WASHINGTON — The development community has generally supported the new International Development Finance Corporation, but a proposal expected in the budget request next week is raising concerns that funding the new agency’s equity authority could come at the expense of other aid programs.
“The White House and the Congress have got to figure out the scoring issue on equity because robbing Peter to pay Paul is just not OK.”— Tom Hart, executive director for North America, ONE Campaign
The administration of U.S. President Donald Trump is expected to include a significantly higher appropriations request in the fiscal year 2021 budget request than last year for DFC, with several sources telling Devex they expect about $700 million to support DFC’s equity investments. A government official, who would not confirm the amount, said that DFC will likely receive more funds for a program account that can be used for a variety of investments the agency makes, including loans, technical assistance, enterprise funds, and equity investments. The fiscal year 2020 budget funded a program account and equity investment separately.
While the development community wants to see DFC succeed, several development experts told Devex that they had serious concerns about how the agency’s equity authority is being funded and that they felt Congress and the administration need to fix the way equity is treated.
Development experts and advocates told Devex that a proposal to fund equity on a one-to-one basis at high levels is “stupid,” a “non-starter,” a “terrible idea,” and “financially inefficient.”
Equity is being scored for budget purposes similarly to a grant — with a total loss of the money expected, which requires the government to allocate the funding on a dollar-for-dollar basis, meaning providing the total amount that can be invested. Loans, on the other hand, are scored differently, based on an estimated repayment rate, which means that a small appropriated amount can be leveraged to make large investments. Some advocates for the Better Utilization of Investment Leading to Development — or BUILD — Act, which created the agency, say that the intention was never for equity investments to be treated as grants and want them to be scored more similarly to loans.
“This could potentially set up a fight, and it's exactly the zero-sum foreign assistance pie fight everybody feared might happen with DFC vis-a-vis the other agencies,” said Conor Savoy, executive director of the Modernizing Foreign Assistance Network.
If there is a significantly higher appropriation for equity, it would raise serious concerns for the development community, including the ONE Campaign, said Tom Hart, the ONE Campaign’s executive director for North America. While the BUILD Act and DFC have broad development support, the way they are being financed does not, he said.
“Our support was enthusiastic to grow private sector development in poorer countries, but not as a substitute, rather as a complement, to the core development assistance that the U.S. does so well around the world,” Hart said. “The White House and the Congress have got to figure out the scoring issue on equity because robbing Peter to pay Paul is just not OK.”
The White House and Congress each want the other to find a solution, and there isn’t a lot of cooperation between the two at the moment, but the issue has to be addressed, he said.
“There is broad bipartisan support on both ends of Pennsylvania Avenue to enhance our private sector tools in poor countries. To not fix this scenario, which is imminently fixable, to not allow that new instrument to reach its full potential is a real shame and goes against a real legislative victory,” Hart said.
However, Congress is unlikely to support a dramatic increase in DFC appropriation at the expense of other development programs, Savoy said. While the administration’s proposal is not likely to go through, it should be treated seriously and help urge a solution to the scoring issue, he said.
There are mixed opinions about what can be done, with some believing that there could be a legislative fix — possibly in the form of an amendment to the BUILD Act — while others are skeptical that Congress will act, especially without guidance from the administration.
George Ingram, senior fellow at the Brookings Institution, has been pushing for amending the BUILD Act to add equity in a provision that outlines how loans and guarantees should be treated under the Federal Credit Reform Act. There has been some concern about whether there is the political will to open up the BUILD Act, he said, adding that he thinks it could get done.
There is an appetite in Congress to work on a fix, according to Rob Mosbacher, former CEO of the Overseas Private Investment Corporation, adding that while he doesn’t want to speak for anybody else, he doesn’t know of any major sponsor of the BUILD Act who thinks appropriation on a dollar-for-dollar basis is the appropriate tool.
“It is important not to lose sight of the fact that equity authority is one of most important elements of the BUILD Act. A failure to implement that in a non-budget-stressful way is a failure to effectively implement the legislation,” he said.
In the past year, people at the White House Office of Management and Budget and at the Congressional Budget Office have expressed concerns and said they weren’t comfortable with a number of proposed approaches to change how equity is scored, Mosbacher said, adding that while he understands the concerns, they haven’t presented a solution.
If the inclusion of a significant increase for equity acts as a “forcing event,” it may help change the way equity is scored, but not without a potential cost, said Erin Collinson, director of policy outreach at the Center for Global Development.
“The damage it does is not insignificant. It makes folks concerned, worried about use of resources, and puts people on edge in a way that’s unhelpful and unnecessary,” she said.