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
USAID continues to believe that there are significant instances in which the U.S. development priorities can be best funded through credit, especially in emerging market countries and in countries moving towards graduation status. At a time when resources are shrinking, the agency should have the flexibility to use credit to support creditworthy borrowers and projects. As a result, the agency is taking steps to strengthen its credit and loan management operations. These steps include ensuring accurate and timely provision of loan data; establishing information control systems for loan data; reassessing staffing needs; review and monitoring of USAID's entire loan portfolio; developing financial performance indicators, and the creation of an active and functioning agency credit review board to oversee all agency credit activities and report directly to the Chief Financial Officer (CFO). Of the 15 actions needed to achieve the foregoing measures, four have already been taken, and the balance should be accomplished no later than December 31, 1997. The credit review board and the CFO will maintain complete responsibility for assuring financial soundness of all agency credit programs. The Global and regional bureaus of USAID will be responsible for assuring the development soundness of these programs.Micro and Small Enterprise Development Program
FY 1998 Micro and Small Enterprise Development Program Request:
Guaranty Subsidy: $1,350,000
Direct Loan Subsidy: $150,000
Administrative Expenses: $500,000
Broad-based, sustainable, economic growth requires an expanding private sector, including thriving micro and small businesses. The success of micro and small enterprises depends, in large part, on their ability to access financing to support viable business ventures. 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, USAID presently operates 61 facilities in 22 developing countries and maintains an active portfolio of over $76 million in loans and guarantees. In FY 1998, USAID expects to support $48 million in loan guarantees and $1 million in direct loans under this program.
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. 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 to present bankable proposals to lending institutions. In the last three years alone, the MSED program has trained more than 1,000 developing nation bankers from participating financial institutions.
The MSED program also uses direct loans and guarantees to provide capital for private voluntary (PVOs) and nongovernmental organizations (NGOs) engaged in microenterprise lending activities and to create sustainable relationships between those PVOs and NGOs and formal financial institutions. 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 since 1989 (see table below) indicates that participant banks are making significant progress reaching new, smaller-sized borrowers. Performance indicators have been modified to gauge performance by individual guarantee facility rather than on an overall program output. For example, 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 down market lending by the bank to reach smaller-sized borrowers, and increased micro borrower access to formal financial markets.
Table: Trend Analysis*
Using Major Program Indicators of the Loan Portfolio Guaranty Program
* For inclusion in trend analysis, minimum activity data of three years required for each facility.
Performance Indicator with Expected Trend Percent of Facilities Exhibiting Trend Explanation of Indicator Increase in Loan Volume 53% Change in lending practices of financial institutions toward micro and small business borrowers Decrease in Median Loan Size 86% Lending to smaller businesses Decrease in Median Asset Size 56% Lending to smaller businesses Increase in First Time Borrower (FTB) rate or FTB rate greater than 50% of guaranteed portfolio 68% Change in the number of borrowers receiving credit who have had no previous exposure to formal credit markets Decrease in Collateral Requirements 63% Change in the perceived risk of lending to the small and micro sector. Increased use of cash flow and other non-collateral based lending techniques.
Enhanced Credit Authority
FY 1998 Enhanced Credit Authority Request:
Guaranty Subsidy: up to $10,000,000
The Enhanced Credit Authority (ECA) is a proposed new initiative 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 ECA will allow USAID to make more rational choices about the appropriate funding tool, i.e., loans, guarantees, or grants, for financing its development activities. It also will allow the agency to leverage its resources more effectively, while using sound, prudent risk-assessment procedures.
For example, a $10 million transfer of Development Assistance funds for the ECA in FY 1998 would be expected to leverage approximately $67 million in loans and guarantees. Funding for ECA administrative expenses (estimated at $1.0 million), is included in the agency's operating expense request. The Office of Management and Budget (OMB) has made this request for $10 million of transfer authority contingent on USAID improving the management of its current credit programs. Accordingly, USAID has developed an action plan to improve its credit management operations, which is now being implemented.
ECA differs from the Urban and Environmental (UE) Credit Program (the successor to the Housing Guaranty Program) in two principal ways. First, ECA may be used to promote any of the developmental objectives of the agency, while the UE program specifically targets developing innovative approaches to the provision of urban and environmental services for the urban poor. Second, through the use of partial guarantees on financially sound development projects, ECA emphasizes developing the capacity of local financial institutions to assess and manage risk. The UE program, which generally finances projects with matching funds from host country participants, aims to forward policy agendas to improve the urban poor's living conditions and to empower them to play an active role in the development of their communities.
