Empowering OPIC: Why the U.S. Should Embrace Development Finance and Harness the Power of Impact Investing

Next Billion
November 10, 2017

The com­ing decades will be defined by dra­mat­ic changes that threat­en to upend nat­ur­al and man-made sys­tems alike. From pop­u­la­tion growth and migra­tion to dwin­dling nat­ur­al resources and tech­no­log­i­cal dis­rup­tion, the impacts of these trends will be com­plex. The result­ing con­flicts, dis­place­ment and grow­ing eco­nom­ic inequal­i­ty will have pro­found and often desta­bi­liz­ing impacts on soci­eties around the world.

It’s dif­fi­cult – but help­ful – to try to quan­ti­fy the scale of these chal­lenges. Using the UN Sus­tain­able Devel­op­ment Goals as one met­ric, it would take as much as US $7 tril­lion more per year in financ­ing to achieve them glob­al­ly. That is a scale of invest­ment that dwarfs gov­ern­ment for­eign aid bud­gets and phil­an­thropic grant cap­i­tal. It can be reached only through coor­di­nat­ed pri­vate investment.

For­tu­nate­ly, a grow­ing num­ber of investors are already seek­ing out oppor­tu­ni­ties to align their dol­lars, euros, pesos and ren­min­bi with glob­al oppor­tu­ni­ties to pre­pare for and adapt to change. These impact investors can be drawn to the effort in dif­fer­ent ways. Some are fun­da­men­tal­ly phil­an­thropic, seek­ing new tools through which impact inno­va­tion and scale can exceed the pow­er of tra­di­tion­al aid. But oth­ers are long-term investors who see that the best way to dri­ve finan­cial return, mit­i­gate risk and even dis­cov­er new mar­ket oppor­tu­ni­ties is to mea­sure and account for social and envi­ron­men­tal impact.

At the U.S. Impact Invest­ing Alliance, our mis­sion is to help cat­alyze the mar­ket for these oppor­tu­ni­ties in the Unit­ed States. The U.S. has a vibrant and grow­ing mar­ket­place for impact invest­ment. Once dom­i­nat­ed by phil­an­thropic actors and high net worth fam­i­lies, today we see main­stream insti­tu­tions like Bank of Amer­i­ca Mer­rill Lynch, Mor­gan Stan­ley, Black­Rock and TPG among oth­ers enter­ing impact invest­ing at the behest of a range of indi­vid­ual and insti­tu­tion­al clients.

Though the U.S. has in some ways led the charge in finan­cial inno­va­tion and investor engage­ment around impact, the con­ver­sa­tion has been dis­pro­por­tion­ate­ly focused on the domes­tic mar­ket. Data from the 2017 GIIN Annu­al Investor sur­vey found that 70 per­cent of impact assets domi­ciled in the U.S. and Cana­da are invest­ed in the U.S. and Cana­da. Com­pare that to 22 per­cent of West­ern Euro­pean assets that stay close to home.

The GIIN sur­vey is not exhaus­tive – it doesn’t claim or try to be – but we can use this as one help­ful data point for think­ing about how our mar­ket has devel­oped. A dis­par­i­ty that large sug­gests a com­plex array of fac­tors at play. One clear dif­fer­ence between the U.S. and West­ern Europe is rel­a­tive size and scope of their devel­op­ment finance insti­tu­tions (DFIs). These agen­cies use the tools of pri­vate sec­tor finance to spur pri­vate invest­ment in emerg­ing mar­kets in a way that sup­ports devel­op­ment and strate­gic objectives.

