Charity vs. Investment: USAID’s Journey to Self-Reliance and the INVEST Initiative

This post was authored by Emily Langhorne, INVEST Communications Specialist.

Words matter. Although current scientific research is still in the process of discovering the extent to which language affects thought, linguists have long understood that a word’s denotation — its literal or primary meaning — can differ vastly from its connotation — the feelings, ideas, or intentions that the word evokes.

For years, the public has viewed international development agencies as donors responsible for the distribution of foreign aid. In one sense, foreign aid — a term defined in the Oxford English Dictionary (OED) as “material help given to a country by another country, especially economic assistance to a poor country” — conjures feelings of a global generosity. However, the term also connotes a relationship based on charity, in which one nation provides another with handouts. One nation deserves praise, the other pity. The nature of this donor-receiver exchange leaves the receiver nation in a position of dependence.

Like the term “foreign aid,” the word “investment” is also in the OED, which defines it as “a devotion of time, effort, etc., for a purpose, with the expectation of a worthwhile or beneficial result.” With such strikingly different denotations, it’s not surprising that a nation-to-nation relationship based on investment evokes a drastically different image than one based on foreign aid.

With this image in mind, the U.S. Agency for International Development (USAID) — the federal agency that leads U.S. Government humanitarian and international assistance efforts — has reoriented its policy framework to support developing countries on their Journey to Self-Reliance. Through this approach, USAID uses foreign assistance funds to help developing nations build their capacity to plan, finance, and implement sustainable solutions to their development challenges. In these enterprise-driven relationships, receiver nations are economic partners rather than dependents, and their citizens are viewed as entrepreneurial allies rather than victims of poverty, thereby restoring the human dignity of which foreign aid unintentionally but often deprives them.

Blended Finance and The Journey to Self-Reliance

Mark Green, the administrator for the USAID, often says, “the purpose of foreign assistance is to end the need for its existence.”

In other words, every development program’s goal should be to help the countries in which it works reach “self-reliant and prosperous state[s]” so that (except during times of natural disaster or unpredictable humanitarian crises) foreign aid is no longer needed. Every development agency should be working to improve humanitarian outcomes to the point that its existence becomes less necessary.

However, the world’s development challenges are becoming increasingly complex, and international development agencies cannot solve them alone. It’s no secret that these agencies lack the resources to fulfill the aspirations of the United Nation’s 2030 Agenda for Sustainable Development, and many of today’s challenges can only be solved through market-oriented solutions that require working alongside the private sector. Acknowledging this reality, the global development community is changing its thinking about development from a funding mentality to a financing one.

Development agencies have begun to recognize the power of blended finance — the strategic use of development finance for mobilizing private capital flows to underdeveloped markets — for achieving development objectives. With blended finance approaches, development agencies can use their limited funding to stimulate investments in development from the private sector. By working with the private sector, they can grow local economies, expand access to financing in local markets, produce positive humanitarian outcomes, scale the development results, and ultimately reduce reliance on foreign aid.

Barriers to Working with the Private Sector

Unfortunately, most development agencies don’t have access to expertise in both investment and development. While USAID and its peers have many assets that investors and financial intermediaries find valuable, such as grants, guarantees, and in-country relationships, they have limited experience in structuring finance transactions and sourcing deals across sectors, geographic regions, and investment stages.

In addition, private enterprises often find it difficult to work with government agencies like USAID. Complex federal regulations are confusing and the long timeline for project development, implementation, and completion is often not compatible with the timeline of the private sector in which agreements and opportunities need to be executed and acted upon quickly.

The Time Comes to INVEST

In 2017, USAID sought to design a prototype to help instigate private investment in developing nations. Bringing together 33 organizations with experience in investment and financing for development, it wanted to design a structure that could efficiently connect the development community with the range of expertise needed to coordinate investments in developing economies. Together, the participants created INVEST, a mechanism that uses USAID funding to mobilize private capital for development and overcomes barriers to private sector engagement.

INVEST is a New Partner Facilitation Model in which an established development agency implementer (the Facilitating Partner) works to build the capability of new and underutilized firms (new partners) by awarding and managing subcontracts. DAI, as the implementer of INVEST, enables new partners to work with USAID by simplifying the proposal process, assisting in the navigation of compliance regulations, and speeding up the timeline from proposal submission to subcontract award. After a subcontract is awarded, INVEST’s team provides the partner firm as much guidance as needed to ensure that it achieves USAID’s development objectives.

To level the playing field for small and local (non-U.S.) firms, INVEST makes the subcontracting process as streamlined as possible. For instance, INVEST usually asks for all technical proposals in the form of a 10-slide presentation, which keeps firms from being overburdened by long proposal writing that USAID usually requires.

“We are a small firm,” explains Serena Guarnaschelli, a partner at KOIS, a firm that specializes in impact investing. “We might not be able to respond to as many tenders if we needed to submit a typical 50-page proposal, which is a project on its own.”

By working with firms like KOIS, INVEST is creating a network of partners with specialized knowledge that USAID can access, on demand, to design customized blended finance solutions for differing development challenges.

As of September 2019, INVEST’s partner network contained 195 members from the development and investment communities. Each member of the network brings its own geographical, technical, and sector-area expertise. For instance, some of INVEST’s partner network members have significant experience working in sub-Saharan Africa. Others bring in-depth sector knowledge, such as agriculture and irrigation expertise. Still, others possess extensive technical competencies, such as business advisory services and fund structuring.

INVEST has implemented activities in 14 countries. It has mobilized $68 million of private capital for development, and it has supported or identified financial mobilization for additional transactions that have a projected pipeline of $377 million in capital.

Restoring Human Dignity: Investment Instead of Charity

By devising pathways for private investors to invest in developing markets, INVEST has helped make electricity more reliable across Haiti, connect entrepreneurs in Afghanistan with foreign investors, create a vehicle for financing agriculture businesses in Ghana, expand off-grid electricity access throughout Kenya, and promote digital financial inclusion for low-income women in Africa, the Middle East, and the Indo-Pacific region.

Through all this work, INVEST is positively contributing to the lives of people throughout the world and assisting developing nations on their journey to self-reliance.

There’s a lot to be said for a name, and INVEST’s name is telling. Through INVEST, USAID is providing more than a handout: it’s creating opportunities for nations to build their own economies. It’s foreign assistance, but it’s not charity. It’s an investment in the future of partner nations and the people who live there.

This content of this blog is made possible by the support of the American People through the United States Agency for International Development (USAID). The content of blog posts are the sole responsibility of INVEST implemented by DAI and do not necessarily reflect the views of USAID or the United States Government.