Is OPIC too small to fail?

U.S. President Obama has made two trips to India during his time in office, and on both occasions Elizabeth Littlefield, chief executive of the Overseas Private Investment Corp., accompanied him. Littlefield heads the roughly 250-person government agency that has come to embody the administration’s business-first approach to global development, and her position has become central to a growing debate about risk, return and impact in U.S. development finance decisions. OPIC, which extends partial risk guarantees and other financial services that can incent investors to enter new or uncertain markets, straddles the line between corporate lending and social good. The agency looks for deals that will open new markets and spur development outcomes, but it also realizes a return on its lending and puts money back into the U.S. treasury year after year. While many see OPIC as a critical policy lever at the nexus of business, development and foreign policy, another common assessment is that the small agency has not fully realized its potential to drive investment to underserved markets and carry the torch of a cutting-edge U.S. development finance strategy. “OPIC remains an underutilized tool — both in terms of reach and impact,” Ben Leo, senior fellow at the Center for Global Development, told Devex. “There is so much more that it could be doing,” he added. Difficult balancing act The Obama administration, including in its current budget request, has proposed consolidating the U.S. government’s development finance institutions — OPIC, the Export-Import Bank and the Trade and Development Agency — into a “one-stop shop.” When these agencies cooperate around whole-of-government initiatives like Power Africa, potential partners often complain they don’t know which agency to turn to. While opinions vary on whether full consolidation is the right way to go — a common website could be enough — many agree some increased collaboration between the organizations could pay dividends. These proposals aside, fundamental questions remain about what it would take to, as Leo has written, “unleash OPIC,” and in large part those questions relate to a difficult balancing act the small agency — and its chief executive — are forced to maintain. The sweet spot of risk, financial return and development impact, Littlefield told Devex in an exclusive interview, “is something that we work to balance on a daily basis.” “By definition we’re taking risks that nobody else will take, by definition we’re seeking to have a positive development impact, and yet by definition we need to generate income every year and be self-sustaining,” Littlefield said. “On top of that we’re also more policy-constrained than most of the other development finance institutions.” The upshot of OPIC’s multiple mandates and obligations is a CEO who — in conversation with OPIC’s board of directors — maintains wide latitude to determine where the agency should land on the risk spectrum and what kinds of projected outcomes justify riskier deals. Arguments extend in both directions Driving investment toward riskier projects ensures OPIC is doing things that the commercial sector cannot or will not do on its own — “taking risks that nobody else will take.” That can mean opening new markets by demonstrating to private investors that it is possible to generate a return in sectors and regions that don’t immediately bring to mind windfall profits. But supporting investments closer to the fringes of bankability means OPIC runs a higher risk of paying out an insurance claim or lending to a borrower who ultimately defaults. Doing so could endanger OPIC’s ability to show it puts money back into the U.S. treasury every year — a powerful argument to wield in budget and reauthorization hearings, especially in front of a U.S. Congress hungry for any opportunity to reduce deficits. OPIC’s involvement in profit-making private investments has also opened the agency up to criticism. Vocal libertarian critics and think tanks allege the agency is doling out “corporate welfare” to U.S. businesses that shouldn’t need government support to make a profit — and shouldn’t transfer risk to American taxpayers. Those “corporate welfare” charges might have been more apt in previous decades, Robert Mosbacher Jr., OPIC’s former chief executive, told Devex, citing some projects in the 1980s and 1990s that “probably didn’t have to be OPIC projects.” In other words, borrowers might have secured financing from commercial banks had they tried a bit harder to find it. But OPIC has “sharpened” its evaluation of potential deals in the past decade or so, Mosbacher stressed, to better ensure the agency is achieving “additionality” — that is, noncompetition with the private sector — and serving as the “lender of last resort.” OPIC has also come under fire from some environmental groups, which charge the agency has wavered on its environmental protections, in particular by backtracking on carbon emissions restrictions that were lifted so OPIC could support Obama’s Power Africa goals with carbon-based power and infrastructure deals in sub-Saharan Africa. For such a small agency, high-profile battles with politicians who openly question whether OPIC should exist at all are a dangerous road to walk. “It is extraordinary how people underestimate just how difficult it is to operate in these markets and just how earnest is our desire … to do good and how difficult it is to ensure that everything goes our way to ensure we get positive development results,” Littlefield said. Critics point to projects that, on the surface, seem like outlandish investments for an ostensibly pro-poor agency to make: a $50 million loan to the Ritz-Carlton Hotel Co. to build a four-star hotel in Istanbul, for example. OPIC defends those investments in two ways First, according to the agency, the four-star hotel is not just a prime piece of real estate, but a necessary investment in the business-enabling environment of a key region for U.S. foreign policy. Investors are more likely to regard a place as business-friendly if it presents those infrastructural elements that exude business-friendliness, the argument goes. In this case, financing a four-star hotel might not be a big gamble, but it still carries significant potential for development impact in support of a U.S. foreign policy priority — building business connections in a turbulent region. OPIC is currently financing another business hotel, Littlefield pointed out, but this time in Juba, South Sudan. “I can guarantee you we have no competition to finance that hotel,” Littlefield told Devex, adding that “frankly no businesses will ever go to South Sudan and bring the foreign investment that country needs so desperately to build its infrastructure if they have no place to stay.” “It’s important to build