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The CGD Podcast
The Little Agency That Could
00:19:00
Elizabeth Littlefield, President and CEO of the Overseas Private Investment Corporation, sits down with me to discuss the agency's success in leading the transition from aid to private finance (despite its modest size), as well as what it has in store...
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- [00:01]
A
Hello and welcome to another edition of the CGD podcast with me, Rajesh Merchandani. My guest today leads an organization that describes itself as the US Government's development finance institution. Opic, or the Overseas Private Investment Corporation, mobilises private capital to solve development challenges. Since it started in 1971, it supported more than $200 billion of investment in more than 4,000 projects generating growth in developing countries as well as trade and jobs here in the us. Its president and CEO is Elizabeth Littlefield and I'm very happy to say that she joins me today. Elizabeth, wonderful to see you.
- [00:39]
B
Nice to be here. Thank you.
- [00:40]
A
So we gave a few statistics there about OPIC over the years since it started. What's true though also is that when OPIC started, aid was a much bigger deal in terms of development than private finance. But that's changed now, hasn't it?
- [00:54]
B
Absolutely. You know, when OPIC was carved out of USAID some, you know, some 40 odd years ago at that time, the vast majority of money flowing into the emerging markets, into poor countries was aid, was grant money and only a little sliver of it was foreign direct investment. And we've seen in the ensuing, you know, 40 years that's completely flipped. So now it's $1 of aid for every $1 of aid, it's $7 of foreign direct investment.
- [01:20]
A
I think a lot of people would be surprised by that as well. Why do you think that has changed?
- [01:25]
B
Well, I think, first of all, I think countries are understanding that foreign direct investment is a big driver of both growth and job creation in those markets. And frankly, companies throughout the world are realizing that the activity and the real growth in the world has been in these emerging markets. So companies throughout the world are looking beyond their shores to make investment. It's about globalization at the end of the day.
- [01:47]
A
And I guess it's a bit of a validation of your model, really.
- [01:50]
B
Well, absolutely. I mean, it shows that Richard Nixon way back then was very prescient in realizing that you actually needed a dedicated bank, if you will, to serve those investors that were going to be investing in these markets. And you know, Rajesh, what else we've seen is that in those 40 years, not only has the foreign direct investment and the overseas ODA flipped, but we've seen the creation of a number of development finance institutions such as OPEC all over the world. And those DFIs, development finance institutions are growing by leaps and bounds. There was an interesting study that was done by another group here in Washington that showed that together the DFIS about a decade ago were financing what, $10 billion a year in investments and now it's $40 billion. So that's a huge growth that we've seen in recent years.
- [02:42]
A
I mean, there's work that we do here at CGD that's led by my colleague Ben Leo, that calls very loudly for what we call OPIC to be unleashed to allow you to become a full service U.S. development Finance Corporation, which seems to suggest that you could be doing more. How would that work and what would it allow you to do?
- [03:01]
B
Right. Well, first of all, we're extremely proud of what the agency is doing right now with very limited resources. As you know, we're about an $18 billion portfolio in about 106 countries making consistently between $3 billion and $500 million a year, all with nothing but 230 or 40 staff.
- [03:20]
A
Making, you mean in terms of returning to the Treasury?
- [03:22]
B
Returning money to the treasury every year in that range. So among the development finance institution peers throughout the world, we're actually very, very small in terms of resources, but not so small in terms of our financial impact. So that study I thought was a very interesting one. And CGD has consistently been a leader in calling for an amplification of the role of private capital in development and pointing to the fact that the US Right now doesn't have the right tools and instruments in the right places to actually do as much as we could be doing to meet the opportunity and the challenge. So I welcome the paper and I think it's been, it has been over the last few years fueling a lot of very interesting conversations and constructive ones in Washington and elsewhere. So we welcome that conversation continuing.
- [04:14]
A
Would you like to be bigger?
- [04:16]
B
Well, right now we see that we are such a small, such a small agency relative to the opportunity. How could we possibly serve all of the US Companies that are interested in, in investing in emerging markets but won't do it without the financing or the insurance that we can provide with only 230 staff here in Washington. So we're too small for the global challenges. Proud of what we're doing with what we've got, but could be bigger. And I also think some of the other reforms that they're suggesting could be very useful to us in terms of flexibilities and instruments to get the job done.
- [04:50]
A
What sort of thing do you think will be good?
- [04:52]
B
Well, first and foremost, I think the most important thing is that we get the human resources to be able to meet business challenges and to do more. Right now we just simply don't have the staff to cover the opportunities that we want to cover. And we see that other institutions are growing much, much faster than we, whether they be Asian institutions or European ones. So the other thing that the paper calls for is more instruments. For example, it notes that OPIC is the only development finance institution to have neither grant authority nor equity authority. And I think that's an interesting thing to think about. And I'm not sure I believe that we should have grant authority. It's the one area where we've differed because I do believe that's the expertise in the business of usaid, whereas our expertise in business is really in the pure profit. I didn't mean pure profit, purely private, financial, commercial approach to stimulating private capital flows into these emerging markets. So I think the grant authority should probably stay with aid, but we'd like to find ways to better align ourselves so that we can work more closely together in circumstances where a given problem requires both grant capital and debt finance, such as our own.
