Foreign Assistance:

Enterprise Funds' Contributions to Private Sector Development Vary

NSIAD-99-221: Published: Sep 14, 1999. Publicly Released: Oct 14, 1999.

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Pursuant to a congressional request, GAO reviewed the enterprise funds, established to support private sector development in selected countries of Eastern and Central Europe, focusing on: (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, given other private investment and international donor efforts; (4) whether the funds are likely to recoup their authorized capital; and (5) whether the funds are complying with recent changes in the Agency for International Development (AID) 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.

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