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The Development Finance Corporation: Leading Private Capital into International Development

Cameron Thomas | The Wilberforce Society

Edited by Eliška Hauferová



The United States International Development Finance Corporation (DFC) was established in 2019, representing an ambitious attempt to consolidate and enhance the USA's development finance strength.  The Better Utilization of Investments Leading to Development (BUILD) Act of 2018 merged the Overseas Private Investment Corporation (OPIC) with other government agencies to create the DFC as a modernised successor organisation. [1] The DFC was granted wide-ranging investment capabilities and an exposure cap of $60 billion, allowing limited equity investments to be made overseas. [2] Supporters of the BUILD Act promoted the legislation in the wake of China's Belt and Road Initiative, hoping to offer an assertive tool to promote private sector-led growth in developing countries while advancing Western foreign policy interests.

Five years following its founding, the DFC's record shows a mixed performance in achieving its stated aspirations.  This paper will measure the agency's performance against its stated aims in the BUILD Act.  For example, this paper does not regard foreign investment as inherently negative but will assess the DFC’s performance in expanding US foreign interests, as it is mandated in its founding legislation.  The US organisation can claim meaningful successes in mobilising private and public finance for development, supporting US initiatives abroad, and catalysing investment through its risk insurance product.  However, when measured against benchmarks of operational efficiency or matching the influence of Chinese state-supported institutions, the DFC's progress seems underwhelming.  Persistent internal constraints regarding risk tolerance, sectoral expertise, and operational capacity have stopped further engagement necessary to match the scale of financing challenges across the developing world.


Genesis of the Build Act

The impetus for consolidating the US government's development finance capabilities gained momentum in Obama's second term.  Officials wanted to streamline cold-war agencies like OPIC which were increasingly viewed as outdated.  The emphasis on mobilising private investment to complement traditional aid aligned with evolving practices in development finance. Furthermore, the ascent of an increasingly assertive China and its trillion-dollar Belt and Road Initiative, launched in 2013, demonstrated Beijing's deepening economic links and political sway in the Global South.  The scale of China's infrastructure investments and mercantilist approach began to spark concerns over debt sustainability, governance standards and erosion of US influence abroad. [3]

This reassessment helped propel the BUILD Act, with bipartisan support, through Congress.  Sponsoring Senators like Bob Corker argued that the bill would help US firms increase competitiveness amidst the presence of increased foreign investment across the Global South.  This proved decisive for conservative commentators and the Trump Administration.  The expectation was that consolidating agencies within a new DFC would better catalyse private investment, achieve cost savings, and increase operational efficiency.

The DFC both invests its own capital and mobilises private sector investment.  These direct investments take the form of debt-based financing and limited partnerships in private equity funds, while private capital is mobilised through the provision of political risk insurance, loan guarantees and co-investments.  The organisation works with regional development banks, microfinance institutions, and invests in an array of portfolio development funds.  In 2022 the DFC committed to more than $7. 4 billion USD in investments worldwide, and mobilised private capital totalling $11. 2 billion USD. [4] As mandated in the BUILD Act, the DFC aims to achieve development through financially viable investments that strengthen institutions, fill market gaps, achieve tangible social and economic outcomes, provide a transparent alternative to authoritarian state-backed capital and facilitate countries' transition to self-reliance.


Staff Capacity and Recruitment Challenges

A key challenge that the DFC is currently facing is its ability to attract and retain quality staff.  This is an especially pertinent issue as the DFC has stated its plan to dramatically grow its workforce from roughly 350 to 700 people. [5] Current DFC staff have highlighted the pay gaps compared to other federal agencies, such as the Federal Reserve and Federal Deposit Insurance Corporation, that offer higher compensation.  The DFC's Inspector General notes this pay gap makes it difficult for the DFC to recruit the technical expertise it needs in areas like project finance, risk management, and development impact assessment.  The Biden Administration has looked to the DFC as a tool to advance US foreign policy interests.  As the DFC is expected to assist with initiatives such as the Partnership for Global Infrastructure and Investment, which aims to mobilise $600 billion, the DFC is being asked to play an outsized role relative to its current staff capacity of just 350 employees. [6] In 2022 the International Finance Corporation managed a portfolio only 3 times as large as the DFC's but employed close to 17 times more staff than the DFC.

