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. 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. 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. 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, 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. 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. 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. 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, 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. 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. 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, 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. 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. 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. 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. 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 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.