All ECA projects will be consistent with existing USAID strategic objectives, whether in the area of economic growth, the environment, population and health, or democracy. One of the key advantages of ECA is that USAID could leverage its resources more effectively 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 ECA-funded project, USAID is improving its capacity to provide impartial credit-risk assessments, subsidy estimates, financial recordkeeping, audits and evaluations of ECA activities.
ECA will only be used 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 reasonable degree of confidence. Borrowers can be sovereign nations, private enterprises or joint public and private ventures. USAID anticipates, however, that a majority of the activities will be non-sovereign (e.g., loan guarantees to provide medium-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 a local intermediate financial institution to targeted sectors. USAID will only provide ECA financing where other funding is not available. Moreover, the use of ECA 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 USAID field mission projects, depending on project goals, there are three performance indicators by which all ECA 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 ECA, USAID will undertake prudent risk management methods to assess project risk and calculate credit subsidy, e.g., the credit subsidy foreach approved project will be no greater than 30%, with an expected average subsidy of 15% per project.
Urban and Environmental Credit Program
FY 1998 Urban and Environmental Credit Request:
Guaranty Subsidy: $3,000,000
Administrative Expenses: $6,000,000
Proper management of the urban environment is essential for sustainable development. Urban development contributes directly to economic growth through capital formation and employment generation and has a strong impact on local and national economies. USAID's urban assistance work has succeeded in 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 the successes of the 35-year Housing Guaranty program by providing long-term financing, technical assistance and training to support urban and environmental development projects. The UE program will use guaranties to engage creditworthy public and private institutions in the investment of urban environmental infrastructure to improve the lot of poor communities. In FY 1998, the UE Credit Program will utilize $3 million of budget subsidy authority to leverage approximately $35 million to address two of USAID's strategic goals -- promoting economic growth and protecting the environment. The creation of the UE program will involve a transformation of its predecessor program. The transformation is characterized by both a change in programmatic emphasis and improved fiscal management.
The programmatic changes include a shift in emphasis from shelter provision to the promotion of environmental infrastructure such as potable water, sewerage, waste water treatment, solid waste disposal, and efficient and renewable sources of energy for the urban poor; improved urban environmental management; and increased urban environmental protection. This shift addresses the economic needs of communities and their impact on the local and global environment. Emphasis is placed on addressing urban and environmental problems that impair human health, decrease child survival rates, negatively impact global climate change and prevent economic progress.
The overall fiscal management reforms being implemented by the agency will help assure the UE program's continued financial soundness. For the UE program specifically, the agency will privatize key loan servicing and financial management responsibilities. Since reviewing and reconciling the current loan portfolio, USAID has begun to transfer loan data into the agency's new management system. Other UE related actions planned for completion no later than the end of FY 1997 include the establishment of three new credit portfolio management positions in the agency's Global Environment Center, the development of new manuals on loan collection and credit procedures, and a follow-up monitoring plan.
The UE Credit program's performance indicators will measure how well the program achieves its target outputs related to improving the economic and social well-being of lower-income urban populations. Performance will be measured by the program's ability to achieve the following results: (1) strengthened local government capacity to manage urban resources in an efficient and environmentally sustainable manner; (2) increased access by low-income families to affordable shelter and urban environmental services such as potable water, sewerage, waste water treatment, solid waste disposal and affordable energy; (3) increased private financial institutions participation in lending to low-income families to improve their shelter conditions; and (4) policy change toward improved availability of shelter, urban infrastructure, and services for low-income families. Performance indicators for each project are used to measure progress over time. This progress is measured by comparing the percentage of targets achieved over the duration of that project to the percentage of money spent. In the USAID Inspector General's most recent audit of the predecessor's performance overview, 60%of the active country programs have exceeded their expected results.
The UE program will continue to achieve the type of concrete results of its predecessor program. For example, the program in Zimbabwe and South Africa engaged private housing finance institutions to provide for the first time, mortgages to low-income households and, in particular, female-headed households. In the context of strengthening democracy, the Central America program supported the development of effective local governments capable of delivering infrastructure and services to the urban poor. In Asia, it assisted the privatization of urban infrastructure and services as a more cost-efficient means of improving the living conditions of below median income families. In the Czech Republic, the program is establishing a market-oriented system of commercial lending to local governments for financing infrastructure investment. In recognition of these efforts, the program and many of its projects have received numerous international awards.
The FY 1998 Urban and Environmental Credit Program request will continue to focus on the urban poor, and will directly benefit approximately 300,000 low-income people in developing countries of Asia, Africa and Eastern Europe.
URBAN AND ENVIRONMENTAL CREDIT PROGRAM, FY 1998
Country Authorization Levels Czech Republic 10,000,000 Indonesia 10,000,000 Zimbabwe 5,000,000 South Africa 10,000,000 Total: 35,000,000
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