Overseas Investment: Issues Related to the Overseas Private Investment
Corporation's Reauthorization (Letter Report, 09/08/97,
GAO/NSIAD-97-230).

Pursuant to a congressional request, GAO reviewed: (1) trends in private
sector investment in developing markets and the role of the public
sector in these markets; (2) the Overseas Private Investment
Corporation's (OPIC) risk management strategy and the steps that OPIC
may take, if it is reauthorized, to further reduce portfolio risks while
pursuing U.S. foreign policy objectives; and (3) the issues to be
addressed and the time it would take to phase out OPIC if it is not
reauthorized.

GAO noted that: (1) improvements in economic and political conditions in
many developing countries have led to a reduction in investors'
perception of risk and a dramatic increase in private investment in
these markets since the late 1980s; (2) however, according to most of
the 34 firms GAO surveyed, risky markets still exist where the private
sector stated they are reluctant to invest or operate without public
guarantees or insurance; (3) in high-risk markets, U.S. investors GAO
spoke with have sought public finance or insurance from OPIC, the
Export-Import Bank, or other public institutions; (4) in risky markets
where OPIC services are not available, U.S. investors tended to use
other public support; (5) if foreign export credit agencies provide the
support, U.S. suppliers could be excluded; (6) OPIC has historically
been self-sustaining by generating revenues from its insurance and
finance programs to cover actual losses; (7) OPIC's risk mitigation
strategy includes maintaining reserves, limiting its exposure in any one
country, requiring pre-approval reviews, and establishing underwriting
guidelines; (8) nonetheless, the private sector's willingness to have
greater involvement in some emerging markets has created opportunities
for OPIC to further reduce portfolio risks, while continuing to pursue
U.S. foreign policy objectives; (9) possible ways for OPIC to minimize
the risks associated with its insurance portfolio include obtaining to a
greater extent reinsurance from or coinsuring with other insurance
providers, insuring less than 90 percent of the value of each
investment, and offering insurance at less than a 20-year term; (10)
while OPIC officials agree that these are good risk mitigation
techniques, they cautioned that these strategies should be employed on a
case-by-case basis so as to enable OPIC to continue to meet U.S. foreign
policy objectives and the needs of its customers; (11) if Congress
decides not to reauthorize OPIC, an orderly phaseout of the agency would
require specific legislative action; (12) an important issue that would
need to be addressed is who would manage the existing portfolio; (13)
also, given that OPIC issues insurance policies with 20-year coverage,
it could take up to 20 years for OPIC's existing obligations to expire;
(14) the government has the option to sell OPIC's portfolio to the
private sector before its expiration; (15) however, a recent study
suggests that disposal of OPIC's assets could only be accomplished at a
discounted price; and (16) if the risk of the remaining portfolio
decreases over time, opportunities for asset disposal may arise.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-97-230
     TITLE:  Overseas Investment: Issues Related to the Overseas Private 
             Investment Corporation's Reauthorization
      DATE:  09/08/97
   SUBJECT:  Surveys
             Investments abroad
             Authorization
             Investment insurance
             Foreign policies
             Privatization
             Risk management
             Assets
             Developing countries
IDENTIFIER:  Russia
             China
             Vietnam
             Ukraine
             Mexico
             
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Cover
================================================================ COVER


Report to the Chairman, Committee on International Relations, House
of Representatives

September 1997

OVERSEAS INVESTMENT - ISSUES
RELATED TO THE OVERSEAS PRIVATE
INVESTMENT CORPORATION'S
REAUTHORIZATION

GAO/NSIAD-97-230

Overseas Investment

(711244)


Abbreviations
=============================================================== ABBREV

  Eximbank - U.S.  Export-Import Bank
  OPIC - Overseas Private Investment Corporation

Letter
=============================================================== LETTER


B-277618

September 8, 1997

The Honorable Benjamin A.  Gilman
Chairman, Committee on International Relations
House of Representatives

Dear Mr.  Chairman: 

The Overseas Private Investment Corporation (OPIC), an independent
government corporation created to promote investment in emerging
market economies, has been the focus of debate in recent months. 
Unless Congress reauthorizes it, OPIC's charter expires September 30,
1997.  Among the issues subject to debate on whether to reauthorize
OPIC are questions relating to public sector investment support,
OPIC's cost to the government, and the potential liabilities OPIC
subjects the government to in pursuing foreign policy objectives by
making investments in developing countries. 

As you requested, we reviewed (1) trends in private sector investment
in developing markets and the role of the public sector in these
markets; (2) OPIC's risk management strategy and the steps that OPIC
may take, if it is reauthorized, to further reduce portfolio risks
while pursuing U.S.  foreign policy objectives; and (3) the issues to
be addressed and the time it would take to phase out OPIC if it is
not reauthorized. 

In conducting this review, we analyzed private investment trends and
surveyed a judgmental sample of 34 U.S.  firms that had made
investments overseas within the last 5 years in the power and
telecommunications sectors--two of the four largest investment
sectors in emerging markets.  (See app.  I for a list of companies
surveyed.) We also analyzed OPIC's risk assessment policies and
financial reports and discussed risk mitigation strategies with
private and public providers of project finance.  Project financing
involves lending for major projects where the assurance of repayment
is provided through the project's structure and anticipated future
revenues rather than through sovereign (that is, national government)
or other forms of guarantees.  In some cases, the public sector
provides investment support to investors in these projects.  Further,
we reviewed and discussed laws and regulations governing an agency
shutdown with cognizant government officials. 


   BACKGROUND
------------------------------------------------------------ Letter :1

OPIC was established by the Foreign Assistance Act of 1969 (P.L. 
91-175, Dec.  30, 1969) to pursue the U.S.  foreign policy of
mobilizing and facilitating the participation of U.S.  private
capital and skills in the economic and social advancement of
developing countries.  In carrying out this responsibility, OPIC took
over the investment guarantee and promotion functions of the U.S. 
Agency for International Development.  In the early 1970s, the U.S. 
approach to foreign assistance began to shift from one of providing
government aid for infrastructure building and large capital projects
to providing assistance to meet basic human needs.  OPIC's role was
to support market-oriented private investment in various sectors. 

More recently, the World Bank has estimated that $200 billion would
be needed annually over the next 10 years to meet the infrastructure
needs of developing countries.  Obtaining this level of private
investment will be a major challenge given the economic and political
characteristics of emerging markets and the unique risks inherent in
each project.  Project financing is emerging as an important
component in infrastructure development. 

