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Opinion: The Development Credit Authority Needs To Stay In USAID (Devex)
February 26, 2018
From the article:
One of the most dependable areas of bipartisan consensus has always been the United States government’s support for global development. And now it seems the Trump administration has found agreement with some members of Congress on at least one critical part of the global development agenda: Supporting U.S. commercial engagement in emerging markets.
The White House has unveiled plans to transform the small 250 person Overseas Private Investment Corporation into a more robust global financing platform — what they are calling the “U.S. development finance institution.”
The new DFI is envisioned to allow the U.S. government to more forcefully exert commercial influence abroad by taking ownership stakes alongside private sector investors, and on the same terms as other G-8 DFIs. The proposal will permit the U.S. development bank to retain more of its profits, allowing it to grow to meet the demands of the market. And it will equip the new institution with the ability to make small grants and conduct feasibility studies, giving U.S. investors and developers a leg up in challenging foreign markets. To supporters of OPIC, these are all positive moves and will better position the U.S. to counter the growing influence of China and other new actors in emerging markets.
But the planned legislation contains one especially destructive provision that is unnecessary to achieve its broader intent. It calls for the consolidation of the United States Agency for International Development’s flagship private sector engagement tool, the Development Credit Authority, into the new DFI. For the past 18 years, DCA has been partnering with local banks to channel local private capital toward U.S. development objectives. Instead of simply granting money directly to agricultural enterprises, for example, USAID uses DCA to prudently share risk with lenders and unlock a sustainable source of local commercial capital as part of broader agricultural sector improvement efforts.
This critical tool has been championed by members of both parties and across five successive USAID administrators. Since its creation in 1999, it has unlocked nearly $5.2 billion of private capital in some of the world’s toughest sectors and countries and has transformed the way USAID development professionals think about market-based solutions to poverty.
...Because of its pure development mandate, DCA often supports deals that most development finance institutions try to avoid. DCA’s deals tend to be small, higher risk, and more favorable from a pricing perspective. For OPIC, or any future DFI, undertaking too many risky projects and suffering 10 percent losses would be a disaster given it frequently advertises that it makes money. As documented by the Center for Global Development, the result is a lot of DFI capital is provided to middle-income countries. But at USAID, the DCA tool can responsibly risk relatively more capital in the least developed countries since USAID is normally issuing grants, not seeking a market return.