After 2 years of development, U.S. International Development Finance Corporation (DFC) emerged in January as America’s development bank to advance key development and infrastructure projects in developing countries, replacing the Overseas Private Investment Corporation (OPIC) and USAID’s Development Credit Authority (DCA). DFC was created as a result of the Better Utilization of Investments Leading to Development (BUILD) Act—landmark bipartisan legislation signed into law in October 2018. With increased capacity and capabilities, DFC has expanded authority to unlock and mobilize increased private capital to invest in development projects in priority regions such as the Indo-Pacific and Sub-Saharan Africa.
This month, we connected with DFC’s Dia Martin, Managing Director on the Social Enterprise Finance team where she leads the Portfolio for Impact and Innovation Program (referred to as PI²), to learn more about DFC, its priorities, COVID-19 response, and plans to advance blended finance solutions to advance global development.
How has COVID-19 impacted DFC? Have priorities shifted?
We have been actively engaging with our existing clients to mitigate the impact of the pandemic on their businesses and long-term development impact. At the same time, we are prioritizing new projects to inject liquidity into markets and help developing countries bolster their health services and resilience. For example, DFC is working with several banking clients to establish liquidity facilities to support businesses, financial institutions, and individuals. Through the 2X Women’s Initiative, we are also continuing to prioritize projects that economically empower women, who are often disproportionately impacted by crises, especially when they seek access to capital. DFC is also a part of the DFI Alliance—the DFIs of 16 OECD countries, including DFC—and we are working closely with the DFI Alliance on key health and economic investments, and are focused on shortening the time it takes to complete transactions.
Under normal circumstances, DFC’s due diligence process includes field visits to assess operations and impact in action. To adapt to new circumstances, we are conducting virtual due diligence through video conferencing. Additionally, we’re enhancing our collaboration with other investors to share information and analysis, enabling us to conduct due diligence more efficiently and effectively while operating in a remote environment.
What enables DFC to have greater flexibility to support investments in low-income and lower middle-income developing countries?
We were able to build on nearly 50 years of experience of OPIC, and so, I think there are a few developments that emerged:
- We have increased our capacity. We went from an organization that had a $29B outstanding portfolio limit under OPIC, where we were at $23B and coming up against our limit. Now we have a $60B cap, giving us a lot more room to grow and have an impact.
- We have increased our toolkit. Previously, we could mainly provide debt, and there are many different debt financing structures that are highly developmental, but it’s not always the right choice or the right tool. Now, DFC is equipped to provide equity, technical assistance or grants, and we have extended our capacity within debt financing to look at local currency lending.
- We have prioritized low-income and lower middle-income countries. DFC is focused on increasing investment in low- and lower middle-income countries to support development in energy, healthcare, critical infrastructure, and technology, with women’s empowerment at its core. Women’s empowerment is written into the legislation for the creation of DFC, so it is in fact core to our design and mandate. In February, we also welcomed our first Chief Development Officer, Andrew Herscowitz, who looks at development as the clear goal at our agency.
- We have a new way to score projects—it’s our IQ Assessment. The IQ framework looks at impact outcome across a number of different components including innovation, inclusion, and depth of reach. For each individual project, using IQ, the Office of Development Policy assigns a score to determine how developmental a project is expected to be and has been to date.
- Our core development initiatives are even more central to the agency. These initiatives include DFC’s 2X Women’s Initiative, PI², which is focused on development and innovation for early-stage businesses, and our regional initiatives across Latin America, Sub-Saharan Africa, and the Indo-Pacific. You can see us at the forefront of this narrative with Prosper Africa, which is a new United States Government (USG) initiative with our CEO at the helm.
- We are taking a whole-of-government partnership approach. This is an effort to build efficiency across USG, so we are working more thoughtfully and collaboratively with our sister agencies like USAID and Millennium Challenge Corporation (MCC). DFC also includes a lot of individuals with USAID experience and connections, so we are working much more closely with USAID missions all over the world.
How will DCA work under DFC?
