One way U.S. government development agencies can move toward a 21st century development model that involves a more strategic relationship with business is by strengthening development finance tools. While these tools were adequate for a time when foreign assistance was a straightforward relationship between governments, they have yet to catch up to take full advantage of the increasing number of companies interested in leveraging their resources with U.S. government agencies. Companies are willing to accept lower profits and look toward riskier markets as part of their long-term investment strategies, particularly if these markets dovetail with U.S. government development priorities and they can mitigate risk with government grant funding and financing tools. These tools can make the difference when it comes to a company integrating a longer view into its core business strategy to make significant socially impactful investments that create new markets and provide sustainable solutions.
Flexible, targeted and coordinated tools would go a long way to encourage companies to invest, coinvest or align their sourcing strategies with U.S. development priorities, such as Feed the Future, MCC Compacts and Partnership for Growth activities. On a number of fronts, development finance tools can provide the tipping point for a potential investment. For example:
- • Providing specific technical assistance to encourage buyer guarantees by organizing farmers to meet quality and volume market requirements, especially effective when coupled with low-cost government financing.
- • Using grant funding as first-loss guarantees for new, riskier projects.
- • Providing patient capital to encourage entrepreneurial activity that can be magnified further by social impact investors.
Many of these tools exist across the U.S. government, but agencies have been reluctant to use them for a number of reasons:
- • Structural issues – different mandates, processes and incentives across the agencies, and the absence of coordinative mechanisms for development agencies – make it difficult to combine or coordinate efforts.
- • Political issues, including mixed signals from Congress, which has not always embraced creative financing as a development tool and traditionally resists multi-year reauthorizations for agencies like OPIC. This has resulted in agency trepidation when it comes to plowing new ground on development finance.
- • Bureaucratic issues, particularly continuing staff skepticism of what the private sector can bring to development, continue to limit opportunities at the project level.
Consequently, numerous opportunities for collaboration between the USG and the private sector are left on the table – opportunities that could make USG development resources go further and result in more sustainable projects with greater developmental impact.
Sharing Risk in a World of Dangers and Opportunities
A December, 2011 CSIS report “Sharing Risk in a World of Dangers and Opportunities” by Dan Runde, Robert Mosbacher, Jr. and Mildred Callear highlights a number of these issues and provides recommendations that resonate with needs identified by the business community. Most notable are calls for multi-year reauthorization of OPIC, along with its ability to combine its financing tools with technical assistance, either provided by other agencies or financed by its own reserves. The report also recommends that OPIC be allowed to take direct equity in projects to catalyze additional debt financing on projects that attract private sector activity, and supports the use of grant funding at MCC and other government guarantees as first loss products. The report is a useful resource on the current landscape of U.S. government tools and the structural challenges within and across the agencies, as the Administration and Congress look seriously at how to institutionalize a development strategy that attracts private capital to enhance the sustainability and effectiveness of our programs.
