchange rish. Therank of Finland has undertaken. to arrc'n.e for additional fifnids to be:Sade available to the companies, if necessary, to complete the projectsand to cover any possiblc shortfall in 4nitinl working eanital.

vrii. In appraising the selected projects, it has been assumed thatthe subsidiary loans would be for terms of 15 years, including graceperiods of 3 years, and bearing interest of 61 per year. Local long-term loans would be available at rates of 7% to 71% per year for termscof 10 to 20 years, including grace periods of 1 to 3 years. On theseconditions and on conservative assumptions as to future production,sales and earnings, the companies should be able to earn a satisfactoryreturn on their investments and to generate sufficient cash to servicetheir debt and distribute normal dividends without impairing theirliquidity position.

viii. The seven projects provide a suitable basis for a Bank loanof about $25 million equivalent to the Mortgage Bank of Finland Oy fora term of 15 years, includling a grace period of 31- years (or six monthslornger than has been calculated In the appraisals).

I. INTRODUCTION

1. Between 1949 and 1959, the Bank made loans totelling t68.3 millionto the Finnish Woodworking Industry (Loans 16, 61, 70, 112, and 222-1F).This is close to 7O/ of the total amount loaned to Finland to date. TheBank loans were used to finance essential equipment and materials mostlyimported for the woodworking industry and included loans for 30 majorprojects. In the earlier stage of Bank lending to the woodworking industry,financing was for rationalization and modernization as iwell as expansionprograms; in the lst two loans t'ie emphasis was on investments resultingin expansion of production facilities. Through financing stearm and powerinstallations in the woodworking industry, the Bank indirectly assistedthe expansion of the overall powJer economy of the country.

2. All projects financed under the first four loans have been com-pleted and are in operation. Of the nine projects financed under the mostrecent loan to the woodworking industry, all but two are virtually com-pleted. Construction of all projects has been or is expected to be com-pLeted within original estimaates. Project costs have remained withinthe estimated provisions, except where projects were expanded with theapproval of the Bank.

3, In September 1960, Finland asked the Bank to provide furtherfinancial assistance to the Finnish lVoodworking Industry. Preliminaryinformation on the projects was received in January 1961, and in Februaryand March a mission visited the country to reappraise the economy ofFinland and study the projects. Tlhese projects were selected by theMortgage Bank of Finland on the basis of their importance to the Finnisheconomy and their need for foreign exchange to the extent possible, al-tlhough the Bank had stated that it would be willing to finance localexpenditures also if it should be found impractical to apply the proposedloan exclusively to imported equipment.

4. Seven projects have been found suitable for Bank financing in thetotal amount of $24.7 million. These projects, iwhose total cost is esti-mated at $MM3.3 million equivalent, represent the greatest part of thewc'odworking industry's proposed investment program for pulp and paper intne near future. Apart from one rationalization project without capacitynncrease, they provide for an expansion of 375,000 tons per year in capacityfor sulphate pulp (of which 84,000 tons would be further processed intokraft paper), 172,000 tons per year of newisprint and higl grade printingpapers, and 80,000 tons per year of kraft paper. The expansion of facilitiesiTould also result in an increase in overall operating efficiency.

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II. THE BORROWZER

The borrower would be the iIortgage Bank' of Finland, a subsidiaryof the Benk of Finland, establislhed in 1956 as the channel for Bank loans,because the Bank of Finland believed it inappropriate for it to engage inlong-term lending. If the loan is granited, the Bank of Finland would makethe necessary arrangements for an increase in the equity cEpital of theI[ortgage Bank, to enable it to assume the proposed additional loan commit-rrment within its statutory borrowning limitations. (Details on tlle IMortgageBank's powers, operations and financial conditions are given in the Appendix )

6. The A-ortgage Bank would be the instrument through which the Bankloan vould be channeled and adm-ainistered. It would relend th'e proceedsof the loan for thLe projects approved by the Bank and would enter intoloan egreenents with the ultimate loan beneficiares in approved arnountsand on terms satisfactory to the Bakc. The loans would be securer bymortgages, in amounts not exceeding 60, of the appraised value of therelative properties. The foreign exchange rislk would be carried by theultimate borrowers. The Bank loan would be guaranteed by the Finnishgovernment.

7. Since its creation, the Iviortgage Bank of Finland has maintaineda particularly close relationship with the Bank, and previous lendirg oper-ations to the Finnish woodwTorking industry have been carried out in a riannerhighly satisfactory to both parties.

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III. TIE FUINISH I0OODWORKING INDUSTRY

8. The position of the Finish forest industries in the Finnisheconomy, their early history and postwar development and their characterand organization today were discussed in TO 201a. Certain outstandingfeatures are discussed below.

9. The forest industries dominate the Finnish economy. About three-quarters of the export income of the country is derived from forest pro-ducts. About 7% of the active labor force is engaged in forestry, another4.5%0 in woodworking and additional workers are errloyed in floating logsfrom the forests to the mills and transporting wood and wood products byrail and road. The forests provide an important outlet for employmentbetwyeen Niovember and May when most of the work is carried on and unemploy-ment in sore industries is seasonally high. Finally, they provide a largefraction of the income of the forest owners, mostly small farmers, Tho ownabout 63, of the country's forests; the remainder is owTnLed by the government,woodworking companies, and various public institutions.

10. Finland's pulp and paper industry is the second largest in Europe,ranking after Sw-feden. In 1959 it produced over 23% of the total WesternEuropean output of woodpulp, close to 18% of the newsprint and 8% of allother paper and board. Finland is second to Sweden in exports of pulp, andis the largest W;Jestern European exporter of paper and board. The pulp andpaper industry alone accounts for 45P;, of the export income of the country.Finland is also the leading exporter of roundwood (pulpwood and pitprops)and plywood in Western Europe and a major exporter of sawn goods.

1. Most of the Finnish woodworking companies are privately owned; ina number of cases they are still otmed or controlled by members of the famil esof their founders. Government interest is limited to owmership of twocompanies and participation in two others. There are a few large coapanies,some of ihich are engaged in other industrial activities as well as wood-working, such as -mechanical engineering, shipbuilding, chemicals, etc., butmost of the companies are mediurn-sized and are engaged mainly in w,oodworking.Pulp and paper compqanies are usuElly integrated producers, i.e. they processinto paper and board all or part of tne pulp they produce. In addition,most of thlem also produce sawn goods, plywood or other sheet materials suchas boxboards, hardboards, etc., prefabricated houses, and chemicals as abyi,-product of pulp production. They usually derive a large fraction oftheir incomne from thieir sawmiills.

12. The industry operates mainly for export. The bulk of its outputis sold in "estern Europe, but the U.S., Latin America and the U.S.S.R. andother Eastern European countries are also major markets, and the industrysells smaller quantities in virtually every other region of the wJorld.

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?echnic al Level of the Industry

1L3. The mills producing paper-grade pulp (both sulphite and sulphate),which makes up about 90%- of the total output of chemical pu3p, are up todate technically arid turn out a high quality product. Their units arelerge corrpared to those in other Scandinavian countries: average annlualcapacities are about 135,000 tons for sulphate pulp End 70,000 tons -orsulphite. Their labor costs are generally lowier, their transportationand power costs generally higher than those of thle other Scandinavianproducers. The advantages offset the disadvantages, and the operatingcosts of the Finnish woodworking industry are roughly equal to those ofthe other Scandinavian producers. In othler respects, they are also ona par; all have efficient managements and skilled workers at every level.The costs of the Scandinavianproducers are somewhat higlher than those ofthe U.S. and Canadian producers who benefit from the higher degree ofrrechanization in their forests which reduces felling costs.

