FAQs/Info for Press on USAID Partial Credit Guarantees
Q: What/Who is USAID?
In 1961, President John F. Kennedy signed the Foreign Assistance
Act into law and created by executive order the U.S. Agency
for International Aid (USAID). USAID is an independent federal
government agency that acts as the principal branch of the
government to extend assistance to countries recovering from
disaster, trying to escape poverty, and engaging in democratic
reforms.
Our Work supports long-term
and equitable economic growth and advances U.S. foreign policy
by supporting and promoting:
economic
growth, agriculture and trade;
global health;,
democracy,
conflict prevention and
humanitarian
assistance.
We provide assistance in four regions of the world:
Sub-Saharan Africa;
Asia and the Near East;
Latin America
and the Caribbean, and;
Europe and Eurasia.
With headquarters in Washington, D.C., USAID's strength is
its field offices around the world. We work in close partnership
with private voluntary organizations, indigenous organizations,
universities, American businesses, international agencies,
other governments, and other U.S. government agencies. USAID
has working relationships with more than 3,500 American companies
and over 300 U.S.-based private voluntary organizations.
Q: What is a partial credit guarantee?
USAID’s partial credit guarantees allow the Agency
to use credit to pursue any of the development purposes specified
under the Foreign Assistance Act (FAA) of 1961, as amended.
The Development Credit Authority (DCA) is the tool that provides
USAID Missions the authority to issue loan guarantees to private
lenders, particularly for local currency loans. These guarantees
cover up to 50% of the risk in lending to projects that advance
USAID’s development objectives.
Q: Why are they used and where?
USAID is working with the private sector in developing countries
to expand investment in local development activities. Since
1999, USAID’s field offices, or “missions”
have used the Development Credit Authority (DCA) to facilitate
these public-private partnerships.
DCA is a tool within USAID that enables the missions to provide
partial credit guarantees for private-sector investments to
reduce the risk associated with lending to new sectors or
new borrowers. These guarantees help stimulate development
by increasing the flow of credit to areas and activities that
need it most, including specific sectors where the need exists
to encourage sustainable local economic growth and represents
a tremendous resource for local businesses, public health
and education, financial services, and infrastructure projects,
just to name a few.
In addition to mobilizing financing for specific projects,
partial guarantees help demonstrate to local banks that loans
to underserved sectors can be profitable. This fosters self-sustaining
financing because lenders become willing to lend on a continuous
basis without the support of guarantees from USAID or other
donors. Partial guarantees are a powerful catalyst for unlocking
the resources of private credit markets to spur economic growth
while advancing development objectives.
Over 115 credit guarantees have already been established
in 42 countries creating practical, innovative and replicable
ways to partner the private sector with creditworthy borrowers.
These countries include South Africa, Uganda, Morocco, Philippines,
Croatia, Kazakhstan, Ukraine, Mexico, Nicaragua, and Russia.
Q: How do they work?
Missions are responsible for the identification, design,
implementation, monitoring, and evaluation of a project using
a guarantee. Missions authorize projects and fund the cost
from their budget. Missions are responsible for ensuring the
developmental soundness of their projects. In Washington,
USAID’s Credit Review Board and the CFO are responsible
for the financial soundness and determination of cost for
each Mission project. The Office of Development Credit Team
(ODC), upon request, will assist Missions in project identification
and design. The ODC Team will also help Missions understand
and comply with the guidelines and regulations established
for the guarantee facility. The ODC Team will assist in the
process that leads to a determination by the CFO of the estimated
cost of the proposed credit assistance (the "subsidy
cost") that will be charged to the Mission's operating
year budget.
USAID’s loan or bond guarantees are often complemented
by USAID-assisted training that help banks better perform
cash-flow analysis, due diligence and risk management on loans
to underserved sectors. The combination of partial guarantees
and training has introduced local financial institutions to
new lending opportunities in the housing, microfinance, infrastructure,
energy and agribusiness sectors.
Q: What is the cost? How is it determined?
Under the Truth-In-Budgeting Act, the cost of a USAID loan
guarantee is the estimated net cost of the assistance to taxpayers
over the life of the guarantee, as expressed in present discounted
value terms. For example, if a Mission makes a $10 million
loan guarantee, the true cost will be determined for the most
part by the risk of default. To over simplify, if the risk
of default is estimated to be 10%, the cost to USAID's budget
of a $10 million loan guarantee would be approximately $1
million. This cost would be approximately the same on a direct
USAID $10 million loan made at interest rates similar to Treasury's
cost of borrowing, assuming again a 10% estimated risk of
default.
Q: What is the typical range for USAID’s guarantees?
Partial guarantees are intended to be used as a credit enhancement
tool with true risk sharing on the part of private and public
sector partners. Loan amounts typically fall in the $5-10
million range, but loan guarantees have been as low as $1
million and as high as $40+ million.
Q: Are there priority sectors where the use of a
guarantee is intended?
Global climate change activities, health, small business
promotion, and energy and environmental infrastructure. However,
all sectors are eligible.
Q: Are there some areas where the use of a partial
guarantee is not applicable? Are there special restrictions
on the use?
The use of partial guarantees is primarily intended for countries
and regions where USAID has an active presence. Eligible projects
must have positive financial rates of return so that the loans
can be repaid. USAID may decline to offer credit assistance
where risk analysis of a specific project demonstrates that
the estimated risk is very high. There should be true risk
sharing through a partial guarantee. True risk sharing requires
an independent risk analysis performed by firms with a real
financial stake in the outcome. This effort will tend to protect
the US taxpayers.
Q: What are the benefits of using a credit guarantee?
Credit assistance is particularly useful in areas such as
micro and small enterprise, privatization of public services,
infrastructure, efficient and renewable energy, and climate
change. Credit projects offer several distinct and very attractive
advantages over other forms of assistance:
Promotes private-sector investment - Large
reserves of untapped private capital are available within
the private sector of developing countries. To encourage financial
institutions to lend that capital for developmentally beneficial
projects, credit guarantees can be used to cover part of the
risk on new loans where financing had been unavailable or
inaccessible.
Encourages lending by reducing risk - USAID
guarantees up to 50 percent of the net loss on principal for
investments covered by a guarantee, sharing the risk with
the private-sector partner.
Builds banks lending capacities - Guarantees
provide local financial institutions with the security to
extend credit and expand into new sectors. In this way, banks
invest in their capacity to lend into new and potentially
profitable markets while increasing the credit available to
developing areas. These guarantees are often coupled with
training and professional assistance from USAID designed to
strengthen a financial institution’s long-term involvement
in local credit markets, beyond the coverage of a partial
guarantee.
U.S. Government funding maximized - By
using credit from local sources to finance development activities,
one dollar from the U.S. Government can leverage up to 50
US Dollars in loans.
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