United States General Accounting Office

GAO Report to the Chairman, Committee on

International Relations, House of

Representatives

September 1997 OVERSEAS

INVESTMENT

Issues Related to the

Overseas Private

Investment

Corporation’s

Reauthorization

GAO/NSIAD-97-230

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-277618 

September 8, 1997

The Honorable Benjamin A. Gilman 

Chairman, Committee on International Relations

House of Representatives

Dear Mr. Chairman:

The Overseas Private Investment Corporation (OPIC), an independent

government corporation created to promote investment in emerging

market economies, has been the focus of debate in recent months. Unless

Congress reauthorizes it, OPIC’s charter expires September 30, 1997.

Among the issues subject to debate on whether to reauthorize OPIC are

questions relating to public sector investment support, OPIC’s cost to the

government, and the potential liabilities OPIC subjects the government to in

pursuing foreign policy objectives by making investments in developing

countries.

As you requested, we reviewed (1) trends in private sector investment in

developing markets and the role of the public sector in these markets;

(2) OPIC’s 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.

In conducting this review, we analyzed private investment trends and

surveyed a judgmental sample of 34 U.S. firms that had made investments

overseas within the last 5 years in the power and telecommunications

sectors—two of the four largest investment sectors in emerging markets.

(See app. I for a list of companies surveyed.) We also analyzed OPIC’s risk

assessment policies and financial reports and discussed risk mitigation

strategies with private and public providers of project finance. Project

financing involves lending for major projects where the assurance of

repayment is provided through the project’s structure and anticipated

future revenues rather than through sovereign (that is, national

government) or other forms of guarantees. In some cases, the public

sector provides investment support to investors in these projects. Further,

we reviewed and discussed laws and regulations governing an agency

shutdown with cognizant government officials.

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Background OPIC was established by the Foreign Assistance Act of 1969 (P.L. 91-175,

Dec. 30, 1969) to pursue the U.S. foreign policy of mobilizing and

facilitating the participation of U.S. private capital and skills in the

economic and social advancement of developing countries. In carrying out

this responsibility, OPIC took over the investment guarantee and promotion

functions of the U.S. Agency for International Development. In the early

1970s, the U.S. approach to foreign assistance began to shift from one of

providing government aid for infrastructure building and large capital

projects to providing assistance to meet basic human needs. OPIC’s role

was to support market-oriented private investment in various sectors.

More recently, the World Bank has estimated that $200 billion would be

needed annually over the next 10 years to meet the infrastructure needs of

developing countries. Obtaining this level of private investment will be a

major challenge given the economic and political characteristics of

emerging markets and the unique risks inherent in each project. Project

financing is emerging as an important component in infrastructure

development.

OPIC’s programs are designed to promote overseas investment and assume

some of the associated risks for investors. Specifically, OPIC offers direct

loans and loan guarantees to U.S.-sponsored joint ventures abroad,

supports private investment funds that provide equity for projects abroad,

and provides political risk insurance to U.S. investors. The political risk

insurance covers investors for up to 20 years against losses due to

currency inconvertibility, political violence, and expropriation.1 OPIC

collects premiums and fees from the private sector for insurance and

financing services. OPIC finance and insurance activities are backed by the

full faith and credit of the U. S. government and are limited to a total

exposure of $23 billion in fiscal year 1997. OPIC services are available in

some 140 developing countries, although OPIC does not operate in some

countries, largely for U.S. foreign policy reasons.

Projects eligible for OPIC assistance include new investments,

privatizations, and expansions or modernization of existing plants. The

sectors OPIC supports include power, financial services,

telecommunications, and oil and gas. To obtain OPIC support, investors

must meet specific criteria, including U.S. ownership requirements.

1

Currency inconvertibility is the deterioration in the ability to convert profits, debt service, and other

remittances from local currency into U.S. dollars. Loss due to political violence results from damage to

assets caused by war, revolution, insurrection, or politically motivated civil strife. Expropriation is the

loss of an investment due to expropriation, nationalization, or confiscation by a foreign government.

Page 2 GAO/NSIAD-97-230 Overseas Investment
B-277618 

Over the years, Congress has placed various requirements on OPIC’s

authority to support U.S. investment. For example, in carrying out its

activities, OPIC is to

• administer its entire portfolio (financing, insurance, and reinsurance

operations) on a self-sustaining basis and in a manner that ensures that the

projects it supports are economically and financially sound;

• refuse support for any investment in countries that are not taking steps to

adopt and implement internationally recognized worker rights; and

• decline participation in investments that are likely to significantly reduce

U.S. domestic employment levels or pose an unreasonable or major

environmental, health, or safety hazard.

Results in Brief Improvements in economic and political conditions in many developing

countries—markets where OPIC services have traditionally been

sought—have led to a reduction in investors’ perception of risk and a

dramatic increase in private investment in these markets since the late

1980s. However, according to most of the 34 firms we surveyed, risky

markets still exist where the private sector (investors, bankers, and

insurers) stated they are reluctant to invest or operate without public

(government or multilateral) guarantees or insurance. For example, four

of the firms that we spoke to that invested in Russia or Ukraine said that

private insurance was unavailable for their projects and financiers were

reluctant to invest without public involvement. In high-risk markets such

as these, U.S. investors we spoke with have sought public finance or

insurance from OPIC, the U.S. Export-Import Bank (Eximbank), or other

public institutions such as Japan’s Ministry of Trade and Industry. In risky

markets where OPIC services are not available, such as Vietnam, China, and

Mexico, U.S. investors that we surveyed tended to use other public

support.2

 For example, the two investors in Vietnam used public providers

of investment support, and two investors in China used public support

while two investors there partnered with the Chinese government. In

Mexico, some investors we spoke to used public support; however, two

investors self-insured. If foreign export credit agencies provide the

support, U.S. suppliers could be excluded.

OPIC has historically been self-sustaining by generating revenues from its

insurance and finance programs to cover actual losses. OPIC’s risk

mitigation strategy includes maintaining reserves ($2.7 billion in reserves

2

Of the 34 firms that we interviewed, 2 operated in Vietnam, 5 in China, and 5 in Mexico. Some of these

firms had operations in more than one country.

Page 3 GAO/NSIAD-97-230 Overseas Investment
B-277618 

held largely in Treasury securities), limiting its exposure in any one

country, requiring pre-approval reviews, and establishing underwriting

guidelines. 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. 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. While OPIC officials agree that

reinsurance and coinsurance 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.

If Congress decides not to reauthorize OPIC, an orderly phaseout of the

agency would require specific legislative action. An important issue that

would need to be addressed is who would manage the existing portfolio.

Also, given that OPIC issues insurance policies with 20 year coverage, and

that OPIC had $5.3 billion in insurance contracts with 19-20 years remaining

as of September 30, 1996, it could take up to 20 years for OPIC’s existing

obligations to expire. OPIC’s past experience, however, shows that most

insurance policies are canceled by clients before the end of the 20-year

term. Thus, OPIC projects that less than 36 percent of its existing portfolio

would remain active after 10 years. The government has the option to sell

OPIC’s portfolio to the private sector before its expiration. However, a

recent study suggests that immediate disposal of OPIC’s assets could only

be accomplished at a discounted price.3

 If the risk of the remaining

portfolio decreases over time, opportunities for asset disposal may arise.

Global Changes Have

Reduced the Private

Sector’s Perception of

Risk, Yet Public

Support Still Sought in

Some Markets

A changing global environment has reduced the perception of risk for the

investors we spoke with in emerging markets. Economic growth and

liberalization have created investment opportunities in sectors that were

previously dominated by government-owned companies or were simply off

limits to foreign investors. Many countries, for example, have privatized

their power and telecommunication sectors and enacted laws that permit

foreign ownership, resulting in dramatic increases in foreign investment.

More recently, private providers of project finance and political risk

insurance are increasingly available to assist investors. However,

3

Overseas Private Investment Corporation: Final Report on the Feasibility of Privatization (New York:

J.P. Morgan Securities, Inc., Feb. 7, 1996).

Page 4 GAO/NSIAD-97-230 Overseas Investment
B-277618 

according to many of the firms we surveyed, markets still exist where they

are unable to obtain private finance or insurance services. As a

consequence, they seek public support. Public support includes direct

loans, loan guarantees, and political risk insurance from OPIC and the U.S.

Eximbank; foreign agencies that provide such services (often called export

credit agencies); or multilateral financial institutions, such as the World

Bank.

