Devex Invested: US DFC looks to protect risky investments, even in Ukraine

As the war in Ukraine stretches on, a growing number of people face life without a limb in a health system ill-equipped to support them. And though donors are lining up to help, they worry about the risk of investing during an active conflict.

That’s where political risk insurance coverage from the U.S. government comes in. The Superhumans specialty hospital — which is focused on prostheses and care for war-related injuries — is able to bring in funding from donors thanks in part to $25 million in political risk insurance coverage from the U.S. International Development Finance Corporation, or DFC.

When Superhumans looked to expand last year, some global philanthropists worried about the safety of the investment — after all, the facility in Lviv could be bombed and damaged or destroyed. But co-founder Philipp Grushko tells me the “wartime insurance” is allaying its donors’ fears.

“Apart from DFC, no one is willing to insure against war risks,” Grushko tells me. While this DFC deal was unique in supporting a philanthropic venture, he hopes it will signal to Ukrainian business owners that they can seek insurance and consider expanding their own businesses, rather than taking their money out of Ukraine.

• DFC wants to expand the use of political risk insurance, or PRI, which protects against the risk of violence, government interference, and currency inconvertibility. It plans to do so to boost Ukraine’s markets and tackle climate change through debt-for-nature swaps.

• And the agency is eager to get the word out, particularly in Ukraine, DFC Chief Operating Officer Agnes Dasewicz tells me. When she tells people, including a group of European DFIs she recently met with, they are sometimes incredulous, she says.

• The agency’s total PRI exposure last year was about $7.3 billion, a number that has been steadily growing since 2020. Some $54.3 billion in insurance has been provided across 3,183 projects since DFC’s predecessor, the Overseas Private Investment Corporation, was established in 1971. In that time it paid about $1 billion in claims.

• While the agency is looking to hire more staff and considering new projects, expansion of PRI could face a roadblock. The U.S. government’s Office of Management and Budget is pushing back against how the agency pays for these deals. And if OMB gets its way, it could significantly hamper DFC’s ability to expand its use of the financial tool, a former DFC employee tells me.

Read: In Ukraine and beyond, the US DFC boosts its political risk insurance

Also, DFC Deputy CEO Nisha Biswal joined us for a Devex Pro virtual event last week to discuss the future of the agency as its reauthorization looms, and about broader development finance trends. You can catch the full recording of the event.

Watch: The future of the US International Development Finance Corporation

A critical moment

Will the European Investment Bank keep its ban on financing ammunition and weapons and equipment or infrastructure for military or police use? That is the key issue roiling the institution, which is under pressure from some European Union leaders to reconsider and chart a different path amid Russia’s war in Ukraine.

The battle underway raises an “existential question” and presents a “critical moment for the institution,” my colleague Rob Merrick reports. A new European defense industrial strategy unveiled by European Commission President Ursula von der Leyen last month urged EIB to create exclusions to the ban on financing military equipment. The European Parliament backs the move, but opinion is split among some EU members.

The ultimate showdown will take place at a meeting of EU finance ministers on Friday. Advocacy groups and development experts are pushing back against the change, arguing that EIB is a development bank and defense is not a part of its mandate. The move could also seriously threaten the bank’s credibility, put it at risk of losing clients, and make it difficult to raise capital, Mikaela Gavas, managing director of the Center for Global Development Europe think tank, tells Devex.

Read: ‘Critical moment’ as EIB wrestles over move into weapons financing

Climate cash

The need for adaptation finance is growing, with the amount low- and middle-income countries need to adjust to climate change at least 50% higher than was previously estimated, Natalie Donback reports for Devex.

Vulnerable countries need between $194 billion and $366 billion per year, according to the United Nations Environment Programme’s latest Adaptation Gap report, and public adaptation funds have declined in recent years. Quite the range, but clearly a significant number.

“We need more donors to collaborate to bring funding together into the kind of support that can provide transformative impact rather than these little pots of money scattered across different portfolios and different indicators that just fragment our delivery,” Daniel Lund, a special adviser on climate action to the Fijian government, tells Natalie.

The push for adaptation finance is underway ahead of the climate conference at the end of this year which is meant to deliver a new collective quantified goal for climate finance. The last goal was a commitment from wealthy countries to support low-income countries to the tune of $100 billion a year, a goal that wasn’t exactly met. And the cost has gone up. Now some are calling for a new goal that would see funds increase over time and would start at $500 billion a year, with $100 billion going to adaptation.

In the current political and fiscal landscape, it’s hard to imagine countries ponying up five times the prior target they struggled to meet, but we’ll see how negotiations unfold.

Read: Climate adaptation finance must double by 2025. How will that happen? (Pro)

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Thinking big (and small)

It’s often easier to talk about “localization” — the term meant to symbolize donors cutting out the middlemen so that aid is allocated by those in communities that receive it —  than to actually do it. But my colleague Vince Chadwick met a social entrepreneur at a conference in Sydney who is taking a new approach.

Mark Pascall is the founder of The Wellbeing Protocol, a mobile app that lets groups of people agree on a “constitution” and then decide together on how to allocate the funding they receive from donors. It’s based on a voting algorithm that aims to provide an alternative to conventional majority rule.

Pascall, who has previously worked in the world of blockchain, tells Vince that the idea is to “scale localism” — allowing groups of 15-500 people to give feedback directly to donors such as governments, foundations, and individual philanthropists. And if recipients don't show proof of what they’ve been doing with the money? Donors can cut off the next tranche of funding. Controversial, perhaps, but could it be a model whose time has come? For now, it’s being trialed within an Indigenous men’s health group in New Zealand.

Read: The New Zealand nonprofit aiming to 'scale localism'

+ The article is part of Roots of Change, our new partnership series focused on elevating the voices of local leaders and taking the drive for locally led development from rhetoric to reality. Explore the series.

And don’t forget to download your copy of our newly updated report, The localization agenda 2.0, to get the updated funding insights on localization.

What we’re reading

No risk, high rewards: Fund managers reap outrageous income in low- and middle-income countries. [Follow the Money]

The World Bank is set to issue up to $1 billion in a debut hybrid note this year. [Reuters]

New report: The IMF talks about climate change but it pushes Argentina into more and more fracking. [Recourse]

Vince Chadwick contributed to this edition of Devex Invested.