An American development finance playbook for a 21st century market

The House Foreign Affairs Committee hearing this month on the Better Utilization of Investments Leading to Development Act, known as the Build Act, which proposes the establishment of a new U.S. international development finance corporation, was by all accounts a model of bipartisan support.

Adding to the chorus, the White House recently endorsed the goals of the Build Act, noting that “U.S. development finance tools are outdated and fragmented across multiple federal agencies, and often are not well coordinated. This has hampered our ability to achieve key U.S. foreign policy and national security objectives and resulted in inefficient use of taxpayer dollars.”

{mosads}Indeed, the Build Act is a unique opportunity to modernize the tools at our disposal to enhance the effectiveness and impact of our foreign assistance dollars. The legislation is ambitious, seeking to create an entity that will “mobilize and facilitate the participation of private sector capital and skills” in order to “complement the development assistance objectives and advance the foreign policy interests of the United States.”

This is an essential step in updating U.S. development finance tools. But the new entity is not being born into a vacuum. It is coming into a rich world of commercial, nonprofit and publicly-funded entities, providing all manner of financing, guarantees and technical assistance meant to help incentivize and catalyze private sector capital and skills in global development. There are already plenty of other players out there looking to make a buck on development finance.

So what will make the new U.S. international development finance corporation successful in this crowded marketplace? To enable it to compete effectively the architects of the new entity must ensure its “additionality.” The new agency can distinguish itself by having clear bottom line economic, environmental and social metrics, and the governance and management capacity to drive those results.

George Ingram of Brookings has outlined ways to do so. Among the recommendations is to ensure the Build Act mandates a chief development officer to coordinate development finance policy and implementation with the U.S. Agency for International Development, the Millennium Challenge Corporation and their field missions.

Maintaining USAID’s strong capacity to engage with the private sector will also be essential to the international development finance corporation’s effectiveness. Keeping the private capital and microenterprise office at USAID would benefit the international development finance corporation in the long run. While the international development finance corporation will by design be focused on deals, the private capital and microeconomic office at USAID addresses more systemic issues affecting the private sector investment climate and enterprise growth.

The office’s unique contribution is that it can effectively work at the macroeconomic, microeconomic and enterprise levels. Its support for private sector development programming helps smooth the way for successful development finance transactions. These are two distinct but complementary tools, and the United States needs both. Amending the bill to maintain the private capital and microeconomic office at USAID would better achieve the worthy goals of the Build Act.

Moreover, not only does keeping this office at USAID make good business sense, it’s also the law. The Foreign Assistance Act requires USAID to have a microenterprise office, so if the private capital and microeconomic office is moved to the international development finance corporation, USAID would be legally required to stand up another office in order to be compliant, incurring unnecessary costs.

The new U.S. international development finance corporation would ultimately be a force multiplier for effective development by “crowding in” more socially impactful investment leading to more inclusive and equitable economic growth. This is a win-win for the United States and its partner countries. But we need to be smart about how the entity is designed, governed,and managed so it can effectively leverage what already exists. This will ensure the United States gets the most bang for every development buck.

Tessie San Martin is president of Plan International USA and co-chairman of the Modernizing Foreign Assistance Network. She was previously a director at the Multilateral Investment Guarantee Agency of the World Bank.