Private Investment in

Transition Markets Has

Increased Considerably

The privatization of public enterprises, legal and regulatory reforms, and a

more stabilized political and economic environment in developing

counties, among other changes, have led to an increase in total private

capital flows. As shown in figure 1, private capital flows to finance

infrastructure projects and other private investments overseas have

increased from $26 billion in 1986 to $246 billion in 1996.4

4

Total private capital flows are calculated by the World Bank on a net basis (net of repayments) and

include portfolio bonds and equity, foreign direct investment, commercial bank loans, and other

private flows. Other private flows include credits from manufacturers, exporters, and other suppliers

of goods, as well as bank credits covered by a guarantee of an export credit agency.

Page 5 GAO/NSIAD-97-230 Overseas Investment
B-277618 

Figure 1: Net Private Capital Flows to

Developing Countries, 1986-96

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996

0

50

100

150

200

250

In billions of 1995 dollars

Source: World Bank.

During the 1990s, private sector finance has increased dramatically,

especially to Asian and Latin American developing countries, despite

setbacks associated with the Mexican peso crisis.5

 Private flows going to

infrastructure reflect these overall increases, particularly in commercial

lending devoted to project finance. According to a 1996 International

Finance Corporation report,6

 these private infrastructure investments

would not have seemed possible 10 years ago. Today, more and more

countries are introducing competition and private participation in

infrastructure ownership and management.

5

The Mexican peso crisis in 1995 led to a temporary decline in private flows to Latin America.

6

Lessons of Experience: Financing Private Infrastructure (Washington, D.C.: International Finance

Corporation, Sept. 1996), p. 1. The International Finance Corporation is a part of the World Bank group

that promotes investment by the private sector.

Page 6 GAO/NSIAD-97-230 Overseas Investment
B-277618 

The 34 power and telecommunications companies that we surveyed

indicated that their investment decisions have been significantly

influenced by the recent developments in emerging markets. In general, 

30 of the companies stated that changes in the legal and regulatory

environment in emerging markets have led them to seek investments in

countries where they had not invested in the past. At the same time, the

U.S. power market matured, and U.S. power companies began seeking

investment opportunities in emerging markets.

Availability of Private and

Public Investment Services

Increasing

The rise in overseas private investment has been accompanied by

increases in investment support by public providers of finance and

insurance as well as increases in private insurance coverage in some

markets. Three countries—Japan, the United States, and Germany—are

the largest public providers of political risk insurance. (See app. II, which

identifies features of the services provided by the major public providers

of political risk insurance.) Lloyd’s of London, the American Insurance

Group, and Exporters Insurance Corporation—three major private

insurers—have recently increased their insurance coverage.

Globally, public providers have increased investor coverage. According to

the Berne Union,7

 new investments insured by its members rose annually

between 1991 and 1996, going from $7.1 billion to $15.2 billion. As of the

end of 1996, the cumulative amount of investment covered by Berne Union

members was $43.4 billion. According to data collected directly from the

major public providers of political risk insurance, Japan led all public

providers with $13.9 billion in cumulative exposure. OPIC was second with

$13.4 billion in exposure, and the German public provider was third with

$7.8 billion in exposure. These public insurers have traditionally

dominated the public risk insurance market. Although the major public

providers generally offer investment services in the same countries, each

of the major providers’ business tends to concentrate in different markets.

OPIC, for example, concentrates in Latin America, the Japanese in Asia, and

the Germans in Asia/Pacific and Central and Eastern Europe. (See app. III

for available information on the regional concentration of major public

insurance providers.) Investors are also assisted by other Berne Union

members, including the Multilateral Investment Guarantee Agency, a

multilateral institution affiliated with the World Bank Group, with about

$3.9 billion in exposure reported in 1997.

7

The Berne Union is an international union of credit and investment insurers that represent private and

public political risk insurers from 38 countries and locations.

Page 7 GAO/NSIAD-97-230 Overseas Investment
B-277618 

The level of coverage of privately provided political risk insurance has

increased considerably over the past 2 years, according to the private

insurers we spoke with. Although the volume of coverage provided by

private insurers is difficult to determine, a political risk insurance expert

estimated that several billion dollars of private political insurance

coverage was provided in 1996.8

 According to the American Insurance

Group, one of the largest private providers of political risk insurance, it

increased the length of its coverage from a maximum of 3 years to a cap of

7 years in 1996. Additionally, ACE, Inc., a private insurance provider,

recently entered into a reinsurance contract with the Multilateral

Investment Guarantee Agency, providing up to 15 years of risk coverage

on the same terms as that agency. However, according to officials of a

large commercial bank and a private political risk insurer, in some risky

markets private insurers are only willing to provide insurance when a

public sector entity is involved in the project. A private insurer we spoke

to said his company had not provided coverage in Russia and most of the

other newly independent states of the former Soviet Union.

Public and private sources also provide financing in developing countries.

Public providers include OPIC; the International Finance Corporation, a

multilateral institution affiliated with the World Bank Group; the U.S.

Eximbank; and other bilateral credit agencies, such as the Japanese

Export-Import bank. Private sector financing to developing countries is

available through commercial banks and other private financial

institutions. According to the World Bank, this source of financing has

increased significantly during the 1990s, with about one-half of these

resources directed toward project financing for infrastructure

development.

Risk Determines Whether

Investors Seek Public or

Private Finance and

Insurance

Investors’, private lenders’, and insurers’ perception of risk frames how

projects are structured and financed. The risks assumed and the type of

support sought by investors can differ by project and by sector.9

 For

example, based on the projects identified in our survey, more

telecommunications projects were completed without public support and

with investor self-insurance than were power projects. Power plants are

costly and can take 10 years or longer to recoup the investment costs,

according to an energy firm official we interviewed, making plant assets

8

Private insurers generally regard the existence and amount of their insurance as a confidential matter.

9

Country political and economic conditions, project size, the ability of the investor to remove or

dispose of the assets, if necessary, the financial strength of the investors, and many other factors are

also considered by project financiers and insurers.

Page 8 GAO/NSIAD-97-230 Overseas Investment
B-277618 

and income subject to long-term political risks. Telecommunications

projects, on the other hand, may generate enough income to cover

investment costs in just a few years.

Investors we surveyed told us that over the past decade, several Latin

American, East Asian, and East European countries have taken steps to

create environments attractive to investors. Specifically, 22 of the 34 firms

we spoke to were comfortable with assuming investment risks after they

had been successful in a country for a period of time. For example, one

telecommunications company that is developing cellular telephone

operations in Hungary told us that the availability of OPIC political risk

insurance was a critical factor in its initial decision to invest $200 million

when privatization allowed the company to enter the market. After 2 years,

however, the company reassessed the political and economic risks of this

investment and decided to drop its OPIC insurance in favor of

self-insurance.10 A company with 10 projects in Poland told us that it

developed 9 cable projects with private investment after completing 1

successful project in Poland that was financed by OPIC 5 years ago when

private financing was not available. In another example, a power company

that has used OPIC in other high-risk markets has made acquisitions of

privatized public utilities in Argentina and Chile without official support

by obtaining financing from European financial markets and locally

syndicated money. Officials of the International Finance Corporation

confirmed that investors are increasingly likely to cancel International

Finance Corporation loans as lower-priced private financing becomes

more available in lower-risk markets.

Despite these trends, some markets are still considered high risk by

investors, lenders, and private insurance companies. Thus, obtaining

commercial finance and insurance in these markets remains difficult,

according to private firms we surveyed. Several of the power and

telecommunications companies we surveyed concurred with the

assessment that in several regions of the world, including Africa, Russia,

the other newly independent states of the former Soviet Union, and

Central America, the perception of risk remains high. Some companies

told us that they are generally unable to raise the necessary financing for

transactions in high-risk countries without public support. For example,

four firms that we spoke to that invested in Russia or Ukraine said that

private finance was unavailable for their projects. One

telecommunications company with investments in Russia and Ukraine

10Some firms still seek public support in Hungary. OPIC officials said that in Hungary they have

recently insured a large telecommunications project and anticipate insuring a power project within the

year.

Page 9 GAO/NSIAD-97-230 Overseas Investment
B-277618 

stated that without OPIC political risk insurance, it would have avoided

these high-risk markets.11 A power company with a $150-million equity

investment in El Salvador covered by OPIC political risk insurance told us

that the availability of OPIC services was a key factor in the company’s

decision to invest in the country. According to an official from this

company, although it considers Guatemala to have great potential for the

industry, private financial institutions and insurance companies still

consider Guatemala to be high risk, and the company will not go forward

with projects in Guatemala without OPIC or other public support.

