Secretary of State Tony Blinken landed in Kenya in November 2022 and was whisked downtown along the $668 million Nairobi Expressway funded by the China Road and Bridge Corp. When Kamala Harris landed in Zambia at Kenneth Kuanda International Airport in Lusaka, she was shepherded through a $360 million terminal funded by the Exim Bank of China, and when First Lady Dr. Jill Biden arrived in Windhoek, she passed another expressway project, in part funded by a grant from the Chinese government. The array of complementary and user-friendly resources behind China’s Belt and Road Initiative (BRI) show that influence requires more than traditional diplomacy. As the U.S. attempts to reshape its engagement with the African continent, the question is with what tools? U.S. policymakers are rightly increasingly focused on commercial diplomacy and improved partnership with the private sector in support of high standards investing. Effectively leveraging development finance institutions (DFIs) must be a central component of that strategy, but there is work to do to ensure America’s DFI, the Development Finance Corporation (DFC), can meet the moment.
The DFC is the U.S. government’s newest foreign policy agency (full disclosure, we both worked at DFC, Rebecca as the Chief of Staff, Lauren as the first Vice President of the Office of Equity and Investment Funds, the newly minted equity business at DFC). DFC functions as a bank, originating, executing, and managing investments in geographies that are often overlooked and deemed too difficult by the private sector, mainly in Africa, Asia, and Latin America. While these markets often lack regular access to capital, they are at the same time flooded by well-intentioned, mostly western, grant and aid dollars that cannot do enough to address long term infrastructure and economic development challenges. DFC’s investments build businesses, create jobs, generate tax dollars, drive local capital markets, and have the potential to cover their costs over the long term. In the three years since DFC’s launch, the agency has committed $18.6 billion in financing that increases American influence around the world while also supporting some of the lowest income communities. DFC’s investments have given the U.S. government an interest in critical minerals mining and processing as well as telecom infrastructure upgrades and development, toll roads, and other areas that displaced Chinese funding. They have provided $2 billion to support COVID-19 response efforts and build greater health resilience in frontier markets, and supported small farmers to stabilize agriculture markets in remote areas throughout Kenya, Rwanda, and Tanzania. These investments matter as locals feel the U.S. has supported progress in their country while also upholding high environmental and governance standards often lacking in BRI projects.
However, as DFC situates itself in U.S. foreign and development policy, it has not made clear to others in the U.S. government and to international partners, its priorities nor what risks it is willing to take, smartly, in order to have the most impact. The agency is failing to find its boldness. The tangible impacts of DFC’s projects and the high environmental and governance standards it encourages are compelling, but the agency’s failure to articulate a strategic vision for itself and prioritize accordingly means a default to focus on volume and return, not impact in emerging markets. The agency needs to embrace its role as a development finance institution and focus on a clear agenda driving investments in priority sectors and that mobilize private capital in order to provide foreign policy and development impacts sought by its stakeholders.
DFC’s Predecessor and Its Pathologies
Despite being new, DFC carries baggage from its predecessor agency and the politics that accompany the birth of any new effort. What came before was the Overseas Private Investment Corporation (OPIC), created in 1971 to be the U.S. government’s development finance institution, fostering development and by doing so, furthering U.S. foreign policy. However, as a self-sustaining entity that relied on returns on its investments instead of an annual appropriation, OPIC fashioned a strident independence that rendered it an orphan in the age of foreign policy by economic intervention. OPIC, always at risk of failing to achieve reauthorization, was driven to maximizing profits for the taxpayer, seeing this as a winning strategy to inoculate itself from sun setting. It was right to be wary of its fate. As Congress contemplated a new development finance agency, the Trump Administration had seriously considered shuttering OPIC.
Instead of reauthorizing OPIC without comment, in 2018 under the Better Utilization of Investments Leading to Development, or BUILD Act, Congress merged the old OPIC with a small, but commercially minded piece of USAID to create DFC. In this reconstitution, the Hill and development policy experts, frustrated by OPIC’s lack of overt alignment with broader economic and foreign policy goals, put private capital mobilization alongside coherent measurement of impact and development to engineer a more effective integration of investment into U.S. foreign policy. Congress layered organizational and Board requirements that increased oversight from the Hill as well as State, USAID, Commerce, and Treasury, allowing for better coordination on the foreign policy directive. BUILD also explicitly requires additionality, meaning DFC is statutorily required to find projects that are inadequately capitalized.
