WASHINGTON — The bipartisan bill introduced Tuesday proposing the creation of a new United States development finance corporation could be a landmark piece of legislation, altering the U.S. development landscape for years or decades to come. But observers note that while it has been generally well received, there are several details that may need ironing out in the weeks and months ahead as it works its way through the political process.
The Better Utilization of Investment Leading to Development, or BUILD Act, would create a new agency that would combine the Overseas Private Investment Corporation and the several private sector-oriented parts of the U.S. Agency for International Development, as well as expand U.S. development finance capabilities. The new agency will have the ability to make equity investments, have a higher spending cap, and have a grantmaking facility for project development and technical assistance.
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Several members of Congress and former OPIC heads have long advocated for expanded and updated U.S. development finance capabilities. Robert Mosbacher and Elizabeth Littlefield, the most recent former OPIC chief executive officers, have been involved in the most recent efforts, working closely with Congress and OPIC staff, including Ray Washburne, OPIC’s current CEO who has become a driving force in the effort to create a new development finance corporation.
While today the idea of a modernized development finance institution with additional capabilities seems to have significant support — in Congress, in the development community and in the administration, just two years ago, an attempt to pass a multiyear reauthorization of OPIC failed.
The new DFC would help put U.S. development finance on par with other countries and help improve U.S. competitiveness against China, for example, which is making dramatic and growing investments through its development finance institutions.
President Donald Trump has signalled his support, first in a speech made last year in Vietnam. Both the National Security Strategy and and the fiscal year 2019 budget proposal further reference the benefits of modern development finance tools, but there is an ongoing interagency process about the new corporation that may have somewhat different or additional recommendations, which will also contribute to the debate.
Some key elements of the bill
The bill proposes folding USAID’s Development Credit Authority, Enterprise Funds, Office of Private Capital and Microenterprise, and OPIC into the new corporation as well as giving it grantmaking authority and the ability to make equity investments, which OPIC has not had.
The purpose of the corporation, notes the bill, would be to “mobilize and facilitate the participation of private sector capital and skills in the economic development of less developed countries, and countries in transition from nonmarket to market economies, in order to complement the development assistance objectives, and advance the foreign policy interests, of the United States.”
The bill would also in effect double the amount of investment that the U.S. can make through its development finance agency. OPIC has a $29 billion lending cap, with more than $23 billion on the books. Under the proposed legislation, the maximum contingent liability of the new DFC would be $60 billion and would be adjusted regularly based on inflation. Lending decisions are sometimes constrained by the cap and the change would allow the U.S. to continue its growth without bumping up against those limits, Littlefield said. It is unlikely that the new DFC would reach the cap overnight, and the fiscal year 2019 budget calls for restricting annual lending or investments for the DFC to $8 billion, which is about double the amount of deals OPIC did in 2017.
The bill places a clear emphasis on low- and middle-income countries, and includes a restriction on investments in higher income countries. Littlefield told Devex she would have welcomed that sort of requirement in her tenure as she was regularly under pressure to do deals in higher income countries.
It also clearly addresses issues of additionality and requires the corporation to only do deals that will not cause market distortion.
The bill would create a series of new positions — a chief risk officer, a chief development officer, and a dedicated inspector general — which Littlefield said would be critical to successfully managing a bigger and more complex DFI.
“It makes a huge amount of sense to create this standalone 21st century development finance institution that really does take a free market approach to development.”— Elizabeth Littlefield, former CEO of OPIC
The bill allows the new DFC to provide loans in either dollars or the local currency, which has the potential to make a big difference for companies they would work with. OPIC is restricted from making local currency loans, which makes it difficult for clients who are trying to manage currency risk, especially those working in regions such as West Africa where the currency is pegged to the euro.
Also key is that the agency would have multiyear reauthorization.
“I’m really excited about it,” Littlefield told Devex. “It makes a huge amount of sense to create this standalone 21st century development finance institution that really does take a free market approach to development.”
The DFIs of the other G-8 nations have been growing and doing development finance in more flexible ways, improving tools and investing much more aggressively than what the U.S. has been able to do. The new DFC would allow the U.S. to compete, and counter the growing influence of China in key markets the U.S. cares about, Littlefield said.
And while the bill doesn’t include all of the things that were planned during her tenure, including reforms of liability management, treasury functions- and added capabilities, it “in many ways goes further and is bolder,” Littlefield said.