Organization of the Industry

1i. The Finnish industry is highly organized. Virtually all -Toodworkingcompanies belong to the Central Association of Finnish voodwrorking Industries,a voluntary organization iwhich plays an important role in formulatinlg industrypolicy, provides a channel for conrunication bet-wieen the industry and thegovernmaent, and performs many other Lmportent functions.

1.5. All the pllp and paper and a large fraction of other products ofthe industry are marketed by trade associations, one for each branch of theindustry and all affiliated with the Central Association. Besides maintain-ing sales representatives all over the world, the associations arrange forfinancing exDorts, thus reducing the working capital requirements of individualproducers. Services are provided at cost. This method of marketing not onlyrreduces the cost of selling and shipping but also .makes possible a rationaldistribution of orders among the several procaucers, thus spreading the effectof any decline in demand among all producers. The sluccess of the Finnishmarketing associations in regulating -production is undoubtedly responsiblefor the adoption in recent years by t.ie entire Scandinavian industry of thepractice of reaching agreements to re'-ulate the level of production in anyline -where marketing difficulties arise.

16. The industry maintains laboratories which do most of the researchcarried on by the industry. They work on problems submaiitted by individualcompan-es as well as on basic research for th-e industry as a w,hole.

Recent Developi'ents in the ILdustry

17. The Finnish pulp and paper industry has -one through tw-io rounds ofexoansion end nmodernization since the war, and are now carrying on a third.The first was directed rnainly to the reconstruction of the industry whichhad been seriously affected both by the loss of forests and fecilities as aresult of the cession of territories to the U.S.S.R. and by wartime neglectof maintenance and renewal. In addition, however, thle pro-rani started theFinnish industry on the path it has followed since the war of slowly in-creasing the proportion of its pulp output that it processes at homne intopaper and board. The fIirst program was completed by 1951; production ofpulp and newsprint were back to prewer levels and production of other t½pesof pqper and board considerably surpassed t.iese levels.

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18. The second round of expansion and modernization was carried out tomeet the rising demand of the 1950's. By 1958 it had achieved a spectacularincrease in capacity. A third round started at that time has already resultedin further very substantial additions to capacity. Figures given below showthe growth of the industryr to 1960:

Production Increases or Decreases1936/36 1951 1955 1960 1936/35-1951 1951/50 1951-60

(thousand metric tons) (per cent)

Sulphite Pulp 961 822 1,084 1,284 - 14 + 32 + 56Sulphate Pulp 463 561 981 1,183 + 21 + 75 +111Newsprint 397 4lO 613 754 + 3 + 50 + 84Cerdboard 123 201 422 526 + 64 + 110 +162Kraft Paper 47 83 223 297 + 77 + 169 +258Other Paper 122 192 334 401 + 57 + 74 +109

19. As the figures indicate, the greatest increases have occurred in pro-duction of kraft paper and cardboard; the large increase in sulphate pulpproduction is related, since sulphate pulp is used in making kraft paper andboard. Finlandls large softwood resources and relatively large productionunits give it a competitive advantage in the production of bulk products suchas kraft paper and board and its procaucers have been able to take a com-mandingposition in these growing markets. Finland possesses the same competitiveadvantages in newsprint also, but production of newsprint haas increased lessthan production of other types of paper because overall demand has grow-n moreslowly.

20. Production of sawn goods, plywood and other woodworking products hasirLcreased less than production of pulp and paper, and the relative importanceoL these products in Finland's exports has declined.

21. The third round of expansion which was partly financed by Loan 222-FIis nearing completion. Capacities to be reached are cornared below withcecacities at the end of 1960.

(annual capacities in thousand metric tons)

At end of To be completed % increase1960 in 1961 or above 1960

early 1962 ___

Sulphite Pulp 1,317 1,617 23Sulphate Pulp 1,252 1,807 44Newsprint 825 1,235 50Caerdboard 6h5 855 33Kraft Paper 326 326 _Other Paper 427 491 15

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22. Future development under a fourth program for which Bank financinghas been requested is expected to proceed along the lines followed since thecl.ose of the war. Plore and more of the country's wood resources are expectedto go into pulp and paper, demand for which is groving. Production of sawn-goods is expected to level off, since, in spite of a strong upsurge in thepast two years, demand is also expected to level off.

IV. THE EXPANSION PROGRAM

23. The Finnish pulp and paper industry is embarking on a newexpansion progr:m, somewhat earlier t1han had previously been expected. Thismove is attributable primarily to the strong market that has prevailed sincemid-1959. The setback in 1958, when pulp and paper production, which had beenrising steadily since 1953, showed no increase over 1957, was followed by astarp upturn beginning in mid-1959, and it is now experiencing boom conditions.For most products, 1961 production - including output from new capacity - hasalready been sold and in the case of certain products, demand exceeds availa-bilities. Prices of pulp and paper have increased only moderately but theproducers have, of course, benefited from higher sales. I11oreover, the associa-tion of Finland with EFTA will enable Finnish producers, like other Scandinavianproducers, all of whom are members of EFTA, to benefit from the reduction ofcustoms duties in EFTA markets.

24. Investment has been encouraged also by the liberal depreciationallowed for new plant and equipment, which will provide a large part of therequired financing, and by the arrangements under which most Finnish pulp andpa,per products are marketed which minimize the risk for individual companies.Since products are sold through a central association, any falling off indemand is met by a reduction of production by all producers, in proportion totheir capacity. Thus, the risk of excess capacity involved in any new invest-ment is not borne entirely by the individual company making the investment, butis shared by the whole industry.

25'. The new expansion program, which includes the projects submitted tothe Bank for financing, provides for an expansion of about 200,000 tons peryear in mechlanical pulp (12% of capacityr in 1961), virtually all of which wouldbe converted into newsprint, and 468,00o tons per year in chemical pulp (14% ofpresent capacity) about one-third of which would be converted into paper orboard. Of the annual increase in chemical pulp capacity, 455,000 tons wouldbe for sulphate pulp and 13,000 tons for sulphite pulp. The proportion oftotal pulp which would be marketed (mechanical and chemical, but not semi-chemical pulp) would remain at about 45%, as at present. Capacity for news-print would be increased by 252,000 tons per year (20% of 1961 capacity) andthere would be increases of 30% in annual capacity for wrapping papers and ofl1;%-20% in annual capacity for other papers. In addition to expanding capacitJ,the program is directed at modernization and rationalization and would resultin substantial reductions in operating costs and improvements in operatingefficiency. Construction work has alreaoy begun on some of the projects, butmcst of the program would be carried out in 1962 and 1963, and final completionis expected in 1965.

26. In addition to the project which may be regarded as firm, two newsulphate pulp mills are under consideration, one in northern Finland and theother in eastern Finland. The studies of these projects are, however, stillin their initial stage, and it is not yet certain whether the plants will bebuilt, nor, if they are built, wqhether they could be completed by 1965. Thesetwlo projects are not included in the capacities of the Finnish pulp and paperindustry expected to be reached by mid-1965, which are shown in the followingtable.

