Opinion: The Development Credit Authority needs to stay in USAID

Devex
By Eric Postel, Andrew Natsios

A successful auto-garage store owner in Indonesia who benefitted from the Development Credit Authority loans. Photo by: Danumurthi Mahendra / USAID Indonesia

One of the most dependable areas of bipartisan consensus has always been the United States government’s support for global development. And now it seems the Trump administration has found agreement with some members of Congress on at least one critical part of the global development agenda: Supporting U.S. commercial engagement in emerging markets.

The White House has unveiled plans to transform the small 250 person Overseas Private Investment Corporation into a more robust global financing platform — what they are calling the “U.S. development finance institution.”

The new DFI is envisioned to allow the U.S. government to more forcefully exert commercial influence abroad by taking ownership stakes alongside private sector investors, and on the same terms as other G-8 DFIs. The proposal will permit the U.S. development bank to retain more of its profits, allowing it to grow to meet the demands of the market. And it will equip the new institution with the ability to make small grants and conduct feasibility studies, giving U.S. investors and developers a leg up in challenging foreign markets. To supporters of OPIC, these are all positive moves and will better position the U.S. to counter the growing influence of China and other new actors in emerging markets.

But the planned legislation contains one especially destructive provision that is unnecessary to achieve its broader intent. It calls for the consolidation of the United States Agency for International Development’s flagship private sector engagement tool, the Development Credit Authority, into the new DFI. For the past 18 years, DCA has been partnering with local banks to channel local private capital toward U.S. development objectives. Instead of simply granting money directly to agricultural enterprises, for example, USAID uses DCA to prudently share risk with lenders and unlock a sustainable source of local commercial capital as part of broader agricultural sector improvement efforts.

This critical tool has been championed by members of both parties and across five successive USAID administrators. Since its creation in 1999, it has unlocked nearly $5.2 billion of private capital in some of the world’s toughest sectors and countries and has transformed the way USAID development professionals think about market-based solutions to poverty.

Having seen the development of the DCA tool and its significant expansion within USAID, we are alarmed by the notion that it should now be stripped from the agency and placed into the new DFI to “increase operational efficiencies” and “reduce redundancy.” In our view, doing so will have the exact opposite effect and will greatly reduce USAID’s ability to incorporate the private sector into its development work.

To be sure, avoiding duplication of programs across government is essential, but using the same tools across multiple agencies is not the same as duplicating programs. Indeed, DCA is a tool, not a stand-alone program. It is part of a well-coordinated, integrated, and multiyear development strategy. Stripping that tool from USAID will weaken the sustainability of programs without adding anything new to the U.S. Development Bank that the DFI won’t already have. Those who argue that the DFI can simply play the role DCA once played for the agency do not appreciate the differences between the tools, their mandates and operational models. Here are just three worth mentioning:

1. Different missions and metrics

DCA’s mandate is to support USAID’s development objectives. Any deal it supports is part of a holistic program designed and funded by USAID country missions in consultation with partner governments. OPIC’s mandate, on the other hand, is to support specific projects in developing countries. This is an equally important objective, but it begets a much different operational strategy, skill set, and risk appetite.

2. Different risk-return requirements

Because of its pure development mandate, DCA often supports deals that most development finance institutions try to avoid. DCA’s deals tend to be small, higher risk, and more favorable from a pricing perspective. For OPIC, or any future DFI, undertaking too many risky projects and suffering 10 percent losses would be a disaster given it frequently advertises that it makes money. As documented by the Center for Global Development, the result is a lot of DFI capital is provided to middle-income countries. But at USAID, the DCA tool can responsibly risk relatively more capital in the least developed countries since USAID is normally issuing grants, not seeking a market return.

3. Sectoral progress versus projects

A DFI, like OPIC, responds to proposals made by investors. This is a necessary and prudent approach to respond to the needs of market participants. But what if there is no market, or the market needs modernization? What if there are noncommercial improvements needed? Such work is in the realm of development. The extensive effort on agriculture, for example, requires complex development interventions across food systems — only one of which may be an investment of the sort which the DFI will support. USAID uses the DCA tool as an integrated component of broader projects. This is quite different than a DFI project which stands all on its own and is not adjusted as the broader sectoral effort proceeds.

While a number of distinguished leaders support the creation of a DFI, what efficiencies are achieved by moving the tiny, 30-person DCA office out of USAID into the new institution? There are no savings here, only a shift of people from one building to another, a “consolidation” box falsely checked, and a weakened USAID with no ability to attract sustainable funding for projects that are part of larger development efforts. DCA’s enthusiastic and bipartisan supporters in Congress are unlikely to allow this to happen. And even if they do for political reasons, the need for the tool is so strong within USAID that we predict it will eventually be recreated inside USAID by some future administration. Let’s save the trouble and get this right.