Just signed into law, the BUILD Act upgrades the power of U.S. government financing so it can help bring the muscle and expertise of U.S. private investors to the development challenges of emerging and frontier economies, while at the same providing weaker governments a better alternative to predatory lending practices by China-backed banks and state-owned enterprises.
Building a Modern American Development Institution
The Better Utilization of Investment Leading to Development (the BUILD Act) will create a new U.S. Development Finance Corporation that joins the existing Overseas Private Investment Corporation (OPIC) with parts of the U.S. Agency for International Development to create a more cohesive entity with souped up lending powers.
Experts Dan Runde and Romina Bandura from the Center for Strategic and International Studies have been at the forefront of shaping legislative thinking around what amounts to the United States’ answer to China’s aggressive investments in infrastructural assets all around the world. In their recent article describing what comes next now that the BUILD Act has passed, they explain how this move can bring the United States back to the forefront in global development through more modern financing approaches.
Souped Up Lending Powers
What separates development financing from traditional overseas development assistance or foreign aid is that this government financing is designed to jump start private sector investment in low and lower-middle income countries where private banks might be restricted from operating, where return on investing is riskier, or profitability has a much longer time horizon. In these cases, it can be argued that development finance institutions bridge the financing gap and help de-risk private investment in projects that are needed for modernizing underdeveloped economies.
Development financing isn’t a new practice. The authority to make loans and loan guarantees to support development projects previously existed under OPIC, but the new U.S. International Development Finance Corporation (USIDFC) will also be authorized to acquire equity or hold a financial interest as a minority investor in private sector projects. It can be more nimble by offering loans in local currency when needed, by delivering project-related technical assistance to foster more successful outcomes, and by providing first loss guarantees.
The agency will also be freer to collaborate with and leverage the resources of like-minded development finance institutions in the UK, Japan, and elsewhere. Congress has raised its spending cap to $60 billion, which effectively doubles the amount that OPIC was authorized to spend, and the new entity is enabled to charge market-based fees to cover its own costs, diminishing the burden on the American taxpayer.
A Strategic Alternative to Chinese Investment
In the first instance, the USIDFC is intended to support projects that benefit the local economy and local workers through commercially sustainable, private-sector led investment. But the agency also has a mandate to be strategic in its selection of investments to simultaneously advance foreign policy objectives such as preventing key infrastructure assets from falling out of local government control and into China’s hands.
China founded the Asian Infrastructure Investment Bank and the New Development Bank which has authorized capital of $100 billion. According to Runde, a mere year into their existence, the China Development Bank and China Export-Import Bank held nearly the same total international assets as all of the Western multilateral development banks combined. China’s massively increased lending power has proven hard to resist for developing country governments, particularly in an environment where U.S. investors are nowhere to be found.
Critics of China’s targeted investments say that China leverages its economic investments to create dependencies as governments overextend themselves. In one example, Sri Lanka handed over a 99-year lease to a major port when it became unable to repay its debt; the port is a part of China’s Belt and Road Initiative to secure its trade routes. Similar examples are surfacing around the world of how rising default rates are putting the financial health of fragile economies at risk. The USIDFC would put the United States in a position to counter with better deals that are more likely to contribute to local economic growth and self-sufficiency while defraying some of the risk for U.S. private investors to play a role in these projects.
BUILD strengthens the U.S. government’s development financing capacity, offering a better alternative to state-directed investments.” – U.S. Secretary of State Mike Pompeo
Development or Containment? Both.
The BUILD Act ultimately enjoyed bipartisan support in the Congress because it represents to many in the development policy community a smarter, more modern way to advance development objectives. It recognizes that traditional foreign assistance is insufficient to address the needs of the developing world and that U.S. funds could be better spent acting as a catalyst for private sector investments in emerging and frontier markets. Developing those markets is good for the local economy and creates new customers for U.S. goods, services, and intellectual products.
At the same time, there is growing global concern about the negative impact of aggressive Chinese investments in developing countries where projects not only fail to deliver the anticipated local economic benefits, but may be primarily designed to extract resources or derive control over strategic infrastructure assets. The new USIDFC will stand as a symbol that the United States has entered the arena and will become a tool in the administration’s efforts to contain China’s global economic ambitions.