Further, the department is plagued with unnecessary bureaucracy.  Any investment over $10 million must be notified to Congress.  Between 2019 and March 2023 this covered over 300 projects. [7] The Inspector General notes the heavily bureaucratic process requires the State Department to sign off for upper-middle income country (UMIC) investments, causing delays.  However, the BUILD ACT does mandate the prioritisation of investment in LICs and LMICs, aiming to maximise developmental impact where it's most needed.  There can be political incentives that increase resource diversion from this central mission, and excessive investment in UMICs could undermine the agency's effectiveness.  For example, the US already faced criticism after passing the Transatlantic Telecommunications Security Act (TTSA), investing in 22 European nations, 12 of which were high-income. [8]

In spite of this, the excess bureaucracy on large loans not only slows the department's ability to quickly respond to rapidly shifting U.S. interests but fuels aversion to risk-taking in investments compared to its competitors that may not face the same level of bureaucratic oversight.  However, there does not seem to be a concrete plan for staff recruitment.  The FY2023 Congressional Budget Justification submitted by the DFC requested no additional funding for domestic staff and instead cited measurable efficiency gains in application processing times and deal approval rates as staff become more adjusted to new procedures. [9] Perpetuating such a lean organisational profile leaves little margin for vetting a diverse array of investment opportunities.


Performance Management

Currently, insufficient resources have been dedicated to tracking investment impacts as the DFC relies on client self-reporting.  This oversight is critical to ensure projects achieve intended development goals over their lifespan.  Enhanced data would also help showcase the DFC's advantage over other development finance institutions in terms of transparency.  The DFC has made some progress by creating its Impact Quotient (IQ), a performance measurement tool to estimate and track development impact. [10] However, estimating impact is different from verifying actual outcomes.  Further, the DFC has to balance stakeholder interests while managing risks.  Inherent tensions exist between DFC's development focus on lower-income countries (LICs), foreign policy priorities in lower-middle-income countries (LMICs), and pressure to maintain portfolio performance.  The BUILD Act states DFC should provide countries with an alternative to other financing sources, but it simultaneously mandates that the DFC should assess a project's development objectives and financial stability.

The consultancy firm Dalberg conducted an independent performance assessment reviewing 36 loans totalling $2. 3 billion USD made to 29 financial intermediaries (FIs) in Latin America. [11] The assessment revealed insufficient monitoring and enforcement of development progress as a factor contributing to underperformance.  The report notes that problems originate from monitoring and response inconsistencies of third parties.  Several FIs whose loans were facilitated by third parties failed to provide sufficient data to determine their compliance and development impact.  These weak and undefined monitoring requirements and target enforcement enabled some FIs to fall short of development objectives.  Dalberg went on to recommend strengthening legal contracts related to impact monitoring, introducing penalties for non-compliance or insufficient reporting, and providing technical assistance to FIs for impact measurement.

To improve the assessment framework of the development impacts of its investments, the DFC could use methodologies used by other development finance institutions.  For example, the World Bank has developed detailed guidelines and tools for monitoring and evaluating project outcomes, including measures of poverty reduction, job creation, and environmental sustainability.  The DFC could adapt these frameworks to its own investment portfolio. [12]


Political Risk Insurance

In 2023, the global consultancy McKinsey produced a report explaining how political risk insurance (PRI) can catalyse investment in LICs and LMICs by reducing investor risk exposure. [13] Political risk is often seen as a barrier to foreign direct investment in volatile, low-income markets.  Perceptions of political instability can constrain capital flows to poorer nations relative to their capital endowments.  PRI protects investors from financial losses and asset damage due to political events such as expropriation, political violence, currency inconvertibility, contract breach, and other non-commercial risks.  This enables investors to enter and operate in markets perceived as higher risk.  This facilitates foreign direct investment and hence supports development goals.  

While risk insurance products can help unlock private investment in higher-risk environments, it is worth considering some potential drawbacks of this approach:

1)      It effectively shifts risk from private investors to public institutions like the DFC, raising the question of whether it is an appropriate use of public resources to subsidise private sector projects.  Further, the opportunity cost of financing through risk insurance, rather than direct equity or debt investment, should be questioned.

2)      The long-term development impacts of attracting private investment through risk insurance are unclear.  Private firms may prioritise profit over broader development goals like poverty reduction and sustainable development.

Regarding these two points, it is important to examine the second-order capital effects that PRI has mobilised, and the extent to which the government takes on this risk.  This paper will argue the DFC has proved successful in this regard.  In second-order capital flows (non-PRI-backed products), $2 billion has been raised in politically unstable regions. [12] The DCF has a competitive advantage in its willingness to underwrite higher-risk markets and provide longer tenors.  This in turn allows second-order capital mobilisation effects, such as investments that improve infrastructure.