Additionally, private lenders and insurance companies we spoke with told

us that they offer limited, if any, services in higher-risk markets such as

the newly independent states of the former Soviet Union. Officials at the

major international banks we visited noted that they are reluctant to lend

in high-risk markets without some form of political risk insurance and that

the private insurance companies often cannot provide the kind of

insurance lenders need in these markets.

U.S. Investors Obtain

Public Support in Some

Non-OPIC Markets

In countries where OPIC services are not available due to U.S. foreign

policy or operational reasons, such as Mexico, China, Pakistan, and

Vietnam, we found that most of the U.S. investors we interviewed often

seek other forms of public support to facilitate investment.12 As is the case

in other emerging markets, investors’ decisions to invest in a project were

predicated on their perceived risk. Our survey of U.S. investors showed

that when U.S. firms believed they needed public investment support in a

non-OPIC country, they sought investment support from the U.S. Eximbank or

other foreign export credit agencies or multilateral financial institutions.

Although such support facilitates the original investment, subsequent

equipment and service procurements are often tied to the countries

providing the support. Thus, if foreign export credit agencies provide the

support, U.S. suppliers could be excluded.

In some non-OPIC markets, such as Mexico, U.S. investors may not always

seek public support. According to a telecommunications company official,

several risk mitigation factors enabled the company to make a $1-billion

investment in Mexico without political risk insurance or other official

participation in the project. Mexico’s historical and geographical

relationship to the United States, trends in Mexico’s economic

11It is difficult to independently discern whether an investment in high-risk markets would have

occurred without public support.

12OPIC does not operate in a developing country unless it has a bilateral investment agreement.

Further, U.S. statutes specify that certain in-country conditions, such as inadequate protection of

internationally recognized workers’ rights, preclude OPIC from supporting private investment.

Page 10 GAO/NSIAD-97-230 Overseas Investment
B-277618 

performance, the potential for free trade, and the contractual commitment

of high-level government officials and the Mexican Central Bank, along

with the company’s confidence in its Mexican partner, all helped lower the

company’s perception of risk. In contrast, a $644-million power project in

Mexico is being undertaken by U.S. investors facilitated by a $477-million

U.S. Eximbank loan, $28 million in U.S. Eximbank political risk insurance

during construction, and a $75-million Inter-American Development Bank

loan.

In China, companies have entered into joint ventures with local companies

that are affiliated with provincial governments, which lowers investor

perception of risk. Depending on the size of the project, these companies

were more likely to obtain a portion of their financing from multilateral

institutions or foreign official sources. For example, one power company

with several recent joint ventures in China financed smaller-sized projects

(under $30 million) without public support. However, the same company

is finalizing a $1.6-billion project and is obtaining support from the U.S.

Eximbank and Hermes, Germany’s export credit agency. The opportunities

presented by China’s large market potential may increase investors’

willingness to do business there despite the perceived risk.

In other markets where OPIC is not available, the U.S. firms we surveyed

have used the services of multilateral agencies or export credit agencies.13

One telecommunications company mitigated its risk in Pakistan by

obtaining guarantees and political risk insurance from the International

Finance Corporation and the Multilateral Investment Guarantee Agency.

Because OPIC was not available in Vietnam, a U.S. power firm used the

Asian Development Bank and Coface (the French export credit agency) to

finance a $160-million power plant.

U.S. investors’ use of investment support from sources other than OPIC may

affect the source of procurements. Multilateral institutions generally do

not tie their support to buying equipment from a particular country.

However, some U.S. firms told us that they were unable to use U.S.

suppliers when they obtained support from foreign export credit agencies.

In testimony before Congress, an official of a large U.S. company testified

that her company utilized or planned to use German, Japanese, or French

equipment for projects in China, Pakistan, and Vietnam because the

13Some foreign export credit agencies extend support to foreign-owned entities that are domiciled

within their borders.

Page 11 GAO/NSIAD-97-230 Overseas Investment
B-277618 

company obtained investment support from German, Japanese, and

French export credit agencies.14

OPIC’s Revenues

Have Exceeded Its

Losses, but Global

Changes May Present

Opportunities for

OPIC to Further

Reduce Portfolio Risk

Historically, OPIC has been self-sustaining, generating substantial revenues

from its finance and insurance programs and its investments that together

have been sufficient to cover actual losses. As of September, 1996, OPIC

had accumulated $2.7 billion in reserves.15 According to a February 1996

J.P. Morgan Securities, Inc., report, OPIC’s reserves are more than adequate

to cover any losses that OPIC might experience, excluding an

unprecedented disaster.16 OPIC’s risk management strategies, which include

maintaining reserves, setting exposure limits, performing pre-approval

reviews, and applying underwriting guidelines, help limit U.S. taxpayers’

exposure to undue risk and prevent project losses. In 1994, OPIC raised the

maximum amount of insurance and finance coverage it offers on a given

project, a step that increases the government’s exposure to loss but may

not negatively affect the quality of OPIC’s portfolio. Notwithstanding OPIC’s

track record, the private sector’s willingness to have greater involvement

in some developing countries has created opportunities for OPIC to take

steps to further reduce the risk associated with its portfolio through

greater risk-sharing. Some possible options to explore include obtaining

reinsurance from other providers, utilizing coinsurance, and insuring less

than 90 percent of the value of each investment. Adoption of any of these

options, however, should be carried out with due consideration of U.S.

foreign policy objectives.

OPIC Has Generated

Sufficient Revenue to

Cover Its Losses

Historically, OPIC has generated sufficient revenues from its insurance and

finance programs to cover its operating costs and the losses associated

with its portfolio.

14Testimony of Linda F. Powers, Senior Vice President of Global Finance at Enron International, before

the Subcommittee on International Economic Policy and Trade, House Committee on International

Relations, March 18, 1997.

15OPIC’s reserves are primarily held in Treasury securities.

16Overseas Private Investment Corporation: Final Report on the Feasibility of Privatization (Feb. 7,

1996).

Page 12 GAO/NSIAD-97-230 Overseas Investment
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OPIC’s Insurance Program Since its inception through 1996, OPIC had about $500 million in insurance

claims and recovered all but $11 million of this amount from the disposal

of assets and recoveries from foreign governments.17 During the same

period, OPIC has received over $922 million in premiums from its insurance

activities. OPIC’s insurance revenues have exceeded its gross claims

payments in all but 3 fiscal years, excluding recoveries that OPIC obtained

after the claims were paid and liabilities were incurred but not reported.

Also excluded is interest from Treasury securities.

OPIC’s Finance Program According to J.P. Morgan Securities, Inc., OPIC’s finance program has

operated at a small loss or close to breaking even. Although OPIC’s cash

revenues from its finance program have exceeded all cash losses from

loans or loan guarantees since 1984, when operating costs and loan loss

provisions are included, OPIC’s finance program shows a net operating loss

for each year since 1993. If income from Treasury securities were

allocated for each of these years, the finance program would show a net

income.18

Under OPIC’s finance program, its direct loans, which by statute are only

available to small businesses, have experienced higher rates of

delinquencies19 and loan losses than its loan guarantees. Between 1984 and

1996, OPIC’s average direct loan loss rate was 4.4 percent; the loss rate was

at its highest, at 11.7 percent, in fiscal year 1984. In the same time period,

OPIC’s loan guarantee portfolio had an average loan loss rate of

0.56 percent for a combined rate (direct loans and loan guarantees) of

0.93 percent on average outstandings.

OPIC’s finance program has been subject to the Federal Credit Reform Act

of 1990, which became effective in fiscal year 1992.20 The act requires that

government agencies, including OPIC, estimate and budget for the total

17OPIC officials noted that the recoveries may not fully take into account the time value of money.

18The allocation of Treasury security interest income is relevant for financial statement purposes. With

regard to OPIC’s statement about its interest earnings, only those earnings properly allocable to its

credit program are relevant to the discussion of its credit subsidy estimates; under credit reform

requirements, interest earned on credit-related reserves is required to be included in estimating the

subsidy cost.

19Late payments on loans.

20The finance program is subject to the Federal Credit Reform Act of 1990 (Public Law 101-508, Nov. 5,

1990) for budgetary treatment.

Page 13 GAO/NSIAD-97-230 Overseas Investment
B-277618 

long-term costs of their credit programs on a present value basis.21 Based

on the required estimation of subsidy costs under credit reform, OPIC’s

finance program will cost the government $72 million in fiscal year 1997

and total about $135 million between fiscal years 1992 and 1996.22

Historically, OPIC’s combined finance and insurance programs have been

profitable and self-sustaining, including costs due to credit reform and

administration. The J.P. Morgan Securities, Inc., report23 stated that OPIC’s

finance program has operated at a small loss or close to breaking even and

that much of OPIC’s profitability has come from interest earned on Treasury

securities. This interest has accounted for over 60 percent of OPIC’s total

revenue over the past 6 years. In fiscal year 1996, OPIC’s net income was

$209 million, of which $166 million was interest on Treasury securities.

