Reauthorization of the U.S. Development Finance Corporation Provides an Important Opportunity

By Dan Runde | June 30, 2023

This Critical Questions expands on an article published March 24, 2022, in The Hill, “Congress should support a ‘fix’ to the Development Finance Corporation.”

The U.S. International Development Finance Corporation (DFC) was created through the BUILD Act in 2018 and replaced the Overseas Private Investment Corporation (OPIC), an entity established in 1971 that grew out of the U.S. Agency for International Development (USAID). The DFC is part of a larger network of international development finance institutions, or DFIs, which are government-backed institutions designed to provide financial instruments, including equity, loans, investment guarantees, and political risk insurance in developing countries to generate private investment in profitable projects with public benefits. DFIs are a powerful and precise tool to use as the West competes with Russia and China across the developing world.

The DFC, the United States’ new DFI, has proven itself an improvement on OPIC, including easing U.S. sponsorship requirements to operate where U.S. investors will not, enabling equity investments, and raising its “credit card” limit to expand the DFC’s scope and impact.

The DFC authorization expires in September 2025 and congressional committees are beginning to take stock. Fortunately, whereas OPIC was hobbled by yearly reauthorizations, reflecting its limited political traction, the DFC’s coalition of global development advocates, great power competition hawks, and U.S. business has proven more durable. With the DFC’s reauthorization, the United States has an opportunity to promote international development with strategic impact. It will be up to Congress to enhance the DFC and take fuller advantage of the tool it can be in great power competition. As Congress pursues reauthorization, it should consider six crucial questions.

Q1: Should the DFC only operate in the poorest countries with failing markets, or should it intentionally expand to more middle-income countries with strategic importance?

A1: Under current law, the DFC prioritizes countries that the World Bank classifies as low- or lower-middle income, and a national security waiver is required to invest in others due to a lack of private capital. While this system has merits, DFC should expand its focus to include middle-income countries, many of which have significant development needs and are critical players in the great power competition with China.

For example, in the Americas, only five countries—Bolivia, El Salvador, Haiti, Honduras, and Nicaragua—are eligible for DFC activity without a waiver, and their political volatility makes them poor potential partners. There are currently no active DFC projects in Bolivia, while those in Haiti and Honduras are limited and extremely hard to develop, and Nicaragua’s authoritarian regime hampers its prospects. The DFC’s operations in this strategic region have steadily declined at the same time that China is spreading its influence throughout the Americas.

Still, there is a danger that needs to be addressed: broadening the DFC’s focus beyond the poorest countries would create a significant temptation for the DFC, as risk-averse as any other bank, to pursue easier, more credit-worthy deals in middle-income countries. Congress should look at different ways to allow the DFC to work in middle-income countries, including using “development impact scores” on transactions or making a case for national security. Gini coefficients, which measure a country’s inequality in terms of income distribution, might also be used to justify transactions in middle-income countries. There may be a need for a minimum that goes to the lowest-income countries to ensure that not all the projects go to middle-income countries.

Q2: How should the DFC’s equity scoring problem be dealt with?

A2: Congress empowered the DFC to make “equity investments”—taking an ownership stake, something that is quite common in the DFI world—in private companies, in part to make it easier for the DFC to collaborate with our allies on projects. Unfortunately, the monies that are given to the DFC for equity investments are given in a way that they are treated as grants and the monies come from the same pot as grants for solving other global development challenges. These investments are treated by budget rules (or “scored”) in the federal budget process as a “loss” even if 10 years from now it will be a “gain.” Because all existing investments are recorded as 100 percent losses, DFC equity monies must be appropriated as grants annually despite potential returns. Compounding this, any profits are returned to the U.S. Treasury instead of the DFC, thereby further limiting the DFC’s ability to invest in critical projects.

One proposed equity fix would score equity investments using the financial concept of “net present value,” which is the standard used in typical financial transactions. Congress could embrace this accounting solution, but getting Congress to use net present value requires decisions beyond the jurisdiction of the committees reauthorizing the DFC. There may be other solutions to the equity fix problem that might also be explored.

Q3: What role should the DFC play in Ukraine’s reconstruction?

A3: The DFC currently has over $800 million of accumulated investments in Ukraine and intends to deliver an additional $250 million for Ukrainian banks. Given the geopolitical significance of the war, the DFC could and ought to be doing far more in the coming years. The reauthorization process presents an opportunity to vigorously engage with the DFC’s leadership to understand their approach to Ukraine and how to improve their operations in that context.

Q4: How is the DFC responding to the digital divide?

A4: While the DFC has identified digitalization as a priority and is investing in digital infrastructure, the United States needs to prevent the digital rails of the future in the developing world from being controlled by bad actors like Huawei. During the reauthorization process, the DFC should be directed to significantly widen its efforts to cement Western leadership on closing the digital divide and prevent a digital future dominated by Chinese firms.

Q5: What is the DFC’s position on oil, gas, hydro, mining, and nuclear power?

A5: The Biden administration has been extremely restrictive with the DFC on those forms of power. Out of 980 active DFC projects, just 12 are in the mining, quarrying, oil, and gas extraction sector. With a Republican House majority, the reauthorization process should raise the issue of reliable energy (along with mining) in addition to renewable energy.

Q6: How does the DFC work with other agencies?

A6: Under the original BUILD Act, the DFC was intended to form a deep partnership with USAID and have no physical footprint. This has proven more difficult than imagined with rapid hiring and a looming DFC restructuring leaving questions over where to house staff. Moreover, as DFC’s relationship with parts of the U.S. government continues to evolve, reauthorization should consider DFC’s field presence, particularly in critical areas such as Ukraine, Africa, and the Pacific Islands. One possibility would be for Congress to consider establishing a coordination committee perhaps chaired by USAID with undersecretary-level staffing from the National Security Council and the State Department, Commerce Department, and Department of Defense to make the most of invested capital and continue close cooperation.