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Ten recommendations to help DFC better execute on its development mandate

Expert Comment

Written by Andrew Herscowitz

Image credit:Empty streets in Washington D.C. Image license:Vlad Tchompalov/Unsplash

The U.S. International Development Finance Corporation (DFC) was launched four years ago as the U.S. government’s new development finance institution.

Its purpose is to bring public and private financing to companies investing in poor countries to advance both development and U.S. foreign policy objectives. There have been several insightful pieces written about changes that should be made during DFC’s reauthorization process in 2025. Building on recommendations from the Center for Strategic and International Studies and the Energy for Growth Hub, this piece brings a different perspective – some practical recommendations from former staff of the U.S. Agency for International Development (USAID) who have worked with DFC in some manner. As a former USAID and DFC official myself, I am sharing those views, based on my discussions, about what DFC is getting right and what might be done to help it be even more effective in executing on its development mandate.


When Congress created DFC, it brought together the former Overseas Private Investment Corporation (OPIC) and USAID’s loan guarantee program, the Development Credit Authority (DCA). It was a merger, not an acquisition. But the DCA staff was about a tenth the size of OPIC’s staff, and they moved into OPIC’s building. Consequently, it felt more like an acquisition with some DFC staff wanting to run things the way OPIC did.

OPIC and DCA had different mandates and different approaches, though. With OPIC, clients generally brought it deals. It would evaluate a project’s development value and financial viability and then decide whether to move forward. Pretty much any deal has some development value, even if it’s just creating a few new jobs.

With DCA, though, USAID started with a development problem it wanted to solve and then decided whether financing was the best tool to solve that problem versus using USAID’s typical grants or contract mechanisms. If financing made sense, USAID would create a deal, including identifying banks and clients, who could help solve the development challenge.

OPIC deals had to have some U.S. nexus or ownership interest. For this reason, it was expedient for OPIC to do deals with the same U.S. companies again and again to build its portfolio. It was estimated at one point that 80% of OPIC’s business was with the same 20 clients – clients like U.S. hotel chains and banks that wanted to mitigate the risks of their overseas investments. They were solid deals and often had big development impacts. For example, OPIC financed billions of dollars of energy projects in Africa. OPIC helped U.S. companies, while earning a return for the U.S. taxpayer, and still “did good.” It was a self-sustaining agency that required only a small appropriation each year, which was a great selling point for many in Congress.

USAID’s DCA mandate was different. Because USAID started with a development problem it wanted to solve, banks or clients were not always identified at the outset. For example, in Uganda USAID wanted to increase financing for small businesses that did not have access to credit. The DCA team identified several banks in Uganda and asked them to lend to these businesses. USAID provided the banks with a guarantee on each loan made and trained bank officials on how to screen loans in sectors where they may not have lent before – sectors like fisheries, cut flowers for export, or tourism. USAID also provided free training and advice to many of the businesses to help them develop business plans and to prepare their loan applications. Over its 20 years of existence, DCA moved billions of dollars for development and earned back most of its money. Not quite break-even, but DCA leveraged modest aid dollars into billions of dollars of private capital for development for some of the poorest people in the world.

DFC now has a dual mandate. DFC’s goals are to use financing both to counter malign influence through market-based investments (i.e., counter China’s Belt & Road Initiative) and solve the world’s most pressing development problems. DFC’s role is to deploy financing to drive economic growth in the world’s poorest countries. Congress even restricted DFC from working in middle-income countries like Mexico, Brazil, and South Africa unless DFC can demonstrate that a deal will advance U.S. foreign policy interests and will have a significant development impact or is targeted towards the poorest people in those countries. In addition, Congress removed the U.S. ownership requirement in deals, giving DFC more flexibility than OPIC had to work with almost anyone, including small, local businesses in developing countries – just like USAID did.

Unlike every other development finance institution (DFI) in the world, DFC is not required to earn a return on its investments in the way that OPIC had to. Other DFIs borrow money from capital markets that they must pay back or they get contributions from “shareholders” who generally expect a return. DFC gets an annual appropriation of approximately $1 billion each year from Congress to help it achieve its goals. Also unlike other DFIs, DFC does not keep the money it collects back; that money goes into the U.S. Treasury. DFC must, however, consider “financial soundness and development objectives” for the projects it supports – pretty broad authority. Congress expects DFC to use the $1 billion it receives each year to deliver on its mandates.

