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AmericasSeptember 3 2018

What is behind the US's reversal on development finance?

In a change of policy, the US administration is modernising its overseas development and foreign aid body, with a Texan taco king leading the charge. Adrienne Klasa reports.
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US aid policy

In March 2017, US president Donald Trump unveiled a ‘hard power’ budget blueprint. The premise was as straightforward as it was controversial: a proposed $54bn increase in military spending and $4bn to build a wall on the Mexican border would be offset by deep cuts to foreign aid, diplomacy and development.

While some Republicans, including house speaker Paul Ryan and former US secretary of state Rex Tillerson, endorsed the president’s plan, others, including Senate majority leader Mitch McConnell, baulked at it.

“I came up here four years ago to get rid of foreign aid – but I’ve become a lot more learned in those four years,” Ted Yoho, a Republican congressman from Florida, said at the US Global Leadership Coalition. “What I’ve learned is what [US defence secretary] general Jim Mattis said: If you cut foreign aid, buy more ammunition, because you’re going to need it.”

A US U-turn 

In Mr Trump’s administration, however, a year can make a world of difference. In a surprising turn, the US is now poised to create a new development finance bank with a $60bn lending cap and a mandate to take equity stakes in some of the world’s most challenging markets.

At the end of July, the House of Representatives passed the Better Utilisation of Investments Leading to Development – or Build – Act. Mr Yoho is one of the bill’s sponsors, and a Senate vote is expected soon. Many believe the legislation to create the new International Development Finance Corporation (IDFC) could be signed into law before the end of 2018.

“This action will catalyse market-based, private sector development and economic growth in less developed countries and advance the foreign policy interests of the US,” the White House wrote in a statement of support released after the House vote.

As the rest of US foreign policy is subject to Mr Trump’s inward-looking 'America First' ethos, some see this rapid progress on a new US development finance institution as anomalous. “It is probably the most interesting reversal or exception to the rule in this administration,” says Eliot Pence, senior director at Washington, DC-based lobbyist McLarty Associates. “It might be that people don’t have sacred cows about development.”

Another US-based emerging markets investor puts it more bluntly: “I can’t believe I’m going to spend the rest of my career praising the Trump administration [for Build] if this passes.”

Supersizing OPIC

The speed of progress and scale of the new development finance institution envisioned by Build contrasts sharply with the depths of US cuts to other international organisations. Mr Trump has slashed funding to the UN, for example: at USAid – the government’s development and humanitarian arm – the budget was cut by one-third, and the Department of State’s by 28%.

Under the ‘hard power’ budget, agencies including the Overseas Private Investment Corporation (OPIC), the US’s development finance arm, and the US African Development Foundation, which provides grants to African entrepreneurs, were recommended for the axe.

“The core of my first budget blueprint is the rebuilding of our nation's military without adding to our federal deficit,” Mr Trump wrote at the time. Many were surprised at this move as private sector-focused OPIC is self-sustaining, generating an average of $280m per year for the Treasury. Its work is well regarded by both the private sector and the development community.

The administration appears to have reconsidered and under the Build Act, OPIC will form the core of the new development finance agency. Its current $30bn lending cap will be doubled, its staff increased and its capacity boosted by bolting on other departments currently housed within USAid.

Reforming OPIC, which was created in 1971 and has not been much updated since, has long been on the agenda. The question is: why now?

Rebuilding Build

Early drafts of Build written during the Barack Obama presidency never got far. When Democrats lost the White House in 2016, the reform programme seemed destined for the dustbin. “We were almost ready to throw out the first draft and abandon the idea when Mr Trump was elected and the OPIC budget was zeroed out,” says an aide to senator Chris Coons, one of the bill’s sponsors.

When Mr Trump nominated Ray Washburne, a Texan businessman and Republican political operative, to lead OPIC, that changed. “He told us: ‘I didn’t leave Texas to close an agency down, I came here to make it work more effectively’,” says the aide.

