USDFC Monitor: Inside the Last Five Years of OPIC’s Portfolio - Five Lessons for the DFC

Prompted by the end of 2019—and the imminent launch of the US Development Finance Corporation—this edition of CGD’s DFC Monitor looks back at OPIC’s last five years of lending to identify lessons for its successor. I look at trends in lending by country income and sector, co-financing with other private sector-oriented development finance institutions (DFIs), risk appetite, and use of financial instruments. The analysis covers the 2015–2019 period and builds off earlier work by my CGD colleagues that examined OPIC’s portfolio from 2010–2014. (Warning: this monitor is slightly longer and more data heavy than previous editions.)

Lesson 1: Achieving a more robust portfolio in lower-income markets might not be as heavy a lift as many DFC watchers anticipate.   

The BUILD Act directs DFC to focus its investments in tougher markets, requiring a presidential waiver for projects in upper-middle-income countries (UMICs). DFC management reportedly plans to grow the organization’s portfolio in low-income countries (LICs) and lower-middle income countries (LMICs) to 60 percent over the next few years. That may sound like a tough order, but together, LMICs and LICs represented around 46 percent of OPIC’s new commitments over the past five years, suggesting that the 60 percent target is achievable. The key will be for DFC to make sure growth in the lower-income portfolio is balanced between LMICs and LICs and to avoid the temptation of achieving its target exclusively through increased investment in high-performing LMICs—think India or Indonesia. While it is often more costly to originate and manage projects in LICs, from a development standpoint, these countries have the most to gain.

Lesson 2: There is room to grow DFC’s infrastructure footprint.

Over the 2015–2019 period, OPIC’s portfolio remained heavily focused on infrastructure (45 percent) and financial services (45 percent). About half of OPIC’s infrastructure investments over the period were in renewable energy, likely propelled by the Power Africa initiative. This trend also reflects that the energy sector lends itself to private finance more than other forms of infrastructure, such as roads—which barely make up 2 percent of OPIC’s infrastructure portfolio. On the financial services side, two-thirds of OPIC’s investments supported small and medium enterprises (SMEs), largely made through financial intermediaries such as banks or investment funds.

A key selling point for creating DFC was to offer an alternative to China’s Belt and Road Initiative, which provides for infrastructure projects in countries around the world. A breakdown of OPIC’s portfolio by sector shows room for DFC to scale up its presence in infrastructure projects, especially those that lend themselves to private finance, such as ports and telecommunications infrastructure. To help increase its activities in this area, DFC should consider our third lesson.

Lesson 3: The multilateral development banks (MDBs) are potentially powerful—and largely untapped—allies.

OPIC has done surprisingly little co-financing with the private sector arms of MDBs or other DFIs. Over the past five years, I estimate that OPIC has co-financed around 7 percent of its projects with other MDB or DFIs, and half of this co-financing was in renewable energy. A nexus requirement, which limited OPIC’s ability to participate in deals that did not have a meaningful connection to the US private sector, was likely a major impediment to co-financing in the past. But DFC will not be subject to the same requirement.   

Infrastructure projects, by virtue of their hefty price tag, often require large-scale financing to be viable. And if DFC aspires to be a larger player in infrastructure (and to meaningfully build up its portfolio in LICs), it would benefit from using peer MDBs as powerful force multipliers for its financing. DFC can also benefit from MDB project pipelines and their strong field presence.  Recent MOUs signed with the Inter-American Development Bank and the African Development Banks suggest DFC recognizes this and has a plan for greater collaboration.

Lesson 4: DFC can raise the bar on results management.

More than half of OPIC projects received a “highly developmental score” (OPIC’s A+) and a quarter received a “developmental score” (closer to a B+) at entry. The rest of OPIC’s projects were not scored, often because they went through a financial intermediary. Follow-up during project implementation remained limited to surveys and occasional site visits, and OPIC did not report how project performance at close aligned with expectations at entry.

The BUILD Act seeks to fill these gaps. DFC—guided by the new chief development officer (CDO) —will launch an ex ante framework to determine and score the potential impact of planned projects. It will also be important that DFC develop a robust monitoring and evaluation framework to guide project management, results reporting, and the broader learning agenda. And getting these building blocks right will require a well-resourced and well-staffed Office of Investment Policy working under the new CDO.

Lesson 5: DFC’s risk appetite can grow

OPIC experienced virtually no loan defaults during the 2015–2019 period and only an estimated average of 0.6 percent of direct loans had to be written off. This means OPIC is likely taking less risk than it could. But it also may reflect OPIC investment officers’ proactive engagement with clients to improve loan repayment performance and restructure loan agreements if they begin to go south.

Early engagement on problem projects and financial restructurings more broadly can have high upfront costs but yield important development (and financial) returns. DFC will need a well-resourced administrative budget and sufficient staff in order to identify challenges early on and turn around projects that would otherwise go into default. But DFC may also be able to take on slightly more risk without jeopardizing OPIC’s history of positive returns.

And because you stuck around until the end, here’s a holiday bonus!

Bonus lesson: More than just lending…  

OPIC’s insurance portfolio has increased in recent years. Over a quarter of OPIC’s total 2019 investment volume was in insurance in 2019, compared to an average of 20 percent over the last decade. Even as it diversifies its lending instruments, insurance will remain a tool largely unique to DFC, and, as my colleagues Nancy Lee and Asad Sami have pointed out, insurance and guarantees tend to have higher mobilization ratios than loans. I hope to see this trend continue for DFC.

All data is from OPIC’s Active Projects reporting on its website (and does not include projects approved in the December 2019 board meeting) and annual reports.