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| >> Return to Home Page >> Central Programs >> Global Programs >> Development Credit | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Development CreditSummary. The budget request for Development Credit (DC) is the Agency's first consolidated credit authority request. For FY 2001, USAID seeks: (1) up to $15 million in transfer authority from other program accounts in order to finance credit subsidy for loans or loan guarantees that will directly complement USAID missions' grant-financed programs; and (2) $8 million as a direct appropriation to fund the administrative expenses of managing the Agency's entire credit portfolio. DC loans and loan guarantees will stimulate private sector lending for financially-viable development projects, leveraging additional development investments in an environment of shared risk. The program assumes that: (a) in the long run, most development financing will come from the mobilization of indigenous private capital and not from the donor community, (b) private capital markets in developing countries currently meet only a limited range of credit needs far below their potential capacity, and (c) development credit programs will encourage local banks, using modern banking practices, to work in moderately risky and previously under-served markets, thereby identifying and correcting market failures. DC provides USAID missions with the flexibility to choose the most effective financial tool -- loans, loan guarantees, grants or a combination of these tools -- to achieve assistance objectives. Missions are expected to pursue their approved objectives, using DC rather than grant assistance, only where conditions for the use of credit assistance are favorable. Evolution of Consolidated Credit. In the past several years, USAID has made significant progress in strengthening its credit management operations. The Agency has outsourced a number of credit servicing functions, hired additional technical staff responsible for credit management, developed improved financial performance indicators, established a Credit Review Board chaired by the Chief Financial Officer to oversee all of USAID's credit activities, and worked closely with the Office of Management and Budget (OMB) to develop more accurate credit risk models. Beginning in FY 2001, Agency credit programs will be fully consolidated under the umbrella of DC. No separate appropriations are being requested under FAA section 108, Micro and Small Enterprise Development (MSED) or under FAA Sections 221-223, Urban and Environmental Guarantee (UE). In addition, administrative expenses associated with the existing credit portfolio will cease to be funded through Operating Expenses (OE). It is intended that DC will be available for all sectors provided that key guiding principles are met. Missions are free to pursue their objectives with 100% grant assistance, or subject to the transfer ceiling set by the Congress, use a portion of their annual budgets to finance credit subsidy. The credit subsidy cost will be estimated independently by DC staff, reviewed by the Credit Review Board and determined by the Chief Financial Officer. The $8 million appropriation request for DC administrative expenses reflects the cost of the development, implementation and financial management of all Agency credit programs, including the existing credit portfolios. (Note: Since new DC activities represent a small portion of total existing and planned credit activities, the requested level is necessary whether or not the full $15 million requested transfer authority is granted). This covers various credit administration costs previously funded by Agency OE. The request embodies a rationalization of credit administrative expenses and is subject to both improved performance due to outsourcing and considerable savings derived from consolidation of all Agency credit operations under the umbrella of DC. The existing credit portfolio currently amounts to approximately $13.3 billion, and incorporates the MSED portfolio ($143 million), the UE portfolio ($2.3 billion), the Direct Loan Program ($10.8 billion), and the DCA portfolio ($93 million). The $8 million appropriation request will fund 29 USDH staff associated with management and oversight of new DC as well as the continued administration of the existing credit portfolios. In addition to providing direct support to field missions contemplating, or using the transfer authority for specific development objectives, it includes financial accounting and services (billing, collections, ledgers, monitoring, debt rescheduling, external reporting) for the entire credit portfolio. Development Credit
Since mission demand will determine the allocation of development credit transfer authority among regions and sectors, no regional breakdown of these budget allocations can be provided at this time. Illustratively, however, the Agency anticipates that demand for credit resources among the geographic regions and central programs in FY 2001 may be as follows: Asia and Near East, $3.5 million; Europe and Eurasia, $4.5 million; Latin America and Caribbean, $2 million; Africa, $2 million; and central programs, $3 million. Guiding Principles of DC. All projects will contribute to the achievement of existing USAID objectives, either at the mission or Washington operating unit level. Risk will be shared with private sector partners in each DC activity. Furthermore, the use of DC will require a commitment to financial discipline by the host country participant that will lead to more appropriate and efficient use of U.S. assistance funds. USAID will utilize prudent risk management methods to assess project risk and calculate credit subsidy amounts. Interagency Country Risk Assessment System (ICRAS) risk ratings will be applied to determine the country risk associated with each credit. The Agency has hired a Senior Credit Risk Supervisory Officer to strengthen its capacity for credit risk assessment and management. This individual is continuing efforts to work closely with the OMB on further refinements to current risk analysis models. DC is not an additional source of funding, but merely an alternative use of existing appropriations whereby funding from other USAID program accounts will be transferred to the DC account. USAID envisions that project revenues for DC partial loan guarantees will be denominated in the same local currency that produces the bulk of its contingent liability. Minimizing foreign exchange risk in this manner will benefit borrowers while at the same time reducing costs for the U.S. Government. USAID anticipates that a majority of DC-funded projects will involve partial loan guarantees to local private-sector intermediate financial institutions to finance non-sovereign borrowers. To assure the financial viability and creditworthiness of each DC-funded project, USAID has strengthened its capacity to: design and implement credit-funded projects; provide accurate credit-risk assessments and subsidy calculations; and manage the financial aspects of DC activities. Detailed credit and operating manuals have been developed that outline procedures and the necessary steps required for the implementation of credit-funded projects to insure effective credit risk assessment and ongoing credit portfolio management. The analytical and management skills required for DC activities, exclusive of the direct loan program, will be located in a newly-formed development credit operating unit, and staff will be reassigned from the predecessor MSED and UE credit activities. Administrative expense also includes minimal overseas personnel necessary for ongoing project development and oversight. In addition to the normal development-based indicators that must be established for all mission projects, DC projects will be measured by three additional indicators:
Examples of DC Activities. The following projects illustrate the kinds of program activities that USAID may fund using DC:
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