OPIC's programs are designed to promote overseas investment and
assume some of the associated risks for investors.  Specifically,
OPIC offers direct loans and loan guarantees to U.S.-sponsored joint
ventures abroad, supports private investment funds that provide
equity for projects abroad, and provides political risk insurance to
U.S.  investors.  The political risk insurance covers investors for
up to 20 years against losses due to currency inconvertibility,
political violence, and expropriation.\1 OPIC collects premiums and
fees from the private sector for insurance and financing services. 
OPIC finance and insurance activities are backed by the full faith
and credit of the U.  S.  government and are limited to a total
exposure of $23 billion in fiscal year 1997.  OPIC services are
available in some 140 developing countries, although OPIC does not
operate in some countries, largely for U.S.  foreign policy reasons. 

Projects eligible for OPIC assistance include new investments,
privatizations, and expansions or modernization of existing plants. 
The sectors OPIC supports include power, financial services,
telecommunications, and oil and gas.  To obtain OPIC support,
investors must meet specific criteria, including U.S.  ownership
requirements. 

Over the years, Congress has placed various requirements on OPIC's
authority to support U.S.  investment.  For example, in carrying out
its activities, OPIC is to

  -- administer its entire portfolio (financing, insurance, and
     reinsurance operations) on a self-sustaining basis and in a
     manner that ensures that the projects it supports are
     economically and financially sound;

  -- refuse support for any investment in countries that are not
     taking steps to adopt and implement internationally recognized
     worker rights; and

  -- decline participation in investments that are likely to
     significantly reduce U.S.  domestic employment levels or pose an
     unreasonable or major environmental, health, or safety hazard. 


--------------------
\1 Currency inconvertibility is the deterioration in the ability to
convert profits, debt service, and other remittances from local
currency into U.S.  dollars.  Loss due to political violence results
from damage to assets caused by war, revolution, insurrection, or
politically motivated civil strife.  Expropriation is the loss of an
investment due to expropriation, nationalization, or confiscation by
a foreign government. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

Improvements in economic and political conditions in many developing
countries--markets where OPIC services have traditionally been
sought--have led to a reduction in investors' perception of risk and
a dramatic increase in private investment in these markets since the
late 1980s.  However, according to most of the 34 firms we surveyed,
risky markets still exist where the private sector (investors,
bankers, and insurers) stated they are reluctant to invest or operate
without public (government or multilateral) guarantees or insurance. 
For example, four of the firms that we spoke to that invested in
Russia or Ukraine said that private insurance was unavailable for
their projects and financiers were reluctant to invest without public
involvement.  In high-risk markets such as these, U.S.  investors we
spoke with have sought public finance or insurance from OPIC, the
U.S.  Export-Import Bank (Eximbank), or other public institutions
such as Japan's Ministry of Trade and Industry.  In risky markets
where OPIC services are not available, such as Vietnam, China, and
Mexico, U.S.  investors that we surveyed tended to use other public
support.\2

For example, the two investors in Vietnam used public providers of
investment support, and two investors in China used public support
while two investors there partnered with the Chinese government.  In
Mexico, some investors we spoke to used public support; however, two
investors self-insured.  If foreign export credit agencies provide
the support, U.S.  suppliers could be excluded. 

OPIC has historically been self-sustaining by generating revenues
from its insurance and finance programs to cover actual losses. 
OPIC's risk mitigation strategy includes maintaining reserves ($2.7
billion in reserves held largely in Treasury securities), limiting
its exposure in any one country, requiring pre-approval reviews, and
establishing underwriting guidelines.  Nonetheless, the private
sector's willingness to have greater involvement in some emerging
markets has created opportunities for OPIC to further reduce
portfolio risks, while continuing to pursue U.S.  foreign policy
objectives.  Possible ways for OPIC to minimize the risks associated
with its insurance portfolio include obtaining to a greater extent
reinsurance from or coinsuring with other insurance providers,
insuring less than 90 percent of the value of each investment, and
offering insurance at less than a 20-year term.  While OPIC officials
agree that reinsurance and coinsurance are good risk mitigation
techniques, they cautioned that these strategies should be employed
on a case-by-case basis so as to enable OPIC to continue to meet U.S. 
foreign policy objectives and the needs of its customers. 

If Congress decides not to reauthorize OPIC, an orderly phaseout of
the agency would require specific legislative action.  An important
issue that would need to be addressed is who would manage the
existing portfolio.  Also, given that OPIC issues insurance policies
with 20 year coverage, and that OPIC had $5.3 billion in insurance
contracts with 19-20 years remaining as of September 30, 1996, it
could take up to 20 years for OPIC's existing obligations to expire. 
OPIC's past experience, however, shows that most insurance policies
are canceled by clients before the end of the 20-year term.  Thus,
OPIC projects that less than 36 percent of its existing portfolio
would remain active after 10 years.  The government has the option to
sell OPIC's portfolio to the private sector before its expiration. 
However, a recent study suggests that immediate disposal of OPIC's
assets could only be accomplished at a discounted price.\3 If the
risk of the remaining portfolio decreases over time, opportunities
for asset disposal may arise. 


--------------------
\2 Of the 34 firms that we interviewed, 2 operated in Vietnam, 5 in
China, and 5 in Mexico.  Some of these firms had operations in more
than one country. 

\3 Overseas Private Investment Corporation:  Final Report on the
Feasibility of Privatization (New York:  J.P.  Morgan Securities,
Inc., Feb.  7, 1996). 


   GLOBAL CHANGES HAVE REDUCED THE
   PRIVATE SECTOR'S PERCEPTION OF
   RISK, YET PUBLIC SUPPORT STILL
   SOUGHT IN SOME MARKETS
------------------------------------------------------------ Letter :3

A changing global environment has reduced the perception of risk for
the investors we spoke with in emerging markets.  Economic growth and
liberalization have created investment opportunities in sectors that
were previously dominated by government-owned companies or were
simply off limits to foreign investors.  Many countries, for example,
have privatized their power and telecommunication sectors and enacted
laws that permit foreign ownership, resulting in dramatic increases
in foreign investment.  More recently, private providers of project
finance and political risk insurance are increasingly available to
assist investors.  However, according to many of the firms we
surveyed, markets still exist where they are unable to obtain private
finance or insurance services.  As a consequence, they seek public
support.  Public support includes direct loans, loan guarantees, and
political risk insurance from OPIC and the U.S.  Eximbank; foreign
agencies that provide such services (often called export credit
agencies); or multilateral financial institutions, such as the World
Bank. 