DFC now is a development agency like USAID that uses financing as a tool. It is not a bank for U.S. companies like OPIC was, even though there’s still a “preference” for working with U.S. companies. It is also a foreign policy agency like the State Department, using financing as its tool to advance the U.S. government’s national security objectives, such as investing in strategic ports, ICT, or critical mineral projects.


The views of those former USAID staff interviewed were largely positive on DFC. Nevertheless, they universally believe that some helpful tweaks could be made. DFC just announced that 73% of its deals were in low-income and lower-middle income countries, and that 47% of its deals last year were under $10 million. Pretty darn impressive. But a $10 million loan still is far too much money for most businesses in the world’s poorest countries. What can be done to help DFC do more deals in low-income countries and to reach those borrowers in places like Haiti who need less than $5 million or even less than $1 million? More needs to be done to ensure that the poorest countries in the world are not left behind in the new green economy.

Here are their recommendations:

1. Expand the countries where DFC can work

As described in my recent Op-Ed, it’s puzzling as to where DFC can work and why the restrictions exist. People working at DFC can’t always explain this. For example, DFC can finance a shipbuilding yard in Greece, but it can’t provide financing to a farmer in Thailand. One client that needed coverage across many countries found it frustrating that DFC could only provide coverage in a few countries, and that it took more than a year to get a clear answer. We’re not advocating for DFC to be doing a lot more deals in wealthy countries with large economies, but there are many countries like small independent island states (SIDS) with small economies that could stand to benefit from increased investment outside of tourism. There needs to be more flexibility. USAID generally does not have these same types of restrictions as to where it can work; rather, it generally is empowered to use its judgment. DFC should be able to do the same.

2. Lend in local currency

If DFC lent local currency for small deals in low-income countries with volatile currencies, it could have a significant development impact. Unfortunately, it rarely does so. As one person asked, “why does DFC force the littlest guy in the deal to manage the currency risk?” DFC has the authority to lend in local currency. But it is expensive because DFC must cover the cost of the anticipated depreciation of the local currency against the dollar over the course of the loan. Because DFC is a development agency, it’s okay to spend its own money to hedge for this risk if it will lead to greater development impact. While lending in local currency generally should not undercut the local market, it may advance DFC’s foreign policy and development goals to take on at least some of the currency risk on strategic infrastructure projects that require long-term financing in order to keep the costs down.

3. Lend to financial intermediaries at cost

To bring down the cost of borrowing for the world’s poor, DFC, as a development agency, also at times should consider lending at cost if this approach will better advance a development goal. One reason that DFIs don’t offer small loans (e.g. less than $1 million) is that the transaction costs are just too high for everyone involved. Instead, DFIs give large loans to banks (financial intermediaries) who then on-lend to small businesses. It’s a good way to get more money out to more businesses, particularly with local banks having staff in the markets themselves. But because the DFIs are expected to earn a return on their loans to those banks, the interest DFIs charge on their loans to banks gets passed on to the borrowers, including smallholder farmers who maybe need just a few thousand dollars.

Unlike other DFIs, DFC is not required to earn a return on a portfolio-wide basis, so it does not need to earn interest on a loan to a bank that essentially is doing work that DFC cannot do itself efficiently. If DFC were to lend at cost to banks in some deals, women buying their first home could get a $20,000 mortgage at a 12% interest rate instead of at 16%. A big difference – particularly to someone who is poor. After all, the reason for the loan is to help the women gain access to credit and get title to their homes, which they can use as collateral for future lower-cost loans. That’s development. Note: for those who are going to raise a flag and say that doing that will distort the market, have you ever heard anyone protest when a state or city in the U.S. helps subsidize interest rates for first-time homebuyers?

4. Pay legal costs

It’s not the client’s fault that doing business with the U.S. government is clunky and expensive, with new bureaucratic requirements every year. DFC could do more business with smaller companies (e.g. those needing less than $5 million) if it covered some of the legal fees for those clients. DFC even passes its own legal costs on to the borrower. One person commented that “not only are we expected to pay our own legal costs for complying with all the U.S. laws and regulations, but then DFC hires outside counsel to represent it and then passes those costs on to us. We don’t even get to choose those lawyers, and in some cases, we have to pay those lawyers to get up-to-speed on our industry.” USAID never required clients to pay its legal costs. Why is DFC? Others, like the Inter-American Development Bank’s “Lab”, have covered legal costs for clients seeking smaller loans in places like Haiti by using grant money from development agencies.

