DFC chief faces congressional scrutiny on its 'woke agenda,' direction

The chief executive of the U.S. development finance institution was in the hot seat in Congress this week at a pair of hearings that offered insight into central issues that will shape its future, as the White House nominee was cautioned against following a “woke agenda” and veering too far away from its development focus. Lawmakers lobbed questions at U.S. International Development Finance Corporation CEO Scott Nathan about what countries the agency can work in, how it can counter China and address other foreign policy priorities, how its equity investing instrument works, and what types of deals it does. DFC, which funds private sector development projects, is up for reauthorization next year, though lawmakers have signaled a desire to extend the agency’s mandate this year, with these hearings helping inform the discussions. While there was considerable vocal support for DFC, Nathan was warned by Rep. Mario Diaz-Balart, a Republican who leads the foreign affairs appropriations subcommittee, that if the agency goes “too far down the Biden Administration’s woke agenda,” it will jeopardize the agency’s bipartisan support. Diaz-Balart expressed concerns that DFC investments, particularly in upper-middle-income countries, focus on gender equity, climate mitigation, adaptation, and resilience. He signaled that those types of investment priorities could be “land mines” that would have a detrimental effect on the agency’s support. DFC also funds global infrastructure, small business, agriculture, and energy projects. “To many of us in the majority, some of these priorities sound more like ESG activism run amok than a focus on your core mission, which is to mobilize private capital in support of broad-based economic growth that furthers a foreign policy interest of the U.S.,” he said, referring to environmental, social, and governance investing, which has come under fire from Republicans. “If you start losing touch with your core mission you’re going to lose bipartisan support and that would be a real shame. What you do is valuable to the national security interest of the U.S., but requires bipartisan support,” he said. But Rep. Joaquin Castro, a Democrat from Texas, had a different concern about what could threaten DFC’s support on Capitol Hill — if it loses its focus on development. “I believe it is essential that we defend and strengthen the agency's development mandate. I fear that if this agency simply becomes a bank to execute the foreign policy priorities of the United States, the bipartisan coalition that supports the DFC will splinter,” he said at the House Foreign Affairs Committee hearing on Tuesday. Despite such warnings, lawmakers on both sides of the aisle seemed generally supportive of the agency and said DFC was an important foreign policy tool. The focus of the House Foreign Affairs Committee hearing was specifically about the DFC’s role in countering China’s economic and development policies, and lawmakers asked Nathan about it at length. “Unlike the development approach of the PRC [People’s Republic of China], or other strategic competitors, DFC’s efforts are directed towards supporting private entities, mobilizing private capital, and building resilient market economies,” Nathan said at the HFAC hearing. “We need to show up and offer our partners a choice based on our values and on private enterprise. So they don't feel trapped into accepting the offerings of our strategic competitors or authoritarian governments.” DFC’s role in offsetting China’s economic and development policies helped lead to the creation of the agency in 2019, but the DFC’s significant focus on national security and foreign policy raises some concerns among some in the development community, and lawmakers like Castro, who have already cautioned about DFC rifting from its development mandate. DFC made $9.3 billion in investments across 132 transactions last year, about double what it did in 2020, Nathan said. He highlighted several significant projects, including $553 million to support the construction of a new shipping container terminal in Sri Lanka; energy investments in Poland, Moldova, Bulgaria, Georgia, and Greece to help shift their dependence on Russian gas; $150 million to a graphite mine in Mozambique; and almost $1 billion to solar power manufacturing facilities in India. Nearly 75% of last year’s investments were in low- or lower-middle-income countries, though a smaller percentage of the capital flowed to those markets where smaller projects are more common, Nathan said. When asked about the upcoming reauthorization, which would extend the agency’s ability to work and could update its mandate, Nathan outlined several steps lawmakers could take to improve the agency — increasing the overall portfolio size from $60 billion to at least $100 billion, expanding the number of countries where the agency can work, addressing restrictions on certain investment tools, including equity, growing the agency’s staff and allowing it to use fees it receives to cover transaction costs. Where to invest One issue raised repeatedly during the hearings was the discussion on where DFC can work — it is mandated by law to invest mostly in low- and lower-middle-income countries, though it can invest in upper-middle-income countries with permission, or in high-income countries if Congress passes specific permission to do so, as with Eastern Europe. Lawmakers want DFC to invest in parts of Latin America and the Indo-Pacific, which fall outside of the current World Bank’s low- and lower-middle income categories. Nathan suggested instead using the World Bank’s lending categories, which would allow it to invest in places like Panama and Trinidad and Tobago, among other areas. DFC has tripled its portfolio in the Indo-Pacific in the past three years and plans to expand investments in the Western hemisphere as well. Africa remains its largest market, he said. Fixing the tools The long-discussed issue of fixing DFC’s equity authority was raised again, though there appears to be growing consensus that a change is needed, at least among members of HFAC. As Devex has reported, the U.S. government treats DFC’s equity investments as a grant, assuming a total loss of the money and requiring direct appropriations to cover the costs. The White House Office of Management and Budget has been reluctant to change that, so Congress will have to pass new legislation to make the fix. What DFC and some lawmakers are pushing for is budgeting based on expected returns, which would allow the agency to use the same amount of appropriated money to make far more investments. Why is this equity fix important? It would allow DFC to take more risk, go into projects earlier to exert influence, and help them materialize, Nathan said. “I do think the expected returns of an equity investment should be reflected in the budgetary costs. And we recognize that some DFC investments by the very nature of where they're going, can be higher risk, but let's operate in the real world” said Rep. Andy Barr, a Republican from Kentucky, at the HFAC hearing. Gripes and growth Lawmakers raised a myriad of other concerns, including that DFC works too slowly and must accelerate project approvals. Nathan agreed the agency needs to be “faster, more responsive” and said a recent reorganization of the agency and an ongoing hiring spree are aimed at making it more efficient and more responsive. DFC plans to double or triple its overseas staffing — it currently only has six direct hires outside of its Washington D.C. headquarters. The agency expects to take on about 40 more employees by October, bringing the total staff count to just over 700. Lawmakers indicated they want DFC to invest in critical minerals, telecommunications, and infrastructure projects. They also raised questions about energy investments. Rep. Scott Perry, a Republican from Pennsylvania, accused the agency of “forcing countries to adopt green energy projects,” while the Chinese government is willing to finance any type of energy project. “Your agency chooses to do one of two things, it seems to me, they make one-sided green deals with these countries, which sends them to permanent state of poverty and a long-term dependency on foreign aid handouts likely from us, or you allow the PRC to close all energy development deals related to diesel, coal, and petroleum because we don't engage in them,” he said. Nathan pushed back against that characterization and pointed to a recent investment in a gas-fired power plant in Sierra Leone that he said would have significant development impacts in a country with very little power generation.