The initial response to the legislation appears largely positive, with development leaders and those who study the industry following closely to see how it will progress and potentially transform U.S. development finance.
The bill is part of an evolution of the development community over the past 20 years or so in which opinions about engaging with the private sector have changed dramatically, said George Ingram, a senior fellow at the Brookings Institution.
“The last couple years is the first time that at least in Washington, the development community has acknowledged that finance is an important part of development,” he said.
In the coming weeks there may be some maneuvering on what Ingram called “secondary issues” but he noted that there is overall agreement on the need to strengthen development finance.
“The great thing about this is there aren’t any ideological issues around it, all of the issues around it are practical — what makes this the most effective development finance instrument and how can it be done in a way that strengthens other entities,” Ingram said. “If we keep it on a practical level, we have good hope of moving it rapidly.”
Notably, the Heritage Foundation — which has advocated for eliminating OPIC — said they are open to the new proposal, according to research fellow James Roberts.
“We’re not ready to write this off, we think it has some potential,” he said. “I’m happy and my colleagues are happy to see an effort to eliminate and consolidate some of the unnecessary agencies in this field. That’s a step in the right direction.”
Heritage would have liked to see the U.S. Trade and Development Agency combined into the new institution, a move that was considered but is not in the bill that was introduced, Roberts said. There are also concerns about raising the funding cap so dramatically, the tenure of the institution, and how to limit its scope so it is focused on the limited cases where development finance has a role to play, he said.
For some who have worked with OPIC, the bill represents an opportunity to address past constraints and is welcome news. David Weiss, the CEO of Global Communities — an NGO working with communities on sustainable development — has worked with OPIC for decades, in a number of partnerships where OPIC provided loan guarantees to help the organization support small-business owners access capital.
“This legislation will serve to bring different elements of the government together to work more synergistically together when it comes to programs and initiatives around investment-led growth,” he said.
In 2006, Global Communities worked with OPIC to create a loan guarantee facility to incentivize local banks in the West Bank to lend to lower income people and businesses. While OPIC provided the guarantee, it didn’t have any grant funds to train bank lending officers to work with this new segment of the economy or to support small-business owners in putting together business plans, which were critical to the success of the deal. Global Communities had to go “beg USAID to provide that grant funding” Weiss said, and the grant authority in the legislation could be used in exactly those situations.
Weiss said he’s hopeful that the new arm could also address issues in the past where there has been tension between USAID and OPIC. OPIC decided not to do a deal several years ago with Global Communities because USAID “in essence vetoed it, not because they didn’t think it was a good idea but because they thought there was overlap or thought it was being competitive with what USAID could do with DCA,” he said.
His hope is that with the new legislation USAID and the new DFC will be able to look at what they do not as rivals or competing organizations but rather look to work closely together, Weiss said.
There will no doubt be discussion about some of the details, and some of those key issues are already being raised and examined.
One key point is to ensure that the creation of the DFC strengthens the U.S. development agencies’ ability to engage with the private sector and does not weaken its ability to leverage the private sector across the places and ways in which it works. Other issues that may crop up include local ownership, accountability, and the need for civil society to have a formal consultative role.
The White House has unveiled plans to transform the Overseas Private Investment Corporation into a new United States development finance institution. But in an effort to "reduce redundancy," the administration has proposed stripping the U.S. Agency for International Development of one of its most valuable tools: The Development Credit Authority. Former USAID Administrator Andrew Natsios and former USAID Assistant Administrator Eric Postel explain.
How USAID will be connected to the new DFC, what the relationship between the agencies will be and how much of that relationship needs to be spelled out in the legislation is one of the most-mentioned issue to discuss and iron out, according to conversations with multiple sources. Several former top USAID officials have raised concerns about moving DCA to the new development finance corporation, and several development leaders expressed concerns to Devex about ensuring that the increased investment in the new DFC does not come at the expense of critical USAID programs.
There seems to be consensus around the need for that relationship, which has been missing in the past, Ingram said. While there are some naysayers, joining grant assistance and market-based financing so there is a continuum of development finance will make U.S. aid more effective, he said.
While much of that relationship between the agencies may come down to the personalities of the leaders and the culture they create, the legislation can encourage that cooperation, Ingram said.
Whether through a regular interagency group or a monthly meeting, the DFC and USAID, and likely other development agencies such as the Millenium Challenge Corporation should come together on a regular basis, Ingram added.
