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Bringing US Development Finance into the 21st Century – Ben Leo
00:19:13
CGD senior fellow Ben Leo says that the United States is losing influence in the developing world due to its outdated development finance mechanisms. He shares his proposals for a US Development Finance Corporation.
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- [00:04]
A
Hello and welcome to the CGD podcast with me, Rajesh Merchandani. Today, is the US losing influence in the developing world? And if so, what can Washington do about it? Joining me is Ben Leo, Senior Fellow and Director of our Rethinking US Development Policy Initiative. Hi Ben.
- [00:21]
B
Hello Rajesh.
- [00:23]
A
Ben, this issue is becoming more and more current, especially in the last couple of weeks with news that several US allies are getting involved with the Chinese led Asian Infrastructure Investment Bank. It's something that Washington is not very happy about. But what does the rise of the aiib, the rise of the BRICS bank, what do they tell us about how the long standing global order of development and development finance is changing?
- [00:47]
B
Dramatic changes, particularly over the last decade, but further accelerated over the last couple of years with Chinese entry into, into these, into these markets, in these regions, with these institutions and others, including its own bilateral agencies like the China Development Bank. There are major changes underway globally as well as domestically. Within the US there's a couple of factors that I would single out. First, there is a growing emphasis that is placed by developing country governments, businesses and just ordinary people that jobs, economic opportunities and related issues are at the very top of their agenda. And you're seeing Chinese and other emerging market nations move to align their tools and their activities with these priorities in developing regions. The U.S. in contrast, has been much slower to the game, but much slower in adjusting its own tools, programs and strategic priorities. We are now very far behind the curve, particularly compared to where we were 10 years ago.
- [02:03]
A
And why is that a problem for.
- [02:04]
B
The US if we are not focusing on what our partners core priorities are and their needs, we can talk about those needs and why they matter so much, then we are less relevant, less, less influential in our engagement. Two and related to that, a lot of our tools that we are bringing to bear are simply outdated in their nature. So it's not just simply we're not focusing on what people care the most about, but how we're deploying the tools that we do have are inefficient and not up to the task of the challenge at hand.
- [02:49]
A
Is there a shift going on in terms of the understanding of how US assistance should work? It's moving away from traditional aid models.
- [03:03]
B
Absolutely. Within the last, say five years, particularly with several new presidential initiatives launched by the Obama administration, they have shifted towards a more public, private type of approach to development issues, focusing on the things that are blocking or restricting private investment and enterprise. We see this in Power Africa and the African electricity sector. We're also seeing this in the African agricultural sector as well, with the new alliance for Food Security and Nutrition, where the US Government has attempted to focus its scarce resources on the issues that will unlock and mobilize private capital to greater good.
- [03:51]
A
So given this landscape, this context, and given the issues of the US Losing influence, as you're saying, you and another senior fellow here, Todd Moss, have come up with concrete proposals in a paper that we published on our website recently. Why don't you take us through it? What exactly is it that you are suggesting?
- [04:10]
B
So it starts from the context which we've been discussing about how the world has changed. The needs, the demands, as well as some of the constraints at home. Shifting budgetary constraints or priorities, shifting political dynamics. And based upon that, lays out a concrete proposal that can drive U.S. efforts forward in a strategic and highly effective way. And it boils down to a proposal for a U.S. development Finance Corporation that brings together, consolidates all these existing tools that focus on private sector based development and would bring some additional scale, rigor and accountability to them. So at its core, a reformed and enhanced overseas private investment corporation would be the bedrock. But then these other tools would be consolidated in. So in this paper we put a lot of flesh on the bones of this idea. We've been talking about this idea for a little while, but not in terms of the specifics of how it actually should happen. So this is now much more of a roadmap for action and a, a list of options for how to actually make this a reality.
- [05:36]
A
You talked about the Overseas Private Investment Corporation OPIC there. I mean, that is the kind of main tool for private sector development finance from the U.S. but there are other finance arms. There's the U.S. export Import Bank. USAID operates development credits as enterprise funds. So why do you think that the US Needs another development vehicle?