Actual and Estimated Annual Capacities of Finnish Pulp and PaperProduction Facilities end of 1960 to mid-1965

(Thousand metric tons)

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)Completed Completed

Capacity between mid Further between midCapacity at Market por- now under Market por- 1961 and Market por- expansion Market por- 1962 and Market por-end of 1960 tion of (1) construction tion of (3) end 1962 tion of (5) program tion of (7) mid 1965 tion of (9)

Mechanical Pulp 1,300 197 370 - 1,670 200 200 - 1,870 200(sales in 1960)

Sulphite PulpDissolving Pulp 220 220 75 75 295 295 __ - 295 295Other bleached sulphite pulp 415 330 150 39 565 369 13 13 578 382Unbleached sulphite pulp 682 440 75

Total Sulphite Pulp 1,317 990 300 179 1,617 1,169 13 (37) 1,630 1,132

Sul hate Puls8leached and semi-bleached pulp 240 130 275 260 515 390 195 165 710 555Unbleached sulphate pulp 1.012 430 280 165 1S292 260 166 1,552 761

Total Sulphate Pulp 1,252 560 555 425 1,807 985 455 331 2,262 1,316

Semi-chemical Pulp 70 - 100 - 170 - - - 170 -

Paper and BoardNewsprint, standard 785 - 110 - 895 - 145 - 1,040 -Newsprint, superealendered 40 - 300 - 340 - 107 - 447 -

Total Newsprint 825 410 1,235 252 1,487

Fine papero 293 - 42 - 335 - - - 335 -

Wrapping papers:Kraft 326 - - - 326 - 100 - 426 -Sulphite 50 - 12 - 62 - 15 - 77 -Greaseproof 34 - - - 4 - - 34

Total wrapping papers 410 12 422 115 537

Other papers 50 - 10 _ 60 - 10 - 70 -

Paper board 645 - 210 _85 - 55 - 910 -

Total Paper and Board 2,223 684 2,907 432 3,339

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V 1i4ARKETS

27. A recent Bank study of the prospects for pulp and paper in theperiod to 1965 (E.C. - 96) concluded that producers should enjoy a favorablemarketing situation over the next five years. That conclusion emerged from aconparison of estimates of probable future growth in demand for paper (detailsof which are given in the study and briefly sunmarized below) with estimates ofprobable growth in supply submitted to FAO in 1959 by representatives of theindustry in all parts of the world and adjusted upward in the Bank study totake account of probable expansions in North America, Japan and the Scandinaviancountries (including Finland) beyond the levels forecast in the FAO study.

28. The Bank study's estimates of probable future growth in paper demandare based on two assumptions: that gross national product in the several region.of the world (ex the Soviet Bloc) will increase at a rate which is the averageof a range of estimates developed in the Bank, and that growtih in demand forpaper will bear the same relation to growth in gross national product in thesevarious regions as it did in the post-war period up to 1958. On these assump-tions, the study estimetes that world (ex Bloc) paper consumption will grow ata rate of 5.5% per year over the period 1954/1956-1964/1966. This compareswith an increase of 6.5% per year in the period 1947/1949-1954/1956. The studyrgives an alternative conservative estimate, based on the assumptions that thegrowth of gross national product in the various regions will not exceed thelowest figure in the range of estimates and that the ratio between growth indemand for paper and growth in gross national product in certain regions willbe lower than it has been in recent years. On these assumptions, the increasein world consumption of paper might not exceed 4.5% per year over the periodending in the mid-1960s.

29. The planned expansion of paper and pulp production through 1965(which it should be emphasized includes not only the proposed expansion ofF'innish capacity in 1961-1965, but estimated expansion in Sweden, NorthAmerica and Japan beyond the levels reported to FAO in 1959) would bringw!orld (ex Bloc) supply into balance with demand if the growth in demandamounted to 5.5% per year, and would only marginally overshoot it if growthin demnand amounted to only 4.5% per year.

30. The study points out, moreover, that in spite of the prospectsthat potential supply will be adequate to meet expected dermand on a world (exBloc) basis, producing capacity in most deficit regions is not likely to expandsufficiently to prevent their present pulp and paper import deficits fromgrowing further. Among the areas where such a growth in the import deficitseems likely to occur is Western Europe outside of Scandinavia, which isFinland's major market. The indications are that Scandinavia's planned expan-sion of pulp and paper (including the additional expansions not covered by theIAO survey) would be absorbed by Europe except for (a) 700,000 tons of pulpequivalent, if European demnd grows according to average expectations, or(b) 1.4 rillion tons of pulp equivalent, if European demand grows according tormnimum assumptions. These surpluses above Western European requirements con-pare with a total expected capacity for pulp in Scandinavia of close to 14million tons, and could of course be marketed in part or entirely in otherregions.

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31. To avoid complexity, the study referred to above did not considerthe prospects for individual types of paper and pulp. It noted, howJever,that demand for the several trpes of paper and pulp had increased at differ-ing rates and might be expected to continue to do so in the future. Thus theprospects of papers might vary according to the grades on which they concen-trate. It is interesting to note, therefore that in Western Europe, the pulpand paper exporting countries (Sweden, Finland, Norway and Austria), particularlyFinland, have concentrated particularly on those products for which derand hasbeen growing most rapidly.

32. The exporting countries account for about 70% of Western Europe'spulp output. But their share in the production of chemical pulp whose con-sumption in Western Earope has increased particularly rapidly in the 1950sis 88%, compared with a share of only 59% in Western Europe's output ofmechanical pulp, used for newsprint, demand for which has been growing moreslowly. Of the two types of chemical pulp - sulphate and sulphite - WesternEuropean consumption of the former, which is used for packaging materials,has increased more than twice as fast as that of the latter in the 1950s.It is in sulphate pulp that the exporting countries are particularly strong- accounting for 88% of total Western European production, as against 71%for sulphite.

33. Within the group of exporting countries, Finland ranks withSwreden as a producer of mechanical pulp, msost of which it retains for pro-CesSing into newsprint. Although it is a nuch smaller producer of chemicalpulp than Sweden, its share in the output of chiemical pulp by Scandinaviaand Austria has risen significantly in the 1950s, and it has made thegreatest gains in sulphate. Its share in the output by the four countriesof that type of pulp has risen from 30 to 36%, as compared with an increasefrom 26% to 29% in the case of sulphite.

34$. In contrast to their dominant position in pulp, Scandinavia andAustria are relatively minor factors in Wlestern European production of paperand board. About 70% of the area's paper and board is produced outside ofScandinavia and Austria, although to a considerable extent from imported pulp.It is significant, however, that while the share of Scandinavia and Austriain Western Europe's pulp production has fallen since '950, their share inpaper production has remained constant. Apparently, instead of placingprimary emphasis on pulp for export, the major Western European pulp pro-ducers have chosen instead to retain larger quantities of pulp for processinginto paper and board. Moreover, their position in the production of thegrades of paper in whose production magnitude of scale makes possibleimrportant economies - newsprint and kraft paper and board - is far moreimportant than their position in other grades of paper. They account for42% of Western Europe's output of newisprint and 53% of its output of kraftpaper and board, the fastest growing paper item,

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35. Finlandts position in these trTO grades of paper is particularlystrong. It is by far the largest producer and exporter of newsprint. Inkraft paper and board, it is surpassed by Sweden as a producer, but it hasbeen gaining rapidly and Sweden's edge is small. As an export, it hasalready surpassed Sweden.

36. Western Europe constitutes the leading market for all the exporters.Despite the fact that the importing countries have increased their share ofthe area's pulp production, the exporting countries have marketed a steadilyincreasing share of their pulp in the region and it now takes 80% of thetotal. In the case of paper, the exporters market only 60% of their exportsin Western Europe. But Western Europets share in their newsprint exportshas risen from 34% to 53% since 1950, while its share in their exports ofpaper and board is over 70%.

