Great power competition with China and Russia is being played out in multilateral institutions and, increasingly, in developing countries seeking investment in energy, infrastructure and digital connectivity to improve 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 this “someone else.” – but this will require thinking more creatively about each development finance tool at their disposal.
An 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 ability to leverage private capital into projects that will produce financial returns and also do good. Many DFIs set up by Western donors over the past two decades have seen dramatic growth in the volume of financial commitments. CSIS research reveals that monetary climate change commitments from major global DFIs for the period 2017-2021, for example, 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 DFI of the United States is the American International Development Finance Corporation (DFC). It is authorized by the Best Use of Investments Leading to Development (BUILD) Act 2018, which replaced the former Overseas Private Investment Corporation (OPIC). The DFC has a positive impact in areas of strategic importance to the United States, such as renewable energy, technology and infrastructure, and healthcare. Working more closely with the private sector and allies like the UK, Japan, France and Germany on overseas projects, 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 has been granted the ability to make investments in private companies – for example telecommunications and energy companies and financial institutions – which have been given the fanciful term “equity authority”. Most other DFIs around the world have the ability to invest in overseas companies 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 partly to better compete with China and partly 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, US lawmakers did not specify how equity investments would be “treated” or accounted for in the US federal budget. The current rules under which the U.S. Government’s Office of Management and Budget (OMB) processes or “scores” these investments are on a 1:1 cash basis. This means that every dollar the US government allocates to a renewable energy or telecommunications project is considered a grant.
Like any grant, the money must be budgeted up front as a “loss”, but – unlike a grant – there could be a financial return on those investments. That money, however, would go to the US Treasury and not the DFC. Therefore, this money cannot be used for future equity investments.
Typically, in most DFIs, it takes five to ten years before the DFI gets its money back or profits from equity investments. So any capital investment made by DFC today will not be recouped for five years or more. With this type of rating, the resources that the DFC allocates to equity investments must be allocated each year, and any money that the DFC derives from these investments must be returned and reappropriated, without giving the DFC any benefit for the return of the cash in the treasury.
To solve this problem, it was proposed to apply a different calculation for equity investments. The America COMPETES Act, for example, has technical language to “fix” DFC’s ability to make equity investments using a “net present value” basis, in accordance with the Federal Credit Reform Act of 1990. The draft bill would also increase the “credit card limit”. ” total investments that the DFC can scale 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 capital projects; 2) it will reduce DFC’s direct competition with other parts of our soft power architecture for money, and 3) it will allow DFC to invest more money in critical energy, infrastructure projects and digital.
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 — are on board with this solution. Make sure that this happens.
Daniel F.Runde is Senior Vice President and William A. Schreyer Chair in Global Analysis at CSIS. He previously worked for the US Agency for International Development, the World Bank Group and in investment banking, with experience in Africa, Asia, Europe, Latin America and the Middle East.