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People walk by the U.S. Capitol building in Washington, U.S., February 8, 2018. REUTERS/ Leah Millis - RC17BD8F7BC0
Future Development

Building a robust US development finance institution

Congressional leaders—Senators Bob Corker and Chris Coons and Representatives Ted Yoho, Adam Smith, and Ed Royce—have introduced bills to meet the long-discussed need to upgrade U.S. development finance capabilities.

The principal U.S. instrument for development finance, the Overseas Private Investment Corporation (OPIC), was an innovation at its creation in 1971 as a spinoff from the U.S. Agency for International Development (USAID) and has been an effective development tool. But with a nearly 50-year-old operating authority and limited budget resources, OPIC is unable to match the abilities of its European and Chinese counterparts.

The nearly identical House and Senate versions of the Better Utilization of Investments Leading to Development (BUILD) Act would create a new U.S. International Development Finance Corporation (IDFC) as the successor to OPIC with expanded authorities and tools. The new entity would be provided with key new capabilities—the ability to make equity investment, a doubling of the contingent liability ceiling to $60 billion, and an extended operating authority (seven years in the House bill and 20 years in the Senate bill in place of the recent year-to-year lifeline).

GUIDING PRINCIPLES

Others in the foreign policy and development communities have articulated why this initiative is so important for achieving U.S. development objectives. I will focus this piece on several issues to consider. As I do, keep in mind several concepts:

First, development finance joins public and private finance and capabilities, the use of assistance in conjunction with private finance, to spur inclusive economic activity by reducing the risk to the private parties. It occurs along a continuum that extends from pure grant assistance to pure market finance. Grant assistance does not exist in one isolated box and development finance in another; they are co-mingled to enhanced impact.

Second, USAID has been a pioneer in leveraging the private sector as a critical element of its development programs. In the past decade and a half, USAID has participated in more than 1,600 public private partnerships. Two signature initiatives are Power Africa, which works with 142 private sector partners (including 69 American companies) to build energy capacity in Africa, and Feed the Future, which has leveraged nearly $830 million in private sector capital investment since 2011.

Third, the mandate of the new corporation must carefully balance the primary mission of development with the agility required of an effective development finance agency.

CLEAR DEVELOPMENT MANDATE

The legislation establishes development as the mission of the IDFC but without clarity as to definition or scope.  One widely accepted vision of development is found in the statute establishing the Millennium Challenge Corporation (MCC): “economic growth and poverty reduction.” Today that objective would be updated by inserting “inclusive” before economic growth.

This, and other improvements to the development mandate covering accountability, transparency, evaluation, and learning are being shared with Congress and the administration in specific line item suggestions by the Modernizing Foreign Assistance Network (which I co-chair).

STRENGTHEN LINKAGE TO USAID

A strong and productive relationship between the IDFC and USAID will be a linchpin to the U.S. achieving development objectives. The bills designate the administrator of USAID as the vice-chair of the IDFC board and suggest the position of chief development officer to coordinate with USAID and the MCC.

The USAID administrator as vice-chair of the board should be assigned specific responsibilities, and the position of chief development officer should be mandated with the duties enumerated beyond “policy and implementation” to sharing of resources, data, analyses (such as constraint analysis), and evaluations. The officer could be held responsible for leading a learning agenda with other agencies and a government-wide development finance strategy, maybe the surest way to solidify IDFC-USAID collaboration and program integration.

Another mechanism to build collaboration is employee secondments, which is assigning a member of one organization to another organization for a temporary period, as is common in military services.

MANAGING THE DEVELOPMENT CREDIT AUTHORITY

The Development Credit Authority (DCA) is a prime example of the critical relationship between the IDFC and USAID. DCA extends a guarantee (typically up to 50 percent) to an entity to facilitate its activities being more developmental, such as more inclusive lending by a financial institution. The legislation would move the authority to the new agency, although some experts disagree as to whether this function fits best with the IDFC or should remain in USAID.

If DCA is transferred to the IDFC, policymakers should consider:

  • Demand for DCA guarantees comes from USAID missions, so USAID country staff are the field operatives for DCA.
  • DCA has no budget of its own (except for administrative cost of the small staff), as the funding to cover the guarantee comes from USAID mission budgets.
  • DCA programs are often linked to a USAID program. For example, 10 DCA guarantees, supporting $530 million in finance, are involved in Power Africa.

WITHER THE OFFICE OF PRIVATE CAPITAL AND MICROENTERPRISE

The Office of Private Capital and Microenterprise, intended to serve as USAID’s center of excellence and technical knowledge for private sector activities and microenterprise, would be moved to the IDFC. Before doing so, policymakers should weigh several factors.

