Diplomacy is Good, But the D in DFC is for Development

The US International Development Finance Corporation (DFC) has been operating for less than two years, and already some lawmakers are keen to expand its mandate. On the one hand, it’s good to see such appreciation for the tools of development finance. On the other, we share deep misgivings about proposals that would authorize—and even encourage—DFC investment in upper-middle-income and high-income countries absent a strong developmental objective or justification. That would divert attention and resources from the agency’s central mission: mobilizing private finance where it's needed most. And, as mission creep spreads, it will likely mean DFC delivers less value for money and could jeopardize future support for the agency.

The Better Utilization of Investments Leading to Development (BUILD) Act requires DFC to prioritize investment in low- and lower-middle-income countries (LICs and LMICs, the world’s poorest countries with an income per head below $4,905). By doing so, it essentially directs the agency to concentrate its effort where financing is needed most and where it can expect to generate the greatest impact. While DFC is authorized to pursue deals in upper-middle-income countries (UMICs), Congress deliberately set a higher bar for such projects. Under BUILD, DFC projects in UMICs require the agency to 1) obtain certification that its support furthers US economic or foreign policy interests AND 2) attest that the support “is designed to produce significant developmental outcomes or provide developmental benefits to the poorest population of that country.”

In devising an approach that prioritizes lower income markets, Congress sought to learn from critiques leveled at DFC’s predecessor, OPIC. Throughout its history, OPIC faced apathy and even fierce opposition from lawmakers on both sides of the aisle. Some opponents argued that OPIC amounted to corporate welfare, while others criticized the agency’s investment decisions as too politicized. Setting aside whether these were credible allegations, they gave rise to political pressure that undermined OPIC’s operations—it periodically experienced lapses in authorization—and threatened the agency’s very survival. These calls for reform were eventually harnessed to enable the creation of DFC—a better, more robust development finance institution—and the lessons informed the authorizing statute. While other US foreign policy priorities will (and should) factor into DFC’s decision-making, the Corporation was designed—and is best used—to foster sustainable private sector-led development in the world’s poorest countries.

Congress already ventured onto the slippery slope of investing in wealthier countries with passage of the European Energy Security and Diversification Act in December 2019, and a number of bills introduced in the current Congress also seek to expand the agency’s remit (see here and here.) To illustrate the problems with that approach, we’ll take the example of The Transatlantic Telecommunications Security Act (TTSA), which would nudge the Corporation into telecommunications investments in Eastern Europe. We’re not against the idea that the US government should support Central and Eastern European allies as they roll out 5G infrastructure (the stated goal of the act). But TTSA would explicitly authorize DFC investment in UMICs and HICs to achieve this goal—without any requirement that investments yield development benefits. 

The TTSA explicitly names 22 countries, only one of which—Ukraine—is amongst the low- and lower-middle income countries targeted by the BUILD Act. Nine others are classified as upper-middle-income: Albania, Bosnia and Herzegovina, Bulgaria, Kosovo, Moldova, Montenegro, North Macedonia, Romania, and Serbia. DFC could pursue investments without new authority in those countries but would need to provide a strong development justification under the terms of BUILD. The majority of countries—twelve—are high-income, explicitly not part of the target countries for which DFC was envisioned. Below we seek to unpack this distinction further by comparing the 22 TTSA countries with LICs and LMICs as a group. (Note: The data in the table below is from 2019, the latest with good coverage.)

Table 1: Key ICT figures for TTSA countries relative to LICs and LMICs

The 22 TTSA countries have a combined population of 188 million—and represent a relatively small population of concern with respect to cellular subscriber base and number of Internet users, especially when compared to countries already prioritized under BUILD. This is worth considering if the goal is shaping or otherwise influencing global Internet or mobile networks.

More striking—though unsurprising—is that the need for external investment support is far greater in LICs and LMICs. The TTSA countries have an income per capita that is, on average, more than six times higher than the average for low- and lower-middle-income countries. And net FDI inflows per capita are more than twenty times as high. TTSA countries also boast rates of mobile and internet penetration twice as high as the low- and lower-middle-income country average. 

And in terms of DFC’s ability to impact outcomes, the TTSA countries already attract more net FDI than all LICs and LMICs combined. The 2019 figure of $174 billion dwarfs DFC’s total annual commitments, which historically have hovered around of $3-4 billion a year and—while growing—are currently capped at $8 billion. Plausible DFC support to the TTSA countries would be a drop in the bucket, and so its impact—from economic, diplomatic, geostrategic, and national security standpoints alike—would be far more modest than in countries comparatively starved of foreign investment.

It’s worth noting that the TTSA doesn’t demand DFC invest in 5G in European countries; it merely authorizes and encourages it. But DFC is likely to play along. The Congress who pays the piper influences the tune—or something like that.

The world’s poorest countries are tough markets in which to operate: deals tend to be smaller and riskier, requiring more effort to get them off the ground and making staff time a precious resource. And DFC has far less staff time to go around than many comparable agencies. According to budget documents, the agency had 322 full-time employees in FY20—to oversee a portfolio valued at $29.7 billion. That means DFC staff were responsible for $92 million in exposure each. That ratio for European peer agencies falls typically between $15 and $25 million. Similarly, DFC’s operating budget per employee is much higher than other DFIs.

As DFC expands its portfolio, it has been working to staff up. Still, it’s slow-going—hampered by the size of its administrative budget and its ability to recruit and hire staff with the expertise required. Under the circumstances, staff and management in the agency face pressure to get deals done and cash flowing out the door, meaning they would also confront considerable incentives to do the big, easy, low development impact deal in Hungary rather than the smaller, complex, potentially transformative deal in Haiti. (We’ll add here that DFC’s program budget is also hamstrung by illogical budget scoring treatment of the agency’s equity authority, which needs a congressional fix.)

We’ve seen Congress already carve out an exception authorizing DFC to pursue energy infrastructure projects in Europe and Eurasia. (We weren’t keen on that change either.) TTSA and similar bills would seek to widen the loophole. Given the pressures faced by an understaffed agency, we worry that high-income, low-impact projects could begin to take up an increasing proportion of DFC’s financing. That would be a loss to development, but also blunt a powerful tool for diplomacy. The agency’s limited dollars should be targeted at the countries where DFC support is most needed and where it is scaled to respond.

Thanks to Jocilyn Estes for the interactive chart and to Todd Moss and Sarah Rose for comments on an earlier draft.