Transforming the Overseas Private Investment Corporation (OPIC) by expanding its resources and authorities while merging it with other financing mechanisms—including the U.S. Agency for International Development’s (USAID) Development Credit Authority (DCA)—to create the U.S. International Development Finance Corporation (DFC) understandably required a major sales effort. While the foreign policy elites saw the DFC as a counter to China’s massive Belt and Road Initiative, advocates for international development viewed the DFC as an expansion of U.S. development leadership. And while fiscal conservatives were sold on prospective cost savings through the elimination of duplication, OPIC management told affected staff at USAID (the DCA team that was transferred to the DFC) that all of them would be offered jobs at the new DFC. Meeting all the expectations was always going to prove difficult—but one of the trickiest topics is how to best solidify the DFC-USAID relationship in order to maximize development results.
The DFC and USAID have a long history. In 1971, when OPIC was created, it assumed investment guarantee and promotion functions formerly conducted by USAID. The USAID administrator has always been a member of the OPIC board of directors since its creation, and served as the initial chairman of the board. Over the years, coordination between the two agencies has ebbed and flowed. In 2018, when Congress merged OPIC with several other federal programs and expanded its capital and authorities to create the DFC through the Better Utilization of Investments Leading to Development (BUILD) Act, a cornerstone philosophy of the legislation was that a vibrant collaboration between USAID and the DFC would be crucial to achieving major development impact.
Eight challenges for collaboration
- Mismatch of development sectors. The sectors (or subsectors) on which USAID is focusing at any given time, either as a result of Congressional and executive branch priorities or country-level strategies, may not always be sectors in which the DFC has deep investment expertise and/or in which there is large private sector interest (as expressed via applications submitted to the DFC).
- Different approaches and metrics for success. Historically, OPIC has been a demand-driven organization that promptly responded to deals presenting themselves to its Washington-based staff. OPIC measured its success largely on its earnings and the amount of investment it facilitated. USAID, on the other hand, undertakes long-term development projects usually designed by staff in the field, in collaboration with host governments and other local stakeholders and subject to detailed Congressional oversight—resulting in long planning and budgetary timelines. Success of USAID projects has been measured by development outcomes and advancement of U.S. foreign policy goals.
- Tension between positive earnings and development effectiveness. The priority placed by the DFC on returning funds to the U.S. Treasury ensures that the DFC often ignores smaller or riskier deals that may only break even, but which can yield significant development results. USAID uses 100 percent of its program funding for grants and contracts that are never repaid, so there is a natural disincentive for DFC staff to work on USAID-sponsored transactions that may only break even or earn negative returns, even though such deals would still be more cost-effective for American taxpayers than a grant or contract.This also means that the DFC “risk analysis models” are much more risk averse than those previously used by the USAID DCA, despite the fact that DCA had a perfectly decent credit history. As a result, DFC deals are more expensive. A DCA $15 million guarantee for a deal in Colombia could be funded with $250,000 (the so-called “subsidy” paid to cover the risks), but now a similar $8 million guarantee for a DFC deal in Columbia requires $340,000.
- Misplaced focus on large deals. Some DFC staff currently mistakenly believe that the BUILD Act’s provision stating that the “Maximum contingent liability of the [DFC] outstanding at any one time shall not exceed in the aggregate $60,000,000,000” means that the DFC must reach that ceiling within the seven-year life of the BUILD Act or risk this ceiling being reduced. This is then cited as a reason why the DFC needs to focus on big deals regardless of the scale of development impact.
- Different definitions of development success. USAID and DFC view the definition of “major development outcomes” differently. DFC Impact Quotients (IQ) scores can be quite high for projects that USAID might not see as having major development impacts in a sector or country.
- Limited political incentives. While heads of U.S. government agencies care deeply about their organizations’ mission, some are also very focused on their agency’s reputation, as well as their personal legacy and reputation. As such, it is a rare DFC CEO or USAID administrator who has the time to spend on helping their colleague get a big “win” if the credit is not shared equally or if the project ranks very low on their own list of priorities.
- Limited staff incentives. Currently, DFC-USAID collaboration is not prioritized in the performance evaluations of the staff of either agency. While the performance review systems at USAID vary by hiring type, for those involved in designing and running programs, reviews primarily focus on management and development success of programs. At the DFC, annual performance reviews largely focus on the number and size of deals closed and the performance of deals already on the books. There is little at either agency that would reward staff for collaborating and jointly advancing results, especially factors prioritized by the other agency.
- Lack of cross-agency understanding. Significant numbers of staff in both organizations have significant gaps in their understanding of the other organization’s processes, incentives, and strategic orientation, making it difficult for them to understand how the two organizations might best work together and the benefits that can arise from such a collaboration.
Overcoming these challenges requires a sophisticated set of responses. Some can be legislated; others will depend on the commitment of USAID and DFC leadership to facilitate strong collaboration that persists across electoral cycles and changes in administration.
