Is the Trump Administration Serious About Merging DFC and MCC?

According to a recently leaked document, the Trump administration is considering reorganizing the US foreign assistance architecture. Notably, the document is proposing to:

1. Repurpose USAID into a humanitarian arm of the State Department largely focused on providing emergency humanitarian and disaster response, as well as global health security, a modified PEPFAR, and food security.
2. “Co-locate” the Millenium Challenge Corporation (MCC), the US Development Finance Corporation (DFC), and the US Trade and Development Agency (USTDA) under the same board chair (to be designated by the Secretary of State) with a view of merging them into a single entity over the longer term.
3. Consolidate “politically oriented programs”—like democracy, women’s empowerment, human trafficking, and religious freedom—into the State Department’s own apparatus.

These changes—especially the latter two—are reportedly intended to drive a new “performance-based, transactional model,” with an explicit quid pro quo where the recipient country promises “economic or a geopolitical benefit” in exchange for US assistance. It’s unclear how much traction the proposal has within the administration, much less its legal workability (the document references several underlying statutes that would require revision). But it does provide useful insight into a possible direction of travel on the foreign assistance front.

An attractive element of the plan is the consolidation and eventual merger of USTDA, MCC, and DFC. This isn’t a novel idea: There have been proposals over the years to merge some of the smaller US development institutions into a mega US development entity.

Let’s be clear, we are not naive: a major restructuring of US assistance requires political and financial investment in the building of an institution that maintains a development mission and is well resourced and professionally staffed. That direction is antithetical to the credo that drove the dismantling of USAID—and the administration’s broader dismissive approach to traditional allies and partners.

Still, it has long been evident to stakeholders on both sides of the aisle that the US development finance architecture is ripe for reform. The status quo suffered an overlap in missions across agencies and tried to do too much, instead resulting in doing too little in too many places. And even a relatively new agency like DFC has been hamstrung by bureaucratic constraints that limit its toolkit and impact (e.g., the budget treatment of direct equity and political risk insurance). It is significant and welcome that some US officials are putting together a plan to prioritize taxpayer dollars towards a cohesive, effective, and impact-oriented assistance toolkit.

Indeed, it is conceptually appealing to bring together the remaining development finance tools under one strategic umbrella to work in unison on big country compacts, rather than a disparate array of small programs that too often do not flow through the recipient government’s own systems. DFC, MCC, and USTDA have complementary missions and tools to do just that. DFC can bring a $60 billion capital base and, with necessary reforms, a flexible set of financing instruments to invest in private sector projects. MCC brings development credibility, with its signature framework for identifying countries that have demonstrated commitment to a positive policy agenda along with a little under $1 billion annually in public sector grants to invest in big sector-wide projects. And USTDA can originate and develop projects that would be ripe for investment by MCC or DFC (which has itself struggled with deal origination).

But there are high-level policy objectives that must underpin a merged entity (let’s call it DFC+) to make it a credible and effective development agency.

1. Maintain an overarching development mandate as core to advancing US national interests. Development assistance that is more impactful in alleviating poverty and driving economic growth in partners countries is essential to bolster US soft power and create more stable global markets. As such, compacts should not be simply used to broker commercial deals. Rather, they should set ambitious and precise development targets that ensure coordinated efforts across US efforts, ideally coordinated with the reform and development priorities set that the US is advancing at the World Bank and International Monetary Fund.
2. Focus on a tightly defined set of priorities. Even with a consolidated DFC+, the United States should not expect to do everything everywhere. In recent years, there have been attempts to define USG-wide development priorities that have achieved varying levels of success (e.g., Power Africa or the Partnership for Global Infrastructure Investment). DFC+ provides an opportunity to better bring together the toolkit in a more disciplined way to make tangible progress on a core list of priorities—like advancing energy security, developing critical minerals partnerships, and providing the foundations for technological change—across a set of partner countries.
3. Better calibrate financing instruments and risk taking with development needs. The US government has often failed to tailor its programs to a country’s level of development. Grant funding frequently goes to countries or projects that don’t really need them (i.e., upper-middle-income countries), and high-leverage instruments like sovereign loan guarantees and bilateral lending are rarely used. DFC+ should seek to better match funding instruments to a country’s financing needs, commitment, and capacity (along the lines set out in the first Trump administration’s Journey to Self-Reliance). Poor countries would get more grant-intensive programs, including blended finance. In frontier and emerging markets, grant funding would taper off, with more focus on concessional lending and investments to mobilize private capital. There’s an added advantage that reflows and profits from lending and higher return investments could subsidize the grant portfolio and greater risk taking in high-impact projects.
4. Merge different cultures and missions that is additive. MCC’s experience and development track record—and culture of transparency and accountability—must not be lost to DFC’s solely private sector focus in the merger. DFC+ needs a CEO that has credibility managing a large, complex organization. And with USAID shuttered, DFC+ will need to form new arrangements with US embassies and other partners to enhance in-country business development and project supervision.
5. Funding ambition. Finally, there’s no dancing around the budgetary implications: DFC+ would need to be a well-resourced and well-staffed agency, capable of tackling major development challenges. The dismantling of USAID has precipitated a massive development funding crisis. DFC+ would need to “refill” some of the gap left in USAID’s wake, including with grants and highly concessional financing. That’s not to say there aren’t opportunities for different funding arrangements. If DFC+ is taking on bank-like features and benefiting from reflows from some its activities, it could also retain those reflows and other profits to help cover its administrative and programmatic budget.

What’s next?

Just as last Wednesday’s leaked document raised hopes that the administration wasn’t giving up on development entirely, Thursday’s Executive Order directing DFC to create a domestic mineral fund poured cold water on some of these expectations. And there’s also the lingering idea of turning DFC into a sovereign wealth fund. It’s difficult to reconcile these very different visions for US development finance. What they all have in common is a major departure from the status quo. The key question will be whether the administration will move past its transactional mindset to embrace that development finance can be positive sum for America and the world. Or whether they will use a merger as a pretense to further degrade the toolkit, laying waste to American influence in the world.