From a governmentwide perspective, interest on Treasury securities held

by OPIC represents transfers between two government agencies (that is,

OPIC’s income from Treasury securities is a Treasury expense) that cancel

each other out. From that perspective, OPIC’s net income from transactions

with the private sector, that is, fees and premiums, amounted to about

$43 million in fiscal year 1996.

OPIC Has Established a

Risk Management Strategy

OPIC’s risk management strategy focuses on limiting OPIC’s maximum

exposure to loss in any one country or sector. No single country accounts

for more than 15 percent of OPIC’s portfolio, effectively protecting OPIC

against the adverse consequences of catastrophic events in any one

country. The purpose of risk diversification is to spread the risk of one

transaction across a number of different transactions, thereby isolating

OPIC against the risk of one “catastrophic event.” As shown in figure 2,

OPIC’s portfolio is diversified across different regions of the world.

21Present value analysis calculates the value today of a future stream of payments/cash flows at the

appropriate discount (interest) rate.

22Subsidy costs arise when the estimated program disbursements by the government exceed the

estimated payments to the government on a present value basis over the term of the credit. Since fiscal

year 1992 (except for fiscal year 1995), OPIC has obtained appropriations to cover the costs of its

finance program. At the end of each fiscal year that appropriations have been received, OPIC paid

dividends to the Treasury equivalent to the finance program costs for the given year. The President’s

1996, 1997, and 1998 budget requests asked that Congress grant OPIC the authority to use its insurance

program resources to fund its finance program instead of receiving appropriations.

23Overseas Private Investment Corporation: Final Report on the Feasibility of Privitization (Feb.7,

1996).

Page 14 GAO/NSIAD-97-230 Overseas Investment
B-277618 

Figure 2: Regional Diversification of

OPIC’s Portfolio of Insurance and

Finance Programs, as of

September 30, 1996 (insurance and

finance combined)

Africa & M. East

Asia & Pacific

Central & E. Europe

The Americas

Newly indep. states

11%

20%

10%

41%

18%

Note: Maximum worldwide exposure: $19.8 billion.

Source: OPIC.

Although OPIC seeks to diversify its portfolio, figure 2 shows that the

countries of the Americas account for more than 40 percent of OPIC’s

portfolio. This trend is explained by the fact that U.S. firms choose to use

OPIC support in these markets. In general, OPIC’s portfolio is consistent with

U.S. foreign direct investment in emerging markets. Figure 3 displays

OPIC’s portfolio diversification by investment sector.

Page 15 GAO/NSIAD-97-230 Overseas Investment
B-277618 

Figure 3: Diversification of OPIC’s

Portfolio of Insurance and Finance

Programs by Sector, as of

September 30, 1996 (insurance and

finance combined)

Financial services

Telecommunications

Power

Manufacturing Oil and Gas

Mining

Other

20%

11%

29%

16% 9%

7%

8%

Note: Maximum worldwide exposure: $19.8 billion.

Source: OPIC.

OPIC’s risk management strategy also includes pre-approval review and

underwriting guidelines that take into account some of the same factors

other private and multilateral insurers use in evaluating projects. For

example, a risk analysis is performed as part of OPIC’s insurance approval

process, and a credit analysis is included in the finance approval process.

OPIC officials said they consider the same factors that any commercial

bank or insurance company would concerning the economics of a project

under consideration for financing or insurance.

Additionally, as of September 30, 1996, OPIC had accumulated over

$2.7 billion in reserves as part of its risk management strategy.24 These

reserves were raised from fees or premiums paid by users of OPIC’s

services and from the investment of these funds in Treasury securities.

OPIC’s reserves as a percentage of the total current exposure to claims have

declined somewhat in recent years due to the rapid increase in the size of

OPIC’s portfolio since 1994. The reserves as a percent of OPIC’s total

outstanding exposure have declined from 41 percent in 1992 to 34 percent

24If OPIC were to draw down its reserves that are comprised of Treasury securities to pay for losses,

the losses would be reflected in budget outlays.

Page 16 GAO/NSIAD-97-230 Overseas Investment
B-277618 

in fiscal year 1995. Despite this decline, J.P. Morgan Securities, Inc.’s, 1996

report on OPIC privatization concluded that these reserves are extremely

large relative to exposure by private sector standards and compared to

OPIC’s historical losses. Further, analysts at J.P. Morgan Securities, Inc., see

the reserves as adequate to cover OPIC’s losses in all cases but an

unprecedented disaster.

OPIC’s Overall Project

Limits Have Recently

Increased

In 1994, OPIC increased per project financing limits from $50 million to

$200 million and insurance coverage from $100 million to $200 million per

project. Although larger transactions increase the government’s contingent

liabilities, large loans are not necessarily more risky than small loans. For

example, 13 of the 14 loans currently in technical default or in a

non-performing status at the end of fiscal year 1996 were loans made to

small businesses and ranged in value from $328,000 to $12.5 million. In

addition, OPIC data show that its direct loans have historically experienced

more problems than its loan guarantees, which are mostly for high-value

loans to large companies. However, for insurance transactions, higher

project limits may or may not raise the overall level of risk for the

portfolio. On the one hand, OPIC could be subject to larger claims if a

foreign government, for example, were to expropriate an insured project.

On the other hand, if OPIC’s past experience with claims were to continue,

the government’s potential liability may be small. Since 1971, OPIC has

recovered over 98 percent of the claims it has paid.

We caution that OPIC’s past experience may not reflect future performance

because OPIC has new exposure to losses in the newly independent states

of the former Soviet Union, where it has had no previous experience.

Furthermore, some countries in the region are considered to be very risky

by the private insurers and bankers we spoke with.

Possible Options to

Reduce the Risks

Associated With OPIC’s

Insurance Portfolio

The private sector’s willingness to have greater involvement in some

emerging markets has created opportunities for OPIC to further reduce

risks in its insurance program. OPIC could share the risk of losses with the

private sector, which has shown an interest in emerging markets. For

example, OPIC could lower the risks associated with its portfolio through

reinsurance, coinsurance, and by decreasing project coverage or terms.

However, OPIC’s efforts to support U.S. foreign policy objectives, which

promote investment in risky markets, present challenges for OPIC when

considering ways to reduce the risks associated with its insurance

portfolio.

Page 17 GAO/NSIAD-97-230 Overseas Investment
B-277618 

Reinsurance Under the reinsurance scenario, OPIC could consider insuring part of its

high- and medium-risk portfolio with private sector insurance companies

at premium rates that are mutually acceptable. For example, OPIC could

enter into a contract with a large private insurer that would pay a specified

percentage of any claims to OPIC. Care must be taken to ensure that the

private insurer is not providing support exclusively for the lower-risk

transactions and that OPIC retains enough of the reinsured premiums to

cover its administrative costs. According to OPIC officials, OPIC had used

portfolio re-insurance by the private sector as a mechanism for managing

risk and stimulating U.S. private sector interest in providing risk insurance

until the mid-1980s. The Grace Commission concluded that given OPIC’s

low claims experience, there was no justification for the U.S. government

to pay reinsurance premiums that exceeded claims payments collected

from the reinsurers. After the Grace Commission’s study25 of OPIC’s

reinsurance practices, the Office of Management and Budget directed OPIC

to stop this practice because it was not cost-effective. OPIC officials told us

that OPIC is currently in discussions with the Office of Management and

Budget about the feasibility of once again pursuing portfolio reinsurance.

As noted earlier, private political risk insurance companies are showing

greater interest in emerging markets. This trend presents OPIC with

opportunities to negotiate fee or premium arrangements that it would not

have been able to negotiate in the past.

Coinsurance Another risk mitigation strategy that OPIC may use is providing more

coinsurance. It could coinsure a project with other private or public

insurers in order to share the associated risks and premiums. In this case,

the coinsurer would provide insurance that might or might not be identical

to the type provided by OPIC that would permit both parties to provide a

higher level and scope of coverage. For example, OPIC could provide

$100 million of coverage on a $200-million project, while a private entity or

a number of entities could provide the other $100 million of coverage. An

insurance industry official has publicly stated that OPIC could leverage its

resources by inviting the private sector to provide 50 percent of the

insurance required on a project. However, OPIC officials said that the

private sector’s reluctance to take long-term risk in risky markets limits its

opportunity to pursue coinsurance. OPIC has documented only 12 of 1,392

contracts that it has coinsured with the private sector since 1988.