37. Finland markets a larger percentage of its exports in colmtriesoutside of Western Europe than any of the other exporters. Nor is thisattributable to its sales to the U.S.S..R. and other Soviet Bloc countries.Finland's exports have a wider geographic dispersion in general. Ndevertheless,the fast growing Western European market is its most important market andwhere (as in the case of newsprint) Western Europe has provided an opportunityto the exporting countries to rmarket an increasing share of their exports,Finland has shared in these growing sales. In all, therefore, Finland wouldseem to be in a strong position to take advantage of the growth of the WesternEuropean market in the next few years.

38. Cyclical fluctuations in econaomic activity may, of course, reducedemand below potential supply for brief periods,as it has in the past.However, the Finnish producers for whom Bank financing has been requestedare all financially strong enough to withstand short periods of reducedoperations.

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Vl. RESOURCES

111ood

39. About 70% of the land area of Finland is covered by forests.They contain an estimated 1,250 million solid m3 of wTood and their annualgrowth at present is estimated at about 47 million solid i 3 . In recentyears total annual removals have been roughly equal to annual growth inthe country as a whole, but in some regions removals have exceeded growth.

l.o. Estimates of the prospects for increasing annual growth andallowable fellings differ widely. The most conservative estimate, madeby the Finnish Forestry Planning Committee, is that, with present methodsof forest management, annual growth and allowable removals could be in-creased to about 66 million m 5 in about 90 years (one complete crop cycle)but that annual growth could be increased to a higher figure by artificialseed breeding and improvement in forest management in the private forests.Wnith present methods of forest management, it is estimated that annualgrowth could be increased by 2% to about 48 million m3 over the ten-yearperiod, 1963-1972, and to about 49 million m3 over the next ten-year period.

41. To achieve even this modest increase in annual growth wouldrequire a continuance of the present road building program in order tobring inaccessible areas within reach of users, continued artificial seedbreeding and swamp drainage at the present rate, and the use of soundcutting practices in young and middle-aped forests. The Finnish ForestP'lanning Committee believes that any increase in fellings above the in-dicated levels or failure to follow sound practices of development andcutting would result in a deterioration in forest resources. Annualforest growth would fail to increase or, if overcutting wias too great,might even decline.

42. The following table gives forest balances and distribution off-ellings by major purposes in 1959 and 1960 and estimates, based on in-formation supplied by Finnish sources, for 1965, when the proposed expan-sion programs of the Finnish lWoodworking Industry and particularly ofthe pulp industry are expected to be completed. The pulp industry andthe saw mill industry are the two largest users of wood in Finland.

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In million solid m3 , barked

1959 1960 1965actual estimate

Sources of Wood

Gross Increment of Forests 46.8 46.8 47.h4Natural Losses (1.0) (1.0) (1.1)

Net Growth 45.8 45.8 46,3

T'otal Fellings 5.5 50.3 46.3Logging and floating losses (3.2) (3.2) (3.2)

Net annual removals from forests 42.3 47.1 43.0

Use of Wood

Fuel Wood 13.0 12.6 )Exports of roundwood 3.8 4.7 ) 7.0Raw materials for the woodworkingindustry 22.9 27.2 34.0

Other Uses 2.6 2.6 2.0

Total Uses 42.3 47.1 43,0

L3. The estimates of distribution of wood cut by uses in 1965 shownabove were based on the following assumptions: that fellings would equalestimated annual growth; that all requirements would be met without draw-inp on inventories; that production of sawn goods would decline slightlyfrom the high level reached in the past two years; and that the newfacilities of other woodwrorking industries would be operated at capacity.The table indicates that, on these assumptions, the raw material needsof the woodworking industry in 1965 could be met only if consumption ofwood for fuel and exports of roundwood were sharply curtailed.

44. It seems questionable, however, that such a drastic reductionin fuel wood consumption and roundwood exports could be achieved in thenext five years. It is highly unlikely that the Government would forbidor even drastically limit roundwood exports. A sharp reduction in round-wood exports would run counter to the interests of the private forestowcners who rely on this alternative market for wood which gives themgreater strength in bargaining with the woodworking industry over prices.It is unlikely therefore that roundwood exports will be sharply curtailed.A sharp decline in fuel wood consumption is also unlikely. Thus on theconservative assumption of the Forest Planning Committee as to forestgrowth, it would be impossible to meet the expanded requirements of theFinnish Woodworking industry in 1965 without some overcutting.

45. There is good reason, however, for believing that the estimatesof the Forestry Planning Committee are unduly pessimistic. Other studentsof' Finnish forest potential point out that the decennial forestry surveys(the most recent one was taken in 1953) have showm a steady increase inwood capital despite increased fellings. They argue, moreover, that itwould be possible to increase annual fellings above annual growth for sometime without damaging the forests by cutting ovyrmature wood stands, whichhave a smaller than average annual growth rate.J Finally, they believethat in the longer run the increased demand for wood should stimulateprivate forest owners to improve their methods of forest management inorder to increase forest growth and that the process will be aided by theintensive educational program which has just been initiated and the finan-cial assistance and free distribution of young trees which the Governmentand Industry plan to provide to private forest owners. The Governmentrmust rely on such indirect means to bring about improvements in private forestmanagement since, although there is a law forbidding wasteful cutting, thereis no law empowering the Govermnent to require private forest owners to followthe most modern methods of forest management.

46. The mission regards the views of the critics of the ForestryPlanning Corumittee as reasonable. However, even the critics agree thattc meet the wood needs of the pulp and paper industry on a sustainedbasis after the completion of the present round of expansion, there willhave to be an improvement in forestry management and a gradual reductionin. fuel wood consumption and roundwood exports. All students of Finnishfcrest potential agree that after the proposed round of expansion, whichwill increase capacity for mechanical and chemical pulp to 5.9 milliontons per year by 1965 (or 2.9 million tons more than in 1955) expansionof pulp making capacity will have to be moderate. Further increases willbe limited to increases in annual forest growth plus reductions in con-sumption by other wood users. The idea that Finnish wood resources areapproaching a limit is a novel one for the voodworking industry but theindustry is increasingly accepting it.

Power

47. The woodworking industry consumes close to 50% of all the powerconsumed in Finland and generates about 3/4 of the power it consumes. Itis. expected to continue meeting at least as large a percentage of its powerneeds as at present. The additional power requirements resulting from thepresent round of expansion in the pulp and paper industry are expected tobe met largely by power generated by the companies themselves, mainly byback-pressure steam turbines. Part of the required steam would be generatedthrough the burning of waste liquor originating in pulp making.

48. The additional power needs of the companies to whom it isproposed that Bank loans should be made would be met as follows. Threeccmpanies would increase their hydropower capacity. One of them

1/ and by extra cuttings to make room for wood species with better growth.

- 15 -a

(Kymmene) would, as a result, continue to be independent of purchasedpower, while the two others(Kajaani and Kaukas) would be enabled tocontinue selling at least as much power as at present. Three plantswould decrease their dependence or become wholly independent of pur-chased power by increasing steam power (Joutseno, Serlachiust MaenttaeMill and Schauman1s Jakobstad kraft pulp and paper mill) and a fourth -would meet approximately its additional power requirements in thesame way (United Paper iillst Kaipola Mill).