- [06:08]
A
Now, you mentioned European and Asian institutions. There's been a lot of talk recently about the aiib. What sort of threat or challenge is that to the US position in global development? Is the US missing out on something here?
- [06:24]
B
Well, I certainly think that when you look at the $4 trillion that emerging markets countries need in investment in infrastructure and other things, additional providers of capital are very welcome. The only thing that I would emphasize, as others have done, is that we would hope and urge that the same standards of environmental and labor and social standards that have been so hard won and are now widely embraced by most of the development agencies are also embraced by these new actors. Because, you know, we feel that our development impact isn't just coming from the financing, it's coming from those standards themselves. So when we finance organizations and companies that invest in these markets, they lift the standards in those markets of human rights and labor and environmental standards. And we'd like to see that development impact continue by ensuring that new actors embrace those high standards as well.
- [07:17]
A
I mean, there's no suggestion to. There's no reason to suggest that they wouldn't. But you mentioned the issue of labour rights and human rights, which is a really interesting point because one of the things I've been hearing a lot about from civil society organizations and NGOs, when they're thinking about, for example, the Financing for Development conference coming up in Addis, where private finance is seemingly what everyone's talking about, there are real worries from on the ground grassroots organisations about an expansion of private finance into development, specifically because of the reasons you talk about worries about labour rights, human rights, safeguards, standards, the private sector doesn't have the best reputation in terms of putting people's rights ahead of profit. What can you say to allay those fears?
- [08:00]
B
Well, you know, it's interesting that you say that because I too note that in the discussions around the financing for development, there does seem to be a real split between those who believe that the private sector is absolutely necessary and is playing an increasingly positive role in emerging markets and in development, a role that wasn't playing maybe 30 or 40 years ago, and who see that as being a critical avenue for achieving global development. Because frankly, public resources and philanthropic resources are never going to be enough to meet the challenges. On the other side, you see organizations that I believe are really overly focused on the suspicions that people have of the private actors and some of the reputation they have in certain circumstances. I believe that as we encourage higher quality investors to invest in these markets, we're going to see the standards rise across the board. There's always going to be a few that are abusive and we have to do everything we can to make sure that they're isolated and only a very few. But in general, there's no question that private actors are playing a more and more constructive role in the development throughout the world. I mean, look at, look at the volumes we're seeing in investment in renewable energy through Power Africa and other avenues in water and sanitation, even health care and education are increasingly being provided by very responsible private investors who really do have a double bottom line of creating value for the local communities and doing so in a sustainable manner.
- [09:32]
A
And you talked about how public money and philanthropic money were not enough. So presumably then you think that private finance is realistically the only feasible proposition for meeting developmental goals in the future?
- [09:45]
B
No, I think it's one very important source. But in many cases that private capital won't flow without some incentive or stimulus from public sector actors. That's exactly what OPIC does. We provide risk mitigation or capital to private actors who are investing in sustainable economic development, but who wouldn't be able to get the financing they need to do that without our resources. So I think private actors are a critical part, but the public sector still has a role to play and as we know, AID still has a very important role to play because not every problem in the world can be solved through private capital. Of course.
- [10:24]
A
Let's talk a little bit about the kind of the politics of development. It's sometimes a hard sell, especially here in the us but from your point of view, what do you think are the things that say the next US Administration needs to really focus on? Why should it be very forthright about understanding the importance of development as something that's not just a sacrifice for Americans, but a win win?
- [10:49]
B
Well, this administration and I think the next organization are increasingly going to be embracing the role of the private sector in development. We've seen a lot of discussion about that by the President's own Global Development and Council who strongly advocated making it easier for the private sector to play a role. So I think we're going to see a continuation of that trend. As I mentioned, we've seen the development finance institution model way of doing development that is one that uses the private sector growing at 10 times the rate of traditional aid. And I think we'll continue to see that. We're seeing a lot of support for that model, you know, on all sides of both houses, in fact, where there's a strong sense that the US Government needs to be involved in development, needs to be present in these markets, and needs increasingly to be harnessing the role of businesses as ambassadors in the countries in which we operate. Because I think you would agree, really the best face of America is oftentimes the businesses that are engaging in person to person, business to business partnerships that are creating mutual prosperity and that really do demonstrate the best of American goodwill and intention and innovation through tangible, concrete partnerships. And I think that's going to be an increasingly powerful foreign policy tool for the US Government in what is a very dangerous world these days.
- [12:17]
A
And talking about the dangers in the world, there's a security imperative there as well, isn't it?
- [12:21]
B
That's right.
- [12:21]
A
A national security.