25The Grace Commission was established in 1982 to identify opportunities for (1) efficiency

enhancement and cost reduction and (2) greater managerial accountability to provide information on

governmental expenditures and indebtedness. The Commission recommended that OPIC phase out

reinsurance on its expropriation and inconvertibility policies and seek reinsurance for its political

violence policies on a temporary basis.

Page 18 GAO/NSIAD-97-230 Overseas Investment
B-277618 

Risk Sharing A third risk mitigation strategy may be to reduce the coverage and terms

of OPIC’s insurance program. OPIC currently offers standard 20-year

insurance with 90 percent coverage of the value of the insured assets.26

One potential option would be that OPIC could insure less than 90 percent

of the value of each investment. OPIC’s rationale for insuring 90 percent,

rather than 100 percent, of the value of the assets is to ensure that the

investor or project sponsor has an incentive to manage its assets

prudently. Another option would be for OPIC to offer less than 20-year

coverage. For example, rather than providing its current 20-year standard

policy, OPIC could offer a standard 15-year term, as is the practice with

other public insurers, and provide 20-year cover only in certain cases.

Lastly, OPIC could require that the insured hold OPIC coverage for a

minimum of 3 years. These measures would lower the value of assets

covered, the length of coverage, and potentially the cost of coverage.

Regarding the risk-sharing option, OPIC officials said that reducing the

coverage level below 90 percent would have an adverse impact on small

businesses and might lead U.S. investors to seek insurance support from

foreign or multilateral sources that provide 90-percent coverage. They also

noted that it might not be practical to make a project sponsor hold the

coverage longer than he or she thinks is necessary or prevent him or her

from seeking alternative sources of insurance. However, since a reduction

in coverage is likely to come with a reduction in price, U.S. investors might

continue to seek OPIC coverage.

OPIC officials acknowledged that reinsurance, coinsurance, and greater risk

sharing may be sound risk management options, but are not without

trade-offs. For example, reinsurance may reduce OPIC’s income from

premiums because OPIC would have to pay premiums to the reinsurer.

Furthermore, OPIC takes on the credit risks of the reinsurer. The officials

also stated that OPIC would need to maintain flexibility as to how and when

to utilize these risk mitigation alternatives.

U.S. Foreign Policy

Encourages OPIC to Invest

in More Risky Markets

The U.S. foreign policy objective of promoting private investment in

developing countries encourages OPIC to take risks that the private sector

may not take without public support. OPIC, the State Department, and other

U.S. government officials consider OPIC to be a major tool for pursuing U.S.

foreign policy goals. One major U.S. foreign policy goal is to assist Russia

in its transition toward a free market economy. According to OPIC officials,

26When the insured asset is a loan, the term is usually for the life of the loan. Thus, an 8-year loan

would be insured for 8 years. Further, lenders are insured for 100 percent of the value of their loans.

Page 19 GAO/NSIAD-97-230 Overseas Investment
B-277618 

by entering into OPIC’s bilateral agreement in 1992, Russia began to

establish the conditions necessary for attracting private investment.

Further, OPIC operates to promote development strategies that are

consistent with internationally recognized worker rights. For example,

OPIC ceased operations in the Republic of Korea in 1991, due to concerns

over worker rights, including the arrest and imprisonment of labor union

leaders.

OPIC’s involvement in Russia was initially quite cautious, as it offered only

coverage for expropriation and political violence. OPIC officials noted that

as conditions improved in Russia, OPIC began offering coverage for

currency inconvertibility risk. Since 1992, OPIC has accumulated a finance

and insurance portfolio in Russia of $880 million and $1.6 billion,

respectively. OPIC justifies its involvement in the high-risk markets of the

former Soviet Union27—currently 18 percent of its portfolio—by noting its

central role in furthering the U.S. foreign policy objective of facilitating

private investment in these markets.

The private sector has tended to perceive the markets that OPIC operates in

as risky, and private investors have often sought support from official

sources when investing in these markets. According to OPIC officials, OPIC’s

goal is to support deals that would not be made without its support, and

OPIC as an agency of the U.S. government has access to risk mitigation

tools, including advocacy and intervention to avert claims, that are not

available to the private sector. This implies that OPIC would seek

transactions that the private sector believes would be too risky without

public support. If OPIC is to continue pursuing its mission, its portfolio will

always be considered more risky than the portfolios of private sector

insurers.

If OPIC Is Not

Reauthorized, Any

Shutdown Legislation

Should Address

Future Management

of OPIC’s Portfolio

OPIC’s authorizing legislation makes no provision for a phaseout process in

the event the agency is closed. Any legislation shutting down OPIC should

make clear whether OPIC’s portfolio should be moved to another agency or

managed by a temporary organization until the portfolio expires. It could

take as long as 20 years for OPIC’s portfolio to expire because many of

OPIC’s insurance contracts run for 20 years, and OPIC had more than

$5 billion in such contracts with 19-20 years remaining as of the end of

fiscal year 1996. According to OPIC’s projections, about one-third of the

27The countries that comprise the bulk of the former Soviet Union (also known as the newly

independent states) are Armenia, Azerbaijan, Belarus, Georgia, Kazakstan, Kyrgyz Republic, Moldova,

Russia, Ukraine, Uzbekistan, Tajikistan, and Turkmenistan.

Page 20 GAO/NSIAD-97-230 Overseas Investment
B-277618 

portfolio would remain after 10 years. If the portfolio risk diminishes,

Congress’ option to dispose of these assets is more viable.

Legislation Should

Establish Who Would

Manage OPIC’s Portfolio

If Congress decides not to reauthorize OPIC, any shutdown legislation

would need to address whether OPIC would continue to manage the

portfolio during a phaseout period or whether the portfolio should be

moved to another agency. If the portfolio is moved to another agency,

Congress would need to decide if any OPIC employees would be moved

with it to ensure an adequate and knowledgeable work force. According to

Office of Management and Budget officials responsible for overseeing OPIC

and related agencies, OPIC staff may be best suited to managing the

portfolio because they are familiar with the portfolio.28

According to OPIC and private sector financial officials, OPIC’s portfolio

could suffer losses if it is not properly managed, thereby increasing the

cost of closing the agency. For example, a successor entity would need to

monitor the construction of power and other projects, as well as political

developments in host countries and the portfolio’s financial performance,

to help prevent claims and/or defaults. Additionally, such an entity would

need to perform OPIC’s administrative and legislatively mandated functions,

including fee collection, repayment, environmental oversight, compliance

with worker rights, and other monitoring to ensure that clients comply

with their contractual agreements. According to OPIC officials, if finance

projects encountered payment difficulties, an entity would also be needed

to restructure the project and make collections where necessary.

If a decision were made to move OPIC’s portfolio to another agency, the

U.S. Eximbank would be the closest fit, according to Office of Management

and Budget officials who are also responsible for overseeing the U.S.

Eximbank. U.S. Eximbank officials also stated that their agency has many of the

appropriate skills to do the job.29 The Eximbank officials cautioned, however,

that their employees would not be familiar with the various monitoring

requirements that OPIC carries out. They noted that OPIC is a foreign policy

agency that provides development assistance while the U.S. Eximbank is an

export promotion agency whose emphasis is on expanding U.S. exports.

28OPIC’s process for providing U.S. firms with financial and insurance services involves (1) an

application and approval phase and (2) a period in which approved projects are monitored (see

flowcharts in apps. IV and V).

29The qualifications for OPIC professionals are similar to those for professionals at the Eximbank.

Many employees at both agencies have the same Office of Personnel Management job classifications.

These classifications include code 110 (economists), code 905 (general attorneys), code 1101 (general

business and industry specialists), and code 1160 (financial analysts).

Page 21 GAO/NSIAD-97-230 Overseas Investment
B-277618 

The U.S. Eximbank’s lack of familiarity with OPIC’s monitoring requirements

would be less of an issue if OPIC staff were transferred to the U.S. Eximbank.

Officials from three other agencies with responsibilities for overseeing

loans or insurance obligations, or for encouraging and tracking U.S.

investment in key overseas markets, all said that their agencies lack the

business skills and resources necessary to manage OPIC’s portfolio. These

agencies include the Departments of Commerce, State, and the Treasury.

Office of Management and Budget officials concurred that their agency

also lacks these skills and resources. In addition, officials from the Agency

for International Development, the agency from which OPIC was created,

said that their agency would not be well suited to managing OPIC’s portfolio

because the agency (1) does not provide political risk insurance,

(2) provides mostly grants, and (3) lends primarily to public entities (OPIC

lends to the private sector).

