Madame Chairman, thank you very much for inviting me to testify today. My name is James Sheehan and I am director of international policy at the Competitive Enterprise Institute, a free market think tank committed to free enterprise, individual liberty and limited government. It is fitting that we address the important subject of corporate subsidies at this time of year, the day before taxpayers are expected to file their income tax returns that finance programs such as the Overseas Private Investment Corporation. Unlike OPIC, my employer does not receive any government subsidies of any kind.
OPIC is a federal agency that props up the investments of private corporations in developing countries. It offers subsidized political risk insurance and financing, guarding against losses in unstable markets. While private companies can make handsome profits off of OPIC, the taxpayers bear the risk of losses when the investments turn sour. With the Asian financial crisis, and other currency debacles in Russia and Brazil, we have learned hard lessons about risk-filled markets in the underdeveloped world. It is a shame that the taxpayers have been forced to cover losses from this subsidy scheme, instead of the investors and multinational firms that would have pocketed 100 percent of the profits if such investments had been successful.
OPIC’s Financial Risk to Taxpayers
The federal government has exposed the taxpayer to enormous risks. Currently, OPIC’s insurance contingent liability is $12 billion, and its exposure under investment guaranties is another $6 billion. Over $3 billion is concentrated in the volatile Soviet Union and Eastern Europe. The two countries with the largest finance and insurance exposure are Russia and Brazil, where currency devaluations have caused economic conditions to deteriorate badly. OPIC’s portfolio is backed by the full faith and credit of the US government. Should the multibillion-dollar OPIC scheme prove to be as shaky as federal deposit insurance, it will need a costly bailout.
The Asian financial crisis and its aftermath are demonstrating the recklessness of OPIC’s investment strategies. OPIC is expected to pay out substantial insurance claims for dollar-ruble inconvertibility in Russia, and the agency reports that it is suffering losses from non-performing loans in that region. The agency’s exposure in Russia’s reeling economy is a whopping $2 billion. Recent news from Moscow, where the Duma is trying to impeach Boris Yeltsin, is not good.
In Brazil, where OPIC exposure totals $1.9 billion, the devaluation of the real has not been as devastating as the situation in Russia. However, OPIC concedes that fully half of its loans in Brazil will be materially impacted by the crisis there, and two OPIC loans have already been downgraded, indicating that trouble lies ahead.
Another OPIC folly is Indonesia, a country the agency once touted as a very promising investment locale. The financial meltdown there, exacerbated by the clumsy actions of the International Monetary Fund, toppled the government of President Suharto. OPIC’s maximum contingent liability in Indonesia is $600 million, though its total liability may be higher. OPIC is aware of potential claims by insured parties, but it has not yet reported on any loan defaults that may be in the offing.
Despite the recent financial calamities in markets served by OPIC, the agency claims it continues to make a profit. It continues to rely on clever accounting gimmicks to make this argument. To start, OPIC is a government agency that pays no taxes, unlike a regular financial institution or insurer. In addition, most of its income is derived from the US government. While the agency reported $139 million in net income in 1998, $193 million in revenues consists of interest on US Treasury securities. Thus, this government agency is counting as income the funds it transfers to itself from another part of the government, the US Treasury. While most people would recognize this shell game for what it is, a loss for taxpayers of $54 million, OPIC insists that it earns a profit for the government.
Madame Chairman, if this Congress will be so generous as to pay me $193 million in interest on government securities, next year I will be happy to pay back the government only $139 million and report the difference as a profit for the government.
I would also note that OPIC failed to pay any dividends to the US Treasury this year, for reasons it does not state in its Annual Report or other literature.
To OPIC aid recipients, the value of subsidized foreign investment is no different than a welfare check. But the recipients of corporate welfare aren't needy – they are often giants of the Fortune 500, such as AT&T ($80 billion in revenues), Citicorp ($32 billion) and Motorola ($28 billion). In 1998, corporate welfare was distributed to such recognizable businesses as J.P. Morgan Securities, Ltd., Marriott International, Inc., and Pepsi Cola General Bottlers, Inc. This year, OPIC’s Annual Report lists as one its clients the Soros Group. Even the billionaire financier George Soros is getting a helping hand from US taxpayers.
