Overseas Investment:

Issues Related to the Overseas Private Investment Corporation's Reauthorization

NSIAD-97-230: Published: Sep 8, 1997. Publicly Released: Sep 8, 1997.

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Pursuant to a congressional request, GAO reviewed: (1) trends in private sector investment in developing markets and the role of the public sector in these markets; (2) the Overseas Private Investment Corporation's (OPIC) risk management strategy and the steps that OPIC may take, if it is reauthorized, to further reduce portfolio risks while pursuing U.S. foreign policy objectives; and (3) the issues to be addressed and the time it would take to phase out OPIC if it is not reauthorized.

GAO noted that: (1) improvements in economic and political conditions in many developing countries have led to a reduction in investors' perception of risk and a dramatic increase in private investment in these markets since the late 1980s; (2) however, according to most of the 34 firms GAO surveyed, risky markets still exist where the private sector stated they are reluctant to invest or operate without public guarantees or insurance; (3) in high-risk markets, U.S. investors GAO spoke with have sought public finance or insurance from OPIC, the Export-Import Bank, or other public institutions; (4) in risky markets where OPIC services are not available, U.S. investors tended to use other public support; (5) if foreign export credit agencies provide the support, U.S. suppliers could be excluded; (6) OPIC has historically been self-sustaining by generating revenues from its insurance and finance programs to cover actual losses; (7) OPIC's risk mitigation strategy includes maintaining reserves, limiting its exposure in any one country, requiring pre-approval reviews, and establishing underwriting guidelines; (8) nonetheless, the private sector's willingness to have greater involvement in some emerging markets has created opportunities for OPIC to further reduce portfolio risks, while continuing to pursue U.S. foreign policy objectives; (9) possible ways for OPIC to minimize the risks associated with its insurance portfolio include obtaining to a greater extent reinsurance from or coinsuring with other insurance providers, insuring less than 90 percent of the value of each investment, and offering insurance at less than a 20-year term; (10) while OPIC officials agree that these are good risk mitigation techniques, they cautioned that these strategies should be employed on a case-by-case basis so as to enable OPIC to continue to meet U.S. foreign policy objectives and the needs of its customers; (11) if Congress decides not to reauthorize OPIC, an orderly phaseout of the agency would require specific legislative action; (12) an important issue that would need to be addressed is who would manage the existing portfolio; (13) also, given that OPIC issues insurance policies with 20-year coverage, it could take up to 20 years for OPIC's existing obligations to expire; (14) the government has the option to sell OPIC's portfolio to the private sector before its expiration; (15) however, a recent study suggests that disposal of OPIC's assets could only be accomplished at a discounted price; and (16) if the risk of the remaining portfolio decreases over time, opportunities for asset disposal may arise.

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