Other Issues to Be

Considered If OPIC Is Not

Reauthorized

Regardless of whether OPIC’s portfolio is turned over to another agency,

certain Office of Personnel Management rules would affect OPIC employee

entitlements as he or she is separated from government service.30 These

entitlements may include (1) retirement or severance pay,

(2) unemployment compensation, (3) the dollar equivalent of unused

annual leave, and (4) settlement from any pending equal employment

opportunity or other labor-related litigation.31 According to officials of the

Office of Personnel Management, if OPIC’s portfolio is moved to another

agency, Congress would have to decide if any OPIC employees are to be

moved with the portfolio. These officials said that reassignment of OPIC

employees to another agency, under current Office of Personnel

Management rules, would be temporary, lasting only until OPIC’s portfolio

expires or the government disposes of the portfolio.

If OPIC’s portfolio is moved to another agency, other issues might be

considered for easing the transition. For example, a timetable could be

30Previous agency phaseout experience indicates that personnel issues are the most difficult.

According to the Federal Deposit Insurance Corporation official responsible for managing the

phaseout of the Resolution Trust Corporation, there are lessons that can be learned from the

Resolution Trust’s termination. Although these lessons may not require specific legislative action,

there are steps that may be taken to mitigate personnel problems in the event of a phaseout. They

include (1) setting up a joint task force with representatives from both OPIC and the portfolio

monitoring entity so that the OPIC participants feel they have some say in how matters are resolved

and (2) establishing a mechanism for employee communications to reduce uncertainty and anxiety.

31Severance pay can be up to an employee’s current gross annual salary, depending on the employee’s

age and length of government service. Unemployment compensation would begin only if the employee

has not yet found a new job once the severance pay is exhausted.

Page 22 GAO/NSIAD-97-230 Overseas Investment
B-277618 

established for transferring OPIC functions to the designated agency. In the

absence of specific congressional direction, General Services

Administration regulations would apply governing the disposal of OPIC’s

property including the transfer of office furniture and equipment. In

addition, OPIC said it has a commercial real estate lease that runs to

June 30, 2007.32

OPIC’s Portfolio May Take

20 Years to Expire

A phaseout of OPIC would require ceasing new business as of a certain

date.33 Also, a phaseout could take as long as 20 years. OPIC’s investment

funds run for 10 years; its loans and guarantees, a maximum of 15 years;

and its insurance policies, a maximum of 20 years.

According to OPIC estimates, which assume a 10-percent annual drop in the

declining remainder of the insurance portfolio due to both cancellations

and policies ending at term, the agency’s potential exposure of $23 billion

for all services would fall by 64 percent, to $8.2 billion, after 10 years.

During the same period, OPIC estimates that its current staff of 200 would

decrease by more than 70 percent to about 60 people as the portfolio

diminishes. We compared OPIC’s assumptions concerning insurance

cancellations and contracts ending at term to historical data and found

these assumptions to be generally consistent with these data.34 According

to OPIC, just under 10 percent of the original exposure would remain in the

20th year, with less than 8 percent of the staff needed to monitor it. The

decline in OPIC’s portfolio is shown graphically in figure 4. The insurance

portion of the portfolio is by far the largest, currently at just under

$16 billion. This portion is about 3 times the value of the finance portion

and almost 8 times that of the investment fund portion. In the 20th year,

just the insurance portion would be left, having dropped by 86 percent to

just over $2 billion (see fig. 4).

32According to OPIC officials, if OPIC terminates this lease without finding a suitable sublessee, it

would be liable for the payment of 1 year’s rent (about $4 million) as liquidated damages.

33OPIC issues a “commitment letter” when it approves a project. As of the end of fiscal year 1996,

OPIC’s insurance commitment letters covered $3.4 billion, 25 percent of its total insurance portfolio;

its finance commitments stood at $1.6 billion, or 38 percent of its total finance portfolio (excluding

investment funds). Any legislation phasing out the agency should recognize the existence of the

commitment letters. According to OPIC officials, legislation that does not give effect to these

commitments would result in a U.S. government liability.

34Our analysis compared OPIC’s assumed 10-percent rate of decline to past experience regarding

OPIC’s insurance cancellation rates. We also subjected OPIC’s calculations to a 15-percent annual

decline and compared this to the previous results to determine the sensitivity of OPIC’s assumption.

Using OPIC’s 10-percent assumption, 35 percent of the insurance portfolio would remain after 

10 years, versus 20 percent if the 15-percent assumption is used.

Page 23 GAO/NSIAD-97-230 Overseas Investment
B-277618 

Figure 4: Projected Phaseout of OPIC’s Portfolio

97 98 99 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 17

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

Fiscal years

Dollars in millions

insurance finance funds

Disposal of Portfolio

Assets Could Be Revisited

in the Future

Although the government may wish to divest OPIC’s portfolio before its

expiration by selling it to the private sector, such a decision would need to

account for the relative riskiness of OPIC’s portfolio and any discounts such

a disposal would necessitate. According to a recent study, a privatization

of OPIC’s current assets could only be accomplished at a discount.35 As

OPIC’s portfolio matures during a phaseout, external factors may affect the

riskiness of the portfolio, either negatively or positively, and thus any

potential privatization discount.

If existing economic and political trends continue in the markets where

OPIC currently operates, OPIC’s portfolio may become less risky. With each

year that passes, the length of the government’s obligation decreases and

the insured as well as the government becomes more familiar with the

risks and issues inherent in a given transaction. As stated earlier, OPIC’s

clients tend to cancel their insurance coverage after a few years as they

35Overseas Private Investment Corporation: Final Report on the Feasibility of Privitization

(Feb. 7, 1996).

Page 24 GAO/NSIAD-97-230 Overseas Investment
B-277618 

feel more comfortable with the political risks. On the other hand, OPIC’s

portfolio may experience greater risk. In general, long-term transactions

are riskier than similarly situated short-term loans, guarantees, or

insurance transactions. Also, according to OPIC officials, cancellations are

more likely to occur in the lower-risk segment of OPIC’s portfolio, thus

making the portfolio riskier in the future than it is today. Either

situation—less risk in the portfolio or greater risk—may occur.

Regardless of the risk characteristics of the portfolio over time, OPIC’s

portfolio will decrease. As the portfolio decreases, the amount of the

discount will decrease for a given risk in the portfolio. If the quality of the

portfolio improves as a result of improvements in OPIC markets, then the

rate of discount will likely be much lower or even disappear. If, on the

other hand, the portfolio becomes more risky over time, the rate of

discount is likely to increase. Since the condition of this portfolio a decade

or more from now is unclear, the government has the option of revisiting

its choice to sell the portfolio if the risk is reduced.

Agency Comments OPIC provided written comments on a draft of this report. OPIC generally

agreed with the information and analyses in the report. In commenting on

the draft, OPIC provided additional information to further clarify its view of

(1) the role of the private sector, (2) risk mitigation opportunities, and

(3) phaseout issues. OPIC also orally provided technical corrections and

updated information that were incorporated throughout the report where

appropriate. OPIC’s comments are reprinted in appendix VI, along with our

evaluation of them.

Scope and

Methodology

To identify trends in private sector investment in developing markets and

the public sector’s role in these markets, we focused on various

characteristics. Specifically, we obtained and analyzed World Bank data

on the extent and types of private capital flows going to finance

infrastructure and the trend of these flows over time. To identify the

recent developments in the volume and types of investment support

provided by the public and private sectors for investments overseas, we

obtained and compared information from (1) five large private providers

of political risk insurance; and (2) the largest public providers of

investment support representing France, Germany, Japan, Canada, Italy,

the United Kingdom, and the United States. (see app. II) and the

Multilateral Investment Guarantee Agency. We also discussed with the

Berne Union information on the nature of political risk insurance and the

Page 25 GAO/NSIAD-97-230 Overseas Investment
B-277618 

role and capability of the public and private sectors. We obtained total

insurance exposure data directly from the Group of Seven (G-7)36

insurance providers. Regarding financing, we obtained information from

major financial institutions that provide financing to U.S. investors,

including the Chase Manhattan Bank and Citibank, and the International

Finance Corporation. We also discussed the international finance

environment with Standard & Poor’s Ratings Services and Moody’s

Investors Service, two large financial rating agencies. An important

component of our analysis of private sector investment was the

identification of the kinds of investment services U.S. investors have

utilized in various developing countries or economies in transition as well

as countries in which OPIC is not open for business (for example, China

and Mexico). To obtain this information, we surveyed a judgmental sample

of 34 U.S. investors that had made major investments within the last 

5 years in the power and telecommunications sectors.37 We selected the

power and telecommunications sectors because they (1) are listed as the

major sectors of growth in emerging markets38 and (2) represented two of

the four largest sectors supported by OPIC.