The taxpayer's loss is the politician's gain. Wealthy individuals with political ties tend to grease the skids for government subsidies. According to the Boston Globe, twenty-seven companies receiving OPIC aid have donated more than $2.3 million to the Democratic National Committee. Many corporate executives linked to OPIC won coveted seats on those infamous foreign trade missions with late Commerce Secretary Ron Brown. While Entergy Power Development Corp. had a 1996 application pending before OPIC for $165 million worth of risk insurance for a Peruvian investment project, it gave the DNC $274,000, according to Federal Election Commission records.
OPIC also backs the Russian investments of rich Democratic Party contributors like Steven Green, a real estate mogul who spent a night in the Lincoln bedroom of the White House, according to a report in Barron's. Dirk Ziff, probably the Democratic Party’s largest single contributor in 1996 at $410,000, sponsors a $150 million OPIC-bankrolled equity fund. The South Asia Capital Fund makes substantial investments in Indonesia and Thailand – ground zero of the Asian financial crisis. (If a Republican were in the White House, the story would be much the same.)
OPIC’s negative economic impacts
OPIC's defenders say that it promotes economic stability in developing countries. However, financial markets are already flooding developing countries with private investment. In 1998, private capital flows to emerging markets topped $150 billion, indicating that no shortage of investment opportunities exist, even in the currently volatile global market. OPIC’s entire portfolio is but a small fraction of what the private sector invests abroad. OPIC facilitates only those investments that private investors are unwilling to risk their own money on. If anything, OPIC has made financial crises worse in places like Russia and Indonesia by over-stimulating investment in high risk ventures, while diverting resources from more viable projects in financially stable countries.
OPIC markets itself as an engine of US exports and job creation. But the top purchasers of U.S. products, such as Japan, Canada and Mexico, have no OPIC-backed investments. Of America's $930 billion in exports last year, OPIC claims credit for a tiny portion – only $2.8 billion. Even if OPIC’s dubious claim is taken seriously, that amounts to only three tenths of one percent of all US exports.
In contrast, many observers claim that OPIC has a negative impact on American jobs. In 1997, OPIC issued a $29 million insurance policy to Levi-Strauss for a new garment-manufacturing plant in Turkey. At the time, the Labor Department provided trade adjustment assistance and unemployment benefits for 6,400 American workers laid off at 11 Levi's plants in the US. These American workers qualified for federal benefits due to Levi’s contention that the layoffs were necessitated by cheap imports from abroad. As Rep. Bernie Sanders declared, OPIC-backed companies “have laid off thousands of American workers in the last decade alone. But they want the American taxpayers to continue subsidizing and putting their tax dollars at risk to further enrich these corporate welfare kings for exporting good-paying American jobs.”
OPIC’s own estimate of its impact on the economy omits the countless job and export opportunities that are lost when OPIC bureaucrats divert scarce capital away from prudent investments the unfettered market would have made. By its nature, OPIC transfers income from the US economy to foreign consumers, resulting in market distortion and a net loss for American consumers. At OPIC, White House foreign policy and diplomacy often take precedence over profit and business sense. For example, OPIC backed a warehouse in war-torn Angola, a hotel in unstable Lebanon, and a bottled water plant in the worrisome West Bank. While the market seeks out well-managed countries with great potential for financial returns, OPIC diverts investment capital to unsound countries that the US government wishes would perform better. Unlike the private market, which selects investment opportunities based on their creditworthiness, OPIC is directed to favor projects that lack this quality.
Is OPIC Really Helping Small Business?
OPIC claims it offers substantial support to small businesses in the US. This argument is made to assure Congress that the broad US economy benefits from OPIC activities. In fact, OPIC remains an exclusive domain of well connected insiders and influence peddlers. Just four companies take up one third of OPIC’s resources: Citicorp, Chase Manhattan, First National Bank of Boston and Enron. In 1996, only 5 percent of the companies receiving OPIC support satisfied the Small Business Administration’s definition of a “small business.” According to Heritage Foundation analyst Brett Schaefer, small businesses receive only 2 percent of OPIC’s insurance subsidies and zero percent of its financing subsidies. The OPIC playing field is tilted decidedly against small business.
OPIC also claims to be creating innovative financial products for investors. It has created 26 investment funds that have invested over $3 billion in undeveloped nations. An OPIC official described the scenario as follows:
“It's not unlike when you were younger and you wanted to buy a car and your
dad signed the bank note. He guaranteed that you would pay it back. Well, we operate an awful lot like that.”
