Note: This document may not always reflect the actual appropriations determined by Congress. Final budget allocations for USAID's programs are not determined until after passage of an appropriations bill and preparation of the Operating Year Budget (OYB).
CREDIT PROGRAMS
Credit is often the best means to leverage private funds for development purposes. It enables USAID to make more rational choices among loans, guarantees, grants (or combinations of these) to address market imperfections in developing countries; and, under the right conditions, it will allow USAID to achieve greater development results. To enhance its capacity to use credit as a financing tool, the Agency has made significant progress in strengthening its credit and loan management operations. This includes a decision to outsource a number of USAID's loan management functions; the hiring of additional staff responsible for credit matters; a review of USAID's entire loan portfolio; the development of financial performance indicators; and the establishment of the Agency Credit Review Board to oversee all Agency credit activities.
Micro and Small Enterprise Development Program
FY 1997 FY 1998 FY 1999 Actual Estimate Request Guaranty Subsidy $1,500,000 $1,500,000 $1,500,000 Administrative Expenses $ 500,000 $ 500,000 $ 500,000 Established by Congress in 1983, the Micro and Small Enterprise Development (MSED) program and its predecessor programs work with financial institutions to correct "market imperfections" inhibiting the flow of credit to small businesses in developing nations worldwide. In 1993, a microenterprise focus was added to reflect the Agency's renewed commitment to support microenterprise development activities. To date, the programs have helped mobilize in excess of $220 million in private sector loans, substantially to support small businesses and, increasingly, microenterprises. Under the MSED program as of the end of FY 1997, USAID has 46 credit facilities in 20 developing countries and maintains an active portfolio of over $75 million in loans and guarantees. In FY 1998, USAID expects to support up to $50 million in new loan guarantees under this program, with an increased focus on Russia and the Latin America and Caribbean region.
USAID, through the MSED program, strives to build sustainable linkages between financial institutions and small and microenterprises lacking full access to formal financial markets. Its primary tool is the Loan Portfolio Guaranty (LPG) program, which provides loan guarantees covering up to 50% of the principal loss on a portfolio of small business loans, and up to 70% for micro-loans, made by financial institutions. The MSED program also uses direct loans and guarantees to provide capital for private voluntary organizations (PVOs) and nongovernmental organizations (NGOs) engaged in microenterprise lending activities and to create sustainable relationships between those PVOs and NGOs and formal financial institutions. Guarantees are combined with training and technical assistance to improve the capacity of banks to assess small and micro business credits, and to assist borrowers in presenting bankable proposals to lending institutions. In the last two years (1996 and 1997), the MSED program has trained more than 450 bankers and borrowers.
The MSED program's performance is measured by the following: (1) the degree to which participating financial institutions increase their lending to micro and small businesses; (2) its success in strengthening the capacity of indigenous financial institutions to engage in micro and small business lending; and (3) the ability of the program to assist sustainable PVOs and NGOs to access formal sector financing for on-lending to microenterprises. Data collected on the LPG program for the period FY 1989 through FY 1996 indicates that participant banks are making significant progress in reaching new, smaller-sized borrowers. Performance indicators gauge performance by individual guarantee facility. Each guarantee is measured relative to its previous year's performance to determine if there has been a change in the bank's lending practices. Examples of successful performance indicators are: a decrease in collateral requirements, an increase in banks' lending to smaller-sized borrowers, and increased micro borrower access to formal financial markets.
Urban and Environmental Credit Program
FY 1997 FY 1998 FY 1999 Actual Estimate Request Guaranty Subsidy $3,500,000 $3,000,000 $6,000,000 Administrative Expenses $6,000,000 $6,053,000 $6,053,000
Adequate provision of water, sewer, sanitation, and housing for the urban poor is critical to the environment and child survival in the world's cities. USAID's urban assistance work has succeeded in improving the living conditions of the urban poor by strengthening the capacity of local governments to manage resources effectively and in supporting decentralization and democratization initiatives worldwide.
The Urban and Environmental (UE) Credit Program builds on 35 years of successes by linking long-term financing, technical assistance and training to support urban and environmental development projects. In FY 1999, the UE Credit Program will utilize $6 million of budget subsidy authority to leverage approximately $68 million of private U.S. investment. The loans provided through these projects are upgrading conditions in the slums of India and Indonesia, financing affordable housing development for low-income families in Morocco and Zimbabwe, and helping municipalities in South Africa and the Czech Republic serve the needs of their citizens with critical basic services.
