Exclusive: Plans underway for new US development finance bank

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WASHINGTON — The United States Congress and the Trump administration are considering plans for a new development finance corporation that could be announced before the end of the year, multiple people involved with the process told Devex.

If and when it is announced, a new development bank would signal a remarkable turnaround for President Donald Trump’s administration, whose 2018 budget proposal had sought to gut the existing development finance agency, the Overseas Private Investment Corporation.

The shape of the new agency is still unclear, but it would likely see an expanded OPIC. The new bank could also absorb other agencies or functions related to development finance, such as the U.S. Trade and Development Agency and the U.S. Agency for International Development’s Development Credit Authority, according to several people with knowledge of the discussions.

OPIC has a roughly $22 billion portfolio of loans and guarantees in about 100 developing countries, an increase of about 160 percent from 2009. The agency operates at no cost to taxpayers and has generated about $2.3 billion for the federal government in the past six years.

Among other donors, development finance has gained ground against more traditional grant assistance. The U.K., for example, just doubled the amount of aid given through development finance with a significant capitalization of its development finance institution, the CDC. China’s development finance institutions are also growing rapidly. But OPIC has struggled in recent years to secure a long-term mandate, relying instead on yearly authorizations through the appropriations process. The agency has also been hamstrung by limits on its authorities, particularly its inability to make equity investments.

Advocates hope a new agency could put the U.S. back on a level playing field with other donor countries. OPIC already has the systems in place to scale up, former OPIC CEO Elizabeth Littlefield, told Devex.

The administration will likely include language about a newly empowered development finance corporation in the fiscal year 2019 budget request, including plans to consolidate other agencies or functions, a Republican lobbyist working on the issue with Congress and the administration told Devex. The National Security Council has also been looking at the proposal as a way to strengthen U.S. economic diplomacy, according to the lobbyist. Plans are underway for the administration to announce the new development finance corporation before the end of the year, he said.

OPIC has also found support in Congress. Bills to improve the effectiveness of the U.S. government’s development finance capacity are being drafted in both the House and the Senate, with input from stakeholders, according to a Hill staffer with knowledge of the process. The staffer also confirmed that the legislative branch is seeking input from the White House.

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“I am hopeful that we will work together in a bipartisan way on this committee not to reduce the scope and capability of OPIC but to actually expand it and to strengthen it,” said Sen. Chris Coons, a Democrat from Delaware, at the nomination hearing for OPIC CEO Ray Washburne in July. “I hope to see us take up legislation to reform and improve the way that the United States government pursues development finance,” the senator said.

The momentum in Congress and in the administration has made this “the best political opportunity to strengthen development finance in the past 10 to 15 years,” the lobbyist said.

The time has come

OPIC’s supporters have tried for years to secure a long-term reauthorization for the agency that would expand some of its authorities.

Proponents of development finance argue that now is an opportune time. Washburne, who served as vice chairman of the Trump Victory Committee and chair of the transition’s commerce team, is well connected both to the White House and Congress.

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At his nomination hearing, Washburne said he would aim to bring OPIC “into the 21st century on financial mechanisms.” He said he would look for additional financial vehicles and expand the agency’s scope. OPIC Executive Vice President David Bohigian also testified at the hearing that both he and Washburne were looking forward to being part of a discussion with the administration about the reform of the agency.

“European and Chinese counterparts are truly investing trillions of dollars in these sort of efforts. America is ready for a 21st century OPIC,” Bohigian said.

Additional authorities for the agency could include facilities that overseas counterparts already have, namely direct equity investments, he said. OPIC and Washburne did not respond to Devex’s request for comment by the time of publication.

“There is this remarkable confluence of support across a broad range of groups,” said Robert Mosbacher Jr., a former OPIC CEO who has been working with members of Congress to help draft legislation for the new agency. He sees a growing global consensus that development finance is an important tool in certain situations where traditional development assistance may not apply.

There is also a growing recognition “from a national security standpoint that soft power, smart power programs that generate economic activity are extraordinarily important to post-conflict or conflict avoidance,” he said.

Appealing to Republicans in Congress and the White House, the proposal could consolidate government agencies while bolstering national security and U.S. economic competitiveness, the lobbyist told Devex. The potential consolidation aligns with the Office of Management and Budget’s efforts to improve efficiency and to review and streamline the operations of agencies, he said.

