We Shouldn’t Be Eliminating OPIC, We Should be Putting it On Steroids

The Trump Administration has a mandate to change the way the U.S. Government does business. As I’ve written elsewhere, we should conduct a top to bottom review of our “soft power” to understand what works and what does not.  We should prioritize activities that make us safer and help create U.S. jobs.  A top to bottom review will find that the Overseas Private Investment Corporation (OPIC) accomplishes both goals.  In other words, the administration should not eliminate OPIC, but rather put it on steroids.

OPIC mobilizes private capital to address key development challenges in ways that support U.S. business and geostrategic interests while also generating a financial return for the U.S. government.  The World Bank estimates that 9 out of 10 jobs in the developing world are in the private sector.  Creating jobs and economic opportunity in places like Haiti, South Sudan, and Afghanistan is critical for long-term stability and serves the U.S. national interest. Unfortunately, even the most risk tolerant U.S. investor is unlikely to enter these markets creating a need for OPIC’s tools and authorities.

Despite the progress developing countries have enjoyed in recent decades, there will never be enough foreign aid in the form of grants or direct loans to poor governments to finance all development needs.  Total global official development assistance stood at about $131 billion in 2015, but meeting infrastructure needs in Asia alone, for example, will require $1.7 trillion in annual investment over the next 25 years.  The private sector will play a critical role in filling this gap. At the same time, private enterprise wants to share risk, get technical advice, and bring in government partners to signal political support.

Whether it’s urbanization or the exploding demand for food, water, and energy to meet the needs of the world’s projected 2050 population of 9.5 billion people, the global challenges we face will require trillions of dollars in private capital, not small buckets of foreign assistance grants.  There are also other challenges that might not immediately lend themselves to private sector solutions, but where private sector activities still have a role to play— providing gainful employment for fighters engage in conflict in places like Afghanistan and Colombia, or addressing push factors that lead people to migrate the U.S. and Europe from Central America or East Africa are just two examples.

Globally institutions like OPIC— a broad and diverse group known generally as development finance institutions (DFIs)— grew from around $10 billion in capital commitments in 2002 to around $70 billion as of 2014.  These numbers understate impact, as DFI capital commitments leverage much larger investments from the private sector.  Canada, the last G7 country without a DFI, just created its own version of OPIC in 2017. China has set up a whole series of institutions to leverage private capital including the well-known Asian Infrastructure Investment Bank (AIIB).  This proliferation of DFI supported capital is neither a coincidence nor a mistake.  Policy makers around the world recognize that DFIs are uniquely suited to tackling challenges (and seizing opportunities) in low and middle income countries.

OPIC
OPIC could be used to drive prosperity and job creation in the U.S. energy industry, including in coal. Photo credit to the U.S. Tennessee Valley Authority : https://commons.wikimedia.org/wiki/File:Shawnee_fossil_plant.jpg

The Trump Administration’s budget proposes to close OPIC comes at a time when the world is doing the exact opposite.  The argument that the private sector is the central player in development has been won, and there is a clear recognition that policymakers need tools and capacities that allow them to work with private actors.  On the demand side, the developing world is richer, freer, and more prosperous than ever before, therefore developing countries are seeking solutions beyond traditional grant based foreign aid. A project I recently directed projected that the “development finance sector” will outpace all forms of foreign aid sometime in the next 5 years.  DFIs like OPIC should be front line agencies.

Some additional things to know about OPIC:

  1. OPIC operates at zero net cost to the US taxpayer and returns a profit to the government every year.  For 39 consecutive years, OPIC has generated money for the U.S. Treasury at no net cost to U.S. taxpayers and has contributed $3.7 billion towards deficit reduction in the last 10 years. For every dollar spent in administrative expenses, OPIC collects eight dollars.
  2. OPIC advances opportunity and job creation for U.S. businesses. OPIC supported projects have generated more than 275,000 American jobs and $75 billion in US exports since 1974.
  3. OPIC focuses on American small and medium enterprises.77 percent of OPIC transactions involve US small and medium enterprises.   In the last two decades, OPIC has provided $6.5 billion in direct loans to U.S. small businesses. Less than 8 percent of all OPIC commitments involve a Fortune 500 company.
  4. OPIC supports long term national security interests by helping keep America safe.By improving prosperity and job prospects in challenging environments, OPIC reduces the incentive for people to leave their homes, either as migrants or extremists.  OPIC operates in a number of difficult places critical to U.S. interests, including South Sudan,  East TimorHaiti, Iraq, Afghanistan, and Pakistan.

There are many cases where DFIs helped drive truly transformative change through their targeted and catalytic interventions. For example, the telecom market in the developing world, particularly Africa and South Asia, was virtually non-existent at the start of the twenty-first century. OPIC’s UK counterpart, CDC, made a series of targeted investments in the African telecom provider MSI Cellular that is broadly credited with sparking the cellular revolution in the developing world. These investments have paid major dividends and have done so quickly. Africa is now the second largest cellular market in the world with over half a billion mobile phone users and projections of 725 million by 2020.

There is still a role for traditional foreign assistance, but that role will change. Private enterprise and the jobs that private enterprise creates are critical components of solving current and future global challenges.  DFIs will play a key role in facilitating this engagement, and the U.S. should have more capacities not fewer to involve the private sector in confronting these problems. We need to shape the world out there so that we have less trouble at home.

There are several steps that would make OPIC more effective in accomplishing its job. OPIC currently operates under a carbon cap which limits its ability to support the adoption of high efficiency U.S. coal technologies, as well as oil and gas infrastructure, overseas.  Removing this cap would be an easy tweak that would support U.S. job creation while simultaneously addressing global energy poverty.

OPIC is also one of the few DFIs that does cannot retain profits for direct equity investments, an authority that would enable it to more strongly influence governance issues. Providing OPIC with more funding for technical assistance on its projects, perhaps through retained profit, would also likely lead to higher yield investments.  It would be a mistake to deprive ourselves of OPIC’s capabilities just as the world has recognized the private sector as the central engine of development. Instead, we should make it stronger.

Article Published in Forbes.com on April 5, 2017.

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