The Overseas Private Investment Corporation (OPIC) is arguably one of the most important players in impact investing, but very few people outside of the economic development field have heard of it. OPIC, an agency of the US government, doesn’t invest its own money overseas. Instead, it helps private investors overcome the barriers that keep them from investing in developing countries by providing loans, guarantees, and insurance that the private sector does not provide.
Elizabeth Littlefield became president and CEO of OPIC in 2010. It’s a role she was well prepared for. Before OPIC, she spent 10 years at the World Bank, where she served as a director and as CEO of the Consultative Group to Assist the Poor (CGAP), a multi-donor organization created to help the microfinance industry grow. Before joining CGAP Littlefield spent more than 15 years at J.P. Morgan, including a year and a half living and consulting with several startup microfinance institutions in West and Central Africa and Pakistan.
OPIC facilitates social and environmental progress, but its mission isn’t altruistic. It’s an arm of the US government designed to achieve two primary goals. It helps create US wealth and jobs—an estimated $74 billion in US exports and more than 275,000 jobs since the agency was formed in 1971. And by helping stimulate development in countries like Afghanistan and Egypt, it helps further US foreign policy. Amazingly, OPIC does all of this and still makes a profit of several hundred million dollars a year that goes back to the US Treasury.
In this interview with Stanford Social Innovation Review Academic Editor Johanna Mair, Littlefield discusses the barriers that private investors face when investing in emerging markets, how OPIC helps overcome those barriers, and her views on impact investing.
Johanna Mair: Many of our readers are probably not familiar with OPIC. Can you tell us what it does?
Elizabeth Littlefield: OPIC is the US government’s development finance institution. Our mandate is to channel private capital, especially US capital, to address development challenges in emerging markets. We do this by helping provide financing and risk-mitigating tools—such as loans, guarantees, and insurance—that remove the barriers to investing in those markets. We have a current finance and insurance exposure of nearly $15 billion spread out over 105 countries. Because we operate on a commercial basis, not only are we generating positive development impacts, but we also generate several hundred million dollars every year that goes back to the US Treasury.
We work with both large US companies, like General Electric and Pepsi, and very small ones, even individuals. The largest companies tend to finance their investments abroad from their own resources rather than borrowing, so most of our clients are smaller. For example, we extended a $3.7 million loan to a small US company and its Brazilian subsidiary to construct an environmentally sustainable, organic açai berry processing facility that has provided income for 10,000 small family farmers.
Investors from the diaspora of any given country are often a powerful force for development and some of the earliest investors in that country. OPIC has partnered with Indian-Americans investing in solar power in India, Pakistani-Americans supporting financial inclusion in Pakistan, and a Turkish-American family renovating a small hotel in Turkey.
We also work actively with NGOs. We’ve provided political risk insurance to some of the relief organizations that have been working in the Horn of Africa to cover their vehicles and other equipment, and last year we approved $45 million in financing for Habitat for Humanity, which is working with microfinance institutions to offer home improvement loans throughout the developing world.
OPIC will provide financing or insurance only to those businesses that are socially, environmentally, and financially sustainable. We focus on the world’s neediest and most difficult markets, many of which are also of high priority for US foreign policy. And everything we do must both be commercially viable and have a positive development impact. So in many regards, we’re living proof that the private sector does have a powerful and growing role in advancing development.
In November 2011, Secretary of State Hillary Clinton announced a shift in US development assistance to focus more on catalytic investment. How does that affect OPIC?
President Obama first indicated a strong shift in this direction when he announced a new US global development policy at the United Nations in 2010. He said we should use all of the tools that we have at our disposal to support development, particularly trade and investment. So both the president and the secretary of state have spoken clearly about the need to harness the private sector and business in new and different ways to advance development.
Has this led to OPIC playing a more prominent role in US foreign policy?
There’s no question that OPIC’s profile as a foreign policy tool has grown. For example, OPIC was able to respond with a specific financial commitment from the United States as a response to the Arab Spring, without needing to tap new budgetary resources. We also focus our business development efforts on national security priorities of the United States, like Afghanistan and Pakistan, or on development priorities, like Haiti and South Sudan.
To understand OPIC’s growing role, it’s helpful to consider a bit of history. OPIC was carved out of USAID 40 years ago. At that time, about 75 percent of the money flowing from the United States to the emerging markets was in the form of official development assistance, such as grants and foreign aid, and about 25 percent was foreign direct investment. Today, that has completely reversed.
Of course, the private sector can’t do everything. There will always be a critical role for foreign aid and grant money in very difficult markets where commercial capital won’t go and for urgent humanitarian relief work. But finding ways to incentivize the private sector to contribute as much as it can makes the taxpayer’s dollar go further.
How does OPIC work with USAID and other development agencies?
We work extremely closely with USAID and our peer development finance institutions from other countries. This cooperation is vital because we have complementary risk appetites and complementary financial instruments. In many cases, especially in the most difficult markets, an OPIC-financed or -insured project can be completed only if some costs are covered by some grant money, equity, or first-loss money. OPIC can’t provide this type of funding, so we turn to one of our partners.
For example, in the wake of the Arab Spring, Secretary Clinton announced that OPIC would provide $2 billion toward private capital investments and job creation in the Middle East and North Africa. Within three months, OPIC’s board approved two $250 million loan guarantee facilities for SMEs (small- and medium-sized enterprises) in Jordan and in Egypt. Both of those facilities were possible only because USAID was working in partnership with us, providing the grant funding to set up the local agent that would implement those loan guarantee funds.