      PRIVATE INVESTMENT IN
      TRANSITION MARKETS HAS
      INCREASED CONSIDERABLY
---------------------------------------------------------- Letter :3.1

The privatization of public enterprises, legal and regulatory
reforms, and a more stabilized political and economic environment in
developing counties, among other changes, have led to an increase in
total private capital flows.  As shown in figure 1, private capital
flows to finance infrastructure projects and other private
investments overseas have increased from $26 billion in 1986 to $246
billion in 1996.\4

   Figure 1:  Net Private Capital
   Flows to Developing Countries,
   1986-96

   (See figure in printed
   edition.)

Source:  World Bank. 

During the 1990s, private sector finance has increased dramatically,
especially to Asian and Latin American developing countries, despite
setbacks associated with the Mexican peso crisis.\5 Private flows
going to infrastructure reflect these overall increases, particularly
in commercial lending devoted to project finance.  According to a
1996 International Finance Corporation report,\6 these private
infrastructure investments would not have seemed possible 10 years
ago.  Today, more and more countries are introducing competition and
private participation in infrastructure ownership and management. 

The 34 power and telecommunications companies that we surveyed
indicated that their investment decisions have been significantly
influenced by the recent developments in emerging markets.  In
general,
30 of the companies stated that changes in the legal and regulatory
environment in emerging markets have led them to seek investments in
countries where they had not invested in the past.  At the same time,
the U.S.  power market matured, and U.S.  power companies began
seeking investment opportunities in emerging markets. 


--------------------
\4 Total private capital flows are calculated by the World Bank on a
net basis (net of repayments) and include portfolio bonds and equity,
foreign direct investment, commercial bank loans, and other private
flows.  Other private flows include credits from manufacturers,
exporters, and other suppliers of goods, as well as bank credits
covered by a guarantee of an export credit agency. 

\5 The Mexican peso crisis in 1995 led to a temporary decline in
private flows to Latin America. 

\6 Lessons of Experience:  Financing Private Infrastructure
(Washington, D.C.:  International Finance Corporation, Sept.  1996),
p.  1.  The International Finance Corporation is a part of the World
Bank group that promotes investment by the private sector. 


      AVAILABILITY OF PRIVATE AND
      PUBLIC INVESTMENT SERVICES
      INCREASING
---------------------------------------------------------- Letter :3.2

The rise in overseas private investment has been accompanied by
increases in investment support by public providers of finance and
insurance as well as increases in private insurance coverage in some
markets.  Three countries--Japan, the United States, and Germany--are
the largest public providers of political risk insurance.  (See app. 
II, which identifies features of the services provided by the major
public providers of political risk insurance.) Lloyd's of London, the
American Insurance Group, and Exporters Insurance Corporation--three
major private insurers--have recently increased their insurance
coverage. 

Globally, public providers have increased investor coverage. 
According to the Berne Union,\7 new investments insured by its
members rose annually between 1991 and 1996, going from $7.1 billion
to $15.2 billion.  As of the end of 1996, the cumulative amount of
investment covered by Berne Union members was $43.4 billion. 
According to data collected directly from the major public providers
of political risk insurance, Japan led all public providers with
$13.9 billion in cumulative exposure.  OPIC was second with $13.4
billion in exposure, and the German public provider was third with
$7.8 billion in exposure.  These public insurers have traditionally
dominated the public risk insurance market.  Although the major
public providers generally offer investment services in the same
countries, each of the major providers' business tends to concentrate
in different markets.  OPIC, for example, concentrates in Latin
America, the Japanese in Asia, and the Germans in Asia/Pacific and
Central and Eastern Europe.  (See app.  III for available information
on the regional concentration of major public insurance providers.)
Investors are also assisted by other Berne Union members, including
the Multilateral Investment Guarantee Agency, a multilateral
institution affiliated with the World Bank Group, with about $3.9
billion in exposure reported in 1997. 

The level of coverage of privately provided political risk insurance
has increased considerably over the past 2 years, according to the
private insurers we spoke with.  Although the volume of coverage
provided by private insurers is difficult to determine, a political
risk insurance expert estimated that several billion dollars of
private political insurance coverage was provided in 1996.\8

According to the American Insurance Group, one of the largest private
providers of political risk insurance, it increased the length of its
coverage from a maximum of 3 years to a cap of 7 years in 1996. 
Additionally, ACE, Inc., a private insurance provider, recently
entered into a reinsurance contract with the Multilateral Investment
Guarantee Agency, providing up to 15 years of risk coverage on the
same terms as that agency.  However, according to officials of a
large commercial bank and a private political risk insurer, in some
risky markets private insurers are only willing to provide insurance
when a public sector entity is involved in the project.  A private
insurer we spoke to said his company had not provided coverage in
Russia and most of the other newly independent states of the former
Soviet Union. 

Public and private sources also provide financing in developing
countries.  Public providers include OPIC; the International Finance
Corporation, a multilateral institution affiliated with the World
Bank Group; the U.S.  Eximbank; and other bilateral credit agencies,
such as the Japanese Export-Import bank.  Private sector financing to
developing countries is available through commercial banks and other
private financial institutions.  According to the World Bank, this
source of financing has increased significantly during the 1990s,
with about one-half of these resources directed toward project
financing for infrastructure development. 


--------------------
\7 The Berne Union is an international union of credit and investment
insurers that represent private and public political risk insurers
from 38 countries and locations. 

\8 Private insurers generally regard the existence and amount of
their insurance as a confidential matter. 


      RISK DETERMINES WHETHER
      INVESTORS SEEK PUBLIC OR
      PRIVATE FINANCE AND
      INSURANCE
---------------------------------------------------------- Letter :3.3

Investors', private lenders', and insurers' perception of risk frames
how projects are structured and financed.  The risks assumed and the
type of support sought by investors can differ by project and by
sector.\9 For example, based on the projects identified in our
survey, more telecommunications projects were completed without
public support and with investor self-insurance than were power
projects.  Power plants are costly and can take 10 years or longer to
recoup the investment costs, according to an energy firm official we
interviewed, making plant assets and income subject to long-term
political risks.  Telecommunications projects, on the other hand, may
generate enough income to cover investment costs in just a few years. 

