Mission Creep at the Development Finance Corporation

The Better Utilization of Investments Leading to Development (BUILD) Act, passed in 2018, was the most significant restructuring of U.S. foreign assistance since 2004. The BUILD Act created the U.S. International Development Finance Corporation (DFC), combining the Overseas Private Investment Corporation (OPIC) and the U.S. Agency for International Development (USAID)’s Development Credit Authority (DCA). The DFC has an explicit mandate for development impact, meaning its core purpose is to better life and economic circumstances in the least developed countries around the globe. The DFC’s purpose is to continue the United States’ moral mission to provide resources and support growth in places that need it with the goal of lifting more of the world’s citizens out of poverty. Since its inception, however, the Trump administration, Congress, and now the Biden administration have all sought exemptions to use the DFC as a silver bullet that will solve all our foreign policy problems. This instinct is misguided, and if it continues, the DFC’s ability to execute on its intended mission will be diminished.

In July 2021, the House of Representatives passed the Ensuring American Global Leadership and Engagement (EAGLE) Act, a bill designed to counter China’s growing strategic challenge to the United States. This bill largely mirrors one passed by the Senate earlier in the summer. Both represent bipartisan attempts to provide additional resources and direction for the U.S. government to meet the growing security and economic challenge posed by China. During markup, an amendment was offered that would allow the DFC to invest in high-income countries. Had the amendment been adopted (it was not), it would have been the latest in a string of such attempts by Congress and the previous administration to use the DFC as a foreign policy tool with a broad mandate. The DFC is seen as part of the solution to nearly every problem the United States confronts, including climate, Covid-19, infrastructure financing, and countering China. This belief is based on the idea that offering financing in high-income and strategic countries will support U.S. interests.

The DFC has a narrow and important mandate that can support U.S. strategic objectives abroad and create private sector-led development impact. Congress and the Biden administration should strongly resist “mission creep” at the DFC and fashion a strategy that draws on the organization’s strengths to deliver on its development mandate. Properly implemented, the DFC’s mandate will deliver value to U.S. foreign policy and drive long-term economic growth across developing countries. To counter other forms of official finance from strategic competitors, the administration and Congress should consider creating or utilizing different financing tools and mechanisms.

Focusing the DFC

Created by the BUILD Act of 2018, the DFC consolidated two existing development finance tools: OPIC and USAID’s DCA. Importantly, Congress gave the DFC new authorities, including the ability to make equity investments, an increased financing cap (from $29 billion to $60 billion overall), and the relaxation of OPIC’s earlier requirement of a U.S. ownership nexus. Alongside these new tools, the BUILD Act also provided the DFC with a clear “development mandate” to invest in the least developed countries with the goal of spurring economic growth. The core of this mandate is in Section 1412 of the BUILD Act, which states: “The corporation shall prioritize the provision of support . . . in less developed counties with a low-income economy or a lower-middle-income economy.”

The BUILD Act’s language is clear: the core mission of the DFC is to invest in lower-income and lower-middle-income countries. The focus is on geographies that struggle to attract private investment and have shallow financial markets of their own that cannot meet the need. The DFC and other development finance institutions provide catalytic financing that de-risks potential investments for private capital. Absent this support, many entrepreneurs and small and medium-sized businesses struggle to attract the financing they need to grow and provide quality jobs. Nine out of ten jobs in developing countries are created by the private sector, yet many of these countries struggle to attract the investment needed to support growth.

The DFC can seek a waiver to work in upper-middle-income economies if there is a national security imperative and in an under-developed region that could benefit from private sector investment. A good example of where the DFC might seek a waiver to operate is in the Northern Triangle of Central America. The three countries—Honduras, Guatemala, and El Salvador—are all upper-middle-income countries that face significant development challenges, and irregular migration from the region presents a national security challenge to the United States. The DFC is already engaged in the Northern Triangle, and it should continue to work alongside other U.S. government agencies present.

In standing up the DFC, the Trump administration implemented what became known as the “triple mandate.” This defined the DFC’s mission as a Venn diagram of development impact, meeting U.S. foreign policy objectives, and providing a positive return for the U.S. taxpayer. While OPIC prided itself on operating at no cost to the taxpayer because it returned a yearly profit, it never previously defined one of its core objectives as a positive return. The more troubling aspect of the Trump approach was its use of the DFC in furtherance of U.S. foreign policy objectives.

During the Trump administration, the DFC sought to provide support to a Greek port, the Three Seas Initiative, and a sovereign debt swap deal in Ecuador. Most controversially, the administration also authorized it to provide support to domestic manufactures under the Defense Production Act to improve the U.S. response to the Covid-19 pandemic. This type of support was not what was envisioned under the BUILD Act and stretched the DFC’s mandate to fit the administration’s agenda. But this mission creep is not unique to the Trump administration; rather, it tapped into the broader zeitgeist of seeing the DFC as a “shiny new toy” and as a potential silver bullet. Congress has sought to provide waivers for the DFC to counter Russia’s energy dominance in Eastern Europe. And the Biden administration sees the DFC as central to meeting U.S. climate financing commitments and the Build Back Better World initiative.

