Building a Portfolio

Congress Creates New Development Finance Agency with the BUILD Act

International development financing has received a new show of support with the introduction of the Better Utilization of Investments Leading to Development Act, also known as the BUILD Act. Signed into law in October 2018, the act will create a new US international development agency—the US International Development Finance Corporation (IDFC)—with the goal of channeling private investment alongside government aid.

The White House issued a statement saying that in adopting the BUILD Act, “Congress has taken an important step toward fulfilling the commitment President Trump made to reform the United States’ development finance institutions so that they better incentivize private sector investment in emerging economies and provide strong alternatives to state-directed initiatives that come with hidden strings attached.”

Refreshing International Development Financing

The newly created IDFC is the successor to the Overseas Private Investment Corporation (OPIC), which was created in 1971 as the US development finance agency, and the US Agency for International Development’s (USAID) Development Credit Authority. The US Impact Investing Alliance reports that the IDFC will have a chief development officer to oversee the agency’s commitment to labor, environmental, and rule-of-law standards, as well as a Development Advisory Council composed of outside experts to ensure compliance with the BUILD Act.

The IDFC aims to facilitate “sustainable, broad-based economic growth, poverty reduction, and development.” George Ingram, a senior fellow at the Brookings Institution in global development, wrote that the new law gives priority to less-developed countries, minority- and women-owned businesses, small businesses, and women’s economic empowerment.

With capabilities that extend beyond what OPIC supported, the IDFC will be able to support feasibility studies, use equity finance on projects where there will be significant development impact, and make loans and guarantees in local currency rather than in US dollars, protecting investors from currency risk. The agency will also have a higher lending limit than OPIC did.

Expanding the Role of Impact Investing Abroad

Key to the new agency is the push to include private impact investments in projects that would not be possible without the involvement of the IDFC for such things as loan guarantees.

“Impact investors will be important partners for the new IDFC, with a shared commitment to development impact and deep expertise deploying capital in challenging local contexts around the world,” said Fran Seegul, executive director of the US Impact Investing Alliance. “IDFC will play a central role in accelerating the global impact investing movement, unlocking more capital for impact by catalyzing new investors to align their portfolios with global development goals.”

One of Congress’s few bipartisan measures in 2018, the BUILD Act’s legislative success might have been due in part to a desire to counter China’s development efforts in Africa and Asia, which have left developing countries deeply indebted to Beijing. When Sri Lanka couldn’t pay its debts to China, the New York Times reports, it was pressured to hand over a port facility for 99 years.

For its part, the US will carefully monitor financing provided by the IDFC for impact and to ensure that each investment is fully transparent. The BUILD Act contains tools for the IDFC to track, assess, and report on the impact of each project it supports, helping emerging markets build a strong foundation for sustainable development finance.

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