In October 2018, the landmark bipartisan Better Utilization of Investments Leading to Development (BUILD) Act was signed into law. It has been described as “the most significant [US] foreign assistance legislation in 15 years.” The BUILD Act implements a reorganization of US government development finance and aid programs, creating a single, consolidated development agency called the US International Development Finance Corporation (DFC). Grounded by legislation that allows it to participate in private sector, market-based transactions, the DFC’s mission is to address both “development challenges and foreign policy priorities of the United States.”
In September 2019, Adam S. Boehler was confirmed by the US Senate as the first CEO of the DFC, and on January 2, 2020, DFC officially commenced operations. Just two months later, March 12, 2020, the DFC Board of Directors approved $881 million in financing and political risk insurance for multiple projects in several regions of the globe.
Structurally, the DFC merged the programs (and personnel) of the existing primary sources of US government development finance—OPIC (the US Overseas Private Investment Corporation) and the Development Credit Authority of USAID (the United States Agency for International Development). Further, the DFC is able to offer new development finance products that have not been previously available to OPIC or other US government agencies.
Who Can Benefit Under What Conditions
The DFC offers support under a variety of statutory directives applicable to its programs. Investors and sponsors will want to be aware of these considerations and their impact on the availability of DFC support for any specific project or investment:
Targeting Lower-Income Countries: Low-and lower-middle income countries (as defined by the World Bank, and previously the recipient of about 46 percent of OPIC-backed financing) are the express priority of the DFC by the terms of the BUILD Act. This will initially mean a focus on the 78 countries with 2018 per capita gross national income below US$3,996 as shown in Table 1.
Preference for US Sponsors: The BUILD Act retains a US nexus, modified from OPIC’s requirement of a “US connection” based on US citizenship or US equity ownership to a “preferential” consideration of projects involving private sector entities that are “US persons” (US citizens or entities owned or controlled by US citizens).
Additionality Requirement: DFC support must not compete with or supplant available sources of private-sector support or crowd-out private sector lending.
Policies Supporting Private Sector: The DFC is directed to give preferential consideration to projects in countries where the government supports private-sector economic principles, including market-based economic policies, protection of private property rights, respect for the rule of law and systems to combat corruption.
International Trade Obligations: The DFC is directed to provide preferential consideration to investments in countries in compliance (or making substantial progress in coming into compliance) with their international trade obligations.
International Terrorism and Human Rights: The DFC is prohibited from providing support to a foreign government—or an entity owned or controlled by a foreign government—if such government has repeatedly supported international terrorism or engaged in serious human rights violations.
Women’s Economic Empowerment: The DFC is required to consider the impact of potential investments on, and seek to improve, women’s economic opportunities.
Boycott Restriction: The DFC must take into account whether a project is sponsored by or substantially affiliated with persons involved in boycotting a country that is “friendly” with the United States and is not subject to a boycott under US law or regulation.
Continuing Requirements—Worker Rights, Child Labor, Environmental and Social, Sanctions, Small Business: The DFC will operate under similar considerations as OPIC in several areas: The DFC can only support projects in countries taking steps to protect worker rights and prevent child labor and must not support projects that have a significant adverse environmental or social impact. The DFC also is prohibited from all dealings with projects involving persons or entities subject to US sanctions laws or regulations. The DFC must afford preferential consideration to projects sponsored by or involving small business and ensure that small business-related projects are not less than 50 percent of all DFC-supported projects involving US persons (an increase from OPIC’s 30-percent target).
Enhanced Capability and Flexibility
The DFC offers new or enhanced financial tools, as well as continue to provide existing support offerings that have long been favored by emerging market investors and project sponsors. As with the predecessor OPIC and USAID programs, the DFC’s obligations are backed by the full faith and credit of the US government. Importantly, the DFC is authorized for an initial seven-year term (as opposed to the recent annual cycle for OPIC), affording market participants with reassurance of its continued existence and program availability.
A summary comparison of the DFC’s major programs with OPIC’s major programs is provided in Table 2. As these details show, the DFC can provide investors and sponsors seeking capital for emerging market projects with enhanced resources and flexibility.
Other details regarding the DFC’s loan and guarantees—such as tenors, interest rates, premia and fee structures—will be essential to an assessment of DFC’s benefits to any specific transaction.
US EXIM Bank and Other US Government Development Programs
Many parties involved in emerging market finance and development have wondered what impact the new “US Super DFI” will have on the export finance mission of US EXIM Bank and the programs of various other US government programs supporting global development activities. For investors and sponsors familiar with EXIM Bank and these other programs, the news is good—EXIM Bank will remain in operation as the US government’s export credit agency, and (for the most part) the other entities and programs also will continue. (As many will know, after several years of uncertainty regarding its continued existence, in December 2019, EXIM Bank was reauthorized for a seven-year term, the longest re-authorization period in EXIM Bank’s 85-year history.) Total US government resources available for emerging market private-sector development and finance will therefore increase post-DFC, and the feared fratricide that might have occurred within its development program portfolio seems to have been avoided.
The DFC’s impact on the US government’s development and related finance program structure is shown schematically in Table 3, summarizing the pre- and post-DFC location of the major US government programs. In the case of EXIM Bank, in particular, its export finance and credit insurance programs will remain in place and continue to support export-driven emerging market transactions. In addition, the export-oriented feasibility study capability of US TDA (the US Trade and Development Agency) will remain in that agency, so sponsors that have been able to pair front-end TDA support followed by EXIM Bank (or other) project financing can continue to access these programs.
Opportunities for Investors and Sponsors
The robust menu of financial support offered by the DFC will undoubtedly put more and better tools in the hands of emerging market infrastructure investors and sponsors. We see a number of enhanced opportunities, such as:
Filling Equity Gaps: In circumstances where debt may be available but equity demands are harder to meet, the DFC will be a new, experienced and stable equity participant in transactions.
Multi-DFI Deals: The DFC’s broader programmatic menu brings it into closer alignment with other DFIs’ offerings, allowing investors/sponsors to structure larger tranches of similar support for projects.
Expansion of Available Sectors: Local currency lending opens a range of investment projects that generate only (or predominately) local currency revenue, allowing investors and sponsors in such deals to access a source of stable, long-term local currency funding.
“One-Stop” Feasibility-to-Funding Opportunities: Combining front-end feasibility study funding with potential back-end, long-term lending enhances efficiency and allows investors and sponsors to concentrate their efforts on one agency, benefitting both sides with iterative development of a project from concept to financial closing.
Keystone Agency: The DFC’s greatly expanded budget and presumed increased deal flow enables investors and sponsors to consider the DFC as more of a “base-load” participant in series investment, such as strings of solar projects in one country or a multi-country wind sector investment program.
Better Coordination of Project Funding: Adjustments to the current OPIC debt funding structures will simplify the integration of DFC senior loans into multi-tranche project finance structures, decreasing documentation complexity and increasing debt funding efficiency.
Enterprise Funding—A New “P3” Tool: Many, if not most, of the countries that the DFC must prioritize face significant issues absorbing large or even medium-sized standalone investments.46 Private investor collaboration with the DFC through the establishment of new equity enterprise funds will expand development capital deployment and allow the DFC to further leverage its impact.
These are just a handful of many new benefits that the DFC can provide in emerging market investments. Investors and project sponsors should start considering these opportunities in their development planning processes if they are ready for a future that includes this new and likely powerful player on the world’s development stage.