Foreign Assistance

A decade ago, the United States authorized enterprise funds as an experimental model to support private sector development in Central and Eastern Europe as those countries moved from centrally planned to market-oriented economies. The funds, which are private, nonprofit U.S. corporations, are supposed to make loans to, or investments in, small- and medium-sized businesses in which other financial institutions are reluctant to invest. With the breakup of the Soviet Union in 1991, enterprise funds were established in the newly independent states. Ten funds now operate in Central Europe and the former Soviet Union, covering 19 countries with authorized funding of about $1.3 billion. Enterprise funds receive their funding through the U.S. Agency for International Development (USAID), which has primary responsibility for monitoring the funds' operations. This report determines (1) whether enterprise funds are assisting private sector development; (2) what factors have affected the funds' ability to carry out their activities; (3) whether funds still have a role in private sector development, in light of other private investment and international donor efforts; (4) whether the funds are more likely to recoup their authorized capital; and (5) whether the funds are complying with recent changing in USAID's reporting requirements.

GAO noted that: (1) to varying degrees, enterprise funds in Central Europe and the former Soviet Union have engaged in investment activities that support private sector development in their host countries; (2) the ten enterprise funds have made investments and loans in and provided technical assistance mainly to small- and medium-size businesses totalling about $809 million through fiscal year 1998, using capital authorized in U.S. grants as well as investment proceeds; (3) nine funds have raised additional investment capital from investment partners on individual deals or by establishing private equity funds that attracted other investors; (4) fund management and host-country legal, regulatory, and economic climates were key factors in the funds' ability to carry out their activities; (5) based on GAO's analysis of financial and investment patterns in Russia and Romania, the enterprise funds in both countries have a continuing development role for the foreseeable future; (6) despite private and international donor investments in these countries, the overall need for foreign investment capital and western business expertise in Russia and Romania continues unabated; (7) other foreign investment in Russia is predominately in stocks and bonds and does not involve the direct transfer of western management skills; (8) the Russian fund has focused on making direct investments in an attempt to influence long-term business management reforms in the private sector; (9) determining whether enterprise funds will recoup their authorized capital is difficult because funds have 10- to 15-year life spans, and thus, long maturity periods for their investments; (10) enterprise funds are venture capital-type funds that involve an inherent risk of financial loss--individual investments will fail, but, in the long term, successful ventures are supposed to offset the losses; (11) the enterprise funds were reporting financial and related information, as required; and (12) AID requires each fund to prepare a strategic framework matrix with multiyear investment projections, break-even analyses, and other investments in small- and medium-sized firms and other private capital raised.