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BUILD Act needs a stronger rule of law foundation

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The recently proposed U.S. International Development Finance Corporation (DFC) is one of the few policy ideas finding bipartisan support in Washington these days. The “Better Utilization of Investments Leading to Development Act of 2018,” or “BUILD Act,” introduced in Congress in late February, has bipartisan support in Congress and fans among development advocates and the private sector alike. President Trump has also signaled support in his FY2019 budget proposal. There is much to recommend with the initiative, which promises increased federal financing to unleash private sector investment in support of sustainable economic growth in the developing world. However, its success will depend in part on the extent to which DFC financial support is tied to good governance and progress on rule of law in countries benefiting from the program.  On that front, the draft BUILD Act remains vague and requires improvement.

The BUILD Act — co-sponsored by Sens. Robert Corker (R-Tenn.) and Chris Coons (D-Del.) — proposes to revamp the Overseas Private Investment Corporation, combine it with USAID’s Development Credit Authority, Enterprise Funds, and Office of Private Capital and Microenterprise, and expand its authority to make grants and equity investments beyond the current authority to issue debt and insurance. The legislation would also double the funds available to a new cap of $60 billion, helping the U.S. to go toe-to-toe with China and other heavy hitters investing in the developing world. 

{mosads}It sounds promising. Unfortunately, the draft legislation fails adequately to address the rule of law conditions that make for a healthy investment and sustainable development climate. Research shows that rule of law — including clear and transparent laws, protection of basic rights, responsive and accountable government, and efficient and impartial dispute resolution mechanisms — correlates closely to economic prosperity. Conversely, gaps in the rule of law pose serious challenges for investment in the form of corruption, social and political unrest, and conflict. The connection between rule of law and development was well understood when President George W. Bush’s development innovation, the Millennium Challenge Corporation (MCC), was created in 2004. MCC was designed with good governance at the core of its eligibility criteria.

The BUILD Act does not explicitly mention governance among investment criteria to be considered. The draft law gives a nod to the MCC criteria, providing that the DFC “should use the constraints analysis and other relevant data of the Millennium Challenge Corporation to be[sic] better inform the decisions of the [DFC],” but this non-binding sense of Congress fails to provide meaningful guidance for DFC investment decisions.

Consideration of the quality of governance in countries targeted for investment should be more than a mere suggestion in the law.  Instead, certain safeguards should be hard-wired into DFC decision-making. For example, DFC investments might require a governance risk assessment and condition funding on certain minimum standards or implementation of mitigation strategies, including undertakings by host country governments to strengthen relevant laws and their enforcement. Private sector beneficiaries of DFC investments could also be required to make compliance commitments to follow global best practices initiatives and to demonstrate how supported investments will yield social and economic benefits for local communities and how any negative impacts will be mitigated or redressed. Rigorous monitoring and evaluation of these aspects of investments should also be required. Without such safeguards, DFC-backed investments will pose higher risks for U.S. taxpayers and investors, and they will lead to weaker sustainable development outcomes for the populations we aim to help.

Some will argue that the DFC need not address governance, because it is designed to complement other agencies, particularly USAID, that address these concerns. Indeed, the BUILD Act urges coordination with those programs. The problem is that the Trump administration has proposed nearly 40 percent cuts to development assistance aimed at promoting good governance. DFC investments that were carefully coordinated with a complementary USAID governance program to create a business enabling environment could be an effective approach, but if the administration’s proposed cuts take effect, there won’t be much by way of such programs with which to coordinate.

The bottom line? The BUILD Act promises a welcome mobilization of private sector resources to enhance development outcomes, but its success will require development of standards for governance in countries targeted for investment and support for coordinated programs of technical assistance to lay the rule of law foundation on which private sector investment can flourish.

Hilarie Bass is president of the American Bar Association, the world’s largest voluntary professional organization with more than 400,000 members. She is co-president of the international law firm of Greenberg Traurig and a prolific trial attorney with a highly successful 30-plus year career.

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