DOUBLE TROUBLE AT OPIC: EXPOSING TAXPAYERS AND UNDERWRITING FOREIGN ADVENTURISM
(Washington, D.C.): Tomorrow, the U.S.
House of Representatives is expected to
vote on a bill, H.R. 3759, that would
extend the authority — and more than
double the statutory ceilings — of
the Overseas Private Investment
Corporation (OPIC). The passage of this
bill would enable OPIC to engage in ever
more perilous venture capital financing
guaranteed by the American taxpayer.
According to a Congressional Budget
Office estimate, the bill:
“would extend through 2001
OPIC’s authority for new commitments,
which expires on September 30 1996.
The bill would also roughly double
the statutory ceilings on OPIC’s
insurance activity (from $13.5
billion to $25 billion) and financing
programs (from $9.5 billion to $20
billion).”
Since coming into office, the Clinton
Administration has developed an ominous
penchant for exposing the U.S. taxpayer
to inordinate financial risks — risks
that no sensible private sector business
would accept.(1)
The result: a growing likelihood that
such insurance and venture capital
underwriting schemes will prove
detrimental to both working Americans’
and U.S. national security interests.
Risk Averse? Hardly
Rather than follow sound investment
and project financing principles, OPIC
appears to be emerging as the Clinton
Administration’s slush-fund of choice to
advance often ill-conceived foreign
policy initiatives, particularly
vis-a-vis Russia. OPIC’s own literature
provides a window on the imprudent
dimensions of OPIC’s risk profile:
“Insurance is available for
investments in new ventures or
expansion of existing enterprises and
can cover equity investments, parent
company and third-party loans and
loan guarantees, technical assistance
agreements, cross-border leases,
assigned inventory or equipment and
other forms of investment. Coverage
is also available for contractors’
and exporters’ exposures, including
unresolved contractual disputes,
wrongful calling of bid, performance,
advance payment and other guarantees
posted in favor of foreign buyer and
other risks.”
In addition, OPIC provides political
risk coverage which protects against
currency inconvertibility, expropriation
and political violence, defined to
include “hostile actions by national
or international
forces,…insurrection…[and] civil
strife.” OPIC covers “loss of
assets or income due to war, revolution,
insurrection or politically motivated
civil strife, terrorism or
sabotage.” Yet OPIC seems deficient
in its application of any concrete,
practical methods of assessing political
risk, preferring to follow guidelines
that highlight non-financial conditions,
such as workers’ rights and environmental
standards. The level of genuine political
risk does not seem to factor adequately
into the organization’s equation.
Indeed, it would seem that OPIC encourages
risk-seeking investors to gamble with
taxpayer money and pursue dubious
business ventures in countries where such
investment is deemed politically
desirable.
Of Particular Concern:
OPIC’s Russia Portfolio
Why then does OPIC absorb even more
risk? According to the Congressional
Budget Office:
“OPIC’s insurance authority
has been increased to meet the
growing demand for political risk
insurance…[Its] annual guarantee
authority has been increased to meet
the growing demand for OPIC
guarantees.”
Basic supply and demand theory can
explain this increase in demand for
political risk insurance and guarantees
in ways which do not bode well for US
taxpayers: There is greater demand for
this type of comprehensive coverage
because global political instability is
on the rise. Russia provides a case in
point: a critically ill President,
international confusion over who is in
charge, a violent secessionist struggle
in the Caucasus, increasingly strident
challenges by Moscow to long-standing
U.S. foreign policy priorities, robust
strategic modernization, unsteady
commitments to democratization and
systemic economic reform and the list
goes on. It is not difficult to see why
businesses would like to off-load the
risk of doing business in Russia onto the
shoulders of the U.S. taxpayer.
OPIC wants, accordingly, to respond to
this burgeoning demand by approving
ever-larger loans, investments and
guarantees with regard to Russia.
Consider a recent article from the Economist
Intelligence Unit, based on a report
that appeared in a WorldTrade Executive,
Inc. publication, International
Finance and Treasury, that states:
“OPIC granted $620 million in
new financing and political risk
insurance support to twenty-two
separate American-sponsored private
business ventures in Russia in
mid-July. The agency now counts more
than seventy-five US ventures in its
Russia portfolio. Among the ventures
are six OPIC-backed private equity
funds that have a total
capitalization of $1.2 billion to
invest in the region.”
In August, OPIC approved another $200
million loan to a U.S. telecommunications
company bent on doing deals in a
turbulent Russia.
Why is the Taxpayer Being
Asked To Assume New, Problematic
Contingent Liabilities?
