How the new Development Finance Corporation can get off to a solid start
Scheduled to open its doors this fall, the new U.S. Development Finance Corporation (DFC) has some ambitious—and welcomed—goals. Created by the BUILD Act, the DFC is set to put “development” at the center of its work. The transition team for this new institution, the core of which combines the functions of the Overseas Private Investment Corporation (OPIC) and Development Credit Authority (DCA) (now part of the U.S. Agency for International Development), has been hard at work since the passage of the legislation. From the smallest details—like designing the new logo—to the important ones—such as laying the ground work for how it will best combine development and growth—the team has worked in an open manner to best learn and hear from a myriad of stakeholders, including other development finance institutions (DFIs), the private sector, other government agencies, and civil society. We applaud the open nature of the collaboration.
As one of its earliest principles, the leadership of OPIC has stated that it wants the DFC to set the gold standard for a modern and transparent DFI. We think that approach is essential. The private sector is increasingly being looked to as a critical source to fill the financing gap for the Sustainable Development Goals (SDGs). To mobilize more of this capital, governments are turning more towards utilizing scarce public money as the catalyst. To date, however, it is not clear whether or not this is a wise investment. To what extent, for example, can we measure whether the use of public money—such as a subsidy or de-risking an investment—has actually mobilized more/better private resources? Has the use of public money resulted in improved development outcomes? Has the investment introduced a new business activity that advances development in a business sector, has it brought in a more developmentally impactful approach to business, has it created more jobs than would have happened without the public funds? Do the DFIs themselves even have the necessary information to make their case that they deserve government resources? And do DFI policymakers and shareholders have the data they need to make informed decisions about the right level and type of contributions to DFIs?
The bottom-line question on all of this is: Do we know what our public resources are buying?
One of the foundations for answering these questions is greater transparency, including the collection and publication of more and better data. Important data would include:
the terms (including financial terms), structure, objectives, and rationale for making the initial investment;
information to demonstrate the development impacts throughout the life of the project;
amount and rationale for the blended finance subsidy; and
monitoring and evaluation data which shows what worked and what didn’t. This will allow for a learning agenda to be built into the entire process.
Overall, there has been significant resistance by DFIs to publishing much of this data. Generally, they raise concerns about “commercial sensitivity” that prevent them from releasing pre- and post- decisional investment information. While some of those concerns are valid, that is not true across the board. First, there are different publication and disclosure practices by different DFIs, showing clearly that some of this data is not commercially sensitive. Second, some DFIs—in part due to pressure from their shareholders—have started releasing much more data, showing that publication does not compromise commercial sensitivity. Many of the DFIs understand that they cannot simply ask for more public resources without being able to demonstrate their value added. Finally, if information is kept siloed by all these different DFIs, how do they—and others—learn from their various outcomes?
Significantly, Philippe Le Houerou, CEO of the International Finance Corporation, has recently raised the bar for all DFI with his announcement that the IFC will now “publicly disclose the estimated subsidy for each project along with the justification for why it is necessary.” This is a positive step in providing the information that can answer some of these public-goods questions. For the rationale on transparency on development finance subsidies, and why it is doable, see Charles Kenny’s recent piece Five Principles for Use of Aid in Subsidies to the Private Sector.
That is the big picture and we look forward and will support the DFC’s efforts to set the gold standard for transparency. In the meantime, the DFC has some specific U.S. mandates that it will need to implement:
The BUILD Act requires that the DFC publish project level information—a change from OPIC’s mandate. Consistent with other development agencies, this information should include basic information, financial data, objectives, and results. See here for more detail.
The Foreign Aid Transparency and Accountability Act (FATAA) and the International Aid Transparency Initiative (IATI) further define the kind of information that the DFC should provide, both at the organization level and the project level. This information needs to be published quarterly. Although OPIC had been covered by OMB Bulletin 12-01, which mandates the publication of detailed aid information, it has not yet fully complied. OPIC, for example, has yet to publish any expenditure data.
As OPIC and the DCA merge—and expand—their functions into the DFC, attention needs to be focused on how they collect and publish the data that they are now required to produce. The DFC should ensure that it has the systems and processes needed to support these requirements. The transition team should learn from other U.S. agencies which have grappled with adapting and updating their data systems to ensure that—to the extent possible—required data is published in an automated rather than a manual process. Finally, it should use this data for management purposes—a recognized best practice—which would give the DFC an enormous leg up on ensuring good quality, timely data.
While the OPIC transition team appears to have taken the development mandate with the utmost seriousness and has the best intention to make the DFC a leader in measuring development impact and transparency, a big constraint is limited staff resources. If the DFC leadership is serious about implementing the gold standard, it will allocate the necessary personnel. However, it needs the cooperation of the administration and Congress in providing the required resources—critical if the administration takes seriously its vision for the DFC and if the Congress upholds the development mandate it has given the DFC.
Reaching these goals will take work and support from all development actors and policymakers and we look forward to contributing to the DFC achieving the gold standard.