Investors we surveyed told us that over the past decade, several
Latin American, East Asian, and East European countries have taken
steps to create environments attractive to investors.  Specifically,
22 of the 34 firms we spoke to were comfortable with assuming
investment risks after they had been successful in a country for a
period of time.  For example, one telecommunications company that is
developing cellular telephone operations in Hungary told us that the
availability of OPIC political risk insurance was a critical factor
in its initial decision to invest $200 million when privatization
allowed the company to enter the market.  After 2 years, however, the
company reassessed the political and economic risks of this
investment and decided to drop its OPIC insurance in favor of
self-insurance.\10 A company with 10 projects in Poland told us that
it developed 9 cable projects with private investment after
completing 1 successful project in Poland that was financed by OPIC 5
years ago when private financing was not available.  In another
example, a power company that has used OPIC in other high-risk
markets has made acquisitions of privatized public utilities in
Argentina and Chile without official support by obtaining financing
from European financial markets and locally syndicated money. 
Officials of the International Finance Corporation confirmed that
investors are increasingly likely to cancel International Finance
Corporation loans as lower-priced private financing becomes more
available in lower-risk markets. 

Despite these trends, some markets are still considered high risk by
investors, lenders, and private insurance companies.  Thus, obtaining
commercial finance and insurance in these markets remains difficult,
according to private firms we surveyed.  Several of the power and
telecommunications companies we surveyed concurred with the
assessment that in several regions of the world, including Africa,
Russia, the other newly independent states of the former Soviet
Union, and Central America, the perception of risk remains high. 
Some companies told us that they are generally unable to raise the
necessary financing for transactions in high-risk countries without
public support.  For example, four firms that we spoke to that
invested in Russia or Ukraine said that private finance was
unavailable for their projects.  One telecommunications company with
investments in Russia and Ukraine stated that without OPIC political
risk insurance, it would have avoided these high-risk markets.\11 A
power company with a $150-million equity investment in El Salvador
covered by OPIC political risk insurance told us that the
availability of OPIC services was a key factor in the company's
decision to invest in the country.  According to an official from
this company, although it considers Guatemala to have great potential
for the industry, private financial institutions and insurance
companies still consider Guatemala to be high risk, and the company
will not go forward with projects in Guatemala without OPIC or other
public support.  Additionally, private lenders and insurance
companies we spoke with told us that they offer limited, if any,
services in higher-risk markets such as the newly independent states
of the former Soviet Union.  Officials at the major international
banks we visited noted that they are reluctant to lend in high-risk
markets without some form of political risk insurance and that the
private insurance companies often cannot provide the kind of
insurance lenders need in these markets. 


--------------------
\9 Country political and economic conditions, project size, the
ability of the investor to remove or dispose of the assets, if
necessary, the financial strength of the investors, and many other
factors are also considered by project financiers and insurers. 

\10 Some firms still seek public support in Hungary.  OPIC officials
said that in Hungary they have recently insured a large
telecommunications project and anticipate insuring a power project
within the year. 

\11 It is difficult to independently discern whether an investment in
high-risk markets would have occurred without public support. 


      U.S.  INVESTORS OBTAIN
      PUBLIC SUPPORT IN SOME
      NON-OPIC MARKETS
---------------------------------------------------------- Letter :3.4

In countries where OPIC services are not available due to U.S. 
foreign policy or operational reasons, such as Mexico, China,
Pakistan, and Vietnam, we found that most of the U.S.  investors we
interviewed often seek other forms of public support to facilitate
investment.\12 As is the case in other emerging markets, investors'
decisions to invest in a project were predicated on their perceived
risk.  Our survey of U.S.  investors showed that when U.S.  firms
believed they needed public investment support in a non-OPIC country,
they sought investment support from the U.S.  Eximbank or other
foreign export credit agencies or multilateral financial
institutions.  Although such support facilitates the original
investment, subsequent equipment and service procurements are often
tied to the countries providing the support.  Thus, if foreign export
credit agencies provide the support, U.S.  suppliers could be
excluded. 

In some non-OPIC markets, such as Mexico, U.S.  investors may not
always seek public support.  According to a telecommunications
company official, several risk mitigation factors enabled the company
to make a $1-billion investment in Mexico without political risk
insurance or other official participation in the project.  Mexico's
historical and geographical relationship to the United States, trends
in Mexico's economic performance, the potential for free trade, and
the contractual commitment of high-level government officials and the
Mexican Central Bank, along with the company's confidence in its
Mexican partner, all helped lower the company's perception of risk. 
In contrast, a $644-million power project in Mexico is being
undertaken by U.S.  investors facilitated by a $477-million U.S. 
Eximbank loan, $28 million in U.S.  Eximbank political risk insurance
during construction, and a $75-million Inter-American Development
Bank loan. 

In China, companies have entered into joint ventures with local
companies that are affiliated with provincial governments, which
lowers investor perception of risk.  Depending on the size of the
project, these companies were more likely to obtain a portion of
their financing from multilateral institutions or foreign official
sources.  For example, one power company with several recent joint
ventures in China financed smaller-sized projects (under $30 million)
without public support.  However, the same company is finalizing a
$1.6-billion project and is obtaining support from the U.S.  Eximbank
and Hermes, Germany's export credit agency.  The opportunities
presented by China's large market potential may increase investors'
willingness to do business there despite the perceived risk. 

In other markets where OPIC is not available, the U.S.  firms we
surveyed have used the services of multilateral agencies or export
credit agencies.\13 One telecommunications company mitigated its risk
in Pakistan by obtaining guarantees and political risk insurance from
the International Finance Corporation and the Multilateral Investment
Guarantee Agency.  Because OPIC was not available in Vietnam, a U.S. 
power firm used the Asian Development Bank and Coface (the French
export credit agency) to finance a $160-million power plant. 

U.S.  investors' use of investment support from sources other than
OPIC may affect the source of procurements.  Multilateral
institutions generally do not tie their support to buying equipment
from a particular country.  However, some U.S.  firms told us that
they were unable to use U.S.  suppliers when they obtained support
from foreign export credit agencies.  In testimony before Congress,
an official of a large U.S.  company testified that her company
utilized or planned to use German, Japanese, or French equipment for
projects in China, Pakistan, and Vietnam because the company obtained
investment support from German, Japanese, and French export credit
agencies.\14


--------------------
\12 OPIC does not operate in a developing country unless it has a
bilateral investment agreement.  Further, U.S.  statutes specify that
certain in-country conditions, such as inadequate protection of
internationally recognized workers' rights, preclude OPIC from
supporting private investment. 

\13 Some foreign export credit agencies extend support to
foreign-owned entities that are domiciled within their borders. 

\14 Testimony of Linda F.  Powers, Senior Vice President of Global
Finance at Enron International, before the Subcommittee on
International Economic Policy and Trade, House Committee on
International Relations, March 18, 1997. 


