Foreign Aid: USAID’s Legacy Foundations in Europe/Eurasia

Foreign Aid: USAID’s Legacy Foundations in Europe/Eurasia

November 28, 2017
Foreign Aid: USAID’s Legacy Foundations in Europe/Eurasia
Historically, the conclusion of an aid program has been due
A 10th enterprise fund, the Western NIS Fund—
to completion of its development mission, poor behavior by
encompassing Ukraine and Moldova—has not yet been
the recipient country, or funding constraints. Whatever the
terminated. Because the need for equity investing and other
case, the formal closing of a U.S. Agency for International
private sector development activities was, if anything,
Development (USAID) mission in the past has been viewed
considered to be as critical to Ukraine now as it was in the
by many U.S. policymakers as diminishing avenues for
1990s, a decision was made both to extend the life of the
U.S. influence in a country and by host country
fund, including making new investments, and, at the same
governments and their public as a loss of U.S. goodwill.
time, to allow it to undertake legacy foundation-like

activities. In 2015, it began to implement a $35 million
The United States has sometimes, and with considerable
legacy program similar to those in other countries.
success, sought to extend its influence, goodwill, or
development efforts to former beneficiaries beyond a period
Table 1. Legacy Foundations and Their Endowments
of direct aid intervention through a variety of legacy
(in $ millions)
mechanisms. For example, a leading think tank in South
Korea today, the Korean Development Institute, was
Polish-American Freedom Foundation (est. 2000)
$263.0
established in 1971 with a $70 million endowment from
Hungarian-American Enterprise Scholarship Fund
USAID. The Costa Rica United States Foundation for
(2003)
$15.0
Cooperation (CRUSA), founded in 1996 with a $12 million
endowment, continues its work promoting economic
America for Bulgaria Foundation (2007)
$422.5
growth.
U.S.-Central Asian Education Foundation (2007)
$17.5
The Foundations and Their Funding
U.S.-Russia Foundation for Economic Advancement
$150.0
and the Rule of Law (2008)
(to date)
In the period from 2000 to 2010, nine so-called “legacy
foundations” were established in East Europe and Eurasia.
Albanian-American Development Foundation (2009)
$200.0
They share a common origin in the USAID-supported,
private sector-managed enterprise funds that were created
Romanian-American Foundation (2009)
$125.0
following the fall of communist systems beginning in 1989.
Baltic-American Freedom Foundation (2010)
$37.5
These entities sought to stimulate free market economic
growth, in part by making equity investments in small and
Slovak-American Foundation (2010)
$4.0
medium firms, many of which had difficulty finding capital
Western NIS (New Independent States) Enterprise
$35.0
in the early years of capitalist development. While the
Fund—still operating
(to date)
development record of the funds is mixed, in many cases,
the equity investments were profitable. As the time
Source: USAID.
approached for fund liquidation—they had been expected to
last about 10 years—the question arose of what to do with
Foundation Purpose and Activities
the profits. Foreign policy leaders in Congress and USAID
In accordance with federal regulations (2 C.F.R. 200.307)
generally agreed that a portion of the profits, representing
and the grant agreements with the foundations, the profits
half of the original grant, would be returned to the U.S.
of the enterprise funds have to be used for the same purpose
Treasury; the remainder would go to endow newly
as the funds—private sector development. That objective
established grant-making foundations.
has been interpreted flexibly by the foundations in some
cases to include economic governance and rule of law if
In practice, the proportion going to Treasury and an
those affect the private sector, but also independent media,
endowment has varied. Profits from the Central Asia and
civil society, local community development, education,
Slovak funds were too small to accommodate both a
cultural heritage, and tourism.
Treasury contribution and an endowment; in these cases, all
profits went to an endowment. Disposition of Treasury’s
The four foundations with smaller endowments use the
portion of the Russia enterprise fund has been subject to
funds exclusively for scholarships and internships in the
two congressional holds since 2007, some Members
United States. The smallest, the Slovak-American
wanting all proceeds to go to the U.S.-Russia Foundation or
Foundation, focuses on grants to start-up entrepreneurs to
another endowment. In the case of Albania, Bulgaria, and
participate in short-term programs in the United States
Romania, profits greatly exceeded the original grant, and
targeted to their business interests.
the endowment, rather than the Treasury, received the
preponderant share. The total endowment for all nine
Those foundations with larger endowments are able to
foundations equals more than $1.2 billion.
undertake a broader range of activities. Several provide
entrepreneurship grants that seek in a variety of ways to
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Foreign Aid: USAID’s Legacy Foundations in Europe/Eurasia
strengthen business development. The American-Albanian
composition, acknowledge U.S. government assistance in
Development Foundation, for instance, supports tourist
their operations, provide audited financial statements, and
improvement districts, whose revitalized historic areas
pursue private sector development.