The revamp dovetails with a global push to leverage private capital to finance development progress around the world. Achieving the UN Sustainable Development Goals, adopted by 193 countries in 2015, will require turning billions of dollars in public funding into thousands of billions in private finance. Development finance institutions are expected to play catalyst for these deals.  

“The Build Act… is a very good thing. Why? Because it refocuses the US private sector investment agency squarely on development,” says Colin Buckley, chief operating officer at the CDC, the UK’s development finance institution.

“OPIC has suffered from a ramshackle assortment of legislation, a set of often-conflicting demands and a hand-to-mouth annual budget cycle. This has forced it to avoid risk, seek short-term political advantages and, at times, prioritise US commercial interests over foreign development.”

In many ways, the institution envisioned by Build will allow the US to play catch up, rather than launching something cutting edge. Other developed countries (including Canada, Japan, South Korea and the UK) have had modernised private sector international investment arms for years. Elsewhere, the ability of a development finance institution to take equity was an innovation in the 1990s. 

“This has been an overdue and necessary thing for a while. I don’t think of this as being competitive with USAid but I see it as complementary – USAid is on the ground, sets the table and helps originate potential transactions. I think it’s seen as quite positive on all fronts,” says Jake Cusack, managing partner of off-grid energy investor and consultancy Crossboundary.

The odd coalition

Support for poorer countries is not a given across administration policy, however, and USAid is struggling under the burden of its budget cuts even as more people around the world need aid due to conflict and natural disasters.  

“I readily admit this budget does not allow us to do everything we might want to do in a perfect world, and it does not allow us to take on every opportunity we might see,” Mark Green, USAid’s administrator and former Republican congressman from Wisconsin, told lawmakers in March. “My commitment is to go as far as I can with every single dollar that’s provided.”

Rather, OPIC’s resurrection is due to a number of factors, not least its ideological alignment with the kind of up-by-your-bootstraps frontier capitalism that appeals to US conservatives. Here, the figure of Mr Washburne comes to the fore. 

“An odd coalition of bedfellows got together on this,” Mr Coons’ aide says. Organisations ranging from Bono’s ONE Campaign to the US Chamber of Commerce have lined up in support. Most people assume that once Build passes, Mr Washburne will lead the new organisation. 

Team building

A Republican campaign bundler and member of the Trump transition team who has donated more than $550,000 to the Republican party and conservative super PACs (political action committees, which raise and donate political funds), Mr Washburne might not seem an obvious choice to be the face of development finance reform. He made his fortune in real estate and chains of tex-mex restaurants before going to work as finance chair for former New Jersey governor Chris Christie and the Republican national committee.

Like his boss, Mr Washburne is keen to distance himself from establishment politics despite this pedigree. “You know I am not a creature of Washington,” he says in an interview with The Banker. (“He’s a political operative – he financed most of the [Republic Party's] senate campaigns,” one official says.)

“I think in [Mr Washburne's] case he is the product of small and medium enterprise-style classic American capitalism,” says Mr Pence at McClarty. “You get the sense that [he] is just straight hustle. He doesn’t necessarily need the spotlight, he’s an operator. I don’t get the sense that this is ideological beyond evangelism on American capitalism.” 

Mr Washburne’s position as a Republic Party power player has been key to rallying support around the Build Act. After his appointment he quickly staffed OPIC with experienced Washington operatives who understood the legislative process. The agency’s executive vice-president, David Bohigian, was formerly an assistant secretary of commerce under George W Bush; chief of staff Douglas Sellers was brought over from the Office of Management and Budget; and Ed Burrier, now OPIC’s vice-president for external affairs, was a deputy staff director on the House Foreign Affairs Committee.

Outside OPIC, other elements were at work as well. In 2017, Robert Mossbacher Jr (another Texas businessman and former director of OPIC under George W Bush) was brought to the White House to advise on the newest version of the national security strategy. Released in December 2017, the document includes a commitment to “modernise [the US’s] development finance tools so that US companies have incentives to capitalise on opportunities in developing countries”. “With these changes, the US will not be left behind as other states use investment and project finance to extend their influence,” it says.

