Introduction

In October 2018, the U.S. Congress passed the Better Utilization of Investments Leading to Development (BUILD) Act, which replaced the former Overseas Private Investment Corporation (OPIC) with the U.S. International Development Finance Agency (DFC). USAID’s Development Credit Authority (DCA) was also merged into the new agency. The transformation brought with it many changes, detailed below.1

In terms of policy and support criteria:

  • DFC is explicitly instructed to target low and lower-middle income countries, whereas only 46% of OPIC funding went to these countries.

  • Previously, OPIC required every investment to have a “US connection” based on the involvement of US citizenship or US equity ownership. Now, this requirement is relaxed down from a requirement to a “preference.”

  • DFC investments must have an additionality requirement, meaning they must not compete with or supplant available sources of private-sector support.

  • DFC must give preferential treatment to countries that support private-sector market principles and those in compliance with international trade obligations.

  • DFC is prohibited from providing support to countries supporting international terrorism or engaged in human rights violations.

  • DFC must consider the impact of potential investments on women’s economic opportunities.

In terms of financing capabilities, the DFC has increased its capability and flexibility:

  • Previously, OPIC had an investment cap of $29 billion. Under DFC, this cap has doubled to $60 billion.

  • DFC can now make direct equity investments of up to 30% in a project company or partnership venture and act as an equity sponsor of new funds.

  • DFC can make loans in local currencies and more flexibly-sized individual loans in USD.

  • DFC’s loan guarantee risk sharing requirements were reduced from 50% to 20%, allowing for higher risk absorption.

  • DFC now offers technical assistance as a core program.

Project Goals

The following analysis seeks to answer two questions:

  • DFC officially opened its doors in January 2020. How have financing flows changed since OPIC became DFC?

  • To attract conservative support, proponents of the BUILD Act argued that DFC would be an effective counterweight to growing Chinese BRI investments and influence, particularly in Africa. However, the act did not specifically require that the DFC fulfill this purpose. How does DFC spending in Africa differ from Chinese lending in terms of size, location and sector?

Methodology

To answer these questions, I relied on the following data sources:

OPIC vs. DFC

  • OPIC Scraped Portfolio Dataset, which contains historical data on OPIC annual commitments between 2000-2016.

  • DFC Active Transactions Dataset, which contains data on all DFC commitments active as of December 31, 2021. I only include data from 2017-2021 because the rest is already included in the OPIC Scraped Portfolio Dataset.

  • Supplementary DFC Transactions Dataset (self-generated), which supplements the DFC Active Transactions Dataset by including projects that may have been committed between 2016-2021 but have closed in the years since. I created this spreadsheet manually by scraping data from DFC Annual Reports.

DFC vs. China

From OPIC to DFC

Although it has only been two years since DFC opened its doors, there are already clear differences in spending. Prior to the passage of the BUILD Act in 2018, new annual commitments averaged around $2.6 billion. In 2019, DFC made $5.4 billion in new commitments, followed by $4.8 billion in 2020, and $6.9 billion in 2021.2 The agency is clearly starting to leverage its increased spending cap and new funding capabilities to accelerate development financing.

How do financing flows between OPIC and DFC differ by sector?

An analysis by the Heritage Foundation found that DFC priorities in 2020 were very similar to those of OPIC between 2011-2018, as shown by the graph below. Similarly, as of 2020, the agency had only made small shifts toward more low and lower-middle income countries and away from upper middle and high income countries.

DFC vs. China

Why the focus on Africa?

Since 2000, DFC has made the highest amount of investment in Latin America, with over $20bn committed. Africa is a close second, however, with around $15bn committed over the same period.

Not only is Africa home to the world’s poorest people, but it is simultaneously the fastest growing continent in the world. As it has grown, Africa has emerged as a focal point in what some are calling a “new cold war” between the U.S. and China, leading to a second “scramble for Africa” as both countries rush to strengthen diplomatic, strategic and commercial ties.

Differences in Total Spending in Africa Over Time 3

How does DFC’s spending in Africa compare to that of China? As shown below, unlike overall DFC spending, DFC spending in Africa has not seen as much of a transformational shift since the passage of the BUILD Act in 2018. In fact, DFC spending in Africa peaked in 2015.

In comparison, Chinese spending in Africa began increasing rapidly around 2005, peaking in 2016, when it spent a whopping $28 billion, almost double the amount that DFC has spent in Africa since 2000. The peak in spending reflects large contracts that the Chinese Development Bank (CDB) signed with Angola that year. Excluding Angola from the database, Chinese spending peaked in 2013, the year China’s Belt and Road Initiative was announced. In the years since, however, Chinese lending has been declining.