39 Since these sectors have

considerably different resource requirements and risks, their inclusion

allowed us to make several important distinctions regarding the

investment environments in which they operate.

To survey firms in the power and telecommunications sectors operating

overseas, we (1) reviewed relevant literature including the Directory of

American Firms Operating in Foreign Countries and U.S. Security and

Exchange Commission data, (2) contacted appropriate Department of

Commerce officials, (3) reviewed OPIC’s annual reports that list overseas

investors, and (4) asked the firms contacted to identify their major

competitors. We attempted to contact the 54 firms identified and

successfully interviewed 34. We asked each firm to identify the projects it

was involved in over the past 5 years, how these projects were structured,

36Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States.

37We characterize our sample as judgmental due to the difficulties associated with identifying the

universe of firms with overseas investments in these sectors. As a result, we did not randomly select

the firms chosen.

38According to International Finance Corporation data, the power and telecommunication sectors

represented about 67 percent of all private investment in developing countries between 1990 and 1995.

39The financial services and manufacturing sectors are larger than the telecommunications sector. We

did not include the financial sector in our sample because it is an intermediary activity that combines

investments in various sectors, including power and telecommunications. We did not include the

manufacturing sector because, although this sector has received a considerable amount of OPIC

support in the past, only a small amount of OPIC’s business in the last 5 years has been in this sector.

Page 26 GAO/NSIAD-97-230 Overseas Investment
B-277618 

their views on the nature of the risks involved, and how it mitigated the

risks.40

To determine OPIC’s risk management strategy and the steps that OPIC may

take, if it is reauthorized, to further reduce portfolio risks while pursuing

its objectives, we obtained and reviewed documents on OPIC’s risk

assessment policies and financial reports that detailed the condition of

OPIC’s portfolio. We also gathered and reviewed information on the risk

assessment policies of two World Bank institutions (the Multilateral

Investment Guarantee Agency and the International Finance Corporation),

organizations that have programs comparable to OPIC’s insurance and

finance programs. To support our analysis of these policies, we

interviewed OPIC, Treasury, and State Department officials. Furthermore,

we interviewed officers of private banks, investment institutions, and

political risk insurance companies about steps that OPIC could pursue in

reducing the risks associated with its portfolio.

To determine the issues that would need to be addressed and the time it

would take to phase out OPIC if it is not reauthorized, we reviewed laws

and regulations and discussed applicable policies and practices with

officials from the Office of Personnel Management, the General Services

Administration, and the Office of Management and Budget. In addition, we

reviewed our past work on the closure of the Resolution Trust

Corporation and interviewed the Federal Deposit Insurance Corporation

official responsible for managing the phaseout of the Resolution Trust

Corporation. To determine how long it would take for OPIC’s obligations to

expire, we obtained documents from OPIC on (1) its current financing and

insurance obligations, (2) its insurance policy cancellation rates, and

(3) its projections on the duration of its existing portfolio and the

resources it would require to manage the portfolio. To assess the

reasonableness of these projections, we reestimated OPIC’s analysis using a

higher projected phaseout rate. With regard to which agency might be best

suited to manage OPIC’s existing portfolio until the obligations expire, we

interviewed officials from the Agency for International Development, the

Commerce Department, the U.S. Eximbank, the National Economic Council,

the Office of Management and Budget, OPIC, the State Department, and the

Treasury Department. We also obtained Office of Personnel Management

documents showing job classifications at OPIC and two other agencies—the

Agency for International Development and the U.S. Eximbank.

40Our analysis did not consider the implications closing OPIC would have on the private sector. Such

an analysis would be highly speculative; and as we discuss in the report, there are many public and

private sector alternatives to OPIC available to private investors.

Page 27 GAO/NSIAD-97-230 Overseas Investment
B-277618 

We conducted our review from January 1997 to July 1997 in accordance

with generally accepted government auditing standards.

We are sending copies of this report to appropriate congressional

committees and the President and Chief Executive Officer of the Overseas

Private Investment Corporation. We will also make copies available to

other interested parties upon request.

This review was done under the direction of JayEtta Z. Hecker, Associate

Director. If you or your staff have any questions concerning this report,

please contact Ms. Hecker at (202) 512-8984. Major contributors to this

report are listed in appendix VII.

Sincerely yours,

Benjamin F. Nelson

Director, International Relations

 and Trade Issues

Page 28 GAO/NSIAD-97-230 Overseas Investment
Page 29 GAO/NSIAD-97-230 Overseas Investment
Contents

Letter 1

Appendix I 

Firms Contacted

During the Review

32

Appendix II 

Main Features of the

Group of Seven

Investment Insurance

Programs

34

Appendix III 

Regional Investment

Insurance Exposure

of the Major Group of

Seven Providers

35

Appendix IV 

OPIC Insurance

Process

36

Appendix V 

OPIC Finance Process

37

Appendix VI 

Comments From

OPIC

38

Appendix VII 

Major Contributors to

This Report

47

Page 30 GAO/NSIAD-97-230 Overseas Investment
Contents

Figures Figure 1: Net Private Capital Flows to Developing Countries,

1986-96

6

Figure 2: Regional Diversification of OPIC’s Portfolio of

Insurance and Finance Programs, as of September 30, 1996

15

Figure 3: Diversification of OPIC’s Portfolio of Insurance and

Finance Programs by Sector, as of September 30, 1996

16

Figure 4: Projected Phaseout of OPIC’s Portfolio 24

Abbreviations

Eximbank U.S. Export-Import Bank

OPIC Overseas Private Investment Corporation

Page 31 GAO/NSIAD-97-230 Overseas Investment
Appendix I 

Firms Contacted During the Review

Firms Surveyed

Power Companies AES Corporation

Coastal Power Energy

CalEnergy Company, Inc.

CMS Energy Corporation

Constellation Power, Inc.

Dominion Resources, Inc.

Duke Energy International, Inc.

Enron International

GE Capital Corporation

GPU International, Inc.

Houston Industries Energy, Inc.

Edison Mission Energy

Ogden Energy Group, Inc.

TECO Power Services Corporation

El Paso Energy International

The Wing Group Ltd. Co.

Telecommunications

Companies

Adelphia Communications International

African Communications Group, Inc.

Ameritech Corporation

Andrew Corporation

BellSouth Corporation

Comcast Corporation

Chase Enterprises

D & E Communications, Inc.

GTE Service Corporation

Hungarian Telephone & Cable Corporation

Lucent Technologies, Inc.

MCT of Russia, L.P.

Millicom International Cellular, S.A.

Motorola, Inc.

Radiomovil Digital Americas, Inc.

Telecel International, Inc.

SBC Communications Inc.

US WEST International Holdings, Inc.

Page 32 GAO/NSIAD-97-230 Overseas Investment
Appendix I 

Firms Contacted During the Review

Other Public and Private

Entities Contacted

American International Group, Inc.

AT&T

Bechtel Corporation, Inc.

Berne Union

The Chase Manhattan Bank, N.A.

Citibank, N.A.

Citicorp International Trade and Indemnity

Citicorp North America, Inc.

Exporters Services

FCIA Management Company, Inc.

International Finance Corporation

MCI Communications

J.P. Morgan Securities, Inc.

Lloyd and Thompson Insurance Co.

Multilateral Investment Guarantee Agency

Moody’s Investors Service

NYNEX

Sedgewick Reinsurance Brokers Ltd.

Standard & Poor’s Ratings Services

Taylor-DeJongh, Inc.

Unistrat Corporation of America

Page 33 GAO/NSIAD-97-230 Overseas Investment
Appendix II 

Main Features of the Group of Seven

Investment Insurance Programs

G-7 Country Investment Eligible investors

Eligible

enterprises Coverage limits

Maximum duration risks

covered

France/COFACE Legal entities registered in

France.

No restrictions. No limit. 15 years.

Expropriation, war,

inconvertibility, breach

of government commitments.

Germany/C&L Domestic German entities. No restrictions. No limit. 15 years.a

Expropriation, war,

inconvertibility, breach of

government contracts.

Japan/EID/MITI Persons and entities existing

in Japan.

No restrictions. $500 million per

project.

15 years.b

Expropriation, war,

inconvertibility, bankruptcy

after 2 years of operation.

Canada/EDC Persons or business beneficial

to Canada.

No restrictions. No limit. 15 years.

Expropriation, war,

inconvertibility.

Italy/SACE Persons or entities domiciled

in Italy.

Developing

countries only.

No limit. 15 years.