a business hotel in that country if we’re ever going to get their economy kick-started,” she said. The second argument for OPIC’s involvement in projects with less risk and higher likelihood of generating returns is that one safe bet can help offset another riskier deal. In other words, OPIC cross-subsidizes the risk presented by one project with the relative security of another. For example, OPIC’s $230 million investment guarantee to Arizona-based First Solar, Inc., to construct a solar photovoltaic park in Chile’s Atacama desert, a relatively safe investment, can help offset some of the risk involved in lending to small and medium enterprises or off-grid renewable energy in regions that have struggled to attract commercial financing. Littlefield urges observers to examine the agency’s investment decisions not always on a case-by-case basis, but with an eye toward risk across its entire investment portfolio. “We’re called upon to be very active, to support U.S. foreign policy and development policy in post-conflict and unstable, fragile states, in places that are foreign policy priority countries, which are very risky and where we may have losses,” Littlefield explained. “OPIC remains an underutilized tool — both in terms of reach and impact.” --— Ben Leo, senior fellow at the Center for Global Development Greater risk-taking hindered by lack of transparency? Mosbacher agrees that balanced approach is the right one, and cautions against “loading up” OPIC’s portfolio with a lot of high-risk projects. “The vast majority of deals” entered into under his leadership at OPIC, Mosbacher told Devex, were “very sound from a risk standpoint,” even with his efforts to be more proactive in seeking out opportunities to support U.S. foreign policy goals and somewhat less reactive to what private sector partners were asking for. But others think OPIC should push itself further in the direction of high-risk if it means potentially higher development reward. George Ingram, senior fellow at the Brookings Institution, is one of those voices calling for greater risk-taking by the countries’ development finance institutions. OPIC, Ingram told Devex, should push further in the direction of venture capital investments, where some degree of failure is acceptable and even necessary to ensure an institution is operating at the cutting edge of where a market can and should be going. For that to happen though, Ingram said OPIC would need more staff, legislation recognizing its mandate to take on more risk, and the authority to provide equity financing, in addition to the debt financing it provides now. Those changes are unlikely to happen now in the waning years of the Obama administration, Ingram said, but could find some momentum at the beginning of a new one. Ingram is currently helping draft a reform agenda for whomever that next administration turns out to be, and will include reforms for a riskier brand of U.S. development finance in his recommendations. According to Leo, OPIC’s risk-taking potential is held back by a lack of transparency about the various criteria that factor into the agency’s investment decisions. OPIC, Leo explained, already collects a significant amount of data that, if released for analysis, would help to explain and build support for the agency’s decision-making. OPIC rates potential deals on a scale of potential development impact — from zero to 100 — including expected outcomes like job creation, demonstration effect and environmental benefits. The agency also “spot checks” about 10 percent of its clients to track their progress against those initial impact estimates and to ensure outcomes are reflecting initial projections Leo explained. “Here’s the challenge,” Leo said, “none of this information is public.” Transparency ‘always a net benefit’ Commercial confidentiality issues prevent some of that disclosure from happening, Leo said, while OPIC’s minuscule staff size, primarily dedicated to transaction teams, makes it hard for the agency to “continuously learn from its experiences and to draw systemic lessons from across its portfolio that would enable it to do better in the future.” Some might worry that opening up its data troves would also open up OPIC to further attacks from political opponents. Leo doesn’t think so, noting that on balance, “greater openness is always a net benefit.” Libertarian opposition to the hotel investments offers one example of why one should view transparency as an ally. When these groups charge OPIC with unnecessarily subsidizing four-star hotels and calling it development finance, OPIC “isn’t in a position to respond with facts or information about the projected benefits of those projects,” Leo said. But if they were able to say that a hotel project was going to create hundreds of jobs, support another 100 businesses and strengthen local value chains, “that would change the dynamics of that conversation.” “It’s no longer just a luxury hotel ... It’s a conversation about job creation, local value chains and tax revenues,” Leo said. That kind of decision-making and goals transparency could also change the conversation about risk. If OPIC had the staff power and authority to open its books for analysis when a project fails or OPIC pays out an insurance claim, U.S. taxpayers and their representatives might see the projected development impact that justified the investment in the first place. Still, the conversation about U.S. development finance would have to evolve to a point where failure might be tolerable, Leo said. “There ... has to be an understanding that a capital cushion will be required and that OPIC, from time to time, may lose money,” he said, adding, “right now, I’m not sure that environment exists.” Littlefield is encouraged by her agency’s central role in the evolving U.S.-India development relationship — and in the willingness both countries’ leaders’ demonstrated in the recent visit to set aside some of the pageantry associated with India’s Republic Day and delve into the business details. Indian Prime Minister Narendra Modi is one example of an emerging cadre of global leaders in developing and middle-income countries, Littlefield said, who are “technically minded,” “business-focused” and “very interested in attracting foreign investment.” Whether that leadership will help build momentum toward an elevated conversation about how development finance institutions should balance risk, reward and impact remains to be seen. Do you think U.S. development finance agencies should take more risk? What would it take to make that possible? Share your thoughts in the comments section below. Stay tuned to Devex for more news and analysis of U.S. aid, and subscribe to The Development Newswire to receive the latest from the world’s leading donors and decision-makers — emailed to you FREE every business day.