Past efforts to expand OPIC have failed in part because few members of Congress are aware of how the agency operates, said Todd Moss, a senior fellow at the Center for Global Development. Moss has written extensively about OPIC, including a proposal about what a new development finance corporation should look like, which includes several of the features being proposed or discussed today. He said he has been fielding calls about the proposal regularly and is thrilled that the ideas are getting picked up in this new legislation.

Increasingly, developing countries are asking for new tools. “More and more countries want private investment rather than aid and the tool for that is development finance,” Moss said. The U.S. should meet that demand and provide aid to countries in the form that they are asking for it, he added.

Sticking points

Behind the general agreement about the need for a new, modern development finance corporation, several of the people Devex spoke to pointed to several remaining disagreements that will need to be settled before a new bank is launched.

As proposals move forward, naysayers may emerge in opposition to the idea of a new development finance institution. Old critiques include that the agency is doing a job commercial banks would do, that it requires taxpayers to take on the risky investments, and that it is corporate welfare. Still, in recent Senate hearings and in conversations with advocates, it seems that opposition is declining.

Proponents generally agree the new bank should come with long-term authorization and an expansion of the types of products the bank can provide, particularly making equity investments.

Through its investments, OPIC returns about $300 million a year to the U.S. Treasury, so the agency does more than pay for itself. Some proponents of an expanded development finance institution are also pushing for the new authorization to allow OPIC, or the new U.S. development finance corporation, to invest a portion of those profits back into the agency, primarily to hire more staff and do more deals, according to several sources aware of the discussions.

There is less agreement over which other agencies, or parts of agencies, could be rolled into the new development finance corporation. Some see the U.S. Trade and Development Agency, or some of its functions, as a good fit, while others believe it should remain separate, according to several people Devex spoke to who are part of these discussions. The proposal Moss co-wrote recommended that parts of USTDA be incorporated into the new agency, but not the whole agency.

“If you were going to the drawing board and trying to draw a sensible structure, what tools, capabilities, and authorities would you want? A lot exist but in different agencies,” Moss said.

Littlefield doesn’t believe the USTDA belongs as part of the new development finance corporation. “I think it is far more important to get a clear delineation between commercial development functions, instruments, roles, skills, and the grant-based ones than merge TDA with OPIC,” Littlefield told Devex, acknowledging that her view is not in line with some other longtime OPIC reform advocates.

She argued against including grantmaking agencies, including TDA, in commercial finance. Some parts of the USTDA could fit better potentially in USAID or with the Export-Import Bank, she told Devex. “I don’t see the rationale for getting a lot of heat loss by trying to merge cultures and organizations when it’s not really necessary,” she said.

Another likely candidate for merging into the new agency is the U.S. Agency for International Development’s Development Credit Authority, which provides partial credit guarantees.

OPIC currently requires that all of the investments it makes have a connection to the U.S., whereas DCA guarantees do not. The authorization for a new agency would have to sort out those regulatory differences, said George Ingram, a senior fellow at the Brookings Institution.

A greater challenge would be human resources. USAID missions currently generate DCA guarantees, while OPIC has a small field staff. A new development bank would need to be represented in the field. Ingram suggested that USAID missions and the U.S. Commercial Service could help to create that pipeline of deals.

The new development bank would likely also aim to make the process of engaging with U.S. development finance easier for the private sector, the lobbyist said. Instead of going to a number of different agencies, businesses could have one central point of contact to engage with the government.

Building a base

Whatever form the new development finance corporation takes, it will require strong connections with other U.S. government agencies, particularly USAID, to allow for better coordination.

In part to strengthen interagency relationships, one recommendation being considered is providing the new development finance corporation some grantmaking authorities, Moss said. While it would require new skills and staff to be able to manage, it would be beneficial to have that grant capital aligned with the portfolio and not have to “beg, borrow, and steal across interagency lines,” Moss said.

The details still need to be ironed out, but there is an emerging consensus around creating a stronger development finance institution. That support is something that OPIC staff have been working toward, Littlefield said. In the past five years, the agency has overhauled its risk management systems, management information systems, and client information systems, and now has what she calls an “institutional architecture build for scale.”

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About the author

  • Adva Saldinger

    Adva Saldinger is an Associate Editor at Devex, where she covers the intersection of business and international development, as well as U.S. foreign aid policy. From partnerships to trade and social entrepreneurship to impact investing, Adva explores the role the private sector and private capital play in development. A journalist with more than 10 years of experience, she has worked at several newspapers in the U.S. and lived in both Ghana and South Africa.