Labor

49. Additional labor requirements created by the proposed Bankfinanced projects would amount to about 1,200 wiorkers in the factoriesand 11,000 workers in the forests. The latter figure is only a roughestimate, since the degree of mechanization of forest work differs sub-stantially from one part ofthe country to another, and is generallyexpected to increase. The companies should have no difficulties inobtaining the additional workers, both skilled and unskilled. Indeed,one of the benefits of the proposed program is that it would help toreduce unemployment, particularly in the winter months when unemploy-ment reaches a seasonal peak.

Transportation

50. Forest products make up about 45% of all freight carried bythe Finnish railways. Apart from occasional minor delays, the Finnishrailways have been able to handle all the freight offered despite theconsiderable increase in the last few years and particularly in thewinter of 1960/61 when exports of woodworking products reached a newheight. Traffic is heavier in the winter than in the summer, sinceharbors in northern Finland are icebound and goods from northern millsmust then be transported by rail to southern harbors or supplies bebrought up to the mills.

1. Up to 1958, average annual investments in Finnish railwaysamounted to about Fmk 12 billion. They rose to about Fmk 18 billionin 1959 and 1960 and in accordance with a long-term program are expectedto rise to Fink 20 to 25 billion per year over the next eight years.Investments of this magnitude should enable the railways to handle theadditional traffic expected in the foreseeable future, even if thetrend towards the use of trucks for short and medium hauls of raw andfinished products should level off.

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VII. THE PROJECTS

General

52. At the time when the loan application was made, detailed informa-tiLon was submitted by the IMIortgage Bank of Finland on the projects and theoperations and financial condition of the proposed borrowers. During sub-sequent field investigations, Bank representatives visited existing plantsand the sites of the proposed new constructions or extensions. In meetingswith representatives of the proposed borrowers, the Nortgage Bank of Finland,the Central Finnish Woodworking Association, and forestry, power and transportauthorities, all the additional inforration required for forming a judgmentoIn the soundness of the projects and the creditworthiness of the proposedborrowers was obtained.

Financial Requirements

53. Of the ten projects originally submitted, two were subsequentlywithdrawn by the companies themselves, and one, found unsuitable for Bankf:inancing in its present state, was finally left out of the group for whicha loan was requested, leaving seven projects for consideration. These sevenprojects were found suitable for Bank financing:

Net In- Estimated Per Cent Previouscrease in Total IBRD Financing of Total IBRD fir-

Projects Capacity Cost 1/ Recommended Cost ancing

(tooo t.) (til . Fmk) (M4il. Fmk) (I 000 Q` (t°°° $equiv.) equiv.)

Sulphate Pulp

.ymmene 90 8,994 1,605 5,016 18 10,700Kaukas 105 5,240 960 3,000 18 2,700Joutseno 80 2,636 700 2,187 27 1,300

NewsDrint andHigh GradePrinting Papers

United Paper Ilills 100 3,390 1,280 4,ooo 38 8,000Eajaani 72 6,348 1,850 5,781 29 600

Kraft Paper

Sclauman 80 g 8,ooo 1,000 3,125 12 300Ž_Rationalization

Serlachius - 1,636 500 1,563 31 1,800

36,224 7,895 24,672 22 25,400

1,/ Excluding working capita1 recuirements and interest capitalized- during construction.2/ Ln addition sulphate pulp capacity would also be increased by 16,000 tons.3// This loan was given to Pietarsaaren Selluloosa Oy which only in 1960 was

incorporated into Qy Schauman Ab.

- 17 -

54. The proposed IBRD loan allocations correspond to the uncoveredcapital needs of the companies concerned. Allocations recommended for threeprojects are somewhat higher than those initially requested by the companies,in. two cases because changes in the projects increased the financial require-ments (Kajaani and Kaukas), and in one case because conservative financialforecasts indicated that the company could not finance as large a part ofthe project from current earnings as was originally estimated (Schauman).

5c. Although the exact relation between local and foreign currencyrequirements cannot be determined until orders are placed, the foreignexchange requirements for imported equipment and services for all the sevenprojects taken together would exceed the proposed IBRD loan of $25.0 millionequivalent. This does not mean that the Bank loan would be used to financeonly the foreign currency expenditures for each project; in the case of someprojects the estimated foreign exchange requirements are smaller than theamLount of the proposed Bank loan; in the case of others, they are considerablyhigher.

A-ailability of Domestic Equipment

56. In the past few years, particularly since the devaluation of theFinnish Markka in the fall of 1957, domestic suppliers of equipment for thepulp and paper industry have become increasingly competitive. Judging frommaichines installed under recent Bank loans, performance of all domesticequipment is good, and buyers have high praise for it.

57. Finnish manufacturers can now produce virtually the whole rangeof machinery required by the pulp industry, except for some electrical equip-ment, in particular steam turbines and generators, and some special equipmentand materials. In the case of large steam and waste liquor boilers and liquorevraporation plants, users still consider that foreign suppliers have the edgein know-how. Bid analyses received on all major equipment (over $100,000equivalent) purchased for the projects financed under the recent Bank loanto the Finnish Woodworking Industry (222-RI) demonstrated the ability ofthe Finnish suppliers to compete with other European and US manufacturers.

58. Finnish paper machine suppliers, who have for some time beensuccessfully supplying the domestic and foreign markets with slower runningpaper machines, have now begun to produce high-speed newisprint machines aswell. Since the latest machines financed by the Bank have been operatingfor only a short time, information is not yet available on their performance,buit there is no doubt that they are well designed and built. If they provefilly satisfactory, it may be expected that imports of paper machines willbe limited in the future to exceptionally wide and/or fast and special papermachines or parts. Grinders to produce mechanical pulp and supercalenders -twio of the more importantitems for paper mills - are still mainly imported.

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Domestic Financing

59. Of the total financial requirements (Fmk 75 billion) of theultimate beneficiaries during their construction periods, about 33% wouldbea financed by long-term and short-term loans, including the proposed IBRDloan of $24.7 million or Fmk 7,895 million equivalent. The IBRD loan wouldamount to 32% of the estimated total long-term and short-term borrowings.The table below shows the estimated amounts of long-term borrowings for eachcompany, and the sources from which they would come. The Bank of Finlandhas received commitments from all the prospective lenders that they wouldmake these funds available. In addition, the Bank of Finland would, as inthe case of the latest Bank loan to the Finnish Woodworking Industry (Loan222-FI), give the Bank its assurance that it would provide or ensure theprovision of any additional funds required for the completion of the IBRDprojects. The net increase in local long-term borrowings (new loans lessamortization on existing loans) during the construction periods is estimatedat Fmk 5,735 million or 50% of the expected new local long-term borr'owings.

Long-term Borrowingsduring the constructioperiod

(Million Fmk)

Domestic Long-term Financing Net In-

Mortgage Industrial National Postal Total Local Proposed Total crease inBank of Mortgage Pension Insurance Savings Long-term IBRD Long-term Short-term

Finland Oy Bank Fund Companies Bank Others Borrowings Loans Borrowings Borrowings

Kymmene - 2,000 500 _- - 2,500 1,605 4,105 659

Kaukas - 700 - - 300 - 1,000 960 1,960 1,351

Joutseno - 1,100 - 300 200 - 1,600 700 2,300 19

Schauman - - 1,000 1,500 - - 2,500 1,000 3,500 1,143

United PaperMills - 1,000 500 _ _ _ 1,500 1,2801/ 3,5001/ -

Kajaani - 1,500 _ - - 600 2,100 1,850 3,950 1,001il

Serlachius 350 - - - 150 150 650 500 1,150 -

Total 350 6,300 2,000 1,800 650 750 11,850 7,895 20,465 4,173

1/ During the construction period, only Fik 1,030 million would bedrawn down on the requested IBRD loan. However, the company expectsto withdraw Fmk 970 million on Loan 222-FI, so that, including localloans of Fmk 1,500 million, total long-term borrowings would actuallyamount to Fik 3,500 million.

