May 14, 2018

House Foreign Affairs Committee Mark-up of the BUILD Act (S. 2463)

5 min

This is an update regarding Senate Bill 2463 (the BUILD Act). The BUILD Act creates the U.S. International Development Finance Corporation (IDFC), a new wholly owned government corporation that will replace the Overseas Private Investment Corporation (OPIC) and transfer the Development Credit Authority, the Enterprise Funds, and the Office of Private Capital and Microenterprise from the U.S. Agency for International Development (USAID) to the IDFC.

On May 9, 2018, the House Foreign Affairs Committee marked-up S. 2463 under H.R. 5105. The mark-up, among other things, achieves 6 key objectives of the House:

  1. Prioritizes Countries Friendly to Private Enterprise. In addition to the IDFC's focus on low-income and lower-middle income economies, the IDFC shall further prioritize countries that embrace and promote private enterprise in the form of open markets, private property rights, rule of law, anti-corruption, and anti-bribery.
  2. Improves Development Coordination. First, the mark-up cements the role of chief development officer as chief liaison for the IDFC with USAID, MCC and State and the USAID Administrator's role in making such appointment, which will bolster general development coordination among the agencies. Second, it mandates that the IDFC not just develop a successor to the impact measurement system of OPIC, but that it rely upon such successor to assess the development values of its projects both before and after project implementation. Third, it requires that the IDFC incorporate relevant data from USAID, MCC, State, and Commerce (such as MCC's Constraints Analysis, State's Investment Climate Statements, and Commerce's Country Commercial Guidelines) into its investment decision-making process, particularly to address #1 above. Fourth, it requires that the IDFC coordinate with USAID on the provision of all technical assistance.
  3. Limits Use of Foreign Exchange. Products of the IDFC will not be denominated in foreign exchange unless the Board determines that there is a substantive policy rationale.
  4. Requires Risk Taking by All Project Parties. When issuing any IDFC loan guaranty, all project parties (not just the parties to the guaranteed loan) must bear the risk of loss equal to at least 20% of the guaranteed support.
  5. Measures Impact on Women, Environment and Labor. The IDFC must comply with all of its human rights, environmental, labor, and social policies, measure the impact it has on women's economic opportunities to mitigate gender gaps and include specific language in its products that requires investors to permit labor's right of association and collective bargaining and abide by applicable laws on minimum age, minimum wage, maximum hours and occupational health and safety.
  6. Limits the IDFC to 7 Years. The IDFC authorities would terminate after 7 years, which is much shorter than the 20 years proposed under S. 2463. Some IDFC products may have maturities as long as 25 years, so conceivably the IDFC would be authorized to service those legacy products but could not engage in any new investment activity.

Procedurally, the House agreed to consider the amended bill under suspension of the rules, which expedites the legislative process by limiting debate, prohibiting further amendments, and requiring a two-thirds majority vote of the House. The procedure is typically used to expedite legislation that has bipartisan support.

On May 10, 2018, the Senate Foreign Relations Committee further examined S. 2463 at a hearing with (i) Ray W. Washburne, president and CEO of the Overseas Private Investment Corporation (OPIC), (ii) Daniel F. Runde, a director at the Center for Strategic and International Studies, and (iii) George M. Ingram, senior fellow at the Brookings Institution. Each gave testimony in support of the bill. They impressed upon the Committee that the U.S. needs to modernize its development finance capabilities to better compete with European and Asian development finance institutions (DFIs) and that S. 2463 is the way to do that, largely because of two new products that the IDFC could offer under the bill, equity investments and grants. Senators Corker (TN), Menendez (NJ), Coons (DE), Gardner (CO), Cardin (MD), and Kaine (VA) asked about competitiveness, the development requirements that should be imposed on the IDFC, and the type of relationship that the IDFC should have with USAID.

Mr. Washburne's primary concern was U.S. competitiveness in the DFI space vis-à-vis China. He noted that while China "loans-to-own" by over-levering borrowers, which typically results in China's control over the borrower, the U.S. cannot and should not take that approach. Instead, his suggestion was that the U.S. be strategic in its DFI program implementation. He gave examples of recently executed memoranda of understanding that OPIC executed with the Japanese and Australian governments regarding DFI initiatives in Asia. Senator Menendez pressed Mr. Washburne on OPIC's measurement of success in development terms and Mr. Washburne stated that he would provide the committee with OPIC's development matrix.

Mr. Runde suggested that the IDFC work very closely with USAID and that it should have investment officers based overseas within USAID missions.

Mr. Ingram proposed four specific recommendations for S. 2463: (i) improve the development mandate, (ii) include transparency language from the Foreign Aid Transparency and Accountability Act, (iii) add the IFC guidelines regarding environmental and social sustainability, human rights, and workers' rights, and (iv) leave USAID's Office of Private Capital and Microenterprise intact at USAID so that USAID has the requisite private sector expertise to work effectively with the IDFC.

A number of these recommendations were addressed in the May 9 mark-up by the House.

We will update you with new developments as they become available from Congress.

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Christopher Vaughn, Counsel in Venable's Corporate Group in Baltimore, was a USAID foreign service lawyer in Ghana and Peace Corps volunteer in Kenya. He was USAID legal counsel on multiple DCA transactions in West Africa in the finance, agricultural, apparel, and energy industries, including Power Africa.