Is DFC Going To Be a Development Finance Institution or a Foreign Policy Bank?

The US International Development Finance Corporation has become a Rorschach test for the policy community: when they look at it, everyone sees something different.

Competing priorities around development and short-term national security goals

For many in the development world, DFC represents the promise of a full-service US development finance institution (DFI) focused on bringing private sector growth to the world’s toughest and least-served markets. But for some foreign policy stakeholders, the agency holds a different appeal—the potential to become the go-to short-term national security finance arm of the US government, providing an American alternative to Chinese and Russian financing. These two perceptions are most clearly in tension when it comes to DFC’s activities in upper-middle income (UMIC) and high-income countries (HICs).

The BUILD Act—DFC’s foundational legislation—enshrines these dueling imperatives and underscores both DFC’s poverty reduction role as well as its mandate to “provide countries with a robust alternative to state-directed resources.” But BUILD is also clear that low-income countries (LICs) and lower-middle income countries (LMICs) should be its primary field of operation. The legislation restricts the provision of support for UMICs unless “the President certifies to the appropriate congressional committees that such support furthers the national economic or foreign policy interest of the United States and that such support is designed to produce significant developmental benefits to the poorest population of that country.” (Interestingly, the BUILD Act is silent on HIC financing, which—seemingly unintentionally—may have left the door open for projects in wealthy countries.)

Presidential certifications of this sort are typically intended to be a major procedural hurdle, but in DFC’s early days, the requirement has barely been a speed bump. Under the Trump administration, the certification process was simply delegated to the Secretary of State. And instead of being the rare exception, around 40 percent of DFC dollars (upwards of $3 billion) has gone to UMICs since the agency was launched in January 2020 (and almost 3 percent or $190 million to HICs).

Misplaced foreign policy priorities?

Building a robust portfolio in LICs and LMICs was always going to be a challenge that required some degree of patience in DFC’s early years. And over half of DFC’s UMIC spending is through projects with a focus on women’s economic empowerment through the 2X Initiative. But several of the investments in UMICs and HICs seemingly don’t even offer the pretense of a development rationale consistent with the BUILD Act.

Instead, they seem motivated by short-term foreign policy priorities alone. In 2020, DFC announced:

  • A $300 million investment in the Three Seas Initiative Investment Fund to finance energy projects in high-income countries across Eastern Europe; a geopolitical gambit made possible by the European Energy Security Act, which allows DFC investments in high-income countries “to preempt or counter efforts by a strategic competitor to the United States to secure significant political or economic leverage.”
  • A $190 million investment in the construction of a 5G-enabled submarine fiber-optic cable to connect Singapore (one of the world’s wealthiest countries) and the US.
  • A DFC-Ecuador framework agreement to refinance up to $3.5 billion of the country’s Chinese debt in exchange for excluding Huawei from its 5G network. Ironically, the debt-burdened Latin America country clearly does need external financing, but the DFC’s announced deal seemed to favor Ecuador’s Chinese creditors without providing any clear development benefit to the country’s citizens.

The change in administration offers hope that DFC will hit a reset button on the organization’s drift toward Foggy Bottom and its priorities—at least where it comes at the expense of DFC’s development mission. But recent reporting surrounding a prospective DFC investment in Greek ports gives us pause. What is the development rationale for investing in this high-income economy? The prospective deal seems to be aimed at favorably positioning US port operators over firms hailing from America’s strategic rivals. Whatever the merits of this activist commercial/foreign policy, it isn’t development.

New year, new opportunities to refocus on development

The coming year will be a defining one for the new organization. The direction of travel the new administration sets for DFC could define its course for the decade to come. Reaffirming the agency’s core development mandate is central to the needed course correction. And re-centering the development mandate means providing some degree of insulation from the State Department (or at least the department’s strictly geostrategic interests).

Clearly, the BUILD Act’s criteria for UMIC financing would benefit from greater clarification. In its absence, DFC should develop more detailed guidance around UMIC financing for its board, engaging congressional actors extensively in the process.

We propose DFC articulate its UMIC financing criteria around five broad buckets:

  • The project is in a poor region/geographical area or will directly benefit the poorest members of the population, as outlined in the BUILD Act (i.e., bottom 40 percent of the income distribution).
  • The project has major positive spillover impacts with regional and/or global benefits (climate, biodiversity, pandemic preparedness).
  • The country is experiencing an acute crisis (economic, natural disaster, pandemic) and DFC can play a demonstrable role in reducing follow-on effects.
  • The investment will finance a major innovation/technology that will benefit LICs and LMICs.
  • The investment is critical for regional economic integration that draws surrounding poor countries into a commercially attractive, growing market.

And in all circumstances, the financial additionality case around DFC’s involvement should be clear cut. That is, DFC should be able to clearly demonstrate how its financing is necessary for the project to move forward and central to mobilizing other sources of finance.

DFC has committed financing for some recent UMIC projects that would fall into these buckets, including:

  • A $22 million direct loan to expand sustainable forestry on degraded land in one of Colombia’s poorest regions.
  • A $100 million insurance project to restructure sovereign debt of Saint Lucia to fund conservation activities with the goals of conserving and enhancing marine and coastal ecosystems.
  • A $18.5 million direct loan to a hospital that focuses on healthcare for women and children to gain access to high quality healthcare in the midst of the COVID-19 pandemic in Ecuador.

In addition, to ensure that DFC support remains predominantly focused on the countries prioritized by its authorizing legislation, UMIC support should be capped. We propose a cap of no more than 33 percent of the volume of new investments, but if DFC has a strong case for an alternative dollar target it should make it public and adhere to it. Finally, we do not see a clear justification for HIC financing. Rather, the administration should explore pursuing this type of financing through the US Export-Import Bank.

DFC has the potential to move the needle in meaningful ways in the world’s poorest countries. The sheer volume of financing it can provide relative to the size of some of the economies in which it invests is meaningful. But it can also bring in other sources of finance, technical know-how and American standards to lower income countries. However, in wealthier countries, DFC finance—and the influence that comes with it—is going to be a drop in the bucket. If DFC is to create enduring change, it would be wise to stick with the places where it can be most relevant. And this may also represent the best return for long-term US foreign policy interests.

Note: On March 30, 2021 we updated this blog to correctly reflect that the certification process is delegated to the Secretary of State, not DFC's CEO.

Note: On April 6, 2021 we revised the volume of the Singapore fiber-optic cable project to $190 million.


CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.

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