WASHINGTON — Touted as the most significant change to the foreign aid ecosystem in the United States in more than 15 years and a critical tool for countering China, the U.S. International Development Finance Corporation, or DFC, has a lot of expectations to live up to as it opens its doors.
The new agency, created with the passage of the Better Utilization of Investments Leading to Development, or BUILD Act, in 2018, officially began operations Jan. 2 after a budget-related delay. The agency has a stronger development mandate than its predecessor and direction to focus on low- and lower-middle-income countries as well as a number of new authorities.
The agency can now make equity investments — though how much has been limited by the appropriations it received — provide technical assistance grants, lend in local currency, and work with companies that don’t have an explicit U.S. connection, though those with U.S. ties will still receive preference.
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DFC has been in the works for more than a year, and has gone through a robust planning process. But development experts said the agency needs to construct the right foundation, and how it implements the legislative requirements will be a true test of DFC’s approach.
As the agency gets up and running, it is in the spotlight — with many watching to see what direction it will take with its larger platform. Devex spoke with several development experts and DFC watchers about what they’re looking for from the agency in its first year and what concerns they have.
“The DFC really needs to continue to engage in a systematic way with the development community in its first year.”— Conor Savoy, executive director, Modernizing Foreign Assistance Network
The agency should put in place a series of building blocks in the first year, said Rob Mosbacher, a former CEO at the Overseas Private Investment Corporation, DFC’s predecessor.
Among the actions DFC should take are successfully integrating Development Credit Authority staff, building a strong relationship with the U.S. Agency for International Development and creating a well-staffed office responsible for evaluating development impact, he said.
The agency should track and disclose impact and expected impact of projects in a regular, robust fashion, he added. DFC should also build out its deal teams so they can handle a greater volume of projects and staff up elsewhere to adequately evaluate transactions, Mosbacher said.
“It’s not all going to happen overnight but in the first year it’s important to put in place systems that enable that to take place,” he said. “You can’t just bolt it on, in some cases [you] need [to] develop new systems.”
DFC needs to build a proper foundation to ensure that it is making responsible investments, said Stephanie Amoako, acting policy director at Accountability Counsel.
“I wish that the institution has the … building blocks in place to do projects in a responsible manner with proper environmental and social management and a proper accountability office.”— Stephanie Amoako, acting policy director, Accountability Counsel
“I wish that the institution has the … building blocks in place to do projects in a responsible manner with proper environmental and social management and a proper accountability office,” she said.
While the development community has been engaged in the planning process during the past year, it’s important that DFC continues to include it, particularly because Adam Boehler, the agency’s CEO, is still largely unknown to much of the community, said Conor Savoy, the executive director at the Modernizing Foreign Assistance Network.
“The DFC really needs to continue to engage in a systematic way with the development community in its first year,” he said.
Fulfilling the mandate
DFC’s development mandate is more explicit than OPIC’s, but how the new agency will implement that mandate, and what role foreign policy priorities will have on how the agency invests, are key issues that the development community is watching in year one.
The new agency will have a chief development officer, a new position responsible for overseeing DFC’s development focus and liaising with USAID and other government agencies. What role that position will play in assessing deals — whether the person sits on the investment committee, how they build relationships, what authority the person has, and who gets the job — are all questions that Savoy said he will be focused on this year.
He’ll also be watching how the development mandate is implemented. The new agency is meant to focus on low- and lower-middle-income countries. It can lend to upper-middle income countries with a presidential certification if the investment would further national economic or foreign policy interests and is likely to be “highly developmental or provide developmental benefits to the poorest population of that country,” according to the BUILD Act.
How exactly that waiver authority will be implemented and how much influence foreign policy priorities may have on the agency are key questions for several of the experts consulted by Devex. The BUILD Act passed in large part because it was sold as a critical tool to countering China and providing countries as an alternative to China’s “predatory” lending.
That message was reiterated by Boehler in a recent Financial Times article that described DFC as “much more explicitly tying its deals” to national security priorities, which is a concern for many in the development community, who worry that focus will detract from the development mandate.
