Capitol Comment 157 – The Case Against OPIC

“I cannot see any redeeming aspect in the existence of OPIC. It is special interest legislation of the worst kind, legislation that makes the problem it is intended to deal with worse rather than better … OPIC has no business existing.”

— Nobel laureate Milton Friedman

September 5, 1996

The Overseas Private Investment Corporation (OPIC) provides direct loans, loan guarantees and investment insurance against currency inconvertibility, expropriation and political violence to corporations and others investing in developing and emerging markets. By transferring investment risks from private-sector corporations to taxpayers, this government agency, formally established in 1971, is a shining example of corporate welfare. OPIC should be abolished. This has been proposed in S. 519, H.R. 387, and H.R. 1171 by Sen. Wayne Allard (R-Colo.), Rep. Robert Andrews (D-N.J.) and Rep. John Kasich (R-Ohio) respectively.

This agency has grown spectacularly in the 1990s, increasing its project financing and political risk insurance portfolio from $5.6 billion in 1989 to $19.8 billion at the end of fiscal year 1996. Last year alone, OPIC backed a record 169 new projects, including everything from gold mining in Ghana, to a hamburger bun bakery in Brazil, to oil field development in Kazakstan, to home construction in Belize, to fishing in Russia. According to the agency’s 1996 annual report, sixty percent of the projects were in the areas of telecommunications, financial services, and energy and power.

OPIC proponents say the corporate welfare label is inappropriate, but a look at their arguments reinforce the fact that the label is well deserved:

No risk to taxpayers? OPIC claims that over the years it has accumulated $2.7 billion in reserves that could be tapped should the program suffer losses. But this money has been lent to the U.S. Treasury and has already been used to finance out-of-control government spending – it is not available to protect taxpayers. OPIC’s “reserves” are no more real than the Social Security “trust fund.”

Moreover, while OPIC proponents boast of minimal losses in the program in the past, it remains to be seen if the recent explosive growth in extremely risky OPIC commitments can withstand the test of time – especially since insurance policies may extend as long as 20 years. OPIC’s taste for high-risk projects is hardly a secret. As then OPIC President Ruth R. Harkin stated, “Where we are going, in many cases, the risk is so high it is really impossible to calculate.”1

Profitable? OPIC’s annual report claims $209 million in profits for 1996, but $166 million of OPIC’s revenues came from the Treasury in the form of interest on the “reserves” of the program. Since the Treasury has already spent the money, however, this $166 million is paid by current taxpayers or is raised through borrowing by the federal government (a tax on future taxpayers). More importantly, regardless of OPIC’s current balance sheet, OPIC could add billions of dollars to the deficit if overseas conditions change. Like the savings and loan industry, OPIC can look pretty good on paper until disaster strikes.

Increasing exports? According to the Trade Promotion Coordinating Committee, exports supported by three key U.S. export-subsidy agencies – OPIC, the Export-Import Bank and the Trade and Development Agency – account for less than four percent of all U.S. exports.

Creating jobs? Contrary to the claims of OPIC proponents, the program does not increase overall job creation. Rather, in a world of limited resources, OPIC merely channels money toward politically favored projects at the expense of job-creating investment opportunities elsewhere.

Promoting market reforms? Ironically, OPIC allegedly promotes privatization and other market reforms. In fact, the opposite is often true. When the federal government covers their losses, investors may be willing to plow money into countries with unsound economic policies – removing the pressure for domestic reforms – that they otherwise would not consider.

A foreign aid substitute? In theory, OPIC may be a comparatively inexpensive alternative to foreign aid, but only because foreign aid has proven to be an extremely expensive failure. In practice, countries around the globe receive OPIC aid and foreign aid alike. The only workable foreign aid substitute is a reduction in U.S. trade barriers, which would spur growth in developing countries just as it would lower prices for American consumers.

The skyrocketing number of commitments by OPIC in recent years involving extremely high risks, the prospect for more of the same and the lack of taxpayer protections in the event of a financial meltdown turn this government program into an accident waiting to happen. Scrapping the agency now is the best way to protect taxpayers.

1 Questions and Answers; Ruth R. Harkin, President and CEO, Overseas Private Investment Corp., San Diego Union Tribune, April 21, 1996, p. G5.