DFI Finance Increases to One Half of ODA
By Dan Runde and Helen Moser | JULY 13, 2015
As the key players in international development gather this week in Addis Ababa, Ethiopiato discuss financing the post-2015 development agenda, development finance institutions (DFIs) should form a central part of the conversation. With greater globalization and the growing role of the private sector, DFIs have played an increasingly prominent role in development finance. Over the past decade and a half, the total of DFI finance has grown to about half of Official Development Assistance (ODA).
In 2002, DFIs invested approximately $10 billion globally in the private sector, or about one sixth of ODA. According to the IFC, this rose to over $40 billion in 2010. A new rough analysis by CSIS of the same institutions found that DFIs’ total commitments to the private sector climbed to $67.9 billion in 2013. In comparison, ODA in 2013 was $135.8 billion. This $27 billion increase in only a few years reflects DFIs’ rapidly accelerating importance in providing effective financing for the developing world beyond traditional grants.
DFIs play a unique and important role in economic development by facilitating private investments to and spurring growth in countries and sectors that would otherwise be unable to attract finance. Each of the G-7 developed nations excluding Canada has its own DFI. The Overseas Private Investment Corporation (OPIC) is the U.S. development finance institution. The International Finance Corporation (IFC), part of the World Bank Group, is a key multilateral DFI. In 2014, IFC invested $22 billion via the private sector in 98 countries, leading to 2.6 million jobs and providing energy to 94 million people.
CSIS’ report from December 2011, Sharing Risk in a World of Dangers and Opportunities, sought to raise awareness of U.S. development finance instruments and make actionable recommendations on how to strengthen them. In the years since there has been greater acknowledgement of the importance of the private sector in international development by the public, private, and non-profit sectors. However, despite stark changes in the international development finance landscape, insufficient progress has been made on strengthening DFIs.
OPIC plays an especially important role as the U.S. DFI. While it has made commendable progress and seen significant growth within its existing structural limitations in the past five years, Congress should make strengthening OPIC’s authority a priority. In 2014, OPIC had a portfolio of $18 billion in more than 100 countries, including $2.94 billion in new financing. OPIC costs the U.S. taxpayers nothing; its own revenues make the institution self-sustaining. Furthermore, with its investment profits OPIC returned $358 million to the U.S. Treasury in 2014, the thirty-seventh consecutive year it has generated income for the government.
Despite its successes in stimulating economic growth through investments that enable the private sector to engage in various sectors such as energy and infrastructure, OPIC exists in political limbo. Prior to 2007 OPIC was authorized by Congress on a five-year basis, but this has since changed to an annual authorization. OPIC has often faced challenges to its Congressional support, including in 2008 when it was not authorized for six months and lost its deal-making ability. During this lapse OPIC accumulated a $2 billion backlog in potential deals, some of which could not be pursued when the institution was eventually reauthorized.
OPIC plays a critical role in Power Africa and has committed to $1.5 billion in financing and insurance for Sub-Saharan Africa as part of this initiative. Power Africa seek to address the gap in energy access that affects about 70 percent of Sub-Saharan Africa’s population and precludes the kind of local economic activity that yields economic growth – a positive for both Africans and the U.S. companies who wish to engage there. Without OPIC’s support in sharing long-term risks with private entities, such important work would be far more difficult. It is imperative then for Congress to authorize OPIC for a five-year term.
OPIC is currently unable to reach its full $29 billion investment cap given its limited staff capacity. The institution currently has 220 full-time employees, making its portfolio dollars to staff ratio the highest among the G-7 DFIs. China added greater amount of staff and capital to its DFI in 2014 alone than OPIC has in total. As OPIC’s President and CEO Elizabeth Littlefield discussed in her May 19 testimony to the U.S. House of Representatives Subcommittee on Terrorism, Nonproliferation, and Trade Committee on Foreign Affairs, with its current employees OPIC can only finance and insure a small fraction of the valuable investment possibilities that it sees. OPIC included a request for funding to hire more personnel in its FY16 budget proposal; Congress should approve this request and grant OPIC additional hiring authority.
Another structural limitation that continues to impact OPIC’s effectiveness is that it cannot retain a small portion of its earned revenues to fund technical assistance, “first loss” and other forms of risk sharing, and equity investments. It is the only G-7 DFI without this ability. Last July, Littlefield told Devex that funding between smaller early-stage grants and bigger scale-up capital, including “first loss” funding, is “utterly absent right now in the impact investing space.” This funding helps to mitigate risk at a critical stage for potential investors and encourage investment in growing enterprises. To be sure, an attractive feature of OPIC’s operations is that its profits are returned to the U.S. government, but given the missed potential returns of these profits this policy should be reconsidered.
OPIC of course does not exist in a vacuum, and effective coordination with the other U.S. agencies that play a role in development finance is important to maximize the impact of its investments. However, as we mentioned in a CSIS commentary on the 2015 Quadrennial Diplomacy and Development Review, there is not a robust and specific interagency coordination strategy for pursuing economic statecraft. This should be created and implemented, with a focus on how OPIC and USTDA can be included more effectively in USAID country exit strategies and MCC compact development. As more and more countries graduate to middle income status, emphasizing OPIC’s unique potential to spur further economic growth in these locations needs to be prioritized.
Four years ago, CSIS made many of these recommendations in its report on strengthening U.S. DFIs. Given DFIs’ increasing financial relevance and a number of new supporters who see the importance of OPIC, far more can and should be done to strengthen OPIC and promote DFIs as a central part of the conversation on development finance.
Daniel F. Runde is director of the Project on Prosperity and Development and holds the William A. Schreyer Chair in Global Analysis at the Center for Strategic and International Studies (CSIS) in Washington D.C. Helen Moser is a research fellow with the CSIS Project on Prosperity and Development and the Project on U.S. Leadership in Development. Elizabeth Melampy, a researcher with the Project on U.S. Leadership in Development, contributed research for this Commentary.