Expropriation, war,

inconvertibility, natural

catastrophe.

U.K./ECGD Persons and entities carrying

on business in United

Kingdom.

No restrictions. No limit. 15 years extendable to 20.

Expropriation, war,

inconvertibility,

breach of contract by host

government.

U.S./OPIC U.S. citizens and entities and

foreign entities 95% owned by

U.S. interests.

Developing

countries only.c

$200 million 

per project.

20 years.

Expropriation, war,

inconvertibility, breach of

contract by host government.

aTwenty years if a project involves long construction period.

bLonger periods for projects with long construction periods; commercial risk for 10 years with

longer periods possible.

cBilateral agreement required; host government attitude toward human rights, worker rights

considered; environmental impact considered.

Source: Overseas Private Investment Corporation (OPIC) Insurance Department.

Page 34 GAO/NSIAD-97-230 Overseas Investment
Appendix III 

Regional Investment Insurance Exposure of

the Major Group of Seven Providers

U.S. dollars in millions

Major insurance providers Asia/ Pacific Europea Africab The Americasc Reported total

Japan

MITI/EID

Unavailable Unavailable Unavailable Unavailable $13,943

U.S.

OPICd

$ 2,740 $3,517 $ 1,554 $ 6,622 $13,386e

Germany

C&L

2,751 3,826 650 608 7,835

France

COFACE

1,050 730 1,590f 100 3,470

Canada

EDC

50 250 40 910 1,250

U.K.

ECGD

380 110 48 2 540

Italy

SACE

2 Unavailable Unavailable 39 41

Total N/A N/A N/A N/A $40,465

Note: All data are as of 1996; exchange rates as of December 31, 1996.

aEurope includes the former Soviet Union, Eastern Europe, and Turkey.

bAfrica includes the Middle East.

cThe Americas includes Central America, South America, and the Caribbean.

dOPIC data as of September 30, 1996.

eThe sum of the geographic regions exceeds the reported total by $1,048,133 due to a

client-specific stop loss adjustment that limits OPIC’s liability.

f

French data for Africa include Middle East and Turkey.

Source: Group of Seven Insurance Providers.

Page 35 GAO/NSIAD-97-230 Overseas Investment
Appendix IV 

OPIC Insurance Process

Approval process

Determine effects of project on U.S. 

economy and obtain clearances pertaining 

to environmental impact, worker and 

human rights issues

Present to investment committee

Present to board of directors

Policy review committee

Perform risk analysis

Negotiate contract

Execute contract or commitment letter

Application process

Preliminary review of application

Monitoring process

Annual reporting by clients

Perform periodic monitoring for compliance

 with effects on U.S. economy, environmental

 impact, worker and human rights issues

Advocacy efforts to head off claims

Recovery of claims

Retire expired contracts

Page 36 GAO/NSIAD-97-230 Overseas Investment
Appendix V 

OPIC Finance Process

Formal screening meeting

Conduct reference and credit checks

Perform credit analysis on project and 

sponsors

Conduct site visits

Determine effects of project on U.S. 

economy and obtain clearances 

pertaining to environmental impact, 

worker and human rights issues

Application and credit assessment

process

Approval process

Present credit due diligence report

Assign pre disbursement loan rating

Meet with finance-credit committee

Present to investment committee meeting

Present to board

Prepare commitment letter/term sheet

Negotiate loan documents with borrower and 

prepare loan agreement

Monitoring process

Monitor construction of projects (with 

each disbursement)

Conduct annual loan review

Conduct independent, periodic credit 

review

Revise/amend agreements as needed

Perform periodic monitoring for 

compliance with effects on U.S. 

economy, environmental impact, worker 

and human rights issues 

Close out loan

Page 37 GAO/NSIAD-97-230 Overseas Investment
Appendix VI 

Comments From OPIC

Note: GAO comments

supplementing those in the

report text appear at the

end of this appendix.

See comment 1.

Now on p. 12

Now on p. 14

Now on p. 12.

Now on p. 17.

Now on p. 9.

Page 38 GAO/NSIAD-97-230 Overseas Investment
Appendix VI 

Comments From OPIC

Now on p. 20.

Now on p. 14.

Now on p. 10.

See comment 2.

Page 39 GAO/NSIAD-97-230 Overseas Investment
Appendix VI 

Comments From OPIC

Page 40 GAO/NSIAD-97-230 Overseas Investment
Appendix VI 

Comments From OPIC

See comment 3.

See comment 4.

See comment 5.

Page 41 GAO/NSIAD-97-230 Overseas Investment
Appendix VI 

Comments From OPIC

See comment 6

Page 42 GAO/NSIAD-97-230 Overseas Investment
Appendix VI 

Comments From OPIC

See comment 7.

See comment 8.

Page 43 GAO/NSIAD-97-230 Overseas Investment
Appendix VI 

Comments From OPIC

See comment 9.

See comment 10.

Page 44 GAO/NSIAD-97-230 Overseas Investment
Appendix VI 

Comments From OPIC

The following are GAO’s comments on OPIC’s letter dated August 6, 1997.

GAO Comments 1. The points that OPIC highlights are there own interpretation of our

analyses. Several points discussed by OPIC, such as the health of their

reserves, filling a commercial void and the impact of its activities on U.S.

employment, are not our specific conclusions. Rather, the report provides

factual information and our analysis of the trends in private sector

investment, the public sector’s role in emerging markets, OPIC’s portfolio

and risk management strategy, and issues to be addressed if OPIC were not

reauthorized.

2. Information in the report on OPIC’s risk management strategy is not

restricted to a discussion of how OPIC limits exposure in any one country

or sector. The report also includes a discussion of OPIC’s pre-approval

review process and underwriting guidelines. Appendixes IV and V contain

information on the application, approval, and monitoring processes for the

insurance and finance programs.

3. Although the report notes that the larger finance projects tend to be less

risky than smaller projects, we do not agree that the same is necessarily

true for OPIC’s insurance projects. Financing involves commercial risks

that well-capitalized and experienced private participants have greater

influence in mitigating. However, political risk insurance only covers

actions taken by governments—actions that are less within the control of

the private sector.

4. The report discusses only the recent growth in privately provided

political risk insurance. The extent to which the private market capacity

for political risk insurance would be affected by changes in demand for

property/casualty coverage is not certain.

5. We recognize that OPIC has in some cases pursued the risk mitigation

options discussed in the report. However, we believe that the private

sector’s current high level of interest in investing in emerging markets has

created opportunities for OPIC to further reduce portfolio risk through

greater use of the options presented.

6. The report provides OPIC data that show 18 (now 12) cases since 1988 in

which OPIC coinsured with the private sector. Although there may be other

cases in which the private sector provided insurance to investors also

insured by OPIC, this information is more anecdotal and these instances

Page 45 GAO/NSIAD-97-230 Overseas Investment
Appendix VI 

Comments From OPIC

would not represent cases in which OPIC formally sought to coinsure with

the private sector.

7. We revised the report to reflect that any loss that was covered by a

drawdown in reserves (that are comprised of Treasury securities) would

become a budgetary outlay. However, we do not agree that such an outlay

should then be compared to the offsetting collections that OPIC receives. If

it were necessary for OPIC to redeem Treasury securities, then it would

need more cash to cover losses than it would be taking in.

8. The report states that under the Federal Credit Reform Act of 1990,

agencies are to estimate and budget for long-term costs of their credit

programs on a present value basis. Subsidy costs arise when the estimated

program disbursements by the government exceed the estimated

payments to the government on a present value basis. The subsidy cost

data in our report are based on OPIC’s reported estimates. In order to show

lower subsidy costs, the costs must be reestimated, with key factors such

as the credit risk of the borrowing country showing improvement. OPIC

identified $72 million in subsidy costs for fiscal year 1997 programs.

With regard to OPIC’s statement about its interest earnings, only those

earnings properly allocable to its credit program are relevant to the

discussion of its credit subsidy estimates. Under credit reform

requirements, interest earned on credit-related reserves is required to be

included in estimating the subsidy cost.

9. We modified the report to include this information.

10. We modified the report to include this information.

Page 46 GAO/NSIAD-97-230 Overseas Investment
Appendix VII 

Major Contributors to This Report

National Security and

International Affairs

Division, Washington,

D.C.

Jaime Dominguez

Kay Halpern

John Hutton

Patricia Martin

Tom Melito

Rona Mendelsohn

Eluma Obibuaku

Office of the General

Counsel, Washington,

D.C.

Ernie E. Jackson

Los Angeles Field

Office

Tom Zingale

(711244) Page 47 GAO/NSIAD-97-230 Overseas Investment
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