2 months until launch, how is the new US DFI shaping up?

WASHINGTON — With two months before the new U.S. International Development Finance Corporation is set to open its doors, the agency’s architects continue to resolve political issues and iron out operational details.

In June, the board of directors of the U.S. DFC approved its bylaws and its risk and audit committees, a move the Overseas Private Investment Corporation’s press secretary Laura Allen called “a critical step toward laying the legal foundation for the agency” in an email to Devex.

OPIC has been working on a new tool that DFC will use to measure development impact called the “Impact Quotient,” which should be released in the coming weeks, according to Allen. The agency is also working to finalize a coordination report outlining how DFC and the U.S. Agency for International Development will work together, which has to be submitted to Congress as one of the final steps before DFC can open its doors.

When it does, there are quite a few questions about whether it will be able to fulfill one key part of its mandate: the ability to make equity investments.

Advocacy is underway to get members of the appropriations committees to give the agency more flexibility in making equity investments. The Better Utilization of Investments Leading to Development, or BUILD Act, gave DFC equity authority and set the cap for equity investments at about $20 billion over a seven-year period.

When the administration put forward its budget request for fiscal year 2020, it asked for $150 million to cover DFC’s equity investments, which it said it would score for budgeting purposes as a total loss, similar to a grant. But the House budget bill included $50 million for equity and kept the same scoring rules, which would allow the new agency to do only one or two equity investments in its first year.

“We’re still very very actively engaged in a host of conversations with appropriators and budget committees about the best way to launch the USDFC, particularly as it relates to equity authority,” Rob Mosbacher, a former OPIC CEO told Devex, adding that he wants to be sure it “starts with enough equity authority be taken seriously and play the role that sponsors thought it would play.”

In May, several members of Congress who had supported the BUILD Act wrote to the House Appropriations Committee asking that “DFC be provided with sufficient equity investment funding and the appropriate scoring treatment” in the fiscal year 2020 budget bill.

“By failing to do so, this new tool will be severely limited in accomplishing economic development in developing countries and cede our leadership in development finance to China,” the letter, which was signed by BUILD co-sponsors Rep. Ted Yoho, a Republican from Florida, and Rep. Adam Smith, a Democrat from Washington, among others.

Conversations are underway to get the Senate Appropriations Committee to include language that would change how equity investments would be scored, urging the adoption of an approach similar to what other development finance institutions use, called “net present value,” which would be more in line with how debt investments are scored and how banks account for risk.

British development finance institution, the CDC Group, makes equity investments that are on average eight years long, which it assumes will generate a roughly 5% return, though it has typically earned more. OPIC has invested debt in equity funds in the past and made an average of a 6% return, while the equity investors in those deals made about 20%.  

Advocates are recommending what they consider to be a conservative approach — using the $50 million appropriated in the House bill as an equity loss reserve fund that could cover potential losses. That fund would enable up to $1 billion in equity investments, assuming that the agency’s equity investments would lose an average of 5% of the funds invested, although the equity investments are expected to make money rather than lose it.

The budget process can be tricky due to competing priorities, so it is unclear what might happen with these efforts. One development expert told Devex that appropriators will be hesitant to create a new standard, especially because other agencies may also want to use “net present value” scoring.

Even if that language on scoring is included, there is still a question about how the congressional budget office would score the legislation, and it would likely need some guidance from budget committee leadership, a senior lobbyist who requested anonymity to speak freely about the situation told Devex.

The Senate is preparing to leave for the August recess, so a budget bill will likely be released in September, which will leave little time for it to be passed before the Oct. 1 start of the new fiscal year. As a result, Congress will likely instead pass a continuing resolution to fund the state and foreign operations budget, which typically just continues the previous year’s funding until Congress passes a permanent bill.

That presents a challenge for DFC, which needs money to begin its operations in October.  The solution is what is referred to as an anomaly, which would essentially be language added to the continuing resolution that would see OPIC’s funding allocated to DFC.

It also seems unlikely that the administration’s recent nominee to lead DFC, Adam Boehler, will be in place when the agency launches. The senior lobbyist told Devex that while the White House appears to want to prioritize the nomination, the Senate hearing process has been slow, in part because of infighting on the Senate Foreign Relations Committee.

David Bohigian, acting CEO at OPIC, could become the acting CEO of the new DFC. Many in the development community had hoped he would get the nod for the top job and were disappointed he did not.