The Trump Administration is making a mistake, based on a flawed premise, by putting the Overseas Private Investment Corporation (OPIC) on the chopping block in its recently released budget request.
OPIC is a little-known agency that helps U.S. allies develop into more stable and prosperous partners by providing loans and risk insurance to crowd in—that is, to incentivize—American investors. As the sole development finance institution of the U.S. government, OPIC was built to support U.S. foreign policy objectives by creating economic opportunities in developing nations.
Budget hawks cannot complain about OPIC’s cost since it doesn’t cost taxpayers. For 37 years in row, OPIC has paid money into the U.S. Treasury. In fact, shutting down the agency will result in costs and lost revenue of $2.2 billion over the next ten years.
Concerns in the past about OPIC engaging in corporate welfare also do not stand up to scrutiny.
That leaves worries about OPIC potentially distorting free markets. Conservative critics, including the new Office of Management and Budget Director, have long argued that OPIC can use its pricing and clout to crowd out private investors. Does this argument hold water? We argue no, for at least three reasons.
First, look at the markets targeted by OPIC. The agency is confined to frontier emerging economies where pioneering businesses and investors see potential for growth but where no commercial investment is available to co-invest.
Frontier markets are volatile and risky. Investors face problems from currency volatility to lousy infrastructure to the threats of military coups or expropriation. That’s why having an institution like OPIC is so important to opening up new markets and crowding in capital to these risky environments—like Jordan, Kenya, Iraq, or Cambodia.
When markets mature and risks diminish, other players like commercial banks step in and OPIC exits. For example, OPIC was once a major provider of political risk insurance in markets like India and South Africa. Now that gap is mostly filled by private insurers increasingly offering such coverage in the more mature emerging markets. OPIC has instead focused its political risk insurance to the most challenging markets such as Ukraine, Afghanistan, Nigeria, and Egypt.
Worries about market distortions are also misplaced because of OPIC’s mission and model. OPIC is required by its statute and its board of directors to maximize, not minimize, the private co-investment in each project. For every $1 that OPIC invests in a project, the borrower and other co-investors bring, on average, an additional $2.60 to the table.
Sure, OPIC could be clearer about how it balances tradeoffs between commercial viability, development goals, and foreign policy objectives. But there’s no evidence of the agency pushing private capital out.
Moreover, OPIC’s involvement in a market can crowd in others beyond bringing additional capital. The agency often helps (or insists) a host country implement market-friendly reforms. For instance, some of the biggest investor roadblocks in places like the Middle East or North Africa are crony capitalism, nepotism, and red tape. OPIC works to remove market distortions—such as local content requirements or onerous regulations—that thwart private investors.
Finally, OPIC’s role is far more than simply generating market access. The true litmus test of OPIC’s success is whether its activities support economic development and American foreign policy objectives. When the White House needs to marshal investment to support an ally—after the collapse of the Soviet Union, the Arab Spring uprising, or to bolster our counterterrorism partners in East Africa—OPIC gets the call. What better way to demonstrate U.S. commitment than an American business investing in a much-needed power plant, housing project, or hospital?
Jordan, for example, is a longtime friend of the U.S. and a cornerstone of regional stability. OPIC has helped crowd in private American investment into housing, water and energy. It has likewise spurred investment in Iraq, Afghanistan, Egypt, and Pakistan.
Could OPIC inadvertently distort a sector? In theory, yes. In practice, there’s no sign of it. The agency’s $22 billion portfolio is diversified across sectors, clients, and regions. Indeed, experts and commissions with bipartisan support have not only backed the agency, but even proposed scaling up and modernizing OPIC.
Development finance is a valuable foreign policy tool that pays for itself. Mobilizing viable private investment to tackle some of the hardest problems in developing nations—building infrastructure, creating jobs, and getting capital into the hands of the next generation of entrepreneurs—advances U.S. interests at no cost to taxpayers. The White House should take a deep breath and a closer look. OPIC doesn’t distort markets, it builds them.
Joseph O’Keefe is a former senior advisor to the President of OPIC. Todd Moss is senior fellow at the Center for Global Development and a former Deputy Assistant Secretary of State for African Affairs.
Disclaimer
CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.
