The Clock Is Ticking on DFC Reauthorization

Introduction

During the first three weeks in office, the Trump administration has taken a series of bold actions, shaking the international development establishment to its core. On January 20, the president issued an executive order pausing nearly all foreign development assistance funded by or through the Department of State and U.S. Agency for International Development (USAID) for 90 days, pending a thorough review. In the future, USAID may be restructured, folded into the Department of State, or permanently abolished. 

This pause in foreign aid and the potential USAID realignment may reflect a broader shift in U.S. development strategy, emphasizing financial tools like development finance over traditional grant-based aid. If that is the case, the Development Finance Corporation (DFC), an agency launched in the first Trump administration, could play a more central role in advancing the president’s foreign policy agenda.

The DFC is up for reauthorization later this year. The next few months is the window to look at what might be included in a reauthorization of the DFC. Below are some suggestions.

Focusing on Strategic Industries and Countries

Since its inception, the DFC has faced ongoing tension between its developmental mandate and strategic national security objectives. A pragmatic approach would focus on overlapping areas where investments serve both purposes. The DFC is uniquely positioned to deploy capital in high-risk regions or sectors where private investors hesitate to venture, for example, in sectors such as communications technology, critical minerals, and energy. Investments in these sectors can address global development needs while advancing U.S. strategic interests.

The DFC should be allowed to work in middle-income and even upper-middle-income countries more easily. For example, in Latin America, the DFC can operate only in four countries (Haiti, Bolivia, Nicaragua, and Honduras) without a national security waiver. This needs to change.

Countering China

Much of what makes the DFC an attractive tool for the next iteration of the U.S. development strategy is its potential to help counter China’s Belt and Road Initiative. We cannot fight something with nothing. DFC is part of our “something.”

The DFC has the ability to finance investments in projects that promote U.S. security. Making capital available for infrastructure investments—such as airports, electricity grids, and telecom networks—can build markets for U.S. businesses.

In this regard, Latin America and Africa should get additional focus. The DFC can enable friendshoring and nearshoring, creating jobs in the United States and emerging economies. U.S. companies investing in sectors like textiles are creating jobs in both Central America and the United States.

Furthermore, the U.S. economy stands as a vibrant hub of innovation, and the DFC has the potential to be a key catalyst for advancing American innovation on the global stage. As Unlock Aid suggests, through the DFC, the United States could use the power of innovation to help countries achieve a path to sustainable development. Some of these ideas include: (1) sharing innovation that emerged from U.S. research agencies, national labs, and universities with countries; (2) partnering with universities, philanthropic organizations, and major corporations to promote digital inclusion; and (3) identifying and scaling successful innovations.

Give DFC Greater Autonomy

The DFC must operate less like a government agency and more like a private financial institution. This would require Congress to give up its requirement that every approved deal over $10 million get an informal approval from every member of Congress through the congressional notification process. Also, the DFC could be given the ability to be run like a bank and retain its profits to reinvest. Currently, all profits go back to the U.S. Department of Treasury. Congress might model the DFC after congressional mandates with seed capital, such as in the case of In-Q-Tel or USAID’s enterprise funds.

Additional Steps

Among the changes that the DFC needs to undertake to make the United States “safer, stronger and more prosperous” include:

• Expand the Insurance Offering: By expanding its insurance and guarantee offerings, the DFC can de-risk private investments in challenging markets like Ukraine or in contexts where there is a national security interest in owning an asset. The DFC also needs to broaden its insurance coverage to catalyze private-sector engagement in high-risk regions. This would require revisiting the Department of Justice’s Office of Legal Counsel decision from 2023 that requires DFC to apply Federal Credit Reform Act provisions to all of its insurance products, completely undermining its ability to work in the highest risk jurisdictions where it is most needed, despite being close to fully reserved to cover claims.
• Increase Scale and Reach: With the DFC reauthorization in the works for 2025, there are proposals for the reauthorization to double DFC’s investment ceiling from $60 billion to $120 billion. This would allow the agency to expand its footprint and impact. However, as we have argued elsewhere, any authorization must also resolve the current equity scoring issue. Any reauthorization of the DFC should allow the agency to retain the financial flows from its equity investments in order to incentivize the responsible use of this tool by the professionals charged with underwriting equity transactions.
  
  With this increase in scale, the DFC should be able to expand its geographical reach to include middle-income countries while maintaining emphasis on critical regions like Africa and Ukraine. The DFC should be able to operate in countries of strategic importance, regardless of the nation’s income status. Eligibility rules should not be overly complicated or cumbersome on the institution’s back-office resources.
  
  The DFC might also consider creating “strike teams” in critical regions to act as temporary units that scale up and move through the bureaucracy differently.
  
  As such, the DFC should be able to deploy investment officers directly into target countries to collect market intelligence and better coordinate with U.S. partners. Deal sourcing and due diligence will suffer without a more substantive on-the-ground presence. The DFC bureaucracy needs better incentives to scale up potential investments in tandem with the Millennium Challenge Corporations (MCC) activities on the ground, especially in infrastructure. One fix might be to assign someone to look at every MCC compact and figure out how DFC financing can be used to take MCC projects further.
• Establish New Enterprise Funds: Enterprise funds, properly structured, can also be a powerful tool to spur development, generate financial returns to the United States, and meet foreign policy objectives. This instrument is based on a private equity model by relying on local investment managers and nurturing quality companies. Because enterprise funds are independent, private sector-led investment funds can complement existing DFC funding mechanisms by moving quickly to invest in areas of strategic interest such as critical minerals. New enterprise funds managed by DFC could be a powerful tool that complements DFC’s mission by supporting early-stage investments in fragile and geostrategic economies.
• Improve Its Measure of Success: While the DFC has increased the number of commitments, which is a positive indicator of the value of the agency, the volume of dollars committed or even invested should not be the only measure of success. At the same time, too many commitments fail to result in disbursements. To ensure the DFC’s dynamic approach to development is never lost, the agency should establish metrics that evaluate success based on private capital mobilization, alignment with national security priorities, its rigorous development impact measurement tool (the impact quotient), and return on investment.
   

Conclusion

A reauthorized and strengthened DFC will be an important instrument of U.S. foreign policy—leveraging private capital to achieve both developmental impact and national security goals simultaneously. It is imperative that the U.S. Congress promptly reauthorize this crucial agency.

Daniel F. Runde is a senior vice president, director of the Project on Prosperity and Development, and holds the William A. Schreyer Chair in Global Analysis at the Center for Strategic and International Studies in Washington, D.C.