2/ Part of these funds will be of long-term nature.

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Descriptions of the Projects

6o. The companies to which allocations would be made under the Bankloan are widely distributed geographically, the more so since most of themha>ve several plants located in different parts of the country. The locationsof the projects are shown in the attached map; one is in \Ilorthern Finland(Kajaani), one, half-way up the Gulf of Bothnia (Schauman), two in CentralFinland (United Paper Ilills and Serlachius), and three in south-easternFinland (Kymmene, Kaukas and Joutseno).

61. The proposed borrowers are all privately owned corporations.Owmership of two is widely spread among corporate and private shareholders(Kynmmene and Kajaani); four companies are owned and managed by one or a fewfamilies (Schauman, Serlachius, Kaukas and United Paper ldiills); and one isa subsidiary of two other woodworking enterprises (Joutseno).

Sulphate Pulp

62. About 41% of the proposed IBRD loan allocation ($10.2 million)would be for three sulphate pulp projects; one of these projects, Kyuiuaene,would receive nearly half of the amount allocated for the three projects inthis group. The Kymmene project is for the erection of a new mill to producesulphate pulp from birch; the mill would be erected adjacent to the company'sexisting mill at Kuusankoski in south-eastern Finland. The annual capacityof the new mill would be 90,000 tons of fully or 3/4 bleached pulp. About23,000 tons wolld be ubed for the production of paper by the company, andthe rest would be exported as dried pulp. The project would make possible animprovement in the quality of the high grade printing and writing papers pro-duced by the company; birch pulp is being increasingly used in the productionof these types of paper. It would also broaden the raw material basis of theccmpany which has been limited to spruce until now; a large part of theacdditional wood required would come from the company's own forests. Work onthe project is expected to start in mid-1962, and the project should be com-pleted by the end of 1964. in contrast to the existing plant sites of thecompany, the new site would have ample space for installations at a laterstage of additional facilities for pulping and paper making.

63. The Kaukas project provides for the erection of a new sulphatepulp mill adjacent to the company's only plant, near Lappeenranta in south-eastern Finland, where it produces, among other items, sulphite pulp ofdissolving grades. The new mill would have an annual capacity of 105,000tcns of fully bleached and dried pulp. Pine and birch would be used as rawmaterials; the propor.tion of birch would not exceed 50% at the outset butis expected to rise gradually, possibly to as much as 80% of the total. Theproject would enable the company to utilize the large and still relativelycheap birch resources in its own forests and the other logging areas fromwhich it draws wood. The new plant would be large enoueh to permit theinstallation at a later stage of additional pulping capacity and facilitiesto process this pulp into kraft paper or kraft liner. Construction of thenew mill is expected to start early in 1962, and the mill is expected to becorapleted in the third quarter of 1964.

- 21 -

64. The Joutseno project involves the expansion of the capacity of thecoinpany's existing sulphate pulp mill, located at Joutseno in south-easternFinland, by 80,000 tons to 200,000 tons per year. The pulp would be leftunlbleached, and about half of it would be left wet, and sold in that form.The market for wet pulp is good at present, but if demand should decline, thecompany could install either drying equipment (space has been left for suchinstallation) or facilities to process wet pulp into kraft paper. The companyhas already embarked upon the project; all major orders have been placed andthe project is expected to be completed in the fall of 1962.

Newsprint and Printing Papers

65. About 40% of the proposed IBRD loan ($9.8 million) would go forthe installation of two modern paper machines in two existing mills. TheUnited Paper tills project provides for the installation of a newsprintmachine with an annual capacity of about 100,000 tons of standard newsprintat the company's plant at Kaipola in central Finland. The machine would bethe fourth to be installed at this plant, which has been laid out so that itcould hold eight newssprint machines. On completion of the present project,the mill would have a capacity of about 345,000 tons per year of standardand supercalendered newsprint, and would be the largest newsprint mill inFinland. Work on the project is expected to begin towards the end of 1961,and the project shoild be completed during the second quarter of 1964.

66. The Kajaani project provides for the installation at the company'sonly mill, located at Fajaani in north-eastern Finland,of a new paper machinewith an annual capacity of about 72,000 tons of supercalendered newsprint andhigh grade printing papers, both coated and uncoated. All additional facilitiesincluding those for the production of mechanical pulp, steam and power wouldbe provided for. At the same time, but not as part of the project, the com-pany plans to expand its chemical pulp capacity by an amount equal to theamount used by the new paper machine to enable it to continue selling sul-phite pulp at about the same rate as at present. At a later date, it mightadd two more paper machines. Work on the project is expected to begin in thefall of the current year, and to be completed in the third quarter of 1963.

Kraft Paper

67. About 13% of the proposed IBRD loan ($3.1 million) would be for akraft paper project. The Schauman project provides for the construction ofa paper mill with an annual capacity of 80,000 tons of kraft, mainly sack,papers. The pulp required would be produced by a new sulphate pulp millwhich also forms part of the project. The pulp mill would have an annualproduction capacity of 100,000 tons of unbleached wet pulp. Both millswould be erected near Jakobstad on the Gulf of Bothnia, adjacent to thecompany's existing sulphite pulp mill. About 16,000 tons per year of sul-phate pulp which would not be required for the production of paper wouldbe exported. Provisions have been made for increases in the capacity ofthe pulp and paper mills at a later date. WTork on the project has alreadybegun, and it is estimated that it should be completed by mid-1962.

- 22 -

Rationalization

68. The balance of the proposed IBRD loan ($1.6 million) would go forthe financing of a rationalization program. The Serlachius project wouldsubstitute a sodium cooking process for the calcium bisulphite cooking pro-cess now used by the company in producing sulphite pulp at its HIaenttae millin central Finland. The change in process would ernble Serlachius to usewoods other than the spruce on which it now relies exclusively; it would makepossible the partial recovery of chemicals lost under the present method withresulting substantial savings in costs; and, finally, it would improve thequality of the pulp produced, thus enhancing the company's competitive posi-tion. At the same time, but not as part of the project, the company wouldincrease its pulping capacity from 70,000 to 100,000 tons per year. Work onthe project is expected to begin early next year and to be completed by theend of 1963.

Economic Benefits

691. The potential annual foreign exchange benefits from the projectsare estimated at $63.8 million equivalent, as compared to an estimated annualfcreign exchange requirement of about $8.3 million equivalent, including $2.9million equivalent for the service of the proposed IBXD loans and $5.4 millionecuivalent for imports of chemicals, fuel and other supplies. When in normaloperation, these projects would provide employment for 1,,200 persons in theplants and another 11,000 persons in the forests.

General Aspects of the Projects

70. The projects are considered as integral parts of the overall con-struction programs of the several companies to which it is proposed to makeloans. The overall programs include all investments which are reasonably firm,or, where companies have not yet developed firm plans, investments at the rateestimated to be necessary to enable the companies to keep mills or mill depart-ments not connected with the IBRD project abreast of technological developments,In accordance with normal Bank practice, the financial forecasts take accountof each company's total financial requirements and sources during the con-struction period of the project and one or two years of operation after projectcompletion.

