Great power competition with China and Russia is being played out in multilateral institutions and — increasingly — in developing countries seeking investments in energy, infrastructure, and digital connectivity to improve the lives of their citizens. Many of these investment requirements will either be met by China (and sometimes Russia) or “someone else.” The United States and our allies in Europe and Asia have the potential to enable that “someone else.” — but that will require thinking more creatively on every development finance tool at their disposal.
One important tool is the development finance institutions (DFIs). These are little known government-backed institutions that invest in private-sector projects in developing countries. They have the capacity to mobilize private capital into projects that will yield financial returns and also do good. Many DFIs set up by Western donors over the past two decades have experienced a dramatic growth in the volume of financial commitments. CSIS research finds that the climate change monetary commitments from the main global DFIs for the 2017-2021 period, for instance, have totaled more than $144 billion. DFIs have also enabled important developments such as the mobile phone revolution in Africa, microfinance and financial inclusion in South Asia, and the transition to renewable energy in the developing world.
The United States’ DFI is the U.S. International Development Finance Corporation (DFC). It is authorized by the 2018 Better Utilization of Investment Leading to Development (BUILD) Act, which replaced the former Overseas Private Investment Corporation (OPIC). The DFC is having a positive impact in areas of strategic importance for the United States, such as renewables, technology and infrastructure and healthcare. Working more closely with the private sector and allies like the United Kingdom, Japan, France, and Germany on overseas projects, the DFC aims to catalyze a total of $75 billion and reach more than 30 million people in developing countries by the end of 2025.
The DFC was granted is the ability to make investments in private companies — for example telecoms and energy companies and financial institutions — which was given the fancy term “equity authority.” Most other DFIs around the world have the ability to make investments into companies abroad either directly, by buying a percentage of the company, or indirectly, through funds that invest in those companies. In the case of the DFC, this authority was granted in part to better compete with China and partially to work more closely with our allies on these projects.
However, there is a technical problem with the DFC’s ability to invest directly in companies by taking an “equity” stake in a company. When the BUILD Act was passed in 2018, U.S. legislators did not detail how equity investments would be “treated” or accounted for in the U.S. federal budget. The current rules through which the U.S. government’s Office of Management and Budget (OMB) treats or “scores” such investments is on a on a 1:1 cash basis. This means that every dollar that the U.S. government allocates to a renewable energy or telecommunications project, is considered as grant money.
Like any grant, the money has to be budgeted upfront as a “loss,” but — unlike a grant — there could be a financial return from these investments. That money, however, would flow back to the U.S. Treasury and not the DFC. Therefore, that money cannot be used for future equity investments.
Typically, at most DFIs, it takes five to ten years before the DFI recoups its money or earns any profits from equity investments. So, any equity investments made by the DFC today will not be recouped for five or more years. With this type of scoring, the resources that the DFC allocates for equity investments need to be appropriated every year, and any money the DFC makes from these investments has to be returned and re-appropriated, without giving the DFC any benefit for returning money to the Treasury.
To address this issue, there have been proposals to apply a different calculus for equity investments. The America COMPETES Act, for example, has technical language to “fix” DFC’s ability to make equity investments by using a “net present value” basis, following the Federal Credit Reform Act of 1990. The bill also would increase the “credit card limit” of total investments that the DFC can make going forward from $60 billion to $100 billion.
Congress should support this fix for several reasons: 1) it will allow the DFC to be a better partner with our allies on investment projects; 2) t will reduce the direct competition of the DFC with other parts of our soft power architecture for money, and 3) it will allow the DFC to invest more monies in critical energy, infrastructure, and digital projects.
Every project we invest in means less Chinese or Russian influence in a country. It appears that the Biden administration and many members of Congress — in both houses and on both sides of the aisle — agree with this fix. Let’s make it happen.
Originally published on thehill.com on March 24, 2022.