Breaking News

International Swaps & Derivatives Association Rules Argentina in Failure-to-Pay Credit Event
Tweet TWEET

JPMorgan Aids U.S. Agency With Market-Based Foreign Aid

Foreign aid has long been one of the most unpalatable dishes on the federal plate. Why should U.S. taxpayers give billions of dollars to ungrateful countries that will waste it and whose people don’t like America anyway?

Quietly, though, the U.S. Agency for International Development has been undergoing a market-oriented sea change that has attracted fans such as Amy Bell, an executive director of JPMorgan Chase & Co. (JPM), and hundreds of Wall Street veterans.

“They’re really showcasing the power of business to do well and do well in a prudent way,” said Bell, the head of principal investments for JPMorgan’s Social Finance unit in New York, in a telephone interview. “I think they’ve done a remarkable job.”

The U.S. government’s global anti-poverty agency backs a private equity fund that Bell’s JPMorgan unit runs for African agriculture businesses. It helped General Electric Co. (GE) secure $10 million in local financing for small maternal-health clinics in Kenya. It’s supported loans by Root Capital, a social-investment fund, to help coffee farmers in Latin America supply Starbucks Inc. (SBUX)

It’s a sea change for an agency that for years simply gave out money. The program, called the Development Credit Authority, was begun in 1999 under President George W. Bush with authority from Congress to provide loan guarantees, but in the 10 years before 2011 it backed only $2.2 billion in credit. Since 2011, the authority has issued $1 billion in guarantees.

Shrinking Funding

That’s still a fraction of the aid agency’s effort. AID has seen its funding shrink from $22.5 billion in fiscal year 2010 to $20.4 billion in fiscal 2014, not adjusted for inflation. The Obama administration has asked Congress for $20.1 billion in fiscal 2015.

“Our developmental objectives -- ending extreme poverty in 15 years, ending preventable child death, ending large-scale, widespread child hunger -- will only be achieved if we can effectively harness and deploy massive amounts of private investment against those goals,” said Rajiv Shah, the agency’s administrator.

When Shah and Ben Hubbard, former director of the credit authority, arrived in January 2010, they saw an underutilized asset.

“We don’t look at these problems and say, ‘How do we get the appropriations budget to solve this?’” Hubbard said in an interview. “It’s, ‘How do I attract the private sector to get this done, because it’s inherently more sustainable?’ Rather than building and paying for solar power plants, we can attract private capital to pay for them.”

Former Bankers

The agency’s credit authority, with a few dozen “private sector, deal-oriented” former bankers and financial analysts, has brought tools from Wall Street to hone a model that Shah said he hopes will transform not only development work, but also the thinking in his agency.

Since 2011, the credit unit has leveraged private capital to help companies expand while assisting some of the world’s most vulnerable people.

The credit authority guaranteed an $8 million loan by New York-based JPMorgan to the African Agricultural Capital Fund, which helped attract equity investors and boost the Uganda-based fund to $25 million. The arrangement allowed the bank to experiment with a new market, lending to the small- and medium-sized businesses that are the engine of economic growth.

Republican Applause

The private-sector approach has drawn applause from critics of foreign aid such as Republican Representative Ileana Ros-Lehtinen of Florida, who’s praised the credit agency’s “proven track record of significantly leveraging private financing in support of development aid,” even as she’s called for cuts to other parts of the foreign aid budget.

The development credit agency works in a number of ways. Most often, it encourages banks in developing countries to loan to smaller businesses, usually in underserved sectors such as farming that align with U.S. development goals, by sharing the risk if there’s a default.

“There’s a lot of wealth in these banks, but they’re risk-averse,” said Hubbard. “We don’t take out all the risk, so they have skin in the game, but we lower it.”

When Nereus Capital LLC was struggling for funds, the credit authority partnered with U.S.-based institutional investors to help raise a $100 million investment in the Mumbai-based company’s fund for clean-energy projects.

Deploying Wealth

“Learning how to deploy that wealth to tackle development challenges, environmental challenges in India, is how we will solve extreme poverty and its consequences of child hunger and child death there,” said Shah, 41, who earned a medical degree from the University of Pennsylvania and previously was chief scientist for the U.S. Agriculture Department and worked for the Bill & Melinda Gates Foundation.

The credit authority’s default rate has been 1.89 percent, with the aid agency paying out $11.6 million in claims since 1999 and collecting $14.1 million in bank fees. It also provide credit enhancement to companies such as Cambridge, Massachusetts-based Root Capital, which identified a gap in financing for farmers’ cooperatives that were too large for microcredit loans and too small for bank loans.

The cooperatives use the funding to help small farmers improve their yields, reduce post-harvest losses -- enhancing food security -- and earn more by selling collectively to companies such as Seattle-based Starbucks, the world’s largest operator of coffee shops.

Loan Guarantees

This year, the president has asked Congress to raise the annual cap on the credit authority’s loan guarantee program to $2 billion from $1.5 billion. It’s an idea whose time had come, Hubbard said.

Still, change is sometimes difficult, Shah acknowledges. The aid agency, created in 1961 by an executive order from President John F. Kennedy, has 9,421 people worldwide who are steeped in a culture of giving money away, not raising it. Now, Hubbard said, overseas missions are being held accountable to targets for attracting private capital to fund their programs.

“There’s a huge amount of enthusiasm and excitement, and also resistance in any system to doing things in new and innovative ways,” Shah said.

One solution has been to recruit Wall Street veterans to the government aid agency, with almost 1,000 joining since the end of the Bush administration, Hubbard said.

Reasons for signing up vary, said Hubbard, who has left the agency to start a firm funding businesses in Africa. “Some lost their jobs because of the financial crisis and found purpose in our mission,” he said. “Others could command a bigger salary elsewhere, they just didn’t have a lot of purpose and meaning in those positions.” As a group, he adds, they’re “very counter-cultural inside the agency.”

Cairo Reality Show

These “field investment officers” work across the agency’s “silos,” Hubbard said, bringing a financial viewpoint to help health or agricultural specialists figure out how to bring private capital into their programs.

Chris Lee, a former energy trader from Newtown, Connecticut, now works as a field investment officer in Cairo, where he’s developed a loan program for small- and medium-sized businesses, helps run a local reality TV show about entrepreneurs, and is looking at ways to support business people in the informal economy.

“It’s amazing how simple ideas can be effective,” he said.

To contact the reporter on this story: Nicole Gaouette in Washington at ngaouette@bloomberg.net

To contact the editors responsible for this story: John Walcott at jwalcott9@bloomberg.net Larry Liebert

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.