   OPIC'S REVENUES HAVE EXCEEDED
   ITS LOSSES, BUT GLOBAL CHANGES
   MAY PRESENT OPPORTUNITIES FOR
   OPIC TO FURTHER REDUCE
   PORTFOLIO RISK
------------------------------------------------------------ Letter :4

Historically, OPIC has been self-sustaining, generating substantial
revenues from its finance and insurance programs and its investments
that together have been sufficient to cover actual losses.  As of
September, 1996, OPIC had accumulated $2.7 billion in reserves.\15
According to a February 1996 J.P.  Morgan Securities, Inc., report,
OPIC's reserves are more than adequate to cover any losses that OPIC
might experience, excluding an unprecedented disaster.\16 OPIC's risk
management strategies, which include maintaining reserves, setting
exposure limits, performing pre-approval reviews, and applying
underwriting guidelines, help limit U.S.  taxpayers' exposure to
undue risk and prevent project losses.  In 1994, OPIC raised the
maximum amount of insurance and finance coverage it offers on a given
project, a step that increases the government's exposure to loss but
may not negatively affect the quality of OPIC's portfolio. 
Notwithstanding OPIC's track record, the private sector's willingness
to have greater involvement in some developing countries has created
opportunities for OPIC to take steps to further reduce the risk
associated with its portfolio through greater risk-sharing.  Some
possible options to explore include obtaining reinsurance from other
providers, utilizing coinsurance, and insuring less than 90 percent
of the value of each investment.  Adoption of any of these options,
however, should be carried out with due consideration of U.S. 
foreign policy objectives. 


--------------------
\15 OPIC's reserves are primarily held in Treasury securities. 

\16 Overseas Private Investment Corporation:  Final Report on the
Feasibility of Privatization (Feb.  7, 1996). 


      OPIC HAS GENERATED
      SUFFICIENT REVENUE TO COVER
      ITS LOSSES
---------------------------------------------------------- Letter :4.1

Historically, OPIC has generated sufficient revenues from its
insurance and finance programs to cover its operating costs and the
losses associated with its portfolio. 



      OPIC'S INSURANCE PROGRAM
---------------------------------------------------------- Letter :4.2

Since its inception through 1996, OPIC had about $500 million in
insurance claims and recovered all but $11 million of this amount
from the disposal of assets and recoveries from foreign
governments.\17 During the same period, OPIC has received over $922
million in premiums from its insurance activities.  OPIC's insurance
revenues have exceeded its gross claims payments in all but 3 fiscal
years, excluding recoveries that OPIC obtained after the claims were
paid and liabilities were incurred but not reported.  Also excluded
is interest from Treasury securities. 


--------------------
\17 OPIC officials noted that the recoveries may not fully take into
account the time value of money. 


      OPIC'S FINANCE PROGRAM
---------------------------------------------------------- Letter :4.3

According to J.P.  Morgan Securities, Inc., OPIC's finance program
has operated at a small loss or close to breaking even.  Although
OPIC's cash revenues from its finance program have exceeded all cash
losses from loans or loan guarantees since 1984, when operating costs
and loan loss provisions are included, OPIC's finance program shows a
net operating loss for each year since 1993.  If income from Treasury
securities were allocated for each of these years, the finance
program would show a net income.\18

Under OPIC's finance program, its direct loans, which by statute are
only available to small businesses, have experienced higher rates of
delinquencies\19

and loan losses than its loan guarantees.  Between 1984 and 1996,
OPIC's average direct loan loss rate was 4.4 percent; the loss rate
was at its highest, at 11.7 percent, in fiscal year 1984.  In the
same time period, OPIC's loan guarantee portfolio had an average loan
loss rate of 0.56 percent for a combined rate (direct loans and loan
guarantees) of 0.93 percent on average outstandings. 

OPIC's finance program has been subject to the Federal Credit Reform
Act of 1990, which became effective in fiscal year 1992.\20 The act
requires that government agencies, including OPIC, estimate and
budget for the total long-term costs of their credit programs on a
present value basis.\21 Based on the required estimation of subsidy
costs under credit reform, OPIC's finance program will cost the
government $72 million in fiscal year 1997 and total about $135
million between fiscal years 1992 and 1996.\22

Historically, OPIC's combined finance and insurance programs have
been profitable and self-sustaining, including costs due to credit
reform and administration.  The J.P.  Morgan Securities, Inc.,
report\23 stated that OPIC's finance program has operated at a small
loss or close to breaking even and that much of OPIC's profitability
has come from interest earned on Treasury securities.  This interest
has accounted for over 60 percent of OPIC's total revenue over the
past 6 years.  In fiscal year 1996, OPIC's net income was $209
million, of which $166 million was interest on Treasury securities. 
From a governmentwide perspective, interest on Treasury securities
held by OPIC represents transfers between two government agencies
(that is, OPIC's income from Treasury securities is a Treasury
expense) that cancel each other out.  From that perspective, OPIC's
net income from transactions with the private sector, that is, fees
and premiums, amounted to about $43 million in fiscal year 1996. 


--------------------
\18 The allocation of Treasury security interest income is relevant
for financial statement purposes.  With regard to OPIC's statement
about its interest earnings, only those earnings properly allocable
to its credit program are relevant to the discussion of its credit
subsidy estimates; under credit reform requirements, interest earned
on credit-related reserves is required to be included in estimating
the subsidy cost. 

\19 Late payments on loans. 

\20 The finance program is subject to the Federal Credit Reform Act
of 1990 (Public Law 101-508, Nov.  5, 1990) for budgetary treatment. 

\21 Present value analysis calculates the value today of a future
stream of payments/cash flows at the appropriate discount (interest)
rate. 

\22 Subsidy costs arise when the estimated program disbursements by
the government exceed the estimated payments to the government on a
present value basis over the term of the credit.  Since fiscal year
1992 (except for fiscal year 1995), OPIC has obtained appropriations
to cover the costs of its finance program.  At the end of each fiscal
year that appropriations have been received, OPIC paid dividends to
the Treasury equivalent to the finance program costs for the given
year.  The President's 1996, 1997, and 1998 budget requests asked
that Congress grant OPIC the authority to use its insurance program
resources to fund its finance program instead of receiving
appropriations. 

\23 Overseas Private Investment Corporation:  Final Report on the
Feasibility of Privitization (Feb.7, 1996). 


      OPIC HAS ESTABLISHED A RISK
      MANAGEMENT STRATEGY
---------------------------------------------------------- Letter :4.4

OPIC's risk management strategy focuses on limiting OPIC's maximum
exposure to loss in any one country or sector.  No single country
accounts for more than 15 percent of OPIC's portfolio, effectively
protecting OPIC against the adverse consequences of catastrophic
events in any one country.  The purpose of risk diversification is to
spread the risk of one transaction across a number of different
transactions, thereby isolating OPIC against the risk of one
"catastrophic event." As shown in figure 2, OPIC's portfolio is
diversified across different regions of the world. 

