WASHINGTON — The U.S. International Development Finance Corporation is about to reach its first birthday, and while the young agency has approved about $8 billion in new investments, made some key hires, announced several new initiatives and launched a new impact measurement framework, there are concerns that it is drifting from its development mandate.
Despite the disruption of the pandemic, DFC put in place some of the key structures outlined in its authorizing legislation, the BUILD Act. It hired a chief development officer, a chief risk officer, and an inspector general. It also launched its Impact Quotient development measurement system, established a development advisory council, and started to make equity investments and technical assistance grants.
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In its first year, the agency also launched a COVID-19 rapid response facility — though it has only approved three deals — as well as a new global health initiative. It also added staff and announced new commitments and investments in Africa and Latin America.
Despite that progress, the key concern raised by a number of development professionals is that the agency has been too driven by foreign policy or geopolitics, often at the expense of its development mandate.
“There’s been tremendous progress … especially when you consider also operating under COVID restrictions, they have gotten a lot done,” Conor Savoy, executive director at the Modernizing Foreign Assistance Network, told Devex.
“That said, I think that we do need to take a critical eye though to some of the policies that have been implemented, some of the decisions that have been made, and really examine the strategic direction of the DFC.”
The chief concern about DFC in its first year is whether it has lost its focus on development and whether foreign policy has dictated investment decisions more than development impact, several experts told Devex.
“There needs to be a sorting out of whether foreign policy is the tail wagging the dog or development is the principal driver of agency’s activities,” a development finance expert who has worked with DFC told Devex.
The agency now employs more foreign policy experts than in the past, and some priorities are not as driven by development impact as they are by the “importance of providing alternatives to China, for instance,” the development finance expert said, requesting anonymity to speak freely.
DFC has a more geopolitical bent than its predecessor, the Overseas Private Investment Corporation, and is being used more as an instrument of geopolitical competition rather than as an extension of policy objectives, said Clemence Landers, policy fellow at the Center for Global Development.
“This administration is a much more transactional administration,” said George Ingram, a senior fellow at the Brookings Institution. “What it means for the DFC in the last six months is it has prioritized projects in countries of high foreign policy importance to this administration.”
“There needs to be a sorting out of whether foreign policy is the tail wagging the dog or development is the principal driver of agency’s activities.”— Development finance expert
While a “little of that” has happened in past administrations it has been “much more prevalent” in the past six to nine months, he said.
DFC’s three key goals are development, foreign policy, and ensuring the agency makes money and contributes to reducing the deficit and there is a “strict focus on those three things in how we evaluate every one of the deals,” DFC CEO Adam Boehler told Devex.
While people sometimes question if there is a conflict between foreign policy and development objectives, Boehler said that he believes it is “very rare the two don’t intersect in a very positive way.”
Development is the most important of the three pillars of DFC, and has the most weight in decision making, he said, adding that generally no project goes forward that does not have significant development impact. DFC’s critics often make qualitative assessments, he said, but noted that the agency has exceeded its goals on investing in low-income and frontier countries.
DFC released its first development strategy in October, outlining priority investment areas and setting targets for the organization through 2025.
The agency also just launched a $75 billion development strategy, something not required by Congress. It is an effort to hold the agency accountable to outputs and not just how much money it is moving, which is unique for a DFI, DFC’s chief development officer Andrew Herscowitz told Devex.
Room for improvement
While DFC has accomplished a lot, experts say there are still areas for improvements — in part because the agency has taken on so much, they told Devex.
“This first year has kind of been a mixed one,” Landers said. “On many levels I think there’s kind of been a failure to launch.”
The mandate of the BUILD Act was that DFC be focused on development and concentrate its investments in low- and lower-middle-income countries. DFC reports that it achieved its target of at least 60% of the approved projects being in those countries. But the way it measures that target — by the number of projects, and not total investment dollars — is different from most development finance institutions and “is a bit misleading” and “allows them to inflate the numbers,” Landers said.
One of the most public stumbles for the agency was when it announced that it had signed a letter of intent with the Eastman Kodak Company to provide a $765 million loan for the company to produce pharmaceutical components. The deal was halted after both Congress and the Securities and Exchange Commission announced investigations related to the potential loan.
It was also confirmation of the fears development experts raised when DFC was delegated the authority to run a domestic COVID-19 supply chain investment program under the Defense Production Act. Experts then, and now, told Devex they don’t believe DFC is the right home for this program and they worry it could take away focus from its core mission or have the potential to harm its reputation.