- [12:23]
B
That's right. In fact, we're seeing, yes, it's amazing to realize that a full third of OPEC's portfolio right now is in countries that are either in conflict or vulnerable to conflict. A full third. That means we're invested deeply in Afghanistan, in Iraq, in the west bank, in Jordan and Pakistan, and countries like this that are, you know, really do need, in addition to the others, other tools we're deploying to create stability in those markets. Because of course, private capital can't do it all. But it is very powerful to see private capital creating the jobs and opportunities that can contribute to the creation of a more stable, stable economy in those places. You know, one example of that I just want to mention is you take Jordan as an example. You know, this is a country that is surrounded by countries which are threatened by extremism. A country that is deeply water insecure. The fifth most water insecure country in the world that doesn't have any of its own power and is trucking its power in heavy fuel oil up, you know, up 300 kilometers to the capital. And it's one of our greatest allies in the region. And now it's got over almost a million Syrian refugees. Take that photo. OPEC has invested about a billion dollars in projects in Jordan ranging from projects that are providing 20% of the water coming into Amman, 25% of the power that that country is generating from the fuel oil that's being shipped in, and a small and medium enterprise lending program that's creating SMEs that are able to create, you know, it's job intensive work. So those are the kind of investments we're making in countries that are important to us, but that are the bulwark against some of the threats that are being seen these days.
- [14:11]
A
So given that that's the picture now, let's cast your mind forward to five, 10 years from now or 20 years from now. Well, let's take it to the 2030. So the end of the SDGs. What sort of picture of OPIC do you imagine then? Or let's be even broader, what's the picture of US development finance that you see then?
- [14:32]
B
Well, as I've said, said, I do think we're going to see more and more engagement and more and more tools to help engage private capital to ensure that private capital is flowing to markets in a way that does contribute to their sustainable economic development. And I think more and more we'll see private capital flowing to some of the world's greatest challenges. One of the priorities, one of the key priorities for OPEC in the last few years has been a response to the three forces we see inexorably coming together right now. Resource scarcity, a growing middle class consuming those resources at an accelerating rate, and climate change. When you look at those three forces coming together, we see that as not only one of the world's greatest challenges, and I think it will be for the foreseeable future, but also one of the world's greatest, greatest opportunities because we have a chance to transform our global economy from one that is inefficient and polluting and exclusive and expensive, to one that is inclusive and cheaper and cleaner and less polluting. So those kind of problems are with us to stay. And I think more and more we'll see that rising on the global development agenda that you mentioned.
- [15:45]
A
Finally, do you think the Obama administration has any, to use a Great American phrase. Any gas left in the tank. It. In terms of development, it's got 18 months left in office or are they kind of done now?
- [15:56]
B
Oh, absolutely not. I think there's a huge amount needs to be done around implementing some of the very powerful development initiatives that have been launched. I mean, Power Africa is one of the most important signature development initiatives that the President has launched and we've seen incredible impact already from that program. Even though as we all know, power plants take an awfully long time to build. But even the first couple years we've seen huge progress. We've seen progress in developers coming to the table that would never have thought of doing power development in Africa and are thinking about it now. We've seen an unusual level of coordination thanks to the good offices of AID amongst US Government agencies.
- [16:34]
A
But that's already happened. What's left? What are, what are the big new ideas yet to come in the last 18 months?
- [16:39]
B
No, there's a huge amount within Power Africa. There's a huge amount left to be done because as I mentioned, these, these things take time to build regulatory frameworks and build power plants. So I think that there's a clear focus on implementation right now and we're excited about that. Even within my own organization, we're raring to go because frankly we're now fully, I've been trained for four years by my organization and I think we've got a lot next to be done in the next two years to execute against that. We've also spent a lot of time really investing this is at OPIC in building the infrastructure that a sophisticated 21st century financial institution needs to have in terms of risk management and processes and management information systems so that we're prepared for the scale up that I think will be inevitable in the next decade. So we've built the infrastructure to enable our model to scale. So we're, we're, we're on fire. We're in overdrive in the next two years. And I know the Obama administration writ large isn't slowing up a bit because we've got a lot we need to get done still.
- [17:51]
A
Do you think the next administration, whatever color it is going to be, is going to be equally supportive? Red or blue?
- [17:57]
B
I absolutely think that red or blue. The next administration is going to be very focused on some of the ideas that the CGD has, has put forward so articulately. The notion of a global development bank and different forms of it is something that is being talked about on both sides of the aisle. And I think will certainly form part of part of the agenda of any incoming administration. And it should be because if you can create organizations that are doing development, advancing foreign policy goals, helping US Businesses tap into the these fast growing markets, and oh, by the way, make money consistently for the taxpayer, that's a model that you definitely would want to scale up in the future, right? Especially when all the other countries that we're competing with are scaling theirs up much faster than we are.
- [18:43]
A
Okay. Well, on that note of positivity for both OPIC and cgd, thank you very much. Don't forget, you can find out much more about all our work on our website. Www.cgdev.org is the address. I'm Rajesh Merchandani, and please do join me for the next CGD podcast from the Centre for Global Development.