   Figure 2:  Regional
   Diversification of OPIC's
   Portfolio of Insurance and
   Finance Programs, as of
   September 30, 1996 (insurance
   and finance combined)

   (See figure in printed
   edition.)

Note:  Maximum worldwide exposure:  $19.8 billion. 

Source:  OPIC. 

Although OPIC seeks to diversify its portfolio, figure 2 shows that
the countries of the Americas account for more than 40 percent of
OPIC's portfolio.  This trend is explained by the fact that U.S. 
firms choose to use OPIC support in these markets.  In general,
OPIC's portfolio is consistent with U.S.  foreign direct investment
in emerging markets.  Figure 3 displays OPIC's portfolio
diversification by investment sector. 

   Figure 3:  Diversification of
   OPIC's Portfolio of Insurance
   and Finance Programs by Sector,
   as of September 30, 1996
   (insurance and finance
   combined)

   (See figure in printed
   edition.)

Note:  Maximum worldwide exposure:  $19.8 billion. 

Source:  OPIC. 

OPIC's risk management strategy also includes pre-approval review and
underwriting guidelines that take into account some of the same
factors other private and multilateral insurers use in evaluating
projects.  For example, a risk analysis is performed as part of
OPIC's insurance approval process, and a credit analysis is included
in the finance approval process.  OPIC officials said they consider
the same factors that any commercial bank or insurance company would
concerning the economics of a project under consideration for
financing or insurance. 

Additionally, as of September 30, 1996, OPIC had accumulated over
$2.7 billion in reserves as part of its risk management strategy.\24
These reserves were raised from fees or premiums paid by users of
OPIC's services and from the investment of these funds in Treasury
securities.  OPIC's reserves as a percentage of the total current
exposure to claims have declined somewhat in recent years due to the
rapid increase in the size of OPIC's portfolio since 1994.  The
reserves as a percent of OPIC's total outstanding exposure have
declined from 41 percent in 1992 to 34 percent in fiscal year 1995. 
Despite this decline, J.P.  Morgan Securities, Inc.'s, 1996 report on
OPIC privatization concluded that these reserves are extremely large
relative to exposure by private sector standards and compared to
OPIC's historical losses.  Further, analysts at J.P.  Morgan
Securities, Inc., see the reserves as adequate to cover OPIC's losses
in all cases but an unprecedented disaster. 


--------------------
\24 If OPIC were to draw down its reserves that are comprised of
Treasury securities to pay for losses, the losses would be reflected
in budget outlays. 


      OPIC'S OVERALL PROJECT
      LIMITS HAVE RECENTLY
      INCREASED
---------------------------------------------------------- Letter :4.5

In 1994, OPIC increased per project financing limits from $50 million
to $200 million and insurance coverage from $100 million to $200
million per project.  Although larger transactions increase the
government's contingent liabilities, large loans are not necessarily
more risky than small loans.  For example, 13 of the 14 loans
currently in technical default or in a non-performing status at the
end of fiscal year 1996 were loans made to small businesses and
ranged in value from $328,000 to $12.5 million.  In addition, OPIC
data show that its direct loans have historically experienced more
problems than its loan guarantees, which are mostly for high-value
loans to large companies.  However, for insurance transactions,
higher project limits may or may not raise the overall level of risk
for the portfolio.  On the one hand, OPIC could be subject to larger
claims if a foreign government, for example, were to expropriate an
insured project.  On the other hand, if OPIC's past experience with
claims were to continue, the government's potential liability may be
small.  Since 1971, OPIC has recovered over 98 percent of the claims
it has paid. 

We caution that OPIC's past experience may not reflect future
performance because OPIC has new exposure to losses in the newly
independent states of the former Soviet Union, where it has had no
previous experience.  Furthermore, some countries in the region are
considered to be very risky by the private insurers and bankers we
spoke with. 


      POSSIBLE OPTIONS TO REDUCE
      THE RISKS ASSOCIATED WITH
      OPIC'S INSURANCE PORTFOLIO
---------------------------------------------------------- Letter :4.6

The private sector's willingness to have greater involvement in some
emerging markets has created opportunities for OPIC to further reduce
risks in its insurance program.  OPIC could share the risk of losses
with the private sector, which has shown an interest in emerging
markets.  For example, OPIC could lower the risks associated with its
portfolio through reinsurance, coinsurance, and by decreasing project
coverage or terms.  However, OPIC's efforts to support U.S.  foreign
policy objectives, which promote investment in risky markets, present
challenges for OPIC when considering ways to reduce the risks
associated with its insurance portfolio. 


      REINSURANCE
---------------------------------------------------------- Letter :4.7

Under the reinsurance scenario, OPIC could consider insuring part of
its high- and medium-risk portfolio with private sector insurance
companies at premium rates that are mutually acceptable.  For
example, OPIC could enter into a contract with a large private
insurer that would pay a specified percentage of any claims to OPIC. 
Care must be taken to ensure that the private insurer is not
providing support exclusively for the lower-risk transactions and
that OPIC retains enough of the reinsured premiums to cover its
administrative costs.  According to OPIC officials, OPIC had used
portfolio re-insurance by the private sector as a mechanism for
managing risk and stimulating U.S.  private sector interest in
providing risk insurance until the mid-1980s.  The Grace Commission
concluded that given OPIC's low claims experience, there was no
justification for the U.S.  government to pay reinsurance premiums
that exceeded claims payments collected from the reinsurers.  After
the Grace Commission's study\25

of OPIC's reinsurance practices, the Office of Management and Budget
directed OPIC to stop this practice because it was not
cost-effective.  OPIC officials told us that OPIC is currently in
discussions with the Office of Management and Budget about the
feasibility of once again pursuing portfolio reinsurance.  As noted
earlier, private political risk insurance companies are showing
greater interest in emerging markets.  This trend presents OPIC with
opportunities to negotiate fee or premium arrangements that it would
not have been able to negotiate in the past. 


--------------------
\25 The Grace Commission was established in 1982 to identify
opportunities for (1) efficiency enhancement and cost reduction and
(2) greater managerial accountability to provide information on
governmental expenditures and indebtedness.  The Commission
recommended that OPIC phase out reinsurance on its expropriation and
inconvertibility policies and seek reinsurance for its political
violence policies on a temporary basis. 


