Overseas Private Investment Corporation (OPIC)

OPIC recently announced it will invest $2 million in a Development Impact Bond (DIB) aimed at improving the availability and quality of cataract surgery services in Cameroon. Specifically, OPIC’s investment will support the Magrabi ICO-Cameroon Eye Institute, a new hospital with an efficiency and financing model based on the acclaimed Aravind Eye Hospitals, over several years. The OPIC news is particularly exciting for four reasons.

First, the investment is another example of the development community’s continued pivot toward results-based financing and greater private sector engagement. DIBs involve three main players: investors, implementing organizations, and outcome funders (typically aid agencies or foundations). Investors provide start-up or growth capital for an intervention, and implementing organizations use that capital to deliver services to a target population. If an independent third party verifies the achievement of targets previously agreed to by all the involved parties (e.g., 80 percent of patients have successful surgeries), the outcome funders repay the investors their principal plus some extra amount. If the targets are not reached, outcome funders do not have to repay the investors in full. In addition to leveraging upfront funding from them, DIBs can incentivize deeper engagement from the investors, as the success of the project influences their final payout. Investors consequently have a reason to apply their knowledge of performance-management to drive innovation and progress. UBS, the investor in a DIB on education known as the Educate Girls DIB, applied risk management and monitoring strategies it had not applied in similar projects.

Second, once the cataract bond is launched, OPIC will be one of the first development finance institutions (DFIs) to support an impact bond. The Inter-American Development Bank’s Multilateral Investment Fund has committed to providing technical assistance for a recently launched impact bond in Colombia on urban employment, and it already provides technical support to other Latin American countries seeking to implement impact bonds. Lots of DFIs have talked about scaling up their impact investment portfolios, but none until OPIC has done so with much rigor. The approval of the cataract bond sets the stage for other teams at OPIC and other DFIs to understand the potential role that DIBs could play in their overall portfolios.

Third, OPIC’s commitment fulfills almost all the cataract bond’s investment needs ($2.5 million) at a time when the cataract bond already has its outcome funders in place (the Conrad Hilton Foundation, the Fred Hollows Foundation, and Sightsavers). Apart from a Humanitarian Impact Bond on physical rehabilitation that launched early last month, no other health-related impact bonds have reached the launch stage. Many, however, have been proposed, including a few on malaria, HIV, early childhood development, sleeping sickness, and family planning. Several of these have struggled to find investors. OPIC’s commitment thus represents a significant step toward the launch of the cataract bond, as well as further testing of the DIB model itself. Results from year one and year two of the Educate Girls DIB were very positive, but it remains vitally important to test the DIB model in various forms.

Finally, insights gleaned from the cataract bond will be valuable for future health-related DIBs. We’ve been interviewing members of the cataract bond’s design coalition on the lessons they learned throughout the development of the bond. We’ll soon release a policy paper outlining those lessons and how the challenges they faced compare to the questions and obstacles others have experienced while attempting to launch health-related impact bonds. Much of the literature on DIBs and Social Impact Bonds (impact bonds where a government serves as an outcome funder instead of a foundation or aid agency) focuses on whether impact bonds have worked, and not what common pitfalls or concerns should be kept in mind before diving into preparation (Brookings launched a report in this space recently). CGD will also host the key stakeholders of the cataract bond at a launch event in early 2018 to discuss the findings from the paper.

As the development community seeks opportunities to leverage blended finance for the achievement of the Sustainable Development Goals, the OPIC-supported cataract bond has much to offer. It will test the DIB model more generally and in the health space, as well as highlight the potential benefits DFIs can bring to and receive from a DIB. Congratulations to OPIC for its commitment to generating evidence on what works (or doesn’t work) in global health and beyond.

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.

Congress has officially wrapped up the FY2017 appropriations process—a mere seven months behind schedule. Much has changed since last fall, including the rhetoric on US foreign aid spending from the sitting administration. And big questions have been swirling about whether the bipartisan consensus in Congress on the importance of effective foreign assistance will hold in this new environment. At least in very short term, the answer appears to be yes.

The omnibus spending package that passed the both chambers last week includes $53.23 billion in funding for State and Foreign Operations. Add the supplemental funding provided late last year and the total reaches $57.53 billion—more than $4.6 billion over FY2016 spending.

There’s certainly a danger in reading too much into this occasion of consensus. Congress is staring down an ambitious agenda featuring big items such as health care and tax reform, so there was clear interest in averting a government shutdown and moving on. Members also may be hedging with an eye fixed on FY2018, when they’ll be starting with a considerably lower request from the administration and facing the threat of sequestration. Still, if you’re searching for signs that Congress continues to see value in constructive global engagement, the bill contains quite a few of them. And where the Trump administration has pushed back against the fundamental value proposition of US assistance while looking to prioritize aid for strategic and political interests over development goals, with this bill Congress appears poised to take the reins to steer a different approach.

Leaked FY2018 budget documents indicate the Trump administration plans to eliminate funding for USAID’s Development Assistance (DA) account, while relying more heavily on the Economic Support Fund (ESF). As my colleague Jeremy Konyndyk pointed out, an easily inferred motive behind the shift is that the administration hopes to use foreign aid chiefly as a tool for achieving near-term diplomatic and political objectives. But that approach may not sit well with Congress, which has rallied behind DA-funded efforts to promote agricultural development and extend access to electricity. Indeed, the omnibus includes an increase in funding for DA, while reducing ESF.

In its FY2018 “skinny budget” released earlier this year, the Trump administration called for eliminating funding to the Overseas Private Investment Corporation. But it appears congressional appropriators see the value of attracting greater private investment through the money-making, development finance agency—providing a modest boost for OPIC’s administrative expenses.

US global health programs have long enjoyed strong support in Congress, but robust funding for USAID’s global health programs also runs counter to the deep cuts proposed by the administration in FY2018. One key area of disagreement is family planning.

While the bill includes reductions in our payments to UN agencies—US multilateral assistance managed through the Treasury Department fared somewhat better. That’s not to say the 115th Congress picked up just where the last left off. There are some visible policy differences on issues such as combating climate change, marked not only by a lack of appropriation but an explicit prohibition on contributions to the Green Climate Fund.

The explanatory statement that accompanied the spending bill highlights the tremendous scale of humanitarian need. According to the UN, close to 20 million people are currently at risk of famine. In response, the measure provides $990 million “for famine prevention, relief, and mitigation” and directs that a portion of the funds appropriated to the International Disaster Assistance account be transferred to shore up the Food for Peace program.

Finally, in another sign Congress isn’t planning to remain idle while the administration reengineers the US approach to development and humanitarian assistance, the bill directs departments and agencies to submit a report outlining any planned reorganization to the Appropriations Committees. The legislative text refers to President Trump’s March executive order specifically, adding to its usual list of demands that includes agency operating and spend plans. The explanatory statement also directs USAID to consult with the relevant congressional committees prior to engaging in discussions with foreign government officials about potential USAID mission closures.

We’ll be watching closely for what’s next—while hoping Congress continues to play an active role in shaping US global engagement in FY2017 and beyond.