The overall fiscal management reforms underway at the Agency will help to assure the UE program's continued financial soundness. The Agency has contracted with a private commercial bank for key loan servicing and financial management services for the UE accounts. Three new credit management positions have been established in the Environment Center to strengthen the UE portfolio oversight, and new manuals on UE loan collection and credit procedures are being developed.
The UE Credit Program's performance measurement system has been modified from 1997 so that it now measures how well the program achieves its targets related to expanding the equitable delivery of urban environmental services and shelter. The Wall Street Journal of November 26 1997 reported that the program in India has been instrumental in launching the first municipal bond offering in South Asia. This will enable the City of Ahmedabad to finance sewer and water projects designed to sustain the city's economic growth, give slum-dwellers access to essential services, and improve the lives of Ahmedabad's more than three million residents.
In FY 1999, the UE Credit Program will continue to focus on the urban poor. The funding requested will generate loans directly benefiting approximately 1,900,000 low-income people in the Czech Republic ($8.5 million), India ($10 million), Indonesia ($15 million), Morocco ($9 million), South Africa ($20 million), and Zimbabwe ($5 million).
Development Credit Authority
FY 1997 FY 1998 FY 1999 Actual Estimate Request Guaranty Subsidy (permissive transfer authority) $0 $7,500,000 $15,000,000 Administrative Expenses (permissive transfer authority within the above amount) $0 $ 500,000 $ 2,000,000
In the FY 1998 Foreign Operations Appropriations Act, Congress gave USAID authority to transfer up to $7.5 million from other accounts to credit subsidy for loans or loan guarantees issued under a Development Credit Authority (DCA), targeting any of the development purposes specified under the Foreign Assistance Act of 1961, as amended. This credit authority can be used only after the Director of the Office of Management and Budget certifies to the Appropriations Committees that USAID has established a credit management system capable of effectively managing programs funded under DCA authority. Together with USAID's Micro and Small Enterprise Development Program and Urban and Environmental Credit Program, DCA will provide USAID with an alternative financing mechanism that is critical in order to implement more market-based approaches to sustainable development. DCA is intended to expand the use of market rate loans and loan guarantees to support USAID's development agenda. The increased use of credit through the DCA will allow USAID to choose the appropriate funding tool, i.e., loans, guarantees, or grants, for financing its development activities.
All DCA projects will be consistent with existing USAID strategic objectives, among them, the objectives of the President's Global Climate Change initiative. One of the key advantages of the DCA is that USAID can provide assistance more efficiently through the use of market rate loans and guarantees to finance sovereign and non-sovereign development projects that are both developmentally sound and creditworthy. To assure the financial viability and creditworthiness of each DCA-funded project, USAID has improved its capacity to provide accurate credit-risk assessments and subsidy calculations, and its ability to manage the financial aspects of DCA activities.
DCA will be used only where (i) development assistance goals can be met using credit authority, and (ii) the credit subsidy cost of the activity can be estimated with a reasonably high degree of confidence. Borrowers can be sovereign nations, private enterprises or joint public-private ventures. USAID anticipates, however, that a majority of the activities will be non-sovereign (e.g., loan guarantees to provide medium-to-long-term financing for indigenous private entrepreneurs, bond guarantees to support waste water facilities, and credit facilities for private, environmentally sound energy co-generation projects). Most of these non-sovereign projects are likely to involve a partial guarantee on loans extended by local intermediate financial institutions to targeted sectors. Moreover, the use of DCA will require a commitment to financial discipline by the host country participant that will lead to prudent and efficient use of U.S. assistance funds.
In addition to the development-based indicators which must be established for all mission projects, depending on project goals, there are three indicators by which all DCA projects will be measured: (1) repayment rates on direct loans, (2) claims against guaranteed loans, and (3) satisfactory economic and financial rates of return. In using DCA, USAID will utilize prudent risk management methods to assess project risk and calculate credit subsidy, and will use Interagency Country Risk Assessment System (ICRAS) risk ratings to determine the country risk associated with each DCA credit.
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