Joint strategy for collaboration. Once every four years (in the year following the presidential election), USAID and DFC should be required to prepare or update a joint strategy for collaboration.1 As part of the strategy, the two organizations should agree on at least three to five sectors of joint interest based on each of their overall sectoral priorities (and funding).2 Similarly, the two organizations should agree on at least five countries of joint interest based on each of their overall country priorities (and funding). The National Security Advisor can facilitate final decisions.
Once the sectors and countries of joint interest are identified, the DFC CEO should ensure sufficient staff expertise within nine months to process any proposed deals in the agreed-upon sectors and coordinate with relevant USAID staff. The USAID administrator should issue an Agency Notice requiring any and all programs in the sectors and countries to identify ways in which working with the DFC could enable achievement of some or all of the programs’ goals prior to using other programming tools. When these modalities of collaboration are identified, USAID should prioritize budget and efforts to support these approaches, and DFC investment papers should reflect that there has been early consultation with USAID and the CDO on each transaction.
Primacy of development. Congress needs to make clear that its number one priority for the DFC is achieving substantial development results. Financial losses on the overall portfolio are to be avoided, but earning a return for American taxpayers has never been mandated in either the OPIC or DFC statutes and should be seen as a nice bonus rather than essential. Positive returns within the portfolio should be used to create a potential fund that DFC could use to take on more risk for greater development impact than OPIC was willing to take on in the past, particularly in low-income countries. Similarly, Congress should clarify that reaching the contingent liability cap within seven years should not be used as a reason to focus on large transactions.
Joint credit. The two organizations shall be told that on any projects involving joint collaboration, announcements shall be joint and issued by both organizations at the same time. Any public signings of deal agreements, Hill meetings, or public events announcing the collaborative deals shall be designed, undertaken by, and convenient to representatives of both organizations (including, when appropriate, the relevant overseas offices).
Board roles. The BUILD Act’s provision concerning the chairperson of the DFC Board of Directors should be amended to state that in the event of the secretary of state’s absence, the vice chairperson (the USAID administrator), shall chair meetings of the DFC Board. In the event the chairperson and vice chairperson are both absent from a Board meeting, then it shall be chaired by the secretary of state’s designee.
Regular joint engagement. The DFC CEO and USAID administrator should convene a joint meeting of all their senior leaderships annually to brief one another on their organizations’ current priorities, challenges, and collaboration impediments. Furthermore, the current quarterly meetings among DFC and USAID regional leaders should be expanded so that USAID regional and pillar bureaus formally meet with their DFC counterparts and vice presidents once a quarter to review and provide information on current pipelines and programs.
DFC chief development officer (CDO) evaluation. Consistent with the BUILD Act’s requirement that the selection of the CDO shall be acceptable to both DFC CEO and USAID administrator, the CDO’s annual performance evaluation should include inputs received from the administrator, as well as “360° feedback” from personnel in both organizations.
Revised performance factors. For applicable job functions, both organizations should make any modifications to annual performance methods, factors, and metrics needed to recognize and incentivize employees for their efforts to ensure effective collaboration.
Joint training. Personnel within DFC and USAID have been working to create training programs relevant to USAID-DFC collaboration. Training for USAID foreign service officers, program officers, deputy mission directors, mission directors, and any other staff with relevant responsibilities, as well as all DFC investment, origination, credit, and legal personnel, shall include substantive training about the other organization, its tools, and methods of collaboration. Training materials shall be jointly prepared by the two organizations. Finally, the two agencies should broaden and formalize the current minimal two-way exchange of staff for multiyear assignments.
In-country staffing. Either the DFC is going to have to be allowed to have career staff located overseas to conduct proactive business development and work with USAID field staff to integrate DFC’s tools with USAID programs, or USAID is going to have to increase, dedicate, and train overseas staff for that purpose (similar to the “field investment officers” USAID created to maximize the DCA office’s effectiveness).
Beneficiary-level monitoring and evaluation (M&E). USAID and the DFC should jointly fund third parties to independently calculate the number of beneficiaries benefitting from a DFC-USAID collaboration so that those numbers can be aggregated with confidence and credibility.
Paperwork reduction. Congress can help reduce some of the time and staff investment required to enact “subsidy” transfers from USAID to DFC so that deals over $10 million don’t require two congressional notifications for the single transaction.
As the DFC evolves and scales its operations within the mandates set by Congress, policymakers are seeking to work out the kinks and make sure it operates efficiently and effectively. Solutions to fix the budget scoring of equity investments, for example, have been ably proposed by former OPIC CEO Rob Mosbacher and colleagues. Other policymakers are thinking through issues concerning how much to focus on low- versus middle-income countries. We offer these recommendations as another contribution to help the new institution leverage USAID’s development experience and in-country expertise to maximize the development effectiveness of its investments.