Your agency is proud that it doesn’t cost the taxpayer any money and actually contributes to the federal budget. What impact does that approach have on your funding decisions? Are there countries that might benefit from OPIC’s assistance but don’t get it because you can’t make a profit from the deal?
We operate on a portfolio approach. We seek a diverse portfolio that optimizes financial risks and costs, financial returns, and development impact. This means that some transactions may have very high social or environmental impact but lower financial returns or vice versa.
Nearly every country in the world offers something interesting for private companies to invest in. There are certain countries, like Afghanistan, where we’ll try especially hard to identify the private investors that are willing to enter those markets. For example, as the United States pulls its troops out of Afghanistan it’s important that we leave behind an economy that has the potential to grow and create jobs and opportunities long after we’ve gone. And we all know that private, foreign direct investment is going to be critical to creating that kind of nonmilitary, non-aid-driven economy.
There are investors who are demonstrating confidence that the Afghan economy will persevere. Afghan-American families, for example, are investing in the retail, trade, and distribution sectors. Some large multinational companies are establishing manufacturing operations in Afghanistan.
We are also involved in a major energy project in Afghanistan. You can’t have much of an economy without electricity, and Afghanistan has less electricity per person than nearly any other country in the world. But there are gas fields in the northwest of Afghanistan, and OPIC is working with USAID, two private US investors, and the Asian Development Bank to make sure that gas is drilled, developed, and sent to fuel a power station that will provide 200 megawatts of reliable domestic power to parts of the country that had none.
Because our portfolio is balanced, and diversified by sector and region, we are able to keep investing in high-impact projects like these while still returning money to the US taxpayer.
It is pretty straightforward to measure the financial performance of your portfolio of investments. But it is probably more difficult to assess the social, environmental, and political impact across your portfolio. Do you have particular ways of assessing the nonfinancial performance?
We score every transaction on a number of different anticipated development outcomes and require our clients to report back every year on whether those outcomes transpired. We also send teams to the field to monitor actual outcomes. Like a financial metric, our development metric allows us to compare apples to apples across a diverse portfolio. OPIC is certainly not the only one out there looking at ways to assess the impact of our portfolio, and we’ve harmonized our development outcome tracking with those of other development finance institutions as much as possible.
Some would say that everything that OPIC does is impact
investing because we aim to have a positive development
impact and create a positive financial return.
Another example of an impact we measure is greenhouse gas emissions avoided. In one year we’ve gone from 70 megawatts of renewable energy generated to more than 700 megawatts of renewable energy that will be generated by our investments.
How significant a role will impact investing play in the future?
It depends to some extent on how you define impact investing. Some would say that everything that OPIC does is impact investing because we aim to have a positive development impact and create a positive financial return. But the narrower definition of impact investing focuses on business models that have at their core the solution to a social or environmental problem.
As to the magnitude of the market, there are, on one side, what I have called the breathless maximizers who project the impact investing market to become a major force in world markets. On the other side are the derisive minimizers who say it will always be a drop in the bucket.
To me the relevant benchmark is not the mainstream financial markets, because impact investing is always going to be tiny compared to that, but how big the impact investing market could be relative to global foreign development and aid budgets. If private money can be invested in some aspects of development, aid budgets can be deployed and concentrated in other more difficult areas.
What is hindering the growth of impact investing?
One of the biggest hurdles OPIC has noticed is the dearth of seasoned fund managers at the investor level and management expertise at the enterprise level. The market needs experienced teams with their own battle scars and a deep well of experience. Money is also still a gap. There’s a lot of public sector money available, but private capital remains scarce. We need a broader range of instruments, like insurance and fixed income instruments, as well as market infrastructure, like a secondary market, so investors know they can sell their investments if they need to.
Probably the chief hindrance right now is that we don’t have a good set of longitudinal performance data that show measurable social and financial returns earned over a number of years. OPIC and other development finance institutions have institutional track records. But we need to capture, measure, and analyze these and other investment experiences so we can demonstrate what types of investments are able to provide both stable and sustainable financial returns and to simultaneously have a development impact.
What else is OPIC doing to stimulate the impact investing market?
About a year ago we issued a request for proposals from fund managers seeking financial support for impact investing funds. We were taken aback at the overwhelming response—88 fund managers completed the full application.
In October 2011, our board approved $285 million in financing for six new investment funds that aim to inject $875 million into the impact investing sector—the largest commitment by the US government to impact investing in emerging markets to date. These are a really interesting and diverse set of funds investing in things like technology-enhanced financial services, health care provision in West Africa, small business support in Mexico, and even the first forest carbon fund. Every one of them is seeking to solve a social or an environmental problem while making a sustainable financial return. And we are hoping to approve a second round of funds this year.
We’ve learned a lot from this exercise. Every possible sector is being looked at, including microfinance, health, education, renewable energy, clean tech, agriculture, and housing. All kinds of different fund structures were proposed, including debt funds, equity funds, and even a fund of funds. We saw a lot of people with mainstream investing backgrounds getting involved, although we didn’t see many of the mainstream financial institutions. And every single one of the applicants had a plan to measure their financial and their development impact, which was exciting to see.
OPIC wants to do more and more in the impact investing space. We’re looking to apply our political risk insurance product to feed-in tariffs for renewable energy. We can provide partial insurance to investors to guarantee that the feed-in tariffs don’t change. We’re also looking at offering a fixed income product, a debt instrument, so that impact investors could invest alongside OPIC and be assured that the product has the highest environmental, social, and governance standards as well as a positive development impact. As the US government’s development finance institution, impacting investing is a natural fit for us.