A New Strategy for U.S. Development Finance

Rather than layering on new exemptions and initiatives, the Biden administration and Congress should work together to launch a new era for U.S. development finance. The administration should work to properly articulate a vision for the DFC that places its strong development mandate at the core of what it does, and at the center of U.S. foreign assistance policy. The administration should also consider whether the United States has all the development finance tools and instruments it needs to achieve U.S. foreign policy goals. Part of the urge to grant the DFC exemptions to work in different countries is a desire to counter official financial flows from geostrategic competitors. The United States should respond to these challenges, but it should do so with the proper tools and not simply see the DFC as the solution.

First, to ensure the DFC is not misapplied, the Biden administration should take the following actions:

1. Develop a revised strategy for the DFC. Such a strategy should place the development mandate firmly at the center of the DFC’s mission and build off the initial strategy created during the Trump administration. It should also make the case for a bolder risk/reward calculus for the agency and make the case that development impact and support of U.S. foreign policy are not mutually exclusive goals.

2. Encourage smart risk-taking. The DFC remains a relatively risk-adverse entity; for the DFC to fully deliver on its mandate, senior leadership should encourage smart risk-taking amongst staff. This should build on a renewed risk/reward calculus as part of a new strategy.

3. Provide resources. In its fiscal year 2022 DFC budget request, the Biden administration sought a significant increase in operating expenses for the DFC. This was a good first, and the administration should build on that request in the coming years to ensure that the DFC has the proper resources—both financial and personnel—to carry out its mission.

Second, there are four other tools/options that the administration and Congress might consider for investment in high-income countries that could serve the national interest:

1. A new financial entity. Congress and the administration could work to create a new government-backed financial entity that would provide financing to upper-middle-income countries and high-income countries deemed strategic partners. This would likely look and function more like the European Investment Bank that provides various forms of financing to EU member states and partners. Such an entity would also focus nearly exclusively on infrastructure finance and would likely provide support to both the private and public sectors.

2. A strategic investment fund. If a new entity is unpalatable, the administration could consider creating a joint strategic investment fund that would pool a certain amount of DFC financing with the U.S. Export-Import Bank (EXIM) financing. Such a fund would seek to co-finance strategic infrastructure projects across a variety of geographies but would primarily focus on upper-middle-income countries. Such a fund could be comanaged by the DFC and Ex-Im, but it would also include significant guidance and input from the National Security Council and the State Department. Given the role of EXIM, the fund would also have a mission of increasing the involvement of U.S. companies in infrastructure projects abroad.

3. Close partnerships with multilateral development banks and other international financial institutions. The World Bank and the regional development banks, alongside other multilateral financial institutions (e.g., European Investment Bank) remain significant funders of infrastructure finance. At one point, the DFC sought to create “co-financing” agreements with the Inter-American Development Bank and the African Development Bank, recognizing that the DFC would need access to additional resources to finance significant projects. The DFC could build on these and solidify co-financing arrangements with all the regional development banks and with the World Bank.

4. Sovereign loan guarantees. The U.S. government is largely out of the business of providing loans or loan guarantees directly to foreign governments. In rare circumstances, the United States will provide direct financial support to allied governments, such as to Ukraine in 2014. Most countries finance infrastructure projects with government resources, including tax dollars and bond issuance; indeed, most Chinese development finance is structured around state-to-state loans to pay for infrastructure projects. The U.S. government should consider whether it wants to once again provide significant direct loans or guaranteed loans to sovereign governments to support infrastructure projects. Any effort to do so should be done carefully with a clearly identified framework and with the goal of not creating unsustainable debt burdens.

Congress and the Biden administration need to consider the tools and instruments the United States has and what tools and instruments the country needs to achieve its goals and objectives. It is important to remember that the DFC has only been up and running for two fiscal years, and it needs further refining. The EAGLE Act and the Senate companion bill, for example, both included an increase in the DFC’s financing cap (up to $100 billion) and a provision that provides an “equity fix”—allowing its equity investment to be “scored” appropriately. These are important enhancements that will strengthen the DFC.

As the Biden administration continues to flesh out its approach to global development, the DFC will be an important component of its strategy. The DFC is a powerful tool to advance development and support U.S. foreign policy, but it is also one that has a limited mandate. And while it may be a limited mandate, it is an important one that, if used smartly alongside other U.S. development agencies, would counter China’s significant presence across developing countries. The DFC should focus on catalyzing private capital to invest in its focus geographies; this is an approach that China does not currently pursue. Most of its financing focuses on providing sovereign loans to finance big infrastructure projects. The United States and its partners have a clear opportunity to fill this gap—one in which we already play a significant role. Yet, we should not leave it there. The administration should consider other options that would enable the United States to provide a full spectrum of financing to countries. Doing so is imperative in this new era of strategic competition.

Conor M. Savoy is a senior fellow with the Project on Prosperity and Development at the Center for Strategic and International Studies in Washington, D.C.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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Conor M. Savoy
Senior Fellow, Project on Prosperity and Development