A new US development finance agency takes flight

WASHINGTON — The United States will have a new development finance institution.

On Wednesday, the U.S. Senate passed the Better Utilization of Investment Leading to Development, or BUILD Act, which will create a new U.S. government agency — the U.S. International Development Finance Corporation. Development experts called it the biggest change in U.S. development policy in 15 years.

The DFC will combine the Overseas Private Investment Corporation and the U.S. Agency for International Development’s Development Credit Authority, add new development finance capabilities, including equity authority, and have a higher lending limit than its predecessor.

A year or two ago, few would have thought a new U.S. DFI possible. The Trump administration had recommended eliminating OPIC in its first budget, previous attempts to reauthorize OPIC had failed, as recently as 2015, and it has operated without a long-term reauthorization for more than a decade.

But a dedicated bipartisan group of lawmakers, administration officials, advocates, and think tank experts worked to make it happen. Consolidating some government functions to create a new agency that was seen as more efficient helped, as did a growing desire within the administration to find tools to counter China’s influence.

A few weeks ago, there was still uncertainty over whether it could pass in the Senate. But in the last two weeks, the BUILD Act was attached to the Federal Aviation Administration reauthorization bill in an effort to work around challenges presented by some senators opposed to the act. The overarching FAA bill passed by a vote of 93 to six.

“I think it was the right vehicle at the right time,” said Representative Ted Yoho, a Republican from Florida, who was a co-sponsor of the House bill and played a key role in creating Freedom Caucus support for the legislation.

Yoho, who chairs the Caucus on Effective Foreign Assistance, pushed for the legislation to improve aid effectiveness and help countries transition from aid to trade. “This will be a significant enhancement to our foreign aid.”

Next comes the hard part of setting up a new federal agency. Some planning has already begun but the process begins in earnest when President Donald Trump signs the bill into law, likely within the week.

Moving forward

Once signed, the administration will have 120 days to create and submit to Congress a transition plan for the new DFC, though the new agency may not open its doors for about a year, several people who worked on the bill said.

Some lingering questions to be answered include where USAID’s Office of Private Capital and Microenterprise and its Enterprise Funds will end, along with details about personnel, assets, and functions of the DFC, a senior government official told Devex. OPIC has already been working with USAID’s DCA on fiscal year 2020 budget requests and USAID will play a key role in the discussions about the new institution, he explained.

The administration, likely led by OPIC, will have to work on a number of policy issues related to the new authorities or instruments the DFC will have. This includes creating criteria for the use of equity investments, how it will use technical assistance grants, what framework it will use to decide if it will make a local currency loan, and when it will invest in non-U.S. businesses or projects, which is also new.

OPIC policies and procedures, along with its leadership, will transfer to the new agency, though the top posts may need to be re-confirmed by Senate.

One of the greatest challenges, according to a senior administration official, will be about management and communicating the changes with staff at OPIC and USAID, and ensuring that operations continue smoothly as the new agency comes together. Part of that will be successfully moving DCA, ensuring that staff handle the cultural shift, and that the pipeline for deals, which comes from USAID missions, is maintained.

Rob Mosbacher, a former OPIC CEO who has been an active advocate for the BUILD Act, said that senior leaders from OPIC and USAID need to work together on some of the issues early in this process, including how to have a fully integrated evaluation of development impact.

“I think they need to make sure they’re standing up this new agency as effectively and as responsibly as possible,” he said, adding that it shouldn’t “get out over its skis before the right policies and procedures” are in place.

OPIC has a strong starting point with capable agency staff and good management, said Todd Moss, a senior fellow at the Center for Global Development. He would like to see a focus on making the DFC as transparent as possible and prioritizing projects with good development outcomes as it balances out a need for commercial viability and foreign policy and national security objectives.

“There is always a risk that the administration can force an agency to do dumb things for national security, but as long as it’s done in the context of the board and investment process, that has historically not been a problem,” he said. “It depends how the administration treats the new agency — and that’s why getting really strong governance in place with the board and congressional oversight is so important.”

Key questions about the agency’s relationship with USAID will need to be resolved and details will have to be ironed out, particularly about how the chief development officer — a new post created in the legislation — will work with the two.

Several people Devex spoke to expressed concerns that the agency would be under pressure to do projects quickly, at the risk of sacrificing proven decision-making practices.

“The biggest worry is that the OPIC team will be under a lot of pressure to stand up some of the capabilities quickly and in haste and under pressure to disburse,” said Elizabeth Littlefield, a former OPIC CEO. “I hope it’s not the case they move more quickly than is prudent.”