Notably, the coalition that got BUILD passed included stakeholders with at times divergent agendas that do not map cleanly along partisan lines. There is infighting amongst Republicans around the extent to which DFC should subordinate development to actively compete and outbid Chinese entities. And there are divides among Democrats focused on frontier markets and those seeking additional carve outs to DFCs development mandate to try and solve for national security problems. Appeasing all these parties, while finding additional, but viable projects that also mobilize private capital in the world’s most inhospitable capital markets, has led to a lack of clear strategic values. As a result, DFC has been unable to live up to its potential.
DFC has many masters. In one week at DFC, Lauren’s 17 person investment team was asked by various corners of the U.S. national security and development apparatus to come up with priorities for commercial investment in Ukraine, leverage infrastructure investments in South Africa and Indonesia to facilitate the transition from coal based on the Just Energy Transition Partnership, source private companies that stem the tide of immigration in Northern Central America (Honduras, Guatemala, El Salvador), as well as to think through the resources needed to raise donor capital to fund a blended finance climate facility (raising donor capital is something DFC had never done and did not have the infrastructure or regulatory compliance mechanisms in place to do). A private investment team with these types of quick turn asks would require many more hyper-specialized investment professionals to make and manage investments on a prudent basis. The goals underlying these asks are in line with DFC’s broad priorities. However, the options DFC put on the table failed to meet the moment for agencies doing the asking, lacking the specificity required for the challenges policymakers were trying to solve for. While DFC is used to thinking creatively as part of a policy process, the expectations of DFC are often too high and too quick turn given necessary partnerships with the private sector.
The cycle of disappointment has led to increasing frustration for policymakers and NGO experts who want to rely on DFC’s in vogue private sector tools but lack insight into the process of making an investment. OPIC’s go-it alone independence had left other internationally focused agencies in the dark about private sector tools available and how those differed in process and outcomes from grants. NGOs, USAID, and the State Department are used to the disbursement of grant capital along agendas with clear impact goals and measurement tools. In contrast, executing financial transactions with the potential to receive money back has its own limitations in the complexity of sourcing, diligencing, and closing an investment, and in the case of equity, taking an ongoing ownership stake in a foreign business. Timelines are longer and solutions less precise than what policymakers want. DFC boasts a 500-person strong workforce with many committed civil servants, a tiny team in comparison to other federal bureaucracies. Last minute changes in direction to try to help manage crisis moments create stress on the system too great to execute any priority well and do not allow for the creation of a long-term investor staffed with the right experts. Building an investment pipeline requires time to source transactions, requiring familiarity with and relationships within a new industry, geography, or investment structure while the team is still trying to fulfill promises from last year.
With so many directives coming fast and furious, in practice, an unfortunate key metric for the agency has become simply dollars invested, a reversion to the OPIC era. The agency is cognizant it needs to change, but it is working against history and conflicting priorities with a board and leadership that hasn’t grappled sufficiently with goal setting and prioritization.
Defining Success for Impact
How, then, should DFC define success and what can it do to be more responsive and impactful?
In private sector contexts, typically a board will complete an annual strategic review and every few years a more transformational process that sets a vision and goals for the years after. USAID as well as the Departments of Commerce, State, and Treasury already have a seat at the agenda setting table. If a similar process were undertaken with each new administration, DFC could outline a long term plan against which to execute on an annual basis. Updates to strategic thinking could be integrated into annual strategy reviews. The board and other stakeholders could feed into this vision building, and management could take on a directly linked execution plan and work within the confines of the DFC’s tools to meet these clearly outlined goals. Clear benchmarks, based on subsector and regional priorities, would allow DFC’s workforce to find and close transactions that balance risk with clearly defined priorities agreed to in concert with the interagency.
This kind of a process would limit DFC’s ability to respond to emergency issues measured in days and weeks, but harmonizing agendas upfront would better accommodate national security and development policy priorities in the medium and long-term. For example, it would allow DFC to work with Embassies and attachés earlier to understand the problem policymakers are looking to solve around Ukraine, climate, and Central America, to take the above-mentioned examples from Lauren’s team, and work to set targets and sourcing goals around each bucket. It requires openness to direction from multiple stakeholders, with leadership focused on translation and execution.
