Elizabeth Littlefield on OPIC's growth and changes in development finance

This story is part of a series of exit interviews Devex is conducting with the leaders of Obama administration aid agencies.

The Overseas Private Investment Corporation went through a reorganization process during the Barack Obama administration — putting in place stronger systems, targeting more vulnerable areas and doubling its annual portfolio, former President and CEO Elizabeth Littlefield told Devex in a recent interview.

OPIC also played a role in shifting the conversation about the role of the private sector in development, she said. Created by Richard Nixon in 1971, OPIC launched at a time when official development assistance dwarfed foreign direct investment. But in the intervening years, those trends have reversed. Now development finance institutions globally are growing.

“Ten years ago people didn’t really understand how businesses were making the world a better place. And we've worked in government circles, in international circles, domestically, to really underscore the role of the private sector in development,” she said.

As Devex has reported, OPIC’s own fate is unclear under the new Donald Trump administration. But there is certainly demand for the corporation’s work in development.

The role of the private sector has been a key part of funding discussions for the Sustainable Development Goals, particularly at the Financing for Development Conference in Addis Ababa, Ethiopia, in July 2015. For now, that is more of a “theoretical awareness rather than a tangible concrete executable action plan,” Littlefield said.

Littlefield led OPIC from 2010 until the end of the Obama administration, having previously served as CEO of the World Bank’s Consultative Group to Assist the Poorest. OPIC made $3.29 billion in new commitments and generated $239 million for the U.S. government in 2016. The agency has a $21.5 billion portfolio of loans and guarantees in about 100 developing countries, a 160 percent increase from 2009.

Littlefield has been a vocal advocate for OPIC and has urged some changes to address limitations holding the agency back, including a need for more funding, more flexibility and more tools, including the ability to make equity investments.

OPIC, which gets about 2,000 inquiries per year, is only able to do about 100 transactions — in part because some don’t meet the criteria of having development impact, being financially viable, embodying high environmental and social standards, and involving a U.S. business, especially a small business. But it is also due to a lack of staff, she said.

In an exit interview with Devex, Littlefield shared her reflections on her time at the agency and the changes in development finance that she’s seen. She spoke to Devex shortly before she stepped down from her role at the end of the Obama administration. Here are excerpts from that interview, edited for clarity and length.

What do you see as your greatest accomplishments during your time at OPIC?

First and foremost, I am really excited about the fact that we are clearly understood to be the U.S. government's development finance institution and part of the development community. I think people understand much better now that you can do development with the private sector and make money and serve business all at the same time, and that's what we do so well.

The second thing is we've invested deeply in building the institutional architecture of the agency with really top flight systems and processes, so that we're actually so strong internally that we're ready for scale. That took a lot of investment, because you're building a financial institution; it's like building an investment bank. I think we're now ready with risk management systems, with processing systems, with policies and structures to grow fast.

The third thing is I'm very pleased that we've focused a lot on reorienting our business to where we can have the most impact. By that, I mean in the poorer countries and regions, in the more frontier sectors that really will contribute to some of the biggest challenges of the world like renewable energy, like agriculture, etc. And with U.S. small businesses. That sort of shift to high-impact partners, high-impact regions and high-impact sectors.

People have sometimes leveled criticism at OPIC — for example, accusing it of being corporate welfare, arguing that commercial markets could play the same role or saying it doesn’t have a strong development impact. How do you respond to those critiques?

We haven't really heard anyone talking about OPIC in that context for a number of years now. I think people who understand our model understand that we will only do transactions that the private markets won't do. Our business is opening up a market, being the first one to risk mitigate, and then withdrawing when banks are willing to engage in that market. We have example after example after example of ways we have gone in, helped U.S. businesses start up a market, and then withdrawn.

That's an example of the political risk insurance business, where we started it and then political risk insurers came along, private ones, and started engaging that business, and so we've withdrawn and now only will offer political risk insurance in the most difficult markets like Iraq, Afghanistan, Ukraine and Egypt. That's a long way of saying the fact that we're required to be and deeply believe in only doing work that no one else will do is a fundamental answer to the question about whether we're inappropriately subsidizing the private sector.

Secondly, we charge commercial rates — risk-adjusted, market-based rates — and we make money every year. So from that perspective, we're meeting the market test by having people willing to pay for the services that we have.

You’ve talked about how much change has happened as foreign direct investment has far surpassed overseas development assistance. What have you seen change in terms of the role of development finance institutions during your time at OPIC?

We've seen all the DFIs grow, emerge into that scenario, such that now they're growing incredibly quickly — 10, 15, 20 percent per annum, while ODA is completely flat. Such that all the DFIs together, including OPIC, are about $90 billion in financing a year, which of course leverages, double that in some cases, of private money. And by the way, that doesn't even include the Chinese, who are adding every year to their equivalent agency the same as the total staff of OPIC — every single year.

