Demand for development finance as a key complement to traditional aid is growing, but despite the impressive strength of the US private sector, the US government’s ability to respond—to date— has fallen short. The good news: Congress got the memo.
Last week, a bipartisan group of lawmakers—led by Senators Bob Corker (R-TN) and Chris Coons (D-DE) and Representatives Ted Yoho (R-FL) and Adam Smith (D-WA)—introduced the Better Utilization of Investments Leading to Development (BUILD) Act of 2018, which would create a full-service United States International Development Finance Corporation (USIDFC).
The bill would address many of the obstacles to strategic and efficient deployment of US development finance efforts that our colleagues Todd Moss and Ben Leo have chronicled in detail over the years. (Check out their proposal for a self-sustaining, full-service, US development finance corporation.)
We’re also pleased to see that the BUILD Act imbues the new USIDFC with a strong mandate to promote development, including a directive to focus support in low-income and lower-middle-income countries. Todd and Rob Mosbacher Jr, a CGD board member and former head of the Overseas Private Investment Corporation (OPIC), recently wrote why now is exactly the right time for this idea.
Here’s what we’re most excited about in the BUILD Act’s vision for a new USIDFC:
At $60 billion, USIDFC’s maximum contingent liability limit is roughly double that of OPIC. And the bill provides for that ceiling to adjust with inflation to prevent erosion of the potential portfolio size in real terms. Giving the institution room to grow will allow it to feature more prominently in the US government’s development and foreign policy toolkit well into the future.
The bill grants the new institution equity authority. This is critical because OPIC is currently limited to debt financing—and the inability to make (even modest) equity investments has kept OPIC out of projects and limited its ability to structure deals. Equity authority—sensibly capped at 20 percent of any project—would better enable the new USIDFC to fulfill its mandate and put it on more equal footing with many of its peer institutions, which all use equity when it’s most needed.
In the tough markets where the USIDFC is expected to operate, the BUILD Act gives the agency the ability to initiate and support feasibility studies and technical assistance. Early support for planning and project development can enable more well-planned projects to get off the ground—and may be necessary to realize critical infrastructure projects.
It’s (more) integrated
The full-service USIDFC will be built on the foundation of OPIC and assume its portfolio. But the BUILD Act draws in a few select components of the US Agency for International Development (USAID) too. By consolidating these functions under a single roof, the BUILD Act would create an institution that is much closer to a one-stop-shop—more efficient and better positioned to structure financing packages with fewer coordination-related delays and roadblocks. Specifically, the bill would integrate USAID’s:
Development Credit Authority (DCA): DCA offers partial credit guarantees backed by the US Treasury, which facilitate access to financing for small businesses in emerging markets.
Enterprise Funds: Over the years, Congress has periodically provided resources for the creation of enterprise funds—which have a mixed record, at best.
Office of Private Capital and Microenterprise: This small, relatively new office seeks to mobilize private capital by facilitating partnerships and by deploying a combination of grant funding and advisory or technical support.
Of course, these changes won’t negate the need for strong coordination between USIDFC and other US agencies engaged in development activities—and USAID, in particular.
For US development dollars to succeed in creating inclusive economic opportunities in frontier markets, a full-service development finance institution is crucial. Introduction of the BUILD Act is a vital first step.