- [05:56]
B
Yeah, well, first of all, I would, I would emphasize why the US Export Import bank doesn't fit here. The Ex IM bank is not a development agency. Its mandate is to promote exports. It does not have a mandate to focus on development priorities and outcomes. So it's an entirely different institution.
- [06:19]
A
Okay, let's take that one off the table. But the others, there are other mechanisms available. Why are you suggesting that the US Needs to bring all these together?
- [06:31]
B
If you look at other peer institutions in Europe as well as emerging markets, they have put all of these kinds of tools and programs that are not necessarily unique to the US under one umbrella so that they can come in to a project, a transaction or a region or an issue and have one conversation about what they can do if it's focused on technical assistance to address regulatory challenges, to providing finance, seed capital or insurance for a specific transaction all the way through the Project Life cycle. So right now the fact that it's so fragmented across different government agencies means that there are tremendous inefficiencies, redundancies that are present, as well as a lack of clear accountability and reporting structures. So putting under one house means that there will be one person, the head of this institution, who is responsible for driving U.S. efforts in this area and for being held accountable by the US President, by Congress and the general public at large. So it really needs to have those synergies and efficiencies. In that context, it's not about bigger government, it's not about a new federal agency. It's about consolidating what we have now and making it much more effective.
- [08:05]
A
So this would be built out of the existing tools that are already there. Kind of beefed up OPIC if you like.
- [08:10]
B
Absolutely. I mean, that's basically what it is. It's a OPIC plus in many ways. So OPIC is the bedrock and then pull in the other authorities that it does not have now that are at other places and put it under its responsibility with some additions, some additional authorities and improvements as well.
- [08:30]
A
The first question that many skeptics or critics are going to ask you is what's this going to cost the taxpayer?
- [08:36]
B
0. 0.
- [08:37]
A
How so?
- [08:38]
B
It actually not only doesn't cost us taxpayers anything, this is revenue positive. So let's start with OPIC. OPIC has for nearly four consecutive decades provided a net transfer to the U.S. treasury. What does that mean? It generates modest profits on its activities. It's not a profit maximizer because it's a development institution. We don't want them trying to squeeze every last dollar. That's not the best role for the US Government, but not in terms of.
- [09:12]
A
Development friendly policies anyway.
- [09:13]
B
It is important that it's self sustaining and it has been so net transfers coming to the US treasury, which means that's more money for other development programs that USAID runs or et cetera. So right now OPIC is budget neutral or budget positive. We would harness that and continue it forward with this proposed US Development Finance Corporation. So what you would see specifically is modest profits from its lending activities would subsidize grant making operations within this corporation for things like technical assistance. We've run the numbers under a whole series of simulations and scenarios that this would be a financially self sustaining entity.
- [10:03]
A
And in terms of, you know, the outward impression that some might have of this being an example of corporate welfare. How do you respond to that?
