The humanitarian forgivable loan program (HFLP) was designed by a retired US banker with assistance from business school professors. The HFLP was developed in the late 1980’s and has been used to fund many projects over the past 30 years.

The HFLP utilizes a collateralized bank loan that is progressively settled by donations from wealthy donors upon achieving project milestones. In return for donations, donors are issued with tax receipts that can be submitted to the IRS to obtain tax credits.

Why a bank loan requiring collateral, if money is being donated?

The HFLP leverages off established banking mechanisms and processes that help to provide protection against misappropriation of funds. A bank loan is created for the project that is secured by the equivalent value in collateral. Collateral is issued by the Sponsor’s bank using a documentary credit instrument such as a Standby Letter of Credit (SLC) or an irrevocable bank guarantee (iBG).

The intended consequences of requiring a bank loan that can be settled by delivering on the project milestones is an incentive to perform. A Third-Party Administrator (major auditing firm) will be appointed to perform a due diligence on the business plan, perform annual audits of the project milestones and act as disbursement agents.

Quantifying the Sponsor’s Risk?

The Sponsor’s risk of a drawdown on collateral can be mitigated against by ensuring that the developers are credible, and that the project is managed appropriately. A term sheet will be issued to the Sponsor (collateral provider) by the legal team of the Donor’s bank. The terms are negotiated between the two parties and once agreement is reached a contract will be issued for signing.

The period of risk for a drawdown on the Sponsor’s collateral is limited to one year. The financial exposure is capped to the value of spend predicted in the approved cash flow forecast for year one of the project. For example, a five-year project may have a cashflow forecast for year one of US$30m. Risk against this $30m is further reduced by tightly managing the project spend on a monthly basis i.e. the exposure could be further reduced to the maximum spend in a single month of say $30m/12 = $2,5m. If credible professional services and contractors are utilized, risk is reduced further.

If fraudulent activity occurs, the TPA will immediately block the flow of funds and an investigation will be performed and an attempt will be made to resolve the situation. If no resolution can be found, the project funding will be cancelled and the SLC/iBG will be returned to the Sponsor. Given that the Sponsor is paid an upfront free on signing the Sponsorship agreement, the value of this fee should cover any liens that may be attached to the SLC/iBG. For example, if fraud occurred in month 3 totaling US$2,5m, and the Sponsor was paid 8% of US$150m = $12m, then the Sponsor will still be cash flow positive i.e. $12m – $2,5m = $+9,5m.

In subsequent project years, performance bonds and insurances are put in place. Why is an SLC/iBG required for the entire project value?

The reason that the SLC/iBG is required for the full project value is because when the loan is created, it will be for the full project value. Once all the agreements are signed, the Donors will fully fund the project by transferring the equivalent value of the loan into a bank trust account. Disbursements are controlled by the TPA and paid from the project loan bank account. The project is audited on an annual basis and if the milestones have been successfully achieved, then the value that has been drawn down from the loan for that year will be reimbursed from the trust bank account where the donors funds have been deposited for this project.

A 501(C)3 entity is registered in the name of the project which will issue tax receipts to the Donors so they can apply to the IRS for tax credits.

Humanitarian Forgivable Loan Program

The Application Process (non binding):

1. Provide a 2 page executive summary of a humanitarian project that has a minimum value of US$150m.
2. Identify possible Sponsors with the capacity to provide collateral of US$150m+ that could be used to back an SBLC or IBG.
3. Present the project to potential Sponsors. Interested Sponsors will need to provide proof of capacity from their bank via a non-binding Bank Capacity Letter (BCL).
4. The Sponsor must provide a letter authorizing verification bank-to-bank of the BCL.
5. The application process is deemed successful once the BCL has been verified by the US Funding agents bank.

The Due Diligence Process:

1. After successfully completing the application process, the US Funding agent will appoint one of the major international auditing firms to perform a due diligence on the business plan. The due diligence is expected to take approximately 90 days.
2. In parallel to the due diligence process, the US Agent will meet with the Sponsor to discuss the terms of the Sponsorship Agreement and subsequently introduce the Sponsor to the legal team representing the US Funders Bank.
3. All parties perform their own checks, KYC (know your client), AML (anti money laundering) and due diligences and review the terms of the Sponsorship agreement.

The Contractual Process:

1. Once due diligences and checks have successfully completed and contractual terms agreed, Sponsorship and Loan Agreements are drafted.
2. Once the Sponsor has signed the Sponsorship Agreement, the Project Developer will be requested to sign the Loan Agreements.
3. Only once both the Sponsor and Loan Agreements have been signed, will Donors transfer the project funds into a bank trust account.

The Project Funds:

1. A non-profit 501(c)3 entity is created in the name of the project.
2. A project bank account with access to the loan funds is opened and controlled by the TPA (escrow).

The Project Execution:

1. A project special purpose vehicle (SPV) is established as a non-profit entity in the country where the project is being executed.
2. All assets created by the project are warehoused in the SPV and donated at the end of the project to a government entity or receiving nonprofit entity.
3. A project governance structure and project management office is established.
4. The project is ready to start once all finances are accessible and the necessary structures are in place.
5. Banking fees, legal fees, commissions and project initiation fees are paid on the first drawdown.
6. A project finance committee approves invoices on a monthly basis and the auditors release payments directly to contractors from the loan escrow account.
7. During the first year of the project, it is anticipated that minimal construction will occur. The first year usually consists planning, finalizing designs and detailed costing using the professional services of architects, engineers, quantity surveyors etc.
8. If the project is planned to be completed in 5 years, the maximum expenditure permitted in year 1 will be approximately 20% of the total project value. This also limits the risk of a drawdown on the SLC/IBG to 20% of the face value.
9. The SLC/IBG is returned to the Sponsor after 13months.
10. Construction companies will be asked to provide performance bonds as security from year 2 onwards.
11. Annual progress audits are done on the project. If the audits confirm that project milestones have been successfully met, the portion of the loan utilized, will be settled by the donors funds provided in the bank trust.
12. Donors receive tax certificates from the 501(c)3 for each donation towards settling a portion of the project loan.
13. The project should complete with no debt and the assets are then donated to the relevant government entity or nonprofit entity