      COINSURANCE
---------------------------------------------------------- Letter :4.8

Another risk mitigation strategy that OPIC may use is providing more
coinsurance.  It could coinsure a project with other private or
public insurers in order to share the associated risks and premiums. 
In this case, the coinsurer would provide insurance that might or
might not be identical to the type provided by OPIC that would permit
both parties to provide a higher level and scope of coverage.  For
example, OPIC could provide $100 million of coverage on a
$200-million project, while a private entity or a number of entities
could provide the other $100 million of coverage.  An insurance
industry official has publicly stated that OPIC could leverage its
resources by inviting the private sector to provide 50 percent of the
insurance required on a project.  However, OPIC officials said that
the private sector's reluctance to take long-term risk in risky
markets limits its opportunity to pursue coinsurance.  OPIC has
documented only 12 of 1,392 contracts that it has coinsured with the
private sector since 1988. 


      RISK SHARING
---------------------------------------------------------- Letter :4.9

A third risk mitigation strategy may be to reduce the coverage and
terms of OPIC's insurance program.  OPIC currently offers standard
20-year insurance with 90 percent coverage of the value of the
insured assets.\26 One potential option would be that OPIC could
insure less than 90 percent of the value of each investment.  OPIC's
rationale for insuring 90 percent, rather than 100 percent, of the
value of the assets is to ensure that the investor or project sponsor
has an incentive to manage its assets prudently.  Another option
would be for OPIC to offer less than 20-year coverage.  For example,
rather than providing its current 20-year standard policy, OPIC could
offer a standard 15-year term, as is the practice with other public
insurers, and provide 20-year cover only in certain cases.  Lastly,
OPIC could require that the insured hold OPIC coverage for a minimum
of 3 years.  These measures would lower the value of assets covered,
the length of coverage, and potentially the cost of coverage. 

Regarding the risk-sharing option, OPIC officials said that reducing
the coverage level below 90 percent would have an adverse impact on
small businesses and might lead U.S.  investors to seek insurance
support from foreign or multilateral sources that provide 90-percent
coverage.  They also noted that it might not be practical to make a
project sponsor hold the coverage longer than he or she thinks is
necessary or prevent him or her from seeking alternative sources of
insurance.  However, since a reduction in coverage is likely to come
with a reduction in price, U.S.  investors might continue to seek
OPIC coverage. 

OPIC officials acknowledged that reinsurance, coinsurance, and
greater risk sharing may be sound risk management options, but are
not without trade-offs.  For example, reinsurance may reduce OPIC's
income from premiums because OPIC would have to pay premiums to the
reinsurer.  Furthermore, OPIC takes on the credit risks of the
reinsurer.  The officials also stated that OPIC would need to
maintain flexibility as to how and when to utilize these risk
mitigation alternatives. 


--------------------
\26 When the insured asset is a loan, the term is usually for the
life of the loan.  Thus, an 8-year loan would be insured for 8 years. 
Further, lenders are insured for 100 percent of the value of their
loans. 


      U.S.  FOREIGN POLICY
      ENCOURAGES OPIC TO INVEST IN
      MORE RISKY MARKETS
--------------------------------------------------------- Letter :4.10

The U.S.  foreign policy objective of promoting private investment in
developing countries encourages OPIC to take risks that the private
sector may not take without public support.  OPIC, the State
Department, and other U.S.  government officials consider OPIC to be
a major tool for pursuing U.S.  foreign policy goals.  One major U.S. 
foreign policy goal is to assist Russia in its transition toward a
free market economy.  According to OPIC officials, by entering into
OPIC's bilateral agreement in 1992, Russia began to establish the
conditions necessary for attracting private investment.  Further,
OPIC operates to promote development strategies that are consistent
with internationally recognized worker rights.  For example, OPIC
ceased operations in the Republic of Korea in 1991, due to concerns
over worker rights, including the arrest and imprisonment of labor
union leaders. 

OPIC's involvement in Russia was initially quite cautious, as it
offered only coverage for expropriation and political violence.  OPIC
officials noted that as conditions improved in Russia, OPIC began
offering coverage for currency inconvertibility risk.  Since 1992,
OPIC has accumulated a finance and insurance portfolio in Russia of
$880 million and $1.6 billion, respectively.  OPIC justifies its
involvement in the high-risk markets of the former Soviet Union\27
--currently 18 percent of its portfolio--by noting its central role
in furthering the U.S.  foreign policy objective of facilitating
private investment in these markets. 

The private sector has tended to perceive the markets that OPIC
operates in as risky, and private investors have often sought support
from official sources when investing in these markets.  According to
OPIC officials, OPIC's goal is to support deals that would not be
made without its support, and OPIC as an agency of the U.S. 
government has access to risk mitigation tools, including advocacy
and intervention to avert claims, that are not available to the
private sector.  This implies that OPIC would seek transactions that
the private sector believes would be too risky without public
support.  If OPIC is to continue pursuing its mission, its portfolio
will always be considered more risky than the portfolios of private
sector insurers. 


--------------------
\27 The countries that comprise the bulk of the former Soviet Union
(also known as the newly independent states) are Armenia, Azerbaijan,
Belarus, Georgia, Kazakstan, Kyrgyz Republic, Moldova, Russia,
Ukraine, Uzbekistan, Tajikistan, and Turkmenistan. 


   IF OPIC IS NOT REAUTHORIZED,
   ANY SHUTDOWN LEGISLATION SHOULD
   ADDRESS FUTURE MANAGEMENT OF
   OPIC'S PORTFOLIO
------------------------------------------------------------ Letter :5

OPIC's authorizing legislation makes no provision for a phaseout
process in the event the agency is closed.  Any legislation shutting
down OPIC should make clear whether OPIC's portfolio should be moved
to another agency or managed by a temporary organization until the
portfolio expires.  It could take as long as 20 years for OPIC's
portfolio to expire because many of OPIC's insurance contracts run
for 20 years, and OPIC had more than $5 billion in such contracts
with 19-20 years remaining as of the end of fiscal year 1996. 
According to OPIC's projections, about one-third of the portfolio
would remain after 10 years.  If the portfolio risk diminishes,
Congress' option to dispose of these assets is more viable. 