- [10:14]
B
There's a couple of key points on this issue. First, OPIC as it stands now has a a very clear requirement that before approving any transactions that it needs to the spot, the US Investor needs to clearly show and document that it has already sought out private financing alternatives so that OPIC can say confidently that this transaction wouldn't have happened if it wasn't supporting it. So that's one, in terms of an additional role vis a vis the private sector alternatives. Two, it has a differentiated pricing structure so that risks associated with projects or transactions are reflected in the fees and interest rates that U.S. investors must pay in. So it is building its operations on market fundamentals with adjusted risk profiles associated with it. That was a little bit of a mouthful, but basically what I'm trying to say is that it factors in these risks as well. There will be some transactions that will not succeed. That's the nature of the business. And you want an institution like OPIC pushing the frontier a little bit and focusing on those kinds of projects that have outsized development potential but may have a little bit more risk as well. What you really want them is to make sure that their overall portfolio of projects and transactions reflects prudent financial practices. That's what they've done. Maybe they could do a little bit more on that, but that's how they've approached these kinds of issues. Going forward, we would want to maintain some of, we would want to maintain that same level of rigor and accountability. But there's a couple of additional things that could be done as well on that front. So right now, opic, it does its annual reports, it has a policy report that lays out its outcomes. But the general public, and Congress in particular doesn't currently have access to a lot of the information that OPIC is collecting. Most people wouldn't know that. It has an extremely rigorous results management framework and it has an accountability structure where they do site visits at 10% of their projects. They get a site visit and they audit what they're receiving from their clients. A lot of that information is locked up partly for good reasons or some good reasons about commercial confidentiality. But one thing that would improve public accountability and frankly help OPIC or this US Development Finance Corporation communicate more effectively with interested stakeholders is, is opening its books a little bit more. Let's hear more about project level outcomes. Let's hear more about financial risks. We just talked about that. Let's get more information on that. It's all happening now, but it's locked up. I think Congress would, many in Congress would find that a welcome reform. Some additional things are even further tightening up their criteria for approving transactions. So I talked about the so called additionality criteria. Let's make that ironclad. Let's make that information more available so that the skeptics out there can dig into some information and at the same time they would be forced to move from platitudes and one off anecdotes to a more informed and grounded conversation about what's really happening.
- [14:30]
A
Let's say, for example, that someone from the administration is listening to this first of all. Then Ben is definitely available to brief you on it as much as you'd like. Thank you for listening. But then how should they proceed? Ben, what is the roadmap, if you like, for actually making the USD fc?
- [14:47]
B
I think there's a couple of things and I think they can be pursued in parallel. First, if this administration has the fire in its belly still, there is time to work very closely with Congress. Despite all the difficulties that that means and has meant in the past, there is still time to push a very ambitious agenda of reform and to try and make the US Development Finance Corporation a reality. 2. It's not just the existing administration that matters. We want to help foster an informed discussion for whoever comes next. The campaign cycle has already begun. Whether candidates have formally announced or not, it's underway. And that's an opportunity to have informed conversations about what's missing in the US Government's development approach and what some of the opportunities are. So existing administration, whoever the next administration is, those are both avenues for pushing the whole proposal. At the same time, there's a number of component parts that are inherent in this proposal that have merit on their own. We've talked about a couple of them. Explicit criteria transparency, shifting some of the tools around and putting them under opic. Another one is providing more resources for OPIC staffing. The biggest constraint right now for OPIC's operations is having enough bodies to do viable, sustainable and accountable transactions. We can talk about that a little bit more if we want. So there's the big proposal and then there's the component parts that can happen now and there's no reason that they shouldn't. They stand on their own.
- [16:55]
A
And this idea, the usdfc, this is one of several ideas that CGD will be presenting in the next few weeks that explicitly look at the next administration targeting whoever's coming into the White House with ideas, specific policy proposals for changing US development policy to bring it in the 21st century. That's right, isn't it?
- [17:18]
B
Absolutely. Absolutely. This is a broader project that I'm very excited about. It's called the White House in the World Project, where we have brought together numerous CGD researchers and bodies of work over time to lay out a whole series of very practical, targeted proposals that will make U.S. development efforts more effective in the future and reflect some of the rapidly changing dynamics we've talked about. Some. But there's similar types of issues that are underway in global health, in trade, in addressing global and regional challenges. A whole series. So this is a comprehensive bias body of work that CGD will be bringing forward to hopefully inform policies for the next administration. It's very exciting.
- [18:14]
A
Everyone listening. Keep an eye out for that on our website. Ben is leading on that as well, bringing it all together. A lot of our CGD experts working on that. Ben Leo, for the moment, we say thank you very much to you for joining me today.
- [18:27]
B
Thank you for having me.
- [18:28]
A
And as ever, you can check out our website for more details about Ben's paper on the U.S. development Finance Corporation proposal proposals. Ben and Todd Moss, I should say. And as we said, more, much more coming up on the White House and the World Project in the coming weeks. That's all@www.cgdev.org. i'm Rajesh Merchandani and once again, thank you for joining us for the CGD pod.
- [19:03]
B
Sam.