For example, a renewable energy project in Kenya mobilised $278 million in private capital with the DFC's $50 million reinsurance coverage.  The resulting 100MW wind farm helped demonstrate the viability of renewables.  In addition to direct capital mobilisation, DFC's political risk insurance products have furthered development goals through other secondary effects.  Demonstration of the successful effects of investment in the energy sector led to decreased risk perception by reducing moral hazard and adverse selection in investment choices.  The establishment of renewable energy infrastructure set a precedent for the next investment opportunity and paved the way for investors to foster sufficient capital flows.  The construction of Kenya's wind farm required a critical upgrade to the national grid.  The DFC's funding of this provided greater electricity generation capacity in the region, providing opportunities for further investment.  Here, DFC's PRI project mobilised additional capital beyond the initial project by reducing information asymmetries and improving infrastructure.

The notion that political risk insurance merely shifts the risk to public institutions and subsidises private profits is not well supported.  McKinsey states that the DFC's political risk insurance has an impressive ratio of 1. 59 in first-order private capital mobilisation across the 14 cases analysed.  There is a direct improvement in capital flows in the first order.  In the case of the Kenyan wind farm, a maximum exposure of $50 million helped to successfully mobilise $278 million in private investment.  Other high-impact examples like healthcare investments mobilised $632 million of private capital across over 10 countries.  This demonstrates the powerful leveraging of public resources to crowd in private investment that would likely not have occurred otherwise.  In the case of long-term development impacts, the evidence points to significant second-order effects beyond just initial profit motivations.  McKinsey stated their second-order estimates were most likely underestimated and significantly helped improve infrastructure, strengthen institutions, and catalyse broader investment inflows.  While a profit motive is undeniable, these are still clear drivers of sustainable economic development aligned with a country's needs.

However, McKinsey notes the DFC does face some constraints.  One of these is limited brand recognition and a perception that it focuses solely on US investors.  Overcoming branding issues could help the DFC expand its political risk insurance product distribution and provide an alternative to foreign investment in emerging markets.  


Scale Limitation

One core challenge that the DFC faces in achieving its objectives in both mobilising private capital and achieving its stated political goals is the limited exposure cap of only $60 billion.  Further, in 2021, DFC investment commitments represented less than 10% of the lowest annual estimates of China's BRI financing. [14] Legislation in Congress has recently proposed raising the exposure cap to $100 billion.  However, some argue Congress should not push DFC to match foreign investment agencies dollar-for-dollar, but to remain focused on commercially sustainable projects.   The DFC's constrained resources stem from policy choices regarding the allocation of public resources.  The agency is less able than state-supported institutions in China to make investments based primarily on geopolitical interests irrespective of their financial viability.  The DFC's investment decisions, like any other development finance organisation, inevitably involve a mix of commercial and political motivations.  While the DFC must structure its investments to generate financial returns, the decision of where and how to invest capital is inherently shaped by US foreign policy interests.  However, the suggestion of a dichotomy between "commercially sustainable" and "politically motivated" investments may be overly simplistic.


Apart from limiting investment opportunities, a small budget can also constrain operational performance.  For example, recent audits revealed weaknesses in procurement, information security, and human capital management.  Building capacity in human resources and IT systems is critical as DFC mobilises exponentially larger private capital flows.  Its limited scale also affects its ability to collaborate with USAID, as mandated by the BUILD Act.  The DFC is forced to compete, both monetarily and in terms of human capital, with better funded agencies, such as the Export-Import Bank and Trade and Development Agency.


Assessing its Founding Legislation

The DFC has made progress in mobilising private capital for development as mandated by Sections 1411(1) and 1412(b) of the BUILD Act.  However, to fully realise its founding legislation the DFC requires strategic improvements in key areas.  Firstly, expanding staff capacity and streamlining bureaucracy will help improve vetting and operational efficiency.  The relative lack of skilled professionals currently hampers a thorough assessment of prospective investments.  Further, relaxing the over-bureaucratic inter-agency approval processes would enable quicker mobilisation when required.

The DFC currently shows a strong advantage with its provision of political risk insurance as it is willing to underwrite markets with a relatively high level of instability.  This helps to fill market gaps and facilitate investment that may not otherwise occur, realising the BUILD Act’s Section 1411(3).  An expansion of these products would play a pivotal role in catalysing investment in developing economies through the mitigation of governance and corruption concerns.  The generation of second-order effects also promotes the DFC’s aim of transitioning countries to self-reliance, as mandated in Section 1411(7).