grow tourist-related businesses. It similarly supports
business improvement districts to enhance infrastructure
USAID has no formal say in how legacy endowment funds
and the environment in commercial neighborhoods.
are used. For example, while USAID has questioned the
funding by the Bulgaria Foundation of a children’s museum
Many foundations provide grants to nongovernmental
as inconsistent with the purpose of U.S. funding, it has little
organizations (NGOs) in support of rural community
ability to prevent the activity. The one instrument of control
development activities. The Polish-American Freedom
USAID possesses is a “reversionary interest” provision
Foundation funds the institutional development of rural and
included in the foundation grant agreements. This provision
small-town NGOs. The Romanian-American Foundation
allows the United States to terminate a foundation and get
supports development of ecotourism destinations and funds
back its money under a range of circumstances, including
farmers’ agricultural associations to boost productivity.
failure to honor the grant agreement and “foreign policy”
reasons, which could include the broad aid prohibitions
The object of one foundation grant has received significant
applicable under the Foreign Assistance Act of 1961. This
public attention. The legacy arm of the Western NIS Fund
ability, however, is viewed by some in the agency as a
provided seed money to Prozorro, a Ukrainian organization
“nuclear option,” a drastic step unlikely to be employed.
that sought to counter corruption by bringing transparency
to the local government procurement process. Its program
A USAID-commissioned independent evaluation of the
was so successful that it was adopted by the national
foundations and their operations is expected to be published
government for all procurements.
in the near future.
Because their endowments are large, the Romania,
Legacy Foundations as a Graduation Model
Bulgaria, and Albania foundations may be expected to exist
If structured well, legacy foundations may be a way to
for many years. The smaller endowed foundations,
extend a U.S. “presence” and influence in a given country
however, will cease to operate when their funds are spent
beyond the formal assistance program. The purposes of
out; the Hungary and Slovakia foundations are expected to
U.S. assistance could thereby continue to be promoted for
be the first to dissolve.
many years. Further, foundations have an advantage over
Foundation Management and U.S. Role
USAID development efforts in that they are embedded in
the communities they serve and may take a more flexible
The management structure of each foundation was largely
and long-term approach which could enhance effectiveness.
agreed between USAID and the enterprise fund as part of
However, there are limitations to the current model that
the fund liquidation process. In each case, the enterprise
Congress may wish to address in future iterations of such
fund proposed the purpose and structure of a foundation
legacy mechanisms:
and negotiated an agreement with USAID. The funds
established the foundations in accordance with their
 Endowment agreements provide only limited guidance
agreement with USAID. Once the funds liquidate as a legal
on what the foundations can and cannot do. USAID
entity, U.S. authority over the foundations is limited to what
could require agreement language with more precise
was defined in the grant agreement.
direction.
The foundations are all 501(c)(3) nonprofit organizations
 Similarly, existing agreements provide the U.S.
registered in the United States. They each have a Board of
government with limited authority to ensure that
Directors composed of both U.S. and host-country
guidance is enforced. An option would be for the
nationals. In addition to the requirement that they pursue
agreements to establish a governance structure that
the objectives of the original enterprise funds, they are
would give the United States a voting position on the
required to give visibility to the U.S. role in their activities,
board or project-by-project approval power, both likely
noting these are a gift of the American people. They are all
requiring congressional authorization. The right to
required to publish annual reports. Although they are not
approve appointment and reelection of board members
required to maintain websites, most do.
may also serve this purpose.
The U.S. role in foundation decisionmaking is limited. The
 Most countries do not have enterprise funds from which
United States maintains a nonvoting liaison to the board of
to draw profits for an endowment—others exist today
each foundation. While USAID has the responsibility to
only in Egypt and Tunisia. Establishing an endowment
make sure the foundations keep to their agreements, it does
would require substantial appropriations, depending on
not always hold the liaison position. In some cases, such as
the size of the country and the anticipated longevity of
in Poland, the U.S. ambassador is specified as the liaison.
its operations.
Although the agency no longer has a mission presence in
most foundation countries, USAID often attends board
Curt Tarnoff, Specialist in Foreign Affairs
meetings as an observer and maintains a relationship with
each board. It continues to monitor the behavior of the
IF10784
foundations to ensure they maintain the correct board

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Foreign Aid: USAID’s Legacy Foundations in Europe/Eurasia

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