Mr Mossbacher and Mr Green, who now leads USAid, have been ideological allies before. Both sat on the board of the Initiative for Global Development in 2013, co-authoring op-eds on the need for private enterprise to assume a larger role in development. Many of the ideas in the Build Act, as well as the National Security Strategy, were ones they had promoted while co-chairing the Consensus for Development Reform, an incubator for conservative approaches to global development.

For Mr Washburne, meanwhile, leading OPIC through this transformation offers the opportunity to leave a long-lasting imprint of the US abroad. “If he does create a supersized OPIC, that will be a huge mark on how the US engages globally, so quite a legacy,” says Mr Pence. 

Competing with China

Another global trend has spurred on the US development reform agenda, namely the rapid expansion of Chinese development finance driven by investments under the Belt and Road Initiative (BRI). Anxiety about China’s expanding global influence has been key in selling the Build Act to Washington, particularly on the Republican side of the aisle. “Certain parties have especially underlined China’s increasing role in private sector funding. That focus plays to certain members of Congress,” says Mr Buckley at the CDC.

Estimates for the scale of Chinese investment into BRI projects across central Asia, Europe and Africa range from $1000bn to $8000bn. Across Africa alone, China’s annual loans to governments and state-owned enterprises grew from $121m to $30bn between 2000 and 2016. It became the region’s top trade partner in 2009. Cumulatively, this amounts to some $124.4bn over 15 years, according to the China Africa Research Institute, which far outstrips US lending to the region.

Chinese activity in Latin America follows a similar pattern, spooking some in the US government who have long regarded the region as their sphere of influence. The Build Act would be a cornerstone to countering this influence. “A development finance institution, no matter what country has [one], is part of the national security strategy of that particular country,” says Mr Washburne.

A beefed-up US development investment arm will be a “healthy mix of complementarity and competition [with China]. If you’re thinking of this as an economic tool of foreign policy: China does [this], we should have a tool to counter,” says Mr Cusack at Crossboundary.

Whether a $60bn lending capacity is likely to make a substantial dent is questionable, given the scale of China's financial interests. Regardless, countering China has proved a useful point of argument for Build Act proponents. And as more Belt and Road projects fall into debt or delay – International Monetary Fund managing director Christine Lagarde warned in April of growing balance-of-payment risks for recipients of China-backed financing – an alternative investment partner may indeed be welcome.

A need for clarity

As the Build Act moves closer to becoming law, lots of details remain unclear. Most assume Mr Washburne will take the reins immediately, but decisions about investment structures and strategy still need to be worked out. Will the new agency's capital be allocated to other funds to invest? Or will the development finance institution originate its own deal pipeline, and if so who will do it?

Several Build Act supporters, including Mr Mossbacher, have argued that the new development finance branch can capitalise on USAid’s well-established global network to source deals by retraining field staff. Others are doubtful. Most aid and humanitarian workers do not have private sector backgrounds and have very different skill sets from investment professionals, as well as different outlooks.

And while the ability to take equity stakes in projects is an important addition to Build, the idea of the US government owning assets in far-flung, often volatile countries makes some people nervous. This was a key concern raised by some lawmakers ahead of the House of Representatives vote.

Others disregard this. “Having an equity position is not about holding assets... The value is not in returns to the development finance institution, it is as a market maker for lenders and creditors,” says Mr Pence.

The new US institution also seems unlikely to take on roles as a guarantor or first-loss investor, even though many development practitioners argue this is where public financiers could be most valuable. “We are not a first-loss lender,” says Mr Washburne. The senate aide concurs: “US taxpayers get nervous hearing about maximising leverage. That is understandable, so we need to find the right appetite for risk.”

While many kinks remain to be worked out, barring an unlikely catastrophe in the Senate, a major overhaul of US development finance will most likely be a legacy of the Trump era – to the surprise of many.

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