NCPA - National Center for Policy Analysis

The Sorry Record Of Foreign Aid Funds

June 4, 1996

The Agency for International Development and the Overseas Private Investment Corporation have established a score of so-called investment funds, providing them with $2 billion in grants and guarantees. Unfortunately, the Clinton administration has increased this kind of taxpayer exposure more than ten-fold.

The funds -- designed to provide investment capital to emerging companies in developing countries -- are attracting criticism on grounds ranging from lack of local expertise to sloppy records and inaccurate bookkeeping. Fund managers and directors are required to know nothing about venture capital and nothing about the local markets their funds invest in. Their operating guidelines seem almost perversely designed to court trouble.

For example, the Polish-American Enterprise Fund's 1994 report stated, "It is our clear mission to offer finance and support where it is least available," including, "to people with little or no business experience."

The most commonly accepted business practices are routinely ignored:

  • In real venture capital funds, promoters have their own money at risk, enter markets they are intimately familiar with, limit overhead and ultimately liquidate their investment in order to repay investors.
  • But according to an AID Inspector General audit last year, "there are no agreed-upon specific objectives and measures" by which to judge the funds.
  • Critics charge that fund employees steadfastly resist outside monitoring despite the fact that several of the funds have operating expenses far above the industry averages.
  • It has also been reported that financial statements from firms are often missing, inadequate, inconsistent and even inaccurate.

As a result, all of the funds would be insolvent by now were they in the private market.

  • The African Growth Fund, for example, lost $2.8 million between 1989 and 1992, forcing it to rely on an AID subsidy of $1.4 million and to consume $1.4 million more in capital.
  • With the exception of one fund during one year, the returns for four European funds have all been negative.
  • The $65 million Czech-Slovak Fund has had to set aside an increasing portion of its portfolio to offset bad debts - 37 percent of assets as of last year.

Experts argue that even if the funds were not wasting taxpayers' money, they are making no measurable difference in national development, which is supposed to be their goal. Improvement will only come when poorer states create a domestic climate that fosters private capital markets and entrepreneurship.

Source: Doug Bandow (Cato Institute), "Uncle Sam, the World's Worst Fund Manager," Wall Street Journal, June 4, 1996.

 

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