Foreign Aid and the Private Sector
May 2, 2006
Carol J. Lancaster, Project Coordinator and Director, Mortara Center for International Studies, Georgetown University
John P. Birkelund, Chairman, Enterprise Investors Corporation
Stephen D. Cashin, Founder and CEO, Pan African Capital Group (PACG)
Spencer T. King, President and CEO, International Executive Service Corps (IESC)
On May 2, 2006, the Program on Science, Technology, America, and the Global Economy hosted the launch of "Foreign Aid and Private Sector Development", a report from the Watson Institute for International Studies at Brown University. Led by former Deputy Administrator of USAID Carol Lancaster, the study explores the various public-private institutions charged with directing aid for private sector development, including enterprise funds, equity funds, and technical assistance by NGOs. Lee H. Hamilton, President of the Wilson Center as well as member of the Board of Overseers of the Watson Institute opened the event along with Thomas J. Biersteker, the Institute's Director. Barbara Stallings, director of the Political Economy and Development Program at the Watson Institute, moderated the discussion.
Lancaster summarized the strategy behind the study and its results. Private sector development, she argued, was the "fuel that drives the growth engine," itself essential for sustained poverty reduction. It strengthens the middle class and amplifies its voice as it calls for better institutions, rule of law, protection of property, and honest, responsive governments in the developing world. The study focused on three areas of aid: private enterprise funds, equity funds, and NGO technical assistance.
Private enterprise funds benefit small and medium-sized enterprises, which are often overlooked as foreign aid focuses on large-scale foreign direct investors or, on the other end of the spectrum, microenterprises. The first enterprise funds were established in the early 1990s and focused on the transition economies of Poland, Hungary, Romania, the Czech Republic and Slovakia, Albania, Bulgaria, the Baltic States, the Western Newly Independent States, Russia, and Central Asia. The U.S. government chooses their boards, which picked the funds' management teams, and supports them with U.S. Treasury funds. Their responsibilities included the promotion of private enterprise and a supportive policy environment for business through lending and technical assistance. The Watson study evaluated each of the ten funds (ignoring the Southern Africa Enterprise Development Fund, for which little data existed) on its financial performance and its catalytic effect on the host nation's business environment. The Poland fund led the field in performance, and the Bulgarian, Romanian, Albanian, and Russian funds also performed well over time. The Western NIS, Hungary, and Czech Republic and Slovakia funds fared less well, while Lancaster characterized the Central Asian fund as a failure.
The study also examined 26 Overseas Private Investment Corporation equity funds, which helped give U.S. government guarantees on equity and debt investment in transition economies. Lancaster noted that individual fund data was difficult to find, but that the funds performed well overall (half had positive returns in 2000, and 16 of 26 met OPIC's required risk ratings), helping make OPIC a self-sustaining government entity.
The final case study examined technical assistance and business advice by NGOs, such as the International Executive Service Corps (IESC), to entrepreneurs or entrepreneurial organizations. Lancaster found that, anecdotally, the NGOs efforts have been positive, but bemoaned the fact that not many independent evaluations from USAID or others exist for a proper study on their practices and their impact.
The Watson study includes several recommendations on improving enterprise funds: 1) appoint qualified, experienced people to run them, keeping these appointments separate from politics; 2) back the funds with an amount of money equivalent to the ambitious goals tagged to them; 3) focus the objectives of the funds. Should they pioneer investment in the host country or promote U.S. foreign policy? Often they cannot do both; 4) choose the host country well. It must exist in that "sweet spot" between possessing a healthy economy already attractive for investment without aid assistance and suffering from such as disastrous political and economic environment that investments are doomed to fail. Lancaster recommended making individual equity funds, as well as the activities of NGOs, more transparent and accountable, as enterprise funds already were.
After Lancaster's introduction of the report, John P. Birkelund, Chairman of the Enterprise Investors Corporation, and former Chairman of the Polish-American Enterprise Fund, discussed enterprise funds. He noted that the Poland Fund, by far the most successful, was blessed with an able board of directors and support in Poland. He blamed the failure of two of the ten enterprise funds on bad management, but noted that the general success rate was more than comparable to that of funds in private sector America. The funds established mortgage banking, consumer finance corporations, and other banks in host countries where none had stood before, and the continued presence of these offices still benefits the host countries, as the Poland office was privatized, repaying the federal government half of its investment and running a foundation supporting rural education with the rest. He urged the U.S. government to copy this successful model elsewhere, perhaps with the Millennium Fund.
Stephen D. Cashin, Founder and CEO, Pan African Capital Group (PACG), deemed the OPIC programs effective, but noted that the agency now lacked clarity of purpose. He also highlighted the problems inherent in a program that combines two financial classes (debt with equity). He disagreed with Lancaster on OPIC's supposed lax reporting, but agreed with the need for experienced managers. Cashin also complained that the USA PATRIOT Act has discouraged U.S. institutions from investing in developing markets.
Spencer T. King spoke on NGOs. He serves as President and CEO, International Executive Service Corps (IESC), a 60-year old organization that has completed 25,000 projects in 100 countries, and involving a 10,000 member strong skills bank of volunteer business advisors (including a "Geekcorps" of 2000 IT advisors). He attributed his organization's continued success to keen observations of the evolving needs of USAID for experienced managers, finding and cultivating strong relationships with strategic partners (in his case, Virginia Tech and Booz Allen Hamilton), and focusing on a few core competences. King observed that the motto of USAID is "From the American People" and suggested that NGOs such as IESC are in a position to "use those American People" in ways more direct and more effective than simply their tax dollars.
The question and answer period featured a wide-ranging discussion on subjects including the potential involvement of diaspora communities in developing world private investment, the soundness of an enterprise fund in the Middle East, and the role of chambers of commerce, among others.
Kent Hughes, Director, Program on Science, Technology, America, and the Global Economy Ext. 4312
Drafted by Alton Buland, Program Assistant, Program on Science, Technology, America, and the Global Economy
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Foreign Aid and the Private Sector