5. Provide free technical assistance

If DFC wants to bring credit to first-time borrowers, it should provide free technical assistance. DFC is a development agency like USAID, and USAID never required its beneficiaries in its loan guarantee programs to repay technical assistance. Why is DFC currently required to try to recover these costs? The U.S. recognizes grants as an effective tool for helping nudge private businesses to make significant investments, as the U.S. is doing in the semiconductor sector at a much greater scale. A $10 million grant, for example, is being used to train workers, which will lead to a $60 million investment. Of course, repayable grants still can be an appropriate tool in advancing costs for large infrastructure projects. DFC should be able to exercise its judgment to determine when technical assistance can be free vs. repayable.

6. Bilingual agreements

If DFC is sincere about doing business in low-income, French-speaking countries in West Africa, wouldn’t it be reasonable to offer products that are accessible? DFC requires its documentation to be in English. Not exactly user-friendly to a small business in Senegal that does not have any staff with strong English skills. I can’t help but picture U.S. officials, including me when I was at DFC, criticizing China for using deal documents and operations manuals in Chinese that were difficult to understand, setting the stage for one-sided negotiations and poor knowledge transfer. DFC’s requirement that documentation be exclusively in English isn’t a great look, though. USAID’s DCA agreements were bilingual, when necessary, with English as the controlling language. And USAID paid the cost of translation. Development work is not free.

7. Relax requirements for smaller deals

If DFC could reduce or simplify its environmental, social, and governance (ESG) requirements under appropriate circumstances, it could do more deals more quickly in places where private capital is not flowing. One of the greatest challenges for smaller businesses is complying with the many standard requirements that apply to every transaction, regardless of whether it’s for a $1 million loan or $1 billion loan. Most small businesses in developing countries don’t have the staff to navigate all the legal and reporting requirements. We should trust DFC’s experts to assess risks on a deal-by-deal basis, rather than assume that every ESG issue will arise under every deal. Perhaps start in low-income countries for deals under $5 million?

8. Notwithstanding authority

Sometimes DFC is asked to respond quickly to an urgent need (e.g. the COVID pandemic, hurricanes), but it can’t because of legal restrictions. DFC doesn’t have any exceptions for emergencies or to advance national security. One authority that other agencies have is called “notwithstanding authority.” It’s an authority that means that “nothwithstanding any other provision of the law,” an agency can do something. Agencies like USAID have this authority to allow them to respond quickly to humanitarian disasters. It can allow the head of an agency to waive ESG or competition requirements. DFC should be given “notwithstanding authority” to respond to disasters or to work in fragile areas. Notwithstanding authority might be used to allow DFC to do deals in countries where it otherwise can’t operate when there’s a highly compelling development or foreign policy need, like supporting lithium processing in Chile (a high-income country) so that China does not dominate the market.

9. Better monitor development impact

DFC needs more staff to make sure its deals have development impact. It does not have enough people to oversee the development performance of its transactions. At USAID, the overseas Missions “owned” and monitored DCA deals, making site visits to ensure the deals were achieving their development goals. DFC needs to be able to do the same.

10. Stop bragging about how much money it’s spending

The amount of money a development agency spends is not an indicator of success. In 2023, USAID spent about $36 billion. I had to struggle to find that figure buried in a public financial statement. USAID doesn’t issue press releases about how much it spends; rather, it issues press releases about what it is accomplishing with that money. DFC should do the same. The development outputs are what matter. So do the number and quality of transactions. As long as DFC keeps issuing press releases about the dollar volume of its portfolio each year, it will perpetuate an incentive for staff to chase large deals sometimes at the expense of smaller, challenging, yet perhaps more impactful transactions.

DFC has been doing a great job in its first four years. Nonetheless, stakeholders need to recognize and celebrate DFC more for the development outputs it achieves, rather than how much money it is spending or returning to the U.S. Treasury. Making these changes will help DFC be even more effective in achieving its development and foreign policy mandates.