“As the DFC is stood up in this first year and starts to undertake projects on its own, something that we’re interested in watching is which of the two streams will really set the tone,” said Aria Grabowski, a senior policy adviser at Oxfam America.
“Will we see kind of the trend that’s been seen throughout this administration on the instrumentalization of foreign assistance and undermining the effectiveness of the development outcomes?”— Aria Grabowski, senior policy adviser, Oxfam America
“Will it be a partnership of both of them or will the development mandate really be at the forefront with the least developed country focus. Or will we see kind of the trend that’s been seen throughout this administration on the instrumentalization of foreign assistance and undermining the effectiveness of the development outcomes?” she said.
While administration priorities have steered investments in the past, it has often still been driven by development, she said.
Savoy said he will be looking to see what types of investments the agency will make this year and where it will invest, adding that he’d like to see a “healthy mix” of large infrastructure deals in partnership with other funders alongside more development-oriented deals that are likely to be smaller.
Mosbacher said he doesn’t believe tension between foreign policy and development should be a problem for the agency, as often the development needs are the greatest in areas where risk is higher, which are often foreign policy priorities. There have “always been times when Congress makes decisions about where to invest” and the agency doesn’t have much choice, Mosbacher said.
“If money is taken away to fund high-income countries it undermines the potential effectiveness of what this agency is designed to do.”— Aria Grabowski, senior policy adviser, Oxfam America
But still, for some there is concern that the agency won’t live up to its strengthened development mandate. The funding bill passed late last year appeared to provide an exception to DFC’s investing guidelines, allowing it to support projects in upper-middle income or high-income countries as part of prioritization of efforts and assistance for energy infrastructure projects in Europe and Eurasia.
The exception for high-income countries that is included is “concerning, it’s supposed to be a development-focused institution,” Grabowski said. It is concerning because it raises questions about whether DFC will shift to being used as more of a political tool and how much of the portfolio will be used for those types of investments, which could undermine the agency’s ability to focus on lower income projects, she said.
“If money is taken away to fund high-income countries it undermines the potential effectiveness of what this agency is designed to do,” she said.
Transparency and accountability
The new agency also provides an opportunity to revamp some of the development finance institution’s accountability mechanisms and improve its transparency. In fact, the BUILD Act requires more reporting than OPIC had and DFC has to comply with the Foreign Aid Transparency and Accountability Act.
MFAN would like to see a greater level of transparency about individual deals, with information about where money is being spent and a rationale for why. The agency should, as part of its reporting requirements, begin gathering and publishing project level data. While it may take time for the agency to get it exactly right, it should begin trying from the start, Savoy said.
As DFC finalizes these policies, it should be sure to have an open process with public engagement and consultation to gather feedback from key stakeholders, including communities that could be impacted, Amoako said.
It is important for the agency to have a robust independent accountability mechanism that allows for concerns to be raised and addressed and serve as an important feedback loop for DFC, she said. Instead of just copying and pasting OPIC’s mechanism, DFC should take this opportunity “to modernize the mechanism to incorporate best practice developed at other institutions and build on the experience of OPIC’s mechanism,” Amoako said.
Accountability Counsel would like the new mechanism to address some procedural errors to accessing the mechanism that existed with OPIC, ensure that communities know it exists, and develop a reserve or remedy fund that holds resources that can be used to redress harm, she said.
DFC is mandated to do development impact evaluations not only before a project gets the greenlight for an investment but also after DFC invests, something that OPIC wasn’t required to do and a mandate that Oxfam is excited about, Grabowski said.
More transparency about environmental and social risk assessments, how specific projects fared, and how DFC engages communities are all important to prove development impact, and assuage potential concerns of development groups and civil society, she said.
Despite some potential concerns about how specific policies will come together, development experts said that they were excited about the potential for the new agency. They’ll just be watching closely to help nudge the agency to meet its mandate and live up to the expectations.