This whole notion that the private sector can and has a strong role and can be a force for good is a wave that we've been very excited to be riding on for the last 10 years. It's happening because — thanks to new business models, thanks to technology and thanks to globalization — you can actually solve some of the world’s biggest challenges with profitable business models. We've seen that in mobile banking, we've seen it in new and more productive agricultural approaches, we've seen it in microfinance, we've seen it in off-grid energy.

Other DFIs are growing, such as the U.K.’s CDC, and you’ve mentioned that OPIC now has the systems to grow. How much bigger should it be and why?

Think of the size of the private sector in the U.S. and the sizes of the economies that need investment in the 150 countries where we're open. So certainly the market demand is not a constraint; what's a constraint are the resources to meet that demand. But we've certainly, as I mentioned early, built the institutional infrastructure that could handle significantly greater scale right now. We would need some changes in our instruments, in our tools, in our policies, — as I outlined in the memo — in order to be able to maximize that. But I think the growth rate already among the DFIs demonstrates that you can easily see continued strong growth. One of the things I'm proud of is we've doubled the portfolio yearly under the Obama administration, and I think we could keep going at that pace as long as we had the staff to competently evaluate projects.

In order to do that, you would need congressional reauthorization to provide those resources. What does the ideal reauthorization bill look like to you?

Well you can't obviously triple overnight, so it would need to be a steady, prudent, growth rate. But clearly if we were able to invest some of the income that we earn in our operations, including hiring the best possible private sector experienced staff, that's the key binding constraint right now. It takes highly technical, experienced people — and many of them — to identify, structure, document and ensure the highest standards of governance and social and environmental policies for a complex, multi-year project in a country that has only the most elemental systems and legal frameworks, and regulatory frameworks and all of that. It's not like making grants or writing papers. You're actually putting together highly complex structures that sometimes require writing new rules and certainly require putting in place new policies and all kinds of other aspects of structuring a deal to protect the investment of the taxpayer.

What do you think the greatest challenge will be for the next administration when it comes to OPIC?

This agency has thrived under Republican and Democratic leadership since it was created in the 70s and we do know that both sides of the aisle really understand the value of a business approach to development, particularly ones that generate income. So I think the challenge is going to continue to be maintaining OPIC's very high standards of effectiveness and efficiency and financial performance while aiming to do business in ever more challenging markets at the frontier.

We're very proud of the fact that — even though we're working in the most difficult places where no other investors will go — we still only have a write-off rate of 1 percent per annum, net of recoveries. Which is a financial performance that most financial institutions would be pretty proud of. But that takes discipline, it takes expertise and it takes pushing really hard to have a positive development impact on every single solitary deal.

What is the biggest opportunity?

One of the things I would love to see in the next administration is some leadership of the overall development architecture of the country that looks at how each of the agencies’ tools and instruments can be complementary, such that development professionals, businesses, and countries can understand which of the U.S. government development agencies are going to be best suited for what projects at what stages. And so that business could be referred more easily between development agencies.

This development architecture was designed 40 years ago, with important changes like PEPFAR [President's Emergency Plan for AIDS Relief] and MCC [Millennium Challenge Corporation] in the meantime. I think top-level review of the overall development architecture — and whether we have the right tools, the right resources, and the right skills in the right places — could make us even more effective and make the roles and responsibilities of each agency as they relate to one another clearer. That would be an exciting thing to work on that I hope this new administration takes up. I'm sure there are other sectors where this needs to be done, whether it's the intelligence community or homeland security or others, but I certainly think the development architecture needs to be better articulated as a whole.

If you could change the way the business of development works, what would you change?

Greater coherence and more of a recognition of complementarity and comparative advantage. For example, it would be great to see five, six global problems tackled in a coherent top-down way, rather than everybody tackling everything on their own. Because it's a very inefficient marketplace right now, where you have an ecosystem that doesn't necessarily allocate global resources to global problems in the most efficient manner.

You have been a leader in talking about the role of private capital in development. How have you seen the use of impact investments, private capital and blended capital change, and where do you think things are heading?

As there's a wealth transfer, frankly to women and millennials, I think you'll see more and more capital flowing toward emerging markets and toward investments that are beneficial from a social perspective, that have both financial and social returns. Boosting that will also be the fact that you have new business models, you have new technologies, and a greater openness on the part of emerging markets countries to foreign capital, so that business actually can profitably invest in a lot of things that are good for the world, which wasn't the case before.

I think it's crucial that we do a much better job of aligning different types of capital — grants, investments, etc. — in a way that recognizes at different stages of the evolution of a company or an impact investment will need different types of capital. But I also think it’s crucial that we be careful about blending, so I use the word aligning instead of the word blending, because one of the things that's worrying to me is that we're now seeing some investors using concessional finance mixing it up with non-concessional finance, commercial finance, to offer rates that are distorting markets. In a way, sometimes that incorrect blending of capital can actually shut off the potential for future investment and can drive the market in reverse.

To get the latest content on the role of the private sector in development, subscribe to the Business Transforming Development Focus Area.