The message is clear: When OPIC racks
up some $800 million in direct and
contingent liabilities involving Russia
over the course of this summer, it is
serving a mission beyond that envisioned
in its original mandate — a politicized
mission.
H.R. 3759 would greatly expand OPIC’s
ability to perform such a dubious
function by increasing the ceilings on
political risk insurance and loan
guarantees into the 21st century. Worse
yet, it would significantly enhance the
President’s personal control over the
organization. Section 106 of the new bill
will state that the “Chairman and
…Vice-Chairman of the Board,…shall be
designated by the President of the United
States from among the Directors of the
Board”, which is itself made up of
representatives from the Departments of
Labor, Commerce, State and the Treasury. In
short, this bill increases directly the
President’s control and discretion over
those who would approve these high risk
guarantees and insurance policies.
Shades of the IMF Scam
The Center for Security Policy has
sought to document the politicization of
some of these financial institutions,
particularly that of the IMF and the
Agriculture Department’s Commodity Credit
Corporation, CCC.
The Center’s warnings were most recently
confirmed when the IMF, after temporarily
suspending the July tranche of a $10.1
billion loan to Russia, suddenly deemed
that Moscow had finally come to grips
with its tax collection problem (despite
the fact that tax collection fell by 62%
in the first six months of 1996). This
decision, made only two weeks after the
original suspension, came on the heels of
comments made by the new Russian Finance
Minister, Aleksandr Livshits, that
equated Russian tax collection with a
“black hole” and said that
Russia is an unusual country because it
is possible to “pay no taxes at all
and nothing whatever will happen.”
Moreover, the IMF agreed to raise
Russia’s budget deficit target from 4% to
5.25% of GDP, allowing it to qualify for
further disbursements of the loan,
despite a ballooning deficit. It appears
to many informed observers that these IMF
decisions were designed to allow
President Boris Yeltsin to make good on
at least some of his outrageous election
campaign promises and to ensure that the
Clinton Administration’s misguided
Yeltsin-centric Russian policy does not
collapse prior to the November elections.
A Frightening Vision
Not only do OPIC’s contingent
liabilities expose the U.S. taxpayer to
undue risks, they could well encumber the
conduct of an effective and responsible
U.S. foreign policy. For example, should
Russia continue to challenge important
U.S. interests in Europe, the Persian
Gulf, the Caspian Sea, Cuba and
elsewhere, there could be congressional
and public calls to suspend U.S. aid
flows to Moscow, an action that could
lead to reciprocal action against U.S.
business interests and investments in
Russia. The result: American
firms with taxpayer-guaranteed
investments would undoubtedly lobby
Congress about the loss of investment,
exports and jobs that could ensue. A
successful lobbying effort would probably
set back U.S. security interests; a
failure would presumably mean an OPIC
pay-out of hundreds of millions of
dollars — a lose-lose situation.
The Bottom Line
H.R. 3759 is advertised as putting
OPIC on track into the 21st Century. The
problem is it is the wrong track
— a track that is likely to harm U.S.
taxpayer and foreign policy interests. If
the privatization of OPIC is deemed
impractical, then the least that can be
done to protect U.S. taxpayer equities is
for the Congress to insist on rigorous
and disciplined lending standards, as
well as (where possible) conditionality,
transparency and collateral. Such
remedies should be promulgated in
coordination with both budget hawks and
representatives of the U.S. national
security community in an effort to
help forestall the abuse of this
institution by an Executive Branch
inclined to pursue questionable foreign
policy initiatives.
– 30 –
1. See, for
example, the Center’s Decision
Brief entitled ‘A
Gathering of Hawks’: Abuse of OPIC as
Foreign Aid Slush-Fund Should be Opposed
by Both Defense and Deficit Hawks
(No. 95-D
25, 18 April 1995).
2. For a previous
evaluation of the reckless nature of
OPIC’s decision-making practices, please
see the lead editorial from the 15 April
1995 edition of the Wall Street
Journal.
3. For a
thoughtful and concise summary of key
OPIC-related issues, see an op-ed
entitled “Corporate Welfare
Reform” by Janice Shields and James
Sheehan that appeared in the 4 September
1996 edition of the Washington Times.
4. See the
Center’s Decision Briefs
entitled ‘Chicken Diplomacy’
and Other Clinton-Yeltsin Campaign Scams
Are Bad for Democracy, Bad for U.S.
Taxpayers (
March 1996) and Clinton’s
Political Fundraising for Yeltsin Will
Entail High Costs for U.S. Taxpayers —
and Interests (
February 1996).
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