USAID would have to recreate the technical capacity of the office for private sector guidance in order to continue to provide advice and guidance to country missions and other operating units.  Furthermore, consider whether microenterprise activities are more poverty alleviation, akin to USAID programs, or development finance.  If the latter, how does this impact the USAID microenterprise mandate?

BEST PRACTICE IN LABOR, ENVIRONMENT, AND HUMAN RIGHTS

The OPIC statute sets out a clear mandate on labor rights, environmental impact, and human rights. Today, expectations and sound business practices are even stronger than when OPIC was created.

Business leaders have come to understand that these are not just nice social concerns, but can directly impact bottom lines. Companies today are adopting comprehensive commitments on sustainability, as reflected by some 7,500 companies issuing sustainability and responsibility reports (see forthcoming Brookings book, Summits to Solutions) consistent with global guidelines. As one example, a broad coalition of international companies that operate in Cambodia are calling on the government to honor the rights of workers to organize and to a minimum wage and to cease harassment and criminal charges against union leaders. The bill should reflect these corporate best practice.

RELEVANCE OF ENTERPRISE FUNDS

The bill provides the authority to establish enterprise funds through reference of certain sections of the original authority to create the Polish and Hungarian enterprise funds from the 1991 Support for East European Democracy Act. The intent is to transfer the responsibility for enterprise funds from USAID to the IDFC.

The enterprise fund model was an innovation developed in response to the opportunity to introduce private enterprise into Central and Eastern Europe after the collapse of the Soviet Union. Of the resulting 10 enterprise funds, two were shuttered early and the others, having completed their original mission, have closed their doors and used the income from selling their portfolio to repay the U.S. Treasury or finance legacy development functions. Only the Western NIS Fund (in Ukraine and Moldova) retains investment activity for a few more years.  Two more recent enterprise funds are operating in Tunisia and Egypt.

Several matters come to mind. The bills continue the practice of a White House-appointed board for enterprise funds. Is this useful today? While some board members possessed the expertise to perform superbly, the qualifications of others were political connections. What is the value of taking six-to-nine months for the White House to appoint the board, another six-to-nine months for the new entity to get up and running, and at best two-to-three years before investing begins?

Beyond that, first answer the question whether a specific enterprise fund authority is necessary or relevant. As to necessity, the reason for the original statute was to provide authority for USAID to engage in equity investment. The bill already does that in the basic authorities.

As to the relevance, the introduction to a recent USAID evaluation of the enterprise funds suggests the answer:

“Despite the enormous challenges of the transition from planned to market economy, the former Soviet bloc countries were very different from today’s developing countries in several important ways…These countries did not have, however, a private sector, and in particular, a diversified private financial sector that could support the financial investments needed to transform the economy into a market-based system. This is the gap that the enterprise funds were designed to help to address. They were a solution to a problem in a very specific context.”

Today, there are few countries lacking private sector and financial markets. Furthermore, unlike when the enterprise fund authority was first established, if analysis of a country’s financial markets suggests that equity fund activity is appropriate, why go to the time and trouble of creating a new politically-sponsored entity? The IDFC could go into the market to contract with an existing social impact fund, an NGO with experience operating for profit development entities, or issue a request for a proposal.

And why use scarce grant money when market finance is available? Since 1987, OPIC has committed $4.1 billion in 62 private equity funds in emerging markets, which in turn have invested more than $5.6 billion in more than 570 privately owned and managed companies in 65 countries.

Finally, regarding responsibility for their legacy operations, consider that those foundations and scholarship funds are grant type activities currently overseen by USAID and would be irrelevant and a distraction to the new entity.

COLLABORATION TO FILL THE GAP

Estimates to fund the internationally-agreed 2030 Sustainable Development Goals range from $2 to $5 to $7 trillion dollars annually. Global development assistance is a fraction of that, totaling $157.7 billion in 2016, and has been relatively static in recent years. The estimate for total global development finance is $70 billion in 2014 and growing. Need more be said about the imperative to grow development finance and for all U.S. government agencies relevant to the task to be engaged and contribute their capabilities? This will require an unusual but critical level of collaboration especially between USAID and the new IDFC.

The success and pattern of collaboration between USAID and the IDFC will be set in the first few years by the leadership of the two agencies. The right players appear to be in place. Administrator Mark Green at USAID is a strong supporter not just of development assistance but also development finance. Ray Washburne is proving to be a strong and collaborative leader of OPIC. With continuation of the bipartisan and bi-agency spirit of cooperation demonstrated by congressional sponsors and agency heads, the IDFC can make a significant contribution to U.S. development policy.

This blog was first launched in September 2013 by the World Bank in an effort to hold governments more accountable to poor people and offer solutions to the most prominent development challenges. Continuing this goal, Future Development was re-launched in January 2015 at brookings.edu.

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