In the era of “America First” China has successfully marketed itself as an attractive economic partner to developing countries, leveraging its large economy, appetite for infrastructure projects and a broad set of commercial tools. By passing the BUILD Act last October with rare broad, bipartisan support, Congress finally recognized the need to revamp and expand American development financing capacities in an effort to better compete globally. Through the creation of the Development Finance Corporation (DFC) — a fully empowered Development Finance Institution (DFI) — the act put the US in a position to make and spur more meaningful investments that promote economic development and support American investors as they enter new markets in an age of Chinese global expansion.
The BUILD Act more than doubled the exposure cap of the DFC’s predecessor, OPIC, to $60 billion while empowering it with an expanded toolkit to make, and facilitate, foreign investment through equity power, loans in local currency and targeted technical assistance. If properly implemented, the DFC will be a powerful tool for economic growth at home and abroad. Yet its potential is already being undermined by Congress’ reluctance to properly fund it, as shown in legislation proposed earlier this month. If it is to live up to the undergirding bipartisan vision and fulfill its mission in deploying the $60 billion, the DFC needs to be adequately funded by Congress.
Prior to the BUILD act, OPIC was already underfunded compared to its European peers.
Tasked with managing a portfolio worth over 23 billion, OPIC received just over $79 million for administrative expenses supporting a staff of 270 in 2018. Compare this to OPIC’s French equivalent, Proparco; to manage a portfolio less than a fourth the size of OPIC’s, the French DFI had an administrative budget of nearly $60 million in 2017, employing a staff of over 300 across its French and regional offices. Meanwhile, OPIC’s British peer, the CDC group, received some $70 million for administrative costs in the same year for its portfolio of just over $6 billion. Although smaller managing portfolios and operating with a more limited geographical scope — CDC operates solely in Africa and South Asia, while Proparco limits its activity to Africa and the Mediterranean — these sister institutions’ administrative budgets rivaled OPIC’s.
A more empowered DFC will clearly need a larger budget than OPIC’s historical one. Despite the DFC’s massively increased responsibilities, its funding request for 2019 included an increase of only $15 million from OPIC’s 2018 budget — for a total of $94 million — for administrative expenses. Receiving even this modest increase is doubtful; the conferenced spending bill that ended the government shutdown earlier this year denied the DFC any additional funding, agreeing only to fund it at OPIC’s existing levels.
The contradictions of maintaining OPIC’s limited funding and small staff size while doubling its investment mandate will undoubtedly lead to pressure to execute bigger and bigger deals. While the importance and potential of large-scale investments should not be ignored, advancing development in lower income countries requires a larger number of smaller deals creating jobs and supporting entrepreneurship. The higher risk associated with smaller deals is the very reason for having DFIs in the first place; the DFC should be seeking out these opportunities to either directly invest, or support American companies looking to invest, in these higher risk, high development outcome opportunities. Pressure to fulfill and demonstrate results from its $60 billion mandate with a stretched staff will prevent the DFC from seeking out these small but crucial deals.
Continuing to fund the DFC at OPIC’s already inadequate levels will not only prevent the organization from employing a large enough staff to seek out these smaller deals but will also hamper its ability to bring in the kind of talent it will need to maximize the new mandate. Given the private sector ethos of the DFC and the broad, world-wide investment scope, the agency will need to be able to competitively attract investor talent from Wall Street and global private equity funds. Currently, top talent at OPIC earn just over $150,000 a year while a private equity director with similar experience can expect to take in over $350,000. Investing in the best and brightest must therefore be a priority; the DFC will need to enhance current capacities with strong talent from the investment community.
Financially starving the DFC does not amount to fiscal responsibility: If anything, empowering the agency should help reduce the budget deficit. Although taking on riskier projects in more volatile markets means returns can vary widely from year to year depending, DFI’s almost always feed money back into their country’s treasury and frequently post double digit returns. OPIC has paid back to the U.S. treasury for the past 41 consecutive years. If properly funded, the DFC will not only promote growth abroad, but more than pay for itself in returns.
Aubrey Hruby is co-founder of the Africa Expert Network, senior fellow at the Atlantic Council and co-author of ‘The Next Africa‘ (2015).