Five things to know about DFC reauthorization

It's finally happening, people.

At some point today, the Senate will (finally) vote to reauthorize the Development Finance Corporation as part of the National Defense Authorization Act. This will help shape US foreign policy for at least the next seven years.

This has been a long time coming. While the vast majority of Congress and the White House have long agreed on wanting the agency to be bigger and more powerful, they’ve split over one key question: should DFC be a development agency, focused on spurring economic growth in emerging markets… or a super-flexible foreign policy bank, advancing whatever priorities the U.S. decides it has overseas? In the end, Congress greatly expanded the agency’s mandate and the administration’s power to prioritize whatever it deems to be “strategic” — and imposed a few (IMO insufficient) guardrails designed to keep the focus on development. This doesn’t mean the argument over DFC’s purpose has ended: it just means we have to push from the outside now.

Here are five key things to know about how the agency’s mandate, structure, and priorities are set to change.

#1: DFC will be bigger — with expanded capabilities.

• Total lending cap raised to $205 billion. The new bill more than triples the agency’s previous cap of $60 billion, giving DFC more room to lend – and more capacity to lend to larger projects. Significantly expanding the agency’s footprint was a bipartisan priority.

• (Finally) an equity fix. DFC has technically been able to make equity investments since it was created in 2019. But its ability to do so has been hampered by an arcane US government accounting rule. This bill side steps that obstacle by establishing a revolving fund for making equity investments. This is not a perfect solution – but it’s what could get done.

• More flexibility to hire good people. Talented lawyers and financial professionals typically have lots of job options, most of which pay far better than the federal government. This has made it difficult for DFC to secure the talent it needs. This bill enables DFC to hire up to 100 staffers outside the normal federal payscale (up from their previous limit of 50). Hopefully, this helps them bring in (and retain) the rising talent so crucial for success.

#2: The agency will be able to invest essentially anywhere.

• Expanded geographic portfolio. DFC’s previous authorizing language explicitly prioritized investments in developing economies, and prohibited the agency from working in high-income countries. Now, it will be able to invest in higher-income countries, as long as projects advance national security, economic competitiveness, and are designed to have development outcomes.

• Some limits on rich countries… Investments in countries defined as ‘high-income’ by the World Bank will be limited to 10% of the agency’s total maximum contingent liability ( so $20.5 billion of a $205 billion cap). And any investments in those countries will be capped at 25% of total project cost. The bill prohibits DFC from investing in the twenty countries with the highest GDP per capita. (Because it’s measured per capita, most of these countries are very rich and very small: e.g. Monaco, Liechtenstein, Luxembourg).

• … but with major exceptions. Even in those twenty richest countries, DFC will be able to invest in three priority sectors: energy, critical minerals and rare earths, and information and communications technology. It will also be able to invest in members of the ‘Five Eyes’ (United Kingdom, Canada, Australia, and New Zealand), even if they fall within the top twenty.

#3: We need DFC to move faster and take more risk — hopefully this is a first step.

• A much-needed new framing of ‘risk’. DFC has historically been risk averse. Its previous authorizing legislation made the agency’s Chief Risk Officer responsible for “identifying, assessing, monitoring, and limiting risk.” This new bill flips that: his or her job now also includes increasing risk tolerance. And DFC will have to report each year on efforts being made to incentivize its transaction teams to take more risk. I believe strongly that development finance institutions should have the capacity and political cover to take ambitious risks in the name of impact. Otherwise, what’s the point? This is an insufficient but promising step toward changing the agency’s cultural risk aversion.

• Doubles the threshold for Congressional notification. To date, DFC has had to notify Congress before making any investment larger than $10 million. This may not seem like a huge deal, but it slows down process approvals and introduces political risk. This legislation raises that threshold to $20 million.

#4: Congress is trying to keep the agency (and this administration) accountable.

• Creates a Congressional Strategic Advisory Group. Throughout the bill, Congress attempts to exert some additional oversight over agency operations. For example, it creates a group comprised of members from the Senate Foreign Relations Committee and the House Foreign Affairs Committee to be consulted on the agency’s priorities, foreign policy implications, and any potential changes.

• DFC will have to make more information public. Congress also increases the amount of information the agency will need to make public about its portfolio, including a breakdown of its investments by country income category and a description of the development impacts (both anticipated and assessed) of every project.

#5: Our job now is to keep pushing for transformative investments.

• External organizations will play a key role in keeping the focus on development. DFC will now have much more flexibility to invest in projects that advance foreign policy goals beyond ‘development’. I’ve always believed the agency should be able to do both. We’re more than capable of building an investment portfolio that simultaneously enhances American security and improves people’s lives around the world. But once Congress passes this legislation, making that a reality is largely up to us. External advocates and organizations must keep the agency’s feet to the fire: track where DFC investment is going and what impact it’s having; and keep engaging with Congress on what’s being achieved and how it advances US interests — or doesn’t. (Watch this space: the Energy for Growth Hub will be tracking DFC’s investment portfolio for exactly this purpose).

• A new ‘Impact Quotient’ is one opportunity. The legislation directs DFC to design a new framework for measuring the ‘development impact’ of its investments and what outcomes a project is expected to have throughout its lifecycle. I want lots of smart people (both inside and outside government) to help shape that new vision for assessing US impact.

This isn’t exactly the bill I would have written if I were in charge of the US congress. But I’m not (… thank god). The good thing is that DFC has been given the mandate and tools to invest much more; take bigger risks; and hopefully move faster. Now we hold the administration’s feet to the fire on priorities and impact.