The ‘Mission Transaction Unit’ (MTU) at DFC now comprises the DCA team, housed within the Office of Development Credit. MTU is organized by region not sector and has about 20 staff members which include investment officers, relationship managers, as well administration and compliance staff. We currently have three regional teams that cover Africa; Asia, Middle East, and North Africa; and Latin America and Eastern Europe. The team continues to work very closely with USAID’s missions on both portfolio management and origination.
Guarantee products are the same as what DCA previously offered, but this division now has access to the broader range of products within DFC’s toolkit, including the products that were brought over from USAID through DCA. Guarantees can be provided on a stand-alone basis or along with other instruments or investments made by DFC. It is not conditional. Everything is available for our clients.
Can you tell us more about the Portfolio for Impact and Innovation (PI²)? How long has this program been in operation?
The Portfolio for Impact and Innovation or PI², as we call it, launched in 2014 under OPIC and started out as the Portfolio for Impact. The program was over $100M with commitments across multiple sectors. Similar to the way we want to amplify and expand the toolkit of DFC, this program now has the entire toolkit of DFC, including grants, equity or debt, and the ability to focus on individual direct investments in companies as well as funds.
We also want to take this program to the next level. With that drive, we’re in the process of creating an innovation lab to develop and create new ideas that we think will catalyze development even further. This initiative serves as a great laboratory to build companies that are able to catalyze future private investments, or to go on and be larger deals for DFC. A really great example is Varthana, hot off the press. Varthana is a non-bank financial company that looks to support private schools for low- and middle-income students in India. We provided a $5M guarantee under PI² in 2015. It was one of the first deals we did under the program and was highly successful. Following our loan, Varthana went on to mobilize over 10x in additional capital after the first guarantee under OPIC. Varthana then came back to us for a loan of $15M which we recently committed and closed this year. I think that’s a perfect example of how PI² could be a first step or pilot ground to support larger scaling development projects.
Could you share a couple of blended finance examples from this portfolio?
The first Development Impact Bond (DIB) that OPIC invested in was done under the blended finance model where we provided $1.75M in financing alongside $250,000 from Netri Foundation to the Magrabi ICO-Cameroon Eye Institute, a cataract hospital in Cameroon. I think this is a perfect example of blending finance, where we came in as an investor to provide financing for capital expenditures and working capital, alongside the Conrad Hilton Foundation, the Fred Hollows Foundation, and Sightsavers, who are the outcome funders responsible for repayment based on the achievement of target outcomes (e.g. 50% of patients have successful surgeries). We also had the African Eye Foundation involved, as they were the entity that created the hospital.
And then, our MOMs (Maternal Outcomes Matter) Initiative exemplifies the breadth of possibility available through blended finance when you have willing partners. We started this initiative with Merck for Mothers, a non-profit related to Merck Pharmaceuticals, as well as USAID, our sister agency, and Credit Suisse. Together, we’re working to mobilize at least $50M to support improved outcomes in maternal and child healthcare. And, what we are seeing as part of this initiative is a real breadth of projects that we can support in this space. Under the MOMs partnership, deals are considered by each partner on an individual basis, which allows flexibility to our MOMs partners to engage in a way that is familiar to them and ultimately provides more opportunity to address the needs of each client. One of the first projects that we have discussed supporting is LifeBank, which is based in Nigeria and provides lifesaving oxygen and blood to hospitals across Nigeria.
Have there been any significant changes since the transition into DFC, and is there a change that excites you most?
I think it’s been a real burst of energy for PI², given the expanded product offering, which means we have financing to fit multiple types of companies. And I also think the innovation lab is a real boost. So, it’s not just transactional but allows us the opportunity to be strategic in the way we make investments and plan for the future for PI².
What excites me the most is the energy and momentum that take form when you start a new enterprise or when you start a new agency. There is an increased spirit for creation. As a new agency—I think we are a little over 3 months old today—it’s a great place and time for us to be creative and bring new ideas to the table to do things that we might have not thought possible, or may have been a little bit reluctant to do in the past. I think that’s not only true for PI² but true for the agency at large, especially when it comes to our new products like our equity and technical assistance.