As Time magazine explains, “If the investments go bad, you, the taxpayer–Dad–will have to repay the note.”
Despite OPIC’s claims, publicly guaranteed investment funds are not desperately needed by the private sector. In fact, OPIC’s activities duplicate the role of many existing mutual funds. In Asia, for example, OPIC’s South Asia Capital Fund competes with the T. Rowe Price New Asia Fund. In Africa, the OPIC-backed Africa Growth Fund competes with the Morgan Stanley Africa Investment Fund. And plenty of private firms have tried their hand in the Russian casino. Morgan Stanley has a Russia & New Europe Fund to bet against OPIC’s Russia Partners fund.
Pointless environmental standards
Along with foreign policy, politically-correct environmental and labor standards must take precedence over financial prudence. OPIC published an Environmental Handbook to establish environmental standards for its recipients. While these political niceties score points with the Vice President’s office, they do not foster a better world. OPIC is merely painting itself green, according to many environmental groups who are critical of the agency. By insuring negligent companies against political risk, writes John Sohn of Friends of the Earth, “OPIC often harms valuable ecosystems and impacts local populations.”
Even though its environmental standards are brand new, OPIC has already attempted to violate them. It is currently considering subsidizing a natural gas pipeline through the Bolivia-Brazil rainforest. Green NGOs are up in arms, and are waging a heated campaign to stop this pipeline from moving ahead. NGOs are finding out that OPIC cannot be trusted to comply with its own stated provisions, and instead must be watched closely to prevent abuses.
Similar environmental safeguards at the Export Import Bank are being ignored. The Eximbank is supporting the Ilisu dam, a $1 billion hydroelectric dam in Turkey. The project will flood homelands of the 15,000 Kurds who live in the vicinity. This human tragedy demonstrates the pointlessness of pamphlets and handbooks filled with broken promises by Washington bureaucrats. When billion dollar projects are at stake, government agencies are more likely to play politics than to adhere to rigid standards.
As a result of environmental activist pressure, many companies are discovering that OPIC support can be more trouble than it is worth. The companies that are seeking OPIC guarantees for the Bolivia-Brazil pipeline, Enron and Shell, may soon suffer the same fate as Freeport McMoran once did in Indonesia. Freeport’s OPIC support was lost when NGOs complained that the company’s mining project harmed the environment. Such disruptions are possible because of the political entanglement of OPIC, and the increased role being played by environmental pressure groups and NGOs. Often NGOs will oppose any investment out of a reflexive belief that all economic development is harmful to the environment. Subjecting investment decisions to these politicized ideological forces tends to undermine the very basis for investment in risky parts of the world. As such, private investors and multinational corporations may be forced to conclude that OPIC’s subsidies – with their intrusive strings attached – are not truly beneficial to American business.
If OPIC’s claims have any basis in fact, and the agency can be run without government support, then it should not be asking Congress for new authorizations. If OPIC can be made a truly profitable enterprise, it should be spun off as a private corporation. Though OPIC might have to be sold off at discount due to the higher risk profile of its portfolio, the privatization option is quite feasible. In 1997, a consortium of private insurers led by Exporters Insurance Co. submitted a proposal to Congress to privatize most of OPIC’s risk insurance portfolio. Exporters offered to assume $5 billion of OPIC’s insurance operations.
If private insurers are willing to undertake OPIC privatization, Congress should take them up on the offer as quickly as possible. Government bureaucrats, whose own money is not at risk, are not as capable of picking winners and losers in the global investment market place. Keeping OPIC in business as a government corporation subjects private companies to unfair competition – only OPIC enjoys the full faith and credit guarantee and the deep pockets of the US Treasury to cover liabilities. If OPIC bureaucrats had any special expertise in foreign investment, they would be employed to do this work in the private sector (e.g., Lloyd’s of London, American International Group, and Exporters Insurance Corp.)
Foreign investment subsidies are inconsistent with the ideals of open trade that we so often preach to undeveloped nations and former communist states. If OPIC were an agency of the European Union or the Chinese government, many legislators would be calling for trade sanctions to counteract its distortion of international markets. The time is ripe for Congress to set an example of real economic reform, and to transfer OPIC from public to private hands.