Q1: Why is reauthorization important?
A1: OPIC needs permanent or multiyear authorization for the simple fact that without it, it cannot do the deals it needs to do. OPIC’s authorization last lapsed in 2008 when Congress failed to renew it for six months. During that period, OPIC’s general counsel determined that it could not accept new business; if OPIC had not signed a commitment prior to the lapse, then work ceased completely on a project. It is estimated that during those six months a total of $2 billion worth of deals accumulated in a backlog. Some of these were never completed, because many private-sector actors were not willing to wait around. Furthermore, the lack of authorization undermined the private sector’s confidence in OPIC’s ability to be a long-term partner. Private-sector actors look at deals over a long period of time (10 to 20 years) and without authorization, OPIC does not appear to be credible.
Lack of authorization also undermines OPIC’s ability to address organizational deficiencies that prevent it from performing its job as well as it could. (See Q3 below.)
Q2: What does OPIC do?
A2: Founded in 1971, OPIC is the U.S. government’s development finance institution (DFI). As such, it facilitates U.S. private investment in developing countries and emerging markets. By mobilizing private capital across the developing world, including high-priority countries such as Egypt and Afghanistan, OPIC advances the U.S. foreign policy agenda while helping U.S. companies expand into areas where investment possibilities would otherwise be prohibitively challenging. By using a number of development finance instruments (e.g., investment guarantees, debt financing, and political risk insurance), the agency is authorized to provide direct loans and investment guarantees to corporations that are substantially U.S. owned.
OPIC’s operations are profitable. The users of its services—U.S.-owned companies—pay interest and fees that more than cover the cost of its operations and allow it to set aside substantial reserves. Thanks to this approach, Congress and the Treasury do not need to borrow money to fund OPIC; instead, Congress authorizes the agency to spend a certain amount of its own funds for administrative needs. As we approach the end of the bull market in foreign assistance, this is a particularly important point to note. OPIC’s profits sit in the Treasury, and to date, the Treasury has accumulated more than $5 billion in reserves over the 40 years of OPIC’s operation. For fiscal year 2011, for instance, OPIC’s budget request was $189 million after an income of $259.9 million, and for the 34th year in a row, OPIC returned money to the U.S. Treasury.
Q3: What would enhanced capabilities look like?
A3: In addition to a permanent or at least a five-year reauthorization, Congress should assist OPIC to tackle other pressing structural issues that limit its effectiveness as a development finance institution. First, allow OPIC to retain a small amount of its profits—perhaps $50 million a year out of the $300 million plus that it sends back to the Treasury each year. Second, provide OPIC with equity authority—that is, the ability to make small, minority-share equity investments in businesses in projects of enormous importance to the United States (e.g., Haiti, Afghanistan, and South Sudan). All other G7 nations with DFIs (Canada is the only G7 country without one) and the World Bank’s DFI, the International Finance Corporation (IFC), have this capability. Equity investments account for a very high percentage of the profits that IFC and other G8 DFIs earn each year. Without equity authority, OPIC is losing out on potentially enhanced revenues and, more importantly, enhanced development impact.
Third, OPIC needs the ability and resources to share risk with the private sector through instruments such as a “first loss” (often in the form of equity and sometimes in the form of a grant), either on its own or in partnership with another government agency such as the U.S. Agency for International Development (USAID). Retained profits would allow OPIC to provide this form of risk sharing. Fourth, OPIC needs to more effectively combine technical assistance (TA) with the investment capital it provides. It is likely impractical to develop an “in-house” TA capability at OPIC in the near term. A better solution would be to have the ability to access USAID’s TA resources in a structured manner. OPIC should be able to use its retained earnings to pay or partially pay for technical assistance just as the World Bank cost shares with the IFC when technical support is required.
Daniel F. Runde is director of the Project on Prosperity and Development and holds the William A. Schreyer Chair in Global Analysis at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Terry Wyer is a senior associate with the CSIS Project on Prosperity and Development.
Critical Questions is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).