Unsurprisingly, total Chinese lending to Africa is higher than that of one individual U.S. agency. While I did not collect data on overall U.S. foreign assistance to Africa, the graph below, produced by Carnegie Endowment for International Peace, shows that overall U.S. spending to Africa began to overtake China starting around 2018. However, researchers believe the decline in Chinese finance to African countries is more of a rebalancing than the start of a trend. Chinese policymakers could just be responding to pressure to make BRI investments more transparent and sustainable, which may translate to less lending in high-risk jurisdictions in favor of more predictable, middle-income countries.

With China potentially more willing to compete on a level-playing field, this gives the OECD countries, including DFC, an opening to better meet Africa’s financing needs.

How DFC Compares to China’s Top Lending Institutions

Which entities have historically led the charge on China’s side? The majority of spending in Africa comes from China’s Export-Import Bank, which has spent $87 billion in Africa between 2000-2020. China’s Development Bank, an institution more equivalent to U.S. DFC, spent $39 billion. DFC’s $12 billion in spending over the same period pales in comparison to both institutions.

Differences in Spending in Africa by Sector

Let’s dive deeper into spending in Africa. In which sectors does DFC spend the most money, and how do these compare to China’s sectoral priorities? According to the data, most DFC loans to Africa support projects related to finance and insurance, utilities, and mining, quarrying, & oil and gas extraction. In fact, one third of all DFC projects go to spending on finance and insurance, while another third of projects support utilities infrastructure.

China similarly spends a bulk of its money on utilities, making up about a third of financing from the country. However, China spends much less than DFC on finance and insurance, and much more on infrastructure like transportation and warehousing facilities. While China spends a similar amount to DFC on mining, quarrying, & oil and gas extraction, it also spends more on information technology (IT) than DFC.

Differences in Spending in Africa by Country

To which countries in Africa does DFC spend the most money? The answer would be none in particular: most spending goes to region-wide projects. However, South Africa, Mozambique, Nigeria, Ghana, and Kenya receive the bulk of DFC country-level spending.

In contrast, the bulk of Chinese financing, over $40 billion has gone to only one country: Angola. In fact, China’s lending model, in which it finances local infrastructure projects built by Chinese companies using Chinese labor in return for raw materials and oil, was largely pioneered in Angola. Known as the “Angola Model,” it has enabled China to become Africa’s lender of last resort and largest trading partner of the continent.

The concentration of spending in Angola can explain much of what we saw earlier in terms of overall spending trends, with declines starting around 2018. The decline occurred because the relationship between China and Angola has soured in recent years after President João Lourenço came to power in Angola in 2017. During his first year in power, he pledged to root out corruption and opened investigations into Chinese-backed projects, many of which had financed infrastructure that was already deteriorating. At the same time, Angola’s debt started to become unsustainable. Angola still owes China more than $23bn, mostly from oil-backed loans. As a result, Chinese investments in the country have declined significantly, with the pandemic causing spending to decrease even further through 2020.

Excluding Angola, it seems that countries like South Africa, Kenya, Nigeria and Ghana are priorities for both agencies. Over the next several years, we can expect Chinese spending to increase in more predictable middle-income countries like these and away from high-risk countries like Angola.

Conclusion

Since OPIC became DFC in 2019-2020, the agency has seen its spending levels accelerate at an unprecedented level. However, spending by China in Africa, a region that will only increase in strategic importance in the years to come, has far outpaced that of DFC over the last two decades, particularly in critical areas such as infrastructure and IT. When looking at overall OECD spending, the picture doesn’t look much better. Despite the historically large differences in financing flows between the two groups, Chinese support to Africa appears to be on the decline as it shifts its strategy toward lower-risk countries, recovers from the pandemic, and deals with its own domestic economic issues. The time is ripe for OECD countries, led by U.S. agencies like DFC, to take the lead in advancing Africa’s development. As the region with the most low income countries in the world, DFC must continue to take steps to fulfill its development-oriented mission by prioritizing Africa and investing in the critical infrastructure and technology that the continent needs most.

  1. Sourced from: https://www.mayerbrown.com/-/media/files/perspectives-events/publications/2019/11/the-new-us-dfc_-opportunties-for-investors.pdf↩︎

  2. Data differs slightly from official reports by DFC, which estimated $5.3 billion in 2018 and $6.8 billion in 2021.↩︎

  3. Chinese data available only through the year 2020. 2021 DFC data was excluded for comparison purposes.↩︎