71. With minor exceptions, the following observations apply to allproj ects:

(a) The status of the projects is not as uniformly advanced as was thecaLse under the most recent loan to nine Finnish woodworking companies: in thecaLse of two projects, construction has already begun; several could be startedas soon as Bank financing becomes available; in the remaining projects, addi-tional work is required before construction can begin. Although additionaldetailed planning is required for tlhe last group of projects, their generalconcept has been well defined, and there is little likelihood that they will be

- 23 -

altered significantly. Since the IBRD projects are expected to account forthe major portion of the exDansion investments of the Finnish pulp and paperindustry during the next few y,ears, the fact that the starts of the projectswould be staggered is advantageous from the marketing point of view, since itwill mean that the increase in capacity will be gradual.

In most cases, the borrowers have ample experience in constructionwork - in three cases demonstrated by the work done on projects financed underthe most recent loan to the Finnish Woodworking Industry and in the others byother recent investmnent activities - or in the supervision of construction andinstallation of machinery. Wherever necessary, consultants have been retainedto plan the general layout, advise on the choice of equiprnent and/or superviseconstruction. Assistance in the erection of equipment will be provided bysuppliers, and, on all questions of steam and power, the Finnish Associationof Steam and Power Economy (ENKONO) with its broad experience, has given ahelping hand. 'Jhere applicable, performance guarantees would be requestedfrom the suppliers.

(b) The managements of all the companies are competent and experiencedand are well able to carry out the projects and to bring them into operation.

(c) IvIethods of procurement are satisfactory, and orders for all majorequipment items have been or will be placed on the basis of competitive bidsfrom foreign and local suppliers.

(d) The project cost estimates are reasonable and include adequatealloiwances for contingencies. In those cases wihere project costs co.ld notyet be firmly established because detailed desigiing had not yet been completed,the mission satisfied itself that the companies would be able to raise addi-.tiional funds either internally (through increased fellings from their ownTorests during the construction period, to be offset by a reduction in fellingsthereafter, or through postponerment of other proposed investments not sourgently needed) or from the outside without affecting the soundness of theirfinancial structure.

(e) The working capital requirements have been projected from the presentposition, and the projections make allowance for increases in wood stocks andothier raw materials and supplies that would be made necessary by the proposedincreases in production and the increases in receivables expected to resultfrom the increase in sales, A projection of wood stocks from the present levelprovides a safety margin; the companies would be able to operate with slightlylover wood stocks than has been assumed necessary.

(f) The earnings forecasts are based in most cases on the companies' ownassumptions and reflect their views on the market prospects for their particularproducts. Where their forecasts appeared over-optimistic they were reviseddownwards In all cases, it has been assumed conservatively that new facilitiesfiranced either out of the proposed IBRD loan or through other investments wouldreach their rated capacity levels gradually.

- 2) -

(g) It has been assumed that production costs and sales prices iwouldremain at current levels even where, at the time the appraisals were made,minor increases in sales prices were expected in the near future. In thecase of a few products, whose prices the companies producing them thoughtnLght decline, the prices assumed for the projections are somewhat belowthe present level. In some cases, an additional margin of safety has beenprovided by assuming increases in operating costs resulLting from expectedMinor increases in wood prices or labor costs.

(h) Depreciation allowances are generally close to the liberal limitsallowed by lat. About 66% of the total additions to fixed assets of all thecompanies during the construction years of the proposed IBRD projects arecovered by depreciation, a high proportion in a period of substantial invest-ment. Some companies have assumed that they would not take the full extra-ordinary depreciation permitted by law, but, instead, that they would makeother preprofit reservations. lNhere their debt position permitted, the Bankmission did not urge the companies to increase depreciation, since that wouldresult in too rapid a writing down of depreciable assets and an undue increasein their tax burdens at a later date if the present liberal depreciationallowances should be reduced and/or the level of company investment shouldfall below the rather high level expected for the next few years.

(i) Debt service coverage has been calculated to include interest andamortization on all outstanding long-term debts as well as interest on short-term debts and supplierst credits. Taxes have been included as expenses,since it is the practice of Finnish companies to show taxable profits thatbear little relation to actual earnings. Debt service of all the companiesunder consideration would be covered more than two times during the construc-tion period and the first one or two years therafter, a satisfactory coverage.

(j) Return on capital investments is the ratio of expected operatingprofit (after depreciation, but before interest and taxes) to the estimatedtotal capital investments for the project, excluding working capital andinterest capitalized during construction. The average return of the sevencompanies is 17%.

(:k) The term "capacity" or "rated capacity" is used to mean normalannual capacity, after making allowance for maintenance and repairs andother normal interruptions such as holidays. Experience has indicated thathigher production rates can be achieved over brief periods of time. Itshould be borne in mind, moreover, that the capacity of a plant or machinecannot be precisely defined; for example, the capacity of a paper machineproducing several grades of paper will vary according to the distributionof total output among the several grades. In Finland, capacities arenormally based on 330 or sometimes only 320 working days per year. Pulpand paper mills normally operate 24 hours per day and saw mills 16 hours.

(1) Adequate long-term financing) in addition to the proposed Bankloan has been assured from local sources and the Bank of Finland (MortgageBank) has received commitments from the respective sources.

(m) No financial covenants on the ultimate borrowers, such aslimitations on the ratios between current assets and current liabilitiesor net sales, or of debt to equity, are suggested. Because the financialstatemients published by the Finnish companies do not reflect their finan-cial position accurately, ratios based on published figures would bemeaningless. Ratios based on more realistic figures would not only bedifficult to establish, but it would also be difficult to deteraine thatthe ratios were being adhered to. This would be true likewise of limita-tions on dividend payments, which would have to be tied to a current ratioor to earnings. lAoreover, because the nominal sharecapital of most of thecompanies is low in relation to their actual assets and liabilities, andthe returns to shareholders low in relation to actual earnings, a limita-tion on dividends would be unwise from the point of view of attractingadditional share capital.

The Hlortgage Bank of Finland Cy, however, will require from theultimate beneficiaries of the proposed loan that during both the construc-tion period and for periods thereafter which will vary with each individualcompany, any additional major investment will be reported to the IMortgageBank for its approval. In the case of one company, financial guarantees ofits share of the loan proceeds will be provided by parent companies. Adequatereporting arrangements will be Tnrked out to enable the Bank to follow closelythe physical progress of the projects and the financial position and prospectsof the ultimate beneficiaries.

(n) Expected payment terms for equipment vary substantially fromcompany to company. However, most of the companies expect to pay part ofthe cost of their projects after completion. Of the total costs of theproposed TBRD projects of some Fnk 36 billion, about Frak 7.3 billion or20% are expected to be spent upon their completion, about half of whichwould be on guarantee payments.

(c.) For the purpose of calculation, it was assumed that the interestrate on the proposed Bank loans for the ultimate borrowers would be 6% perannum (including a 0.2% fee to the Mortgage Bank of Finland Cy) and thatthe terms of the loans would be 15 years including a grace period of 3 years,with the first payment due on July 1, 1964. For long-term loans from localsources, it was assumed t1at the interest rates would vary between 7% and7,,% per year and theterms of the loans between 10 and 20 years, includinggrace period of between 1 and 3 years. It was assumed that local short-termcredits would be available at about the sare rates of interest.

