DFC identifies its priorities in first development strategy

WASHINGTON — The U.S. International Development Finance Corporation released its development policy Thursday — a document that identifies priority sectors and a set of commitments on development outputs. The strategy will guide DFC’s work through 2025, though it may adapt and change over time, and outlines targets for how DFC aims to invest $25 billion and mobilize about $50 billion from the private sector. The strategy was a project led by DFC Chief Development Officer Andy Herscowitz, who told Devex that one thing that struck him when he joined the organization was that DFC was “being asked to measure development by counting deals in low-income countries and lower-middle-income countries.” “That’s not development. That’s one piece of it, perhaps,” he said. So after getting buy-in from the board in June, Herscowitz led a process to create the new strategy, which included consultations with many outside of DFC and a look at the history of transactions from both DFC and its predecessor, the Overseas Private Investment Corporation. “Lets keep in mind that this strategy is not meant to limit the DFC in where it invests, be it by sector or region. It is meant to provide an overarching framework.” --— Andy Herscowitz, chief development officer, DFC The strategy, which includes targets on outputs to measure how many people the investments are impacting, is in part an effort to see if he could “nudge the portfolio,” Herscowitz told Devex. “We can also create incentives for our teams to pursue certain deals and do better jobs trying to track metrics,” he said. The Roadmap for Impact includes targets for investing in low-income countries, lower-middle-income countries, and fragile states — which combined will account for 60% of projects — as well as a goal of reaching 30 million people. DFC will prioritize funding for technology and infrastructure, energy, financial inclusion, food security and agriculture, health, and water, sanitation, and hygiene, according to the strategy. Some of those areas will get more funding than others. DFC commits to $10 billion in energy sector investments and $6 billion for financial inclusion, but food security gets $500 million and WASH just $250 million in commitments. The strategy also lays out targets beyond just how much it will invest in each category, including commitments to increase access to potable water for 1 million people, provide health care services for at least 2 million, and increase electricity access for at least 10 million people. “Lets keep in mind that this strategy is not meant to limit the DFC in where it invests, be it by sector or region. It is meant to provide an overarching framework and meant to be a living document,” Herscowitz said, adding that DFC recognizes there could be political or policy changes that may adjust the themes and goals. One of the goals of DFC is to expand its client base, adding at least 15 new clients a year, with 30% of them being local or regionally based, according to the strategy. The BUILD Act, which authorized DFC, allows the agency to invest in companies without a U.S. “nexus” or connection, and the strategy pushes the agency to explore those deals. In addition to those investment areas, the strategy also sets out a number of “cross-cutting development themes” that it will prioritize, including financial systems strengthening, sustainable job creation, and women’s economic empowerment. The strategy also lays out a set of guiding principles for DFC: that it will more actively seek out deals, aim to maximize development impact, be more collaborative, be more innovative, be transparent, and take on more risk. The strategy says DFC will be more risk-tolerant and will work to develop a risk framework that can “support higher risk transactions in less developed countries.” Herscowitz said DFC has to change the way it looks at risks to invest more in lower-income and more fragile countries, but doing so costs money. “As long as DFIs [development finance institutions] are always chasing a big return, it makes people reluctant to take risks that lose money. There’s a culture change that needs to be backed by resources to take those risks,” he said. A loan to a company in a fragile state or low-income country is much more expensive than one that DFC would give to a business in an upper-middle-income country, but there are finite resources, Herscowitz said. He added that DFC was discussing appropriations with members of Congress to ensure that resources are not a constraint to doing deals.