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America’s International Development Finance Corporation to Open for Business

By Karen Lynch

The International Development Finance Corporation (DFC) is scheduled to open in late 2019 as a new U.S. government agency that aims to engage more private companies and investors in advancing economic development overseas.

The DFC consolidates and expands existing programs, such as the Overseas Private Investment Corporation (OPIC)—doubling the size of OPIC’s current portfolio to $60 billion and increasing its support for small businesses.1 The agency will also begin taking equity stakes in investment funds, as well as using conventional development finance tools such as loans, guarantees, and insurance.

 

The DFC is the centerpiece of the 2018 “Better Utilization of Investments Leading to Development Act” (BUILD Act). Its expansion of OPIC is seen to be “transforming a government agency that had long struggled to find support into a new entity twice the size, which development experts believe will better equip the U.S. to finance development objectives,” according to a report from the Devex development community.2

 

Overhauling U.S. Development Finance Efforts

 

OPIC currently provides development finance tools for investments that private companies would not otherwise make on their own because of political risks, exchange rate risks, and legal and regulatory uncertainties in developing countries. “Limited backing from the U.S. government can help catalyze significant amounts of private capital into developing countries,” according to the U.S. administration.3

 

In 2017, for example, OPIC committed $3.8 billion to 112 projects, mobilizing $6.8 billion in capital, noted the Congressional Research Service.4 The biggest share of its portfolio is in Sub-Saharan Africa.

 

Even as the work of OPIC is expanded, the DFC will also absorb another development finance program: the Development Credit Authority of the U.S. Agency for International Development (USAID).5 This program uses partial credit guarantees to mobilize local financing in developing countries. Since 1999, more than 600 guarantees have catalyzed $5.5 billion in private financing for more than 350,000 entrepreneurs in 80 countries.6

 

Additionally, the DFC will collaborate with USAID, which primarily provides grants and technical assistance, as well as other U.S. development and relief programs. For its part, USAID is also increasing private sector activity, including the creation of a Private Sector Engagement Hub.

 

How Development Finance Benefits U.S. Businesses

 

The DFC and its peer agencies support U.S. foreign policy priorities while advancing development in developing countries. The DFC’s mandate includes support for U.S. businesses competing for overseas investment opportunities.

 

The economic benefit of financing overseas development has become more apparent to the U.S. business community over time. “With most of the world’s population and economic growth squarely centered in the developing world, U.S. companies are increasingly reliant on emerging economies,” according to the U.S. Chamber of Commerce. “In fact, over half of U.S. exports now go to developing countries.”7

 

OPIC case studies provide a more detailed look at benefits to U.S. businesses. A $200 million OPIC loan to a U.S. airport developer helped build an international airport in the Ecuadorian capital of Quito. In turn, that loan benefited two dozen U.S. suppliers of goods and services to the construction project, paved the way for U.S. hotels and food chains to serve the market, and provided new opportunities to Ecuadorian entrepreneurs and tourism companies.8 A $7 million OPIC loan to an American-owned shipping and logistics company in Tanzania helped expand the company’s fleet and operations throughout the region.9

 

OPIC’s development financing has gone to wholly or partly U.S.-owned companies and has ranged from loans as small as $350,000 to guarantees and loans up to $250 million.10 In March 2019, for example, OPIC approved $200 million in financing to a private equity fund to invest in small and mid-market companies in Asia’s education and healthcare sectors.11

 

The DFC’s mission will be similar to OPIC’s, though specifics will change. For example, 50 percent or more of the DFC’s projects must be sponsored by or involve small businesses, compared to OPIC’s 30 percent target.12

 

Development Finance on the World Stage

 

According to the Congressional Research Service, the BUILD Act was, in part, a response to China’s Belt and Road Initiative (BRI).”13

 

Launched in 2013, the BRI is a Chinese economic development finance program that has already invested billions of dollars to build a network of trade routes connecting Asia, Europe, and Africa. Italy and Switzerland joined dozens of other countries in the initiative in the first half of 2019, although the U.S. and other major European countries have not participated.14