When Littlefield got to OPIC, there was competition and tension between DCA and OPIC but over time, through regular meetings, coordination and collaboration was improved. The proposed DFC “takes it a step further bringing it under one roof,” she said.
Bringing all of the U.S. government's banking tools under one roof will not only help the various teams but will also be better for clients who will more easily be able to access a range of financing options or have packages designed for their needs, Littlefield said.
Another key concern is about the transparency and accountability measures of the new DFC.
The new DFC needs strong environmental and social policies and a strong accountability mechanism, said Stephanie Amoako, a policy associate at Accountability Counsel, an organization that advocates for people and communities harmed by internationally financed projects. The legislation should make clear whether OPIC’s office of accountability will continue as the mechanism for registering grievances or whether a new independent accountability mechanism will be created according to international best practices, she said.
These accountability mechanisms not only provide an avenue of remedy for project-affected communities but also help reduce reputational risk for the institution and investors and if done well can serve as a “feedback loop” to strengthen the institution's plans and policies, Amoako told Devex.
Ideally, a new office is created that builds on the growth of OPIC’s accountability office, international best practice and addresses some key gaps, including outreach to communities, ensuring proper handling of complaints and removing barriers to accessing the mechanism, she said.
“If the goal is to create a strong DFI, this is part of the equation. You can’t have it without strong environmental and social policies and accountability mechanisms,” Amoako said, adding that it’s important for the authorizing legislation to create a strong mandate for accountability from the start.
People will also be looking at the make-up of the board, and how the overall mission is articulated, whether the authorizing language articulates that it is an organization focused on reducing global poverty and advancing inclusive growth, and that there is the right balance between the development mission and the financial focus, Ingram said.
“We think that the involvement of civil society, particularly local stakeholder groups, is extremely important,” said Tessie San Martin, co-chair of the Modernizing Foreign Assistance Network and the president and CEO of Plan International USA. It is also important the DFC is held to rigorous monitoring and evaluation standards, she said.
There is also a concern that as these new tools are created, it doesn’t come at the expense of existing systems or funding for other development programs, San Martin said. She would also like to make sure that the legislation gives the agency the ability to adapt as it learns, she said.
The Trump administration
While the administration has publicly welcomed the legislation, and said it looked forward to working with Congress on the proposal, it has not yet said that it is supporting the bill. However, a senior administration official told Devex that he “fully anticipate[s] we will get to that point.”
Back in September, the Office of Management and Budget and the National Security Council started an interagency working group to address the U.S. government's development finance tool.
“From an administrative perspective, we’re happy they’ve embraced the concept of the development finance institution and for development finance to play a bigger role in development policy and foreign policy,” the official said.
The bill is largely in keeping with what the administration has been discussing, though the interagency process is ongoing, he said. As the process plays out, there will be a more uniform position from the interagency group and they will engage with Congress to work with them to “perfect legislation that will set the foundation for an institution [that] will be at the center of U.S. development policy for decades to come.”
The official said he has been focused on what key development finance tools the new agency should cover, and with a few more meetings of the interagency group to come, they still haven’t agreed on what should be the maximum contingent liability of the agency, among other issues. While there isn’t an official administration position yet, he said the $60 billion cap in the bill is something that the administration may be comfortable with.
The administration will likely support equity authority, but what type of constraints there may be on that authority hasn’t yet been decided, he said. The bill would limit the DFC from taking a stake of more than 20 percent in any one company, and require that equity investments not be more than 35 percent of its portfolio.
The interagency process is also looking at how the new DFC could be more connected to other agencies, particularly how it could have key linkages with USAID and the state department, the official said. There have been conversations about dual appointments and how that coordination may work so that each institution is leveraging the expertise that both bring to the table, he said.
OPIC is a relatively small agency, with a total of about 270 staff, only six of whom are not based in Washington, D.C., so having closer connections with USAID will be a “tremendous kind of benefit, a force multiplier for the DFI,” he said. USAID officers and commercial service officers will be important if the DFI is going to step up and play a bigger role in U.S. policy, he said.
One thing is clear though, the official said: “USAID is the lead development agency, period. And it’s always going to be the U.S. government’s lead institution for development policy. This DFI, this is about the institution that’s going to do the transactions and giving that institution the tools and the power to catalyze the private capital into the developing the world.”
While there does appear to be clear support for the legislation, whether the bill makes it through this year is still hard to predict. It seems to have a shot, but with a limited number of legislative days in this election year, and a crowded calendar, it remains to be seen if it can pass.