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Washington, D.C., Agency for International Development, 1983 May. 16 p. (A.I.D. Policy Paper)Cofinancing is a useful method of development finance that offers the potential for increasing the effectiveness of the US Agency for International Development's (USAID) resources by broadening the scope of investment opportunities beyond those that are within its singular capacity. Cofinancing is any formal arrangement under which USAID loan and/or grant funds are associated with funds from one or more different sources (private or public) outside the borrowing country to finance a particular program. Cofinancing may be used to leverage USAID resources with those of the external private sector as well as to facilitate the transfer of skills and technology. The Development Assistance Committee (DAC) of the Organization for Economic Cooperation and Development (OECD) has viewed cofinancing primarily in the context of its ability to improve the quality of assistance (additionality). Multilateral Development Bank (MDB) participation in USAID-sponsored cofinancing arrangements should generally be in the form of at risk lending as a means of enhancing the prospects for additionality over the medium to longer term. While USAID in appropriate conditions is willing to provide relief, it will not generally link its loans to those of other cofinancing participants through the use of mandatory cross-default clauses but may use optional cross-default clauses in the case of private lenders. In addition to advantages in the application of development assistance resources, cofinancing offers the potential for enhancing the effectiveness of USAID's policy dialogue with the respective less developed countries (IDCs). Although cofinancing has a number of potential advantages, particular care should be exercised to insure that cofinancing does not become an end itself, but rather remains a mechanism among other alternatives to be utilized when it represents the most efficient application of USAID resources in the context of the development objectives of country-specific strategies.