In recent years, many Euro­pean DFIs have seen their man­dates grow sig­nif­i­cant­ly to include inno­v­a­tive financ­ing tools – tools which are not avail­able in the U.S. As Devex reports just this month, the U.K. will invest at least $800 mil­lion per year through its DFI, the CDC (Com­mon­wealth Devel­op­ment Cor­po­ra­tion). This announce­ment comes as the insti­tu­tion unveils a new strat­e­gy that will diver­si­fy its port­fo­lio of equi­ty and debt finance to include a high­er pro­por­tion of ear­ly-stage, high­er-risk invest­ments. Even still, the insti­tu­tion has aver­aged a 7 per­cent ROI as it sup­ports devel­op­ment objec­tives in sub-Saha­ran Africa and South Asia. And even with this new infu­sion of cap­i­tal, the CDC’s bud­get as a pro­por­tion of British devel­op­ment aid comes in behind the DFI bud­gets of the Nether­lands, Ger­many and France.

The Over­seas Pri­vate Invest­ment Cor­po­ra­tion (OPIC) is the U.S. government’s devel­op­ment finance insti­tu­tion. In both real and rel­a­tive terms, the insti­tu­tion is small com­pared with some Euro­pean coun­ter­parts. In 2013, for instance, OPIC’s $67 mil­lion oper­at­ing bud­get was about half that of Germany’s DEG, and its total port­fo­lio was about a third the size rel­a­tive to GDP.

OPIC sup­ports projects that cre­ate jobs and busi­ness oppor­tu­ni­ties at home while deliv­er­ing clear impact in near­ly 100 coun­tries around the world. It lever­ages lim­it­ed pub­lic invest­ment to attract bil­lions of dol­lars in pri­vate cap­i­tal. And to top it off, for 39 con­sec­u­tive years it has returned mon­ey to the Trea­sury, reduc­ing the deficit by $2.6 bil­lion over the past eight years alone.

OPIC deliv­ers this strong set of results by offer­ing a suite of finan­cial prod­ucts – polit­i­cal risk insur­ance, loans and guar­an­tees – that help U.S. firms enter mar­kets that would oth­er­wise prove inhos­pitable. At home, this helps sup­port jobs and increase exports. Abroad, it cre­ates eco­nom­ic oppor­tu­ni­ty in devel­op­ing coun­tries and pro­vides solu­tions to chal­lenges that tra­di­tion­al aid can­not sin­gle-hand­ed­ly address. The abil­i­ty to use devel­op­ment finance to lever­age pri­vate cap­i­tal can also free up gov­ern­ment resources to be deployed elsewhere.

And yet OPIC remains con­strained in terms of how it can oper­ate. It can’t, for exam­ple, take equi­ty posi­tions in deals that it sup­ports, even though that’s often the type of cap­i­tal that emerg­ing mar­kets lack. Even allow­ing the orga­ni­za­tion to retain a por­tion of its prof­its each year – to sup­port admin­is­tra­tive costs, fea­si­bil­i­ty stud­ies or tech­ni­cal assis­tance pro­grams – would have a trans­for­ma­tive effect.

Such pro­pos­als are nei­ther rad­i­cal nor new. Mem­bers of Repub­li­can and Demo­c­ra­t­ic admin­is­tra­tions alike have lined up to sup­port these sorts of com­mon sense changes, but they have strug­gled to gain trac­tion in a cli­mate of par­ti­san grid­lock in Wash­ing­ton. Yet, the demand for OPIC invest­ment cap­i­tal is there. Even with the restric­tions in place, OPIC turns away many more deals than it’s able to take on each year.

We can see what’s already hap­pen­ing today when the incen­tives line up to attract pri­vate cap­i­tal. “There’s a vir­tu­ous cycle that forms when a DFI invests in a com­mu­ni­ty,” says Nan­cy Pfund, man­ag­ing part­ner of DBL Part­ners. “Even beyond the lever­age cre­at­ed on the dol­lars invest­ed, sup­port from OPIC and USAID is a sig­nal that helps funds like mine fol­low suit. Once we are able to go in and prove the fea­si­bil­i­ty of the invest­ment, even larg­er com­mer­cial pools of cap­i­tal can fol­low and take the com­pa­ny to scale.”

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