The Kodak “debacle burned through some of the goodwill and political capital [the agency] had at the beginning,” Landers said.
Opinions on DFC:
Advocates have also expressed concerns about the agency’s transparency and accountability policies and about how little project-level data the DFC is releasing. DFC should release more information at the project level about the development rationale and it could be more narrative rather than exact IQ scores, Landers said.
DFC is unlikely to release specific IQ scores but both Boehler and Herscowitz told Devex they would like to release a narrative description of the proposed development impact of each project made public, but the agency hasn’t had the capacity to do so yet.
Another concern is that DFC is not taking enough risk, that the focus on returning money to the federal government is causing the agency to place too much emphasis on profit, Ingram said.
The credit committee is discussing risk, Herscowitz said, and will take on more risk with the new Africa TIES program — a partnership with the U.S. Africa Development Foundation to promote investment in technology, innovation, and entrepreneurial solutions in African countries.
It is more expensive for DFC to invest in low-income and lower-middle-income countries and requires using more of its appropriated funds, or subsidy, to offset the risk, Herscowitz said. The agency has a mandate to prioritize those investments but needs to have enough funding to carry out the mission, so a lack of subsidy isn’t an impediment to those deals, he explained.
For development experts concerned about mission drift, the incoming Biden administration is an opportunity to take a close look at DFC’s first year, make some changes, and help it realize its full potential as a development-focused institution, they told Devex.
“My guess is a Biden administration will look to continue to use the DFC strategically but put an emphasis back more squarely on development and call on DFC to reinforce foreign policy objectives where appropriate and possible,” the development finance expert said.
DFC could play a key role in the new administration partly because the Biden administration is going to want to do more on development and foreign aid and “it’s going to be difficult to get the cash,” Ingram said.
DFC’s new leadership should review policies and some of the commitments the agency has made to individual countries — particularly some of the nonbinding memorandums of understanding with upper-middle-income countries — to determine if they should be changed moving forward, experts said.
Among those policies that should be reviewed is the development strategy, the focus on investing in energy security in eastern Europe, and how the agency handles transparency and accountability, Savoy said. Others also mentioned the new nuclear policy the agency approved this year. The new administration should also move the domestic COVID-19 response program authorized under the Defense Production Act to a different agency, he said.
The new administration should also continue working to strengthen cooperation between the U.S. Agency for International Development and DFC, something both former USAID Administrator Mark Green and others have said is key.
“Folks at USAID need to realize DFC is USAID’s bank.”— Andrew Herscowitz, chief development officer, DFC
USAID and DFC both need a high level commitment to work together and find ways to leverage each agency’s capabilities. There is no incentive built into the aid process for missions to design projects that include investment from DFC, and DFC lacks incentives to use USAIDs expertise, Ingram said. A more robust staff exchange between the agencies could help so that eventually it is a natural part of business to bring in the other agency, Ingram said.
DFC should continue its interagency collaboration and joint trips with other agencies, Boehler said. DFC will bring on development finance fellows — USAID foreign service officers who will work at the agency and help with connectivity, Herscowitz said.
There are some constraints on both sides, but “folks at USAID need to realize DFC is USAID’s bank,” Herscowitz said, adding that he’s spoken to the transition teams at USAID and DFC encouraging them to have a joint conversation.
One area DFC is likely to focus in the new administration is climate finance, several experts told Devex. While it is not clear exactly what it will look like, the agency could build on its investments in renewable energy, and a new partnership announced Monday with The Rockefeller Foundation meant to help de-risk renewable energy investments could be a good foundation for some of that work, Boehler said.
One of the key issues that a new administration could resolve is how equity investments are scored for budget purposes. Right now, equity investments are scored like grants, requiring that the full amount for them be appropriated, but DFC advocates and BUILD Act supporters are trying to change that so more equity investments can be done. The Office of Management and Budget could choose to score equity investments differently, requiring a pool of funding to cover risks, as it does for the agency’s loan products, rather than a one-to-one appropriation.
Given the challenges in the past year of passing legislation to solve the problem, it would be easier for OMB to do so, the senior development expert said, adding that the transition team understands the issue and the opportunity to fix the problem, but it remains to be seen if the new team will choose to do so.
The Biden team has not yet said who will lead DFC, but Boehler said whoever it is will have his support. Boehler said he will work hard until his last day at the agency or beyond helping any future nominee, much as past OPIC leaders helped him.