On achieving tangible development outcomes, as prioritised in Sections 1411(4) and 1412(b), a greater allocation of resources to the tracking and independent verification of the development (or foreign policy) impact of projects throughout their lifespan is suggested.  While the current Impact Quotient provides ex-ante estimations, this is an inadequate substitute for rigorous monitoring during the project implementation.  Enhanced ex-post impact data will help demonstrate the DFC's transparency and accountability while encouraging private capital investment.

Further gains could derive from closer collaboration with complementary agencies such as USAID, which benefit from field offices and regional bureaus. These can help the DFC to identify investments tailored to regional development needs.  Co-financed projects with respected multilaterals like the African Development Bank Group would provide credibility while diversifying risk across these partner agencies.  This would help realise Section 1411(5) which calls for coordination with similar international institutions.  So far, the DFC has had modest success in providing a more transparent model of investment in LICs relative to authoritarian state-backed capital as envisioned in Section 1411(6).  However, its comparatively small size and internal operational constraints limit how fully it can counter foreign capital flows and balance stakeholder interests at this stage.

Finally, as the DFC operates under the guidance of the State Department as stipulated in Section 1412(b), its investment activities inherently help advance broader US foreign policy interests.  Finding the right balance between these foreign policy priorities and the promotion of good governance, per Section 1411(2), is an ongoing challenge to manage across its portfolio.  A higher emphasis on renewable energy access and sustainable infrastructure in poorer regions could help elevate the DFC's profile among private investors, allowing capital to be mobilised on a large scale.  Meanwhile, pursuing larger exposure caps and equity investment powers would enable the DFC to finance more ambitious regional development programs.  

Fulfilling the DFC's vast mandate demands more ambitious action across multiple policy lines to sharpen global competitiveness and efficiency.  With the proper strategies, the relatively new organisation can still emerge as a strong vehicle for advancing both sustainable regional development and American interests amid pressing global investment needs.



[1] H. R.  302, “BUILD Act” (P. L.  115–254), October 5, 2018, https://www. congress. gov/115/plaws/publ254/PLAW-115publ254. pdf.

[2] Runde, D.  and Bandura, R.  (2018).  The BUILD Act Has Passed: What’s Next? [online] www. csis. org.  Available at: https://www. csis. org/analysis/build-act-has-passed-whats-next.

[3] Bhattacharya, A. , Dollar, D. , Doshi, R. , Hass, R. , Kharas, H. , Solís, M. , Stromseth, J. , Jones, B.  and Mason, J.  (2019).  CHINA’S BELT AND ROAD: THE NEW GEOPOLITICS OF GLOBAL INFRASTRUCTURE DEVELOPMENT A BROOKINGS INTERVIEW.

[4] Nathan, S.  (2023).  DFC 2022 Annual Report.

[5] General, I.  (2023).  Top Management Challenges Facing DFC in FY 2023

[6] House, T.  W.  (2022, June 26).  FACT SHEET: President Biden and G7 Leaders Formally Launch the Partnership for Global Infrastructure and Investment.  Retrieved from The White House website: https://www. whitehouse. gov/briefing-room/statements-releases/2022/06/26/fact-sheet-president-biden-and-g7-leaders-formally-launch-the-partnership-for-global-infrastructure-and-investment/

[7] Murphy, E. , Runde, D. , Bandura, R.  and Unger, N.  (2023).  The Next Five Years of the DFC Ten Recommendations to Revamp the Agency.

[8] Murphy, E.  L. , Runde, D.  F. , Bandura, R. , & Unger, N.  (2023).  The Next Five Years of the DFC: Ten Recommendations to Revamp the Agency.  Www. csis. org.  Retrieved from https://www. csis. org/analysis/next-five-years-dfc-ten-recommendations-revamp-agency

[9] CONGRESSIONAL BUDGET JUSTIFICATION Fiscal Year 2023 dfc. gov.  (2022)

[10] DFC.  (2020).  Developing DFC’s New Development Performance Measurement System.

[11] Dalberg.  (2022).  Development Impact Performance Assessment for Financial Intermediary Projects.

[12] Evaluation Department, O.  (2004).  Monitoring and Evaluation: Some tools, methods and approaches.  Retrieved from https://ieg. worldbankgroup. org/sites/default/files/Data/reports/mande_tools_methods_approaches. pdf

[13] McKinsey (2023).  Capital Mobilization Impacts Resulting from DFC’s Political Risk Insurance Product Impact Assessment Report.

[14] Research Service, C.  (2022).  U. S.  International Development Finance Corporation: Overview and Issues.  R47006. 


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