In addition to a streamlined and less noisy goal-setting, DFC has an opportunity to improve its execution capabilities through BUILD Act reauthorization, required before September 2025. BUILD created an innovative agency in DFC. Reauthorization and debates around it over the next two years are an opportunity to take a frank look at what worked well and how Congress and DFC should work together to compound the agency’s strategic impact.
Specifically, DFC’s effectiveness would improve vastly with the following reforms:
- Allowing for the appropriate accounting for equity investments as an asset rather than a grant. Currently, government policies cannot account for equity as a long-term asset, meaning any ownership stake in a company is treated as a grant that will not return capital in the future. As a result, funding for equity investments requires a new appropriation from Congress in every budget cycle. There is ample evidence that a portfolio of equity and fund investments return cost, based on reporting from DFC’s peer development finance institutions, emerging markets, and investment industry data, as well as OPIC’s existing track record. Clearly defined economic return targets should be articulated and assessed on a portfolio wide basis over time, allowing for some higher risk, highly developmental transactions, and some strategically important lower risk projects to co-exist. This change will unlock the potential of this program, without requiring an outsized appropriation.
- Reevaluating country eligibility standards. DFC is required to prioritize work in low- and lower-middle income countries based on World Bank Income Categories. These requirements are meant to ensure communities most in need of DFC tools are prioritized, but in practice, they lack nuance. They change annually in some cases based on outsized swings in commodity prices and are often not reflective of need, particularly in markets with high inequality coefficients, like Brazil, Guatemala, and Iraq, all classified as upper-middle income. DFC cannot work in high income countries and must seek certification to commit capital in upper middle-income countries, except in specific legislated excepted circumstances. Alternatively, aligning DFC to the World Bank’s International Development Association (IDA) and International Bank for Reconstruction and Development (IBRD) lending standards would put the agency better in line with its partners, including USAID, which does not have these restrictions. Alongside this change, DFC should share its impact scoring on a deal-by-deal basis with the Hill, ensuring that the new categorization does not come at the cost of high impact in target communities.
- Moving DFC’s workforce to the higher pay scale band used by CFPB and the SEC, among others. This will accelerate hiring of talented career staff with the skills to source and structure deals in priority sectors and enable DFC to better compete with the financial services sector for talent. In hiring for equity investment roles, salary was the number one reason candidates declined offers. Even in the junior ranks, qualified employees often had the opportunity to earn two times the highest GS pay scale levels. Taking pay cuts in a move from the private to the public sector is normal, but DFC’s pay scale should consider standards of directly competitive industries.
- Reporting to Congress a clear articulation of how the agency’s strategy mobilizes private capital as well as development and foreign policy impact. Currently, DFC’s reporting requirements are focused on development impact. To address the full set of foreign policy and development objectives, this reporting should be augmented and used as an interagency tool to proactively have a conversation about sourcing investments and goal setting.
- Embracing risk taking with any increase to DFC’s cap to assets under management. The Hill is likely to increase DFC’s cap on portfolio investments from $60 to $100 billion in any reauthorization, an indication of the importance of private sector tools in foreign policy. That increase is a moment for the Hill to make clear its commitment to impact and risk taking in DFC’s portfolio with a benchmark for total portfolio returns. The agency should not lose money over a five-year timeline, but the agency would be more amenable to ensure a truly diversified portfolio if legislative language embraced catalytic investments that take first loss positions as needed.
DFC can be among the most effective foreign policy tools the U.S. government has at its disposal. The bones of a best-in-class development finance institution are there, but the fundamentals of DFC’s work must be mastered and articulated, to drive investments that improve people’s lives and bring other capital along. Focusing on investments for which capital is traditionally hard to find, and prioritizing strategically important sectors, like clean energy, telecommunications and critical minerals, will be a central tenet of savvy economic statecraft in a post neoliberal world. DFC and its stakeholders must make choices, embrace tradeoffs, and prioritize development impact. If they do that, the power of deep engagement with and investment in emerging markets will pay dividends for communities around the world who need it most and in the U.S. national security interest.