JuLly 28, 1961

APPHIMIX

Page 1

MORTGAGE BANK OF FINWA\D OY

Purpose and Organization

The Mortgage Bank of Finland Oy is an institution set up in1956 under the Finnish i-Iortgage Credit Bank Law by a decision of the StateCouncil of December 23, 1955, to replace the Bank of Finland as the channelthrough which foreign long-term loans could be relent to Finnish enterDrises,because it was considered inappropriate for the Bank of Finland to continueperforming this function.

The iEortgaEe Bank is owned, staffed (except for one officer whoseentire salary is paid by the Hortgage Bank) and managed by the Bank of Fin-lEnd. The chairman and two members of the Bank's board of five are repre-sentatives of the Bank of Finland. A representative of the iinistr- ofFinance and the chairman of the Bank's supervisors are at present the'other members of the board.

Powers-~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Under its Articles, the MIortgage Bank is authorized to grant loansfor not over 20 years against mortgages in amounts not exceeding 60% of theappraised value of the mortgaged real estate. It may also accept additionalliens in the form of guarantees of the Finnish Governrnent, banks or corpora--tLons.

Until now, the Bank's loans have been made mainly from fundsobtained by contracting long-term foreign loans, and to a minor extent fromits own funds. It secures itself against losses arising from fluctuationsin foreign exchange by protective arrangements in the loans it makes. In1'360, however, the Articles of Association of the Bank were amended byshareholder decision, confirmed by the Council of State, to allow it tocontract domestic as well as foreign loans. Although the Bank does notexpect to borrow domestically on a large scale, it does expect to contractsome medium and long-term loans from savings banks and insurance companiesin the next years. The Bank intends to relend the proceeds of such loansto finance local expenditures for power and industrial projects.

Under Section 5.04 of the IBRD Loan Agreements (Loans 142-FI and222-FI), the Iiortgage Banlk may not, without IBRD approval, borrow. or engagein operations other than the relending of the proceeds of the IBRD loans.IHowever, the sale by the Bank to its shareholders of debentures which arejunior to all its other liabilities is not treated as borrowing; thesedebentures are considered to be the Bank's own funds, equivalent to equity.In 1957, the IBRD authorized the Bank to invest its own funds without priorapproval, on condition that the IBRD be informed of the investments and thatpaiyments of interest and amortization for each investment be guaranteed bythe Bank of Finland.

APPENIK

- 2 - Mortgage Bank

The Bank is required to limit its liabilities (excluding share-holders' debentures) to twenty times the total amount of its share capital,reserves and debentures. Liabilities are interpreted as meaning not totalloans contracted, but only the amounts actually drawn down. The Bank mayalso contract short-term credits up to twice the amount of its own funds.

Capitalization

The IlMortgage Bank has a subscribed and fully paid share capitalof' Fmk 300 million, represented by three hundred shares of Fmk 1 million each;298 shares are held by the Bank of Finland, one by a subsidiary of the Bankof Finland (Tervakoski Paper Hill) and one by the National Pension Fund.Under its present authority, the IMortgage Bank may issue an additional Fmk 600million in share capital, and will issue Fnk b50 million this year. Inconnection with the existing IBRD Loan Agreements (1 42-FI and 222-FI) the Bankof' Finland undertook not to dispose of any part of its hloldings of' MortgageBank equity capital nor to permit its reduction nor to take or permit anyaction which would deprive it of its effective control of the Mortgage Bankw:ithout the consent of the IBRD during the life of these loans. It is proposedto obtain a similar commitment in respect of the loan under consideration.

Qoerations

Since its establishment, the Hortgage Bank has received four foreignloans equivalent to about Fmk 25 billion, including two loans from the IBRD,one from the U.S. Export-Import Bank and one from the German Kreditanstalt fw4rW;iederaufbau.

The first IBRD loan (142-FI of Mvay 22, 1956) of $14 million at4-3/4% was for five power projects.

The second IBRD loan (222-FI of March 16, 1959) of $37 million at5-3/4% was for nine woodworking enterprises.

The loan from the Export-Import Bank (from ICA-PL 480 funds) wasmade on February 18, 1958, and amounted to 4il4 million. It was for twoprojects in the power and woodworking industries (Kemijoki and Tampella).The loan is for 40 years; the interest rate is only 3% and the loan was freeof interest up to Iiay 1, 1961.

The Kreditanstalt fur Wiederaufbau loan of DM 50 million, grantedin 1959, was to assist Outukumpu Oy, the largest mining concern in Finland,to open up a new ore deposit. This loan bears interest at 6-1/4% and is for15 years.

APPEi'iDIX

- 3 - M4ortgage Bank

As at the end of 1960, the IIortgage Bank had invested Fmk 390million of its own funds in five different cornpanies. Three loans totallingFrk 120 million went to oil companies, mainly for storage facilities. Twoloans totalling Fmk 270 million went to power companies, of which Fnk 250million went to Kemijoki Oy for the expansion of power generating facilities.The loan to Kemijoki is for ten years; all the other loans are for five years.

The lMortgage Bank charges currently 7% on domestic loans from itsown funds and mark-ups of 1-1/2 to 2-1/2% on loans financed out of Export-ImLport Bank funds and 0.2% on loans financed out of TBRD and Kreditanstaltfunds. For IBRD loans, a fee of 0.15% is also charged on the total amountof the loan when it is credited to the borrower.

Financial Position

A summary of the M4ortgage Bank's financial position as atDecember 31, 1960, is given below (in million Fmk):

Assets Liabilities

Deposits with Bank of Finland 157.9 Foreign Exchange Loans 17,026.9Deposits with Post Office Delcredere Reservation 53.Lh

Savings Bank 2500. Transitory Items 182.5Foreign Exchange Loans Shereholders' Debentures 900.0

Outstanding 17,397.0 Share Capital 300.0Domestic Loans Outstanding 390.0 Regular Reserve 60.0Investments in Securities 326.4 Unallocated Profits 1.8Other Assets 3.3

Total Assets 18,524.6 Total Liab.& Equity 18,524.6

The difference of Fmk 370 million between the amounts of foreignexchange loans shtwn on the Liabilities and Assets sides is attributable toadvances made by the Mortgage Bank under these loans to ultimate beneficiariesin advance of its drawing these amounts from the lenders.

The foreign indebtedness, reported as Fmk 17,027 million, includesthe entire Export-Import Bank loan of Fmk 4,487 million, Fmk 11,202 millionof the two IBRD loans totalling Fin- 16,640 million, and Fnk 1,338 million ofthe Fmk 4,000 million loan from the Kreditanstalt fur Wiederaufbau. When thefour loans have been completely drawn down, the Miortgage Bank's indebtednesswill amount to about Fnk 25,127 million. Its present debt ceiling isF)nk 25,236 million, but it could be raised easily and quickly if it werenecessary to do so for the proposed loan.

APPENDIX

- 4 - Mortgage Bark

In 1960, the iiortgage Bank showed a profit of Fmk 2h.9 million(compared with Fmk 21.6 million in the preceding year); most of this wasallocated to reserves. The I-ortgage Bank has not paid any dividends.

Prospects

The Miortgage Bank was set up in 1956 as a vehicle for IBRD loans,but, as has been noted, it has been used since then, with the authorizationof the Bank, to take up and relend other foreign loans. It has now beenauthorized to borrow domestically, but it does not expect its domesticborrowings to be large. Its major activity will remain the channeling offoreign loans, mainly from the IBRD.