      LEGISLATION SHOULD ESTABLISH
      WHO WOULD MANAGE OPIC'S
      PORTFOLIO
---------------------------------------------------------- Letter :5.1

If Congress decides not to reauthorize OPIC, any shutdown legislation
would need to address whether OPIC would continue to manage the
portfolio during a phaseout period or whether the portfolio should be
moved to another agency.  If the portfolio is moved to another
agency, Congress would need to decide if any OPIC employees would be
moved with it to ensure an adequate and knowledgeable work force. 
According to Office of Management and Budget officials responsible
for overseeing OPIC and related agencies, OPIC staff may be best
suited to managing the portfolio because they are familiar with the
portfolio.\28

According to OPIC and private sector financial officials, OPIC's
portfolio could suffer losses if it is not properly managed, thereby
increasing the cost of closing the agency.  For example, a successor
entity would need to monitor the construction of power and other
projects, as well as political developments in host countries and the
portfolio's financial performance, to help prevent claims and/or
defaults.  Additionally, such an entity would need to perform OPIC's
administrative and legislatively mandated functions, including fee
collection, repayment, environmental oversight, compliance with
worker rights, and other monitoring to ensure that clients comply
with their contractual agreements.  According to OPIC officials, if
finance projects encountered payment difficulties, an entity would
also be needed to restructure the project and make collections where
necessary. 

If a decision were made to move OPIC's portfolio to another agency,
the U.S.  Eximbank would be the closest fit, according to Office of
Management and Budget officials who are also responsible for
overseeing the U.S.  Eximbank.  U.S.  Eximbank officials also stated
that their agency has many of the appropriate skills to do the
job.\29 The Eximbank officials cautioned, however, that their
employees would not be familiar with the various monitoring
requirements that OPIC carries out.  They noted that OPIC is a
foreign policy agency that provides development assistance while the
U.S.  Eximbank is an export promotion agency whose emphasis is on
expanding U.S.  exports.  The U.S.  Eximbank's lack of familiarity
with OPIC's monitoring requirements would be less of an issue if OPIC
staff were transferred to the U.S.  Eximbank. 

Officials from three other agencies with responsibilities for
overseeing loans or insurance obligations, or for encouraging and
tracking U.S.  investment in key overseas markets, all said that
their agencies lack the business skills and resources necessary to
manage OPIC's portfolio.  These agencies include the Departments of
Commerce, State, and the Treasury.  Office of Management and Budget
officials concurred that their agency also lacks these skills and
resources.  In addition, officials from the Agency for International
Development, the agency from which OPIC was created, said that their
agency would not be well suited to managing OPIC's portfolio because
the agency (1) does not provide political risk insurance, (2)
provides mostly grants, and (3) lends primarily to public entities
(OPIC lends to the private sector). 


--------------------
\28 OPIC's process for providing U.S.  firms with financial and
insurance services involves (1) an application and approval phase and
(2) a period in which approved projects are monitored (see flowcharts
in apps.  IV and V). 

\29 The qualifications for OPIC professionals are similar to those
for professionals at the Eximbank.  Many employees at both agencies
have the same Office of Personnel Management job classifications. 
These classifications include code 110 (economists), code 905
(general attorneys), code 1101 (general business and industry
specialists), and code 1160 (financial analysts). 


      OTHER ISSUES TO BE
      CONSIDERED IF OPIC IS NOT
      REAUTHORIZED
---------------------------------------------------------- Letter :5.2

Regardless of whether OPIC's portfolio is turned over to another
agency, certain Office of Personnel Management rules would affect
OPIC employee entitlements as he or she is separated from government
service.\30 These entitlements may include (1) retirement or
severance pay, (2) unemployment compensation, (3) the dollar
equivalent of unused annual leave, and (4) settlement from any
pending equal employment opportunity or other labor-related
litigation.\31

According to officials of the Office of Personnel Management, if
OPIC's portfolio is moved to another agency, Congress would have to
decide if any OPIC employees are to be moved with the portfolio. 
These officials said that reassignment of OPIC employees to another
agency, under current Office of Personnel Management rules, would be
temporary, lasting only until OPIC's portfolio expires or the
government disposes of the portfolio. 

If OPIC's portfolio is moved to another agency, other issues might be
considered for easing the transition.  For example, a timetable could
be established for transferring OPIC functions to the designated
agency.  In the absence of specific congressional direction, General
Services Administration regulations would apply governing the
disposal of OPIC's property including the transfer of office
furniture and equipment.  In addition, OPIC said it has a commercial
real estate lease that runs to June 30, 2007.\32


--------------------
\30 Previous agency phaseout experience indicates that personnel
issues are the most difficult.  According to the Federal Deposit
Insurance Corporation official responsible for managing the phaseout
of the Resolution Trust Corporation, there are lessons that can be
learned from the Resolution Trust's termination.  Although these
lessons may not require specific legislative action, there are steps
that may be taken to mitigate personnel problems in the event of a
phaseout.  They include (1) setting up a joint task force with
representatives from both OPIC and the portfolio monitoring entity so
that the OPIC participants feel they have some say in how matters are
resolved and (2) establishing a mechanism for employee communications
to reduce uncertainty and anxiety. 

\31 Severance pay can be up to an employee's current gross annual
salary, depending on the employee's age and length of government
service.  Unemployment compensation would begin only if the employee
has not yet found a new job once the severance pay is exhausted. 

\32 According to OPIC officials, if OPIC terminates this lease
without finding a suitable sublessee, it would be liable for the
payment of 1 year's rent (about $4 million) as liquidated damages. 


      OPIC'S PORTFOLIO MAY TAKE 20
      YEARS TO EXPIRE
---------------------------------------------------------- Letter :5.3

A phaseout of OPIC would require ceasing new business as of a certain
date.\33

Also, a phaseout could take as long as 20 years.  OPIC's investment
funds run for 10 years; its loans and guarantees, a maximum of 15
years; and its insurance policies, a maximum of 20 years. 

According to OPIC estimates, which assume a 10-percent annual drop in
the declining remainder of the insurance portfolio due to both
cancellations and policies ending at term, the agency's potential
exposure of $23 billion for all services would fall by 64 percent, to
$8.2 billion, after 10 years.  During the same period, OPIC estimates
that its current staff of 200 would decrease by more than 70 percent
to about 60 people as the portfolio diminishes.  We compared OPIC's
assumptions concerning insurance cancellations and contracts ending
at term to historical data and found these assumptions to be
generally consistent with these data.\34 According to OPIC, just
under 10 percent of the original exposure would remain in the 20th
year, with less than 8 percent of the staff needed to monitor it. 
The decline in OPIC's portfolio is shown graphically in figure 4. 
The insurance portion of the portfolio is by far the largest,
currently at just under $16 billion.  This portion is about 3 times
the value of the finance portion and almost 8 times that of the
investment fund portion.  In the 20th year, just the insurance
portion would be