 

From a U.S. business perspective, though, “America can benefit a lot from this Belt and Road,” said Gal Luft, Co-director of the Institute for the Analysis of Global Security, because the BRI’s infrastructure will give U.S. companies greater access to consumers who are currently difficult to reach.15 International relations professor Parag Khanna concurred that “BRI serves American business objectives.” He pointed to one U.S multinational technology company as a primary user of a BRI freight rail line, and said that other American companies are actively seeking to become subcontractors on infrastructure projects.16

 

The

Takeaway:

As the U.S. Development Finance Corporation opens its doors in late 2019, the U.S. government is intensifying its efforts to engage businesses large and small in international development. Observers point to private sector benefits including business opportunities and increased trade, in addition to the potential to help strengthen economies in developing countries.

Karen Lynch - The Author

The Author

Karen Lynch

Karen Lynch is a journalist who has covered global business, technology and policy in New York, Paris and Washington, DC, for more than 30 years. Karen also is a principal at Content Marketing Partners.

Sources

1. “BUILD Act: Frequently Asked Questions About the New U.S. International Development Finance Corporation,” Congressional Research Service; https://fas.org/sgp/crs/misc/R45461.pdf
2. “How Policy Wonks, Politicos, and a Conservative Republican Remade U.S. Aid,” Devex; https://www.devex.com/news/how-policy-wonks-politicos-and-a-conservative-republican-remade-us-aid-93934
3. “United States International Development Finance Corporation,” White House; https://www.opic.gov/sites/default/files/files/shelby-letter-reorg-plan-compressed.pdf
4. “BUILD Act: Frequently Asked Questions About the New U.S. International Development Finance Corporation,” Congressional Research Service; https://fas.org/sgp/crs/misc/R45461.pdf
5. “United States International Development Finance Corporation,” White House; https://www.opic.gov/sites/default/files/files/shelby-letter-reorg-plan-compressed.pdf
6. “Development Credit Authority,” USAID; https://www.usaid.gov/what-we-do/economic-growth-and-trade/development-credit-authority-putting-local-wealth-work and https://www.usaid.gov/sites/default/files/documents/1865/DCA_One-Pager_2018.pdf
7. “Foster Development Through Trade and Aid,” U.S. Chamber of Commerce; https://www.uschamber.com/issue-brief/foster-development-through-trade-and-aid
8. “How an OPIC-supported Infrastructure Project in Ecuador Had Far-reaching Development Outcomes,” Overseas Private Investment Corporation; https://stories.opic.gov/infrastructure-project-emerging-market/
9. “A Seven Million Loan Creates Invaluable Impact Investing in East Africa,” Overseas Private Investment Corporation; https://stories.opic.gov/impact-investing-alistair-group/
10. “What We Offer,” Overseas Private Investment Corporation; https://www.opic.gov/what-we-offer/financial-products/financing-techniques
11. “OPIC Approves More than $1.1 Billion in Development Projects,” Overseas Private Investment Corporation; https://www.opic.gov/press-releases/2019/opic-approves-nearly-1-billion-development-projects
12. “BUILD Act: Frequently Asked Questions About the New U.S. International Development Finance Corporation,” Congressional Research Service; https://fas.org/sgp/crs/misc/R45461.pdf
13. Ibid.
14. “Switzerland Joins BRI as the Initiative Extends Further into Central Europe,” China Global Television Network; https://news.cgtn.com/news/3d3d514f30556a4d34457a6333566d54/index.html
15. “China’s Belt and Road Initiative: An Opportunity for the United States,” Atlantic Council; https://www.atlanticcouncil.org/blogs/new-atlanticist/china-s-belt-and-road-initiative-an-opportunity-for-the-united-states
16. “Washington Is Dismissing China’s Belt and Road,” Politico; https://www.politico.com/magazine/story/2019/04/30/washington-is-dismissing-chinas-belt-and-road-thats-a-huge-strategic-mistake-226759

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