New US development finance institution edges toward launch

WASHINGTON — The Trump administration has submitted a plan to Congress outlining what it will accomplish before the new U.S. Development Finance Corporation opens its doors in October. The document is fairly broad, but it does provide some insight into the process of creating the new agency.

Ray Washburne, who served as the Overseas Private Investment Corporation’s president and CEO, left the agency last month, but the process of standing up the new agency has continued without much disruption. David Bohigian, who is now the acting president and CEO at OPIC, had been leading the process before he took on the top job. And in an interview with Devex before he left, Washburne said he was confident the process would go smoothly and quipped that no one at the agency would notice he was gone.

The budget for the development finance corporation was released on March 11, a few days after the plan was submitted, and asks for $98 million in administrative expenses, $2 million for the inspector general, $50 million to support the loan program, and $150 million to support the agency’s new equity authority. The Department of State and the U.S. Agency for International Development can also transfer about $50 million to the DFC.

The budget request and the plan for the rollout may well be the start of a new conversation between Congress and the administration — not just about funding the new agency, but about how it is funded.

One of the key new capabilities the DFC will have is the ability to make equity investments, but the way that the administration has chosen to count them will mean that the agency will be limited in how much it can invest. The administration has decided that equity investments will be treated as a total loss in the budgeting process, much like grants.

By contrast, the DFC’s loans will be governed by the Federal Credit Reform Act, which allows loan programs to book expected gains and losses up front, so a small amount of appropriated dollars can leverage much more spending. Because of the proposed way of budgeting equity, in fiscal year 2020 the DFC would only be able to invest a total of $150 million, which would likely mean the agency would only make a handful of equity investments. 

There will be pushback on Capitol Hill to the way the administration has proposed budgeting equity investments because it is not in line with what sponsors or supporters of the legislation thought they were authorizing, said Rob Mosbacher, a former OPIC CEO who played a key role in getting the Better Utilization of Investment Leading to Development, or BUILD Act, passed.

Sponsors and supporters of the BUILD Act expect the DFC to have a robust equity program, likely in the billions of dollars, Mosbacher said, adding that in order not to compete for scarce resources on a dollar-for-dollar appropriations model, Congress should use a net present value model such as the one used for debt.

“What OMB [Office of Management and Budget] proposed may be a function of them not being comfortable with how to do this and they may want guidance from the hill. That’s what I think they will get,” he said. “They proposed something not consistent with the intent of the legislation that would render a new DFC capacity seriously impaired.”

Congress could push back on the administration’s method of scoring equity and add language into an appropriations bill that would allow that money to be leveraged rather than counted as a total loss. A change would require congressional action.

Unanswered questions

A new administration proposal for how to fund the agency is also expected. In the past, OPIC has collected fees from borrowers to cover much of its costs, but the administration is expected to propose a system that would require upfront appropriations for the agency. If the fees didn’t cover the appropriations under the new system, some of the earnings from OPIC’s investments would be used to cover the costs.

This is potentially problematic considering it could reduce the amount of money congressional appropriators have for the rest of the aid budget, Mosbacher said. Because the agency can cover a significant amount of its costs of doing business through fees, it doesn’t have to rely on appropriations, he said, adding that he wouldn’t want to see that ability diminished.

One of the unresolved issues in the plan is how sovereign wealth guarantees will be managed.  The plan mentions that this is still being worked out, but sources close to the discussions say it seems no agency wants the ownership or financial liability. 

The plan says the administration does not want the roughly $21 billion liability to be on the DFC’s books and that it will continue to work to find a solution. If they were to go on its books, it would severely limit the agency’s ability to expand, taking up a lot of the increase in its spending cap that Congress had approved.

The plan also discusses the role of the chief development officer, which it says “will take on a large role at the DFC, and help to ensure the projects the DFC supports have lasting outcomes.”

The CDO will have six primary responsibilities: leveraging the expertise of USAID, the State Department, and the Millenium Challenge Corporation; using data and analysis to better inform investment decisions and results management; providing transaction support; monitoring and evaluation of the development impact; evaluations and assessments; technical assistance; and the integrating the DFC into the U.S. government’s development strategies.

There are several unanswered questions that will likely be discussed in the coming months, including what the agency’s development assessments will look like and how it will change its investment strategy to focus more on low-income and lower-middle-income countries.

Before the DFC opens its doors the administration must submit a report to Congress about how the DFC and USAID will work together, how it will stand up equity authority, and how it will provide technical assistance. In order to staff up the DFC’s technical assistance capabilities, one idea already being floated is to second employees with relevant experience from USAID or MCC to the new agency, rather than starting from scratch.  

OPIC is awaiting the confirmation of three nominations to its private sector board, and the administration will likely look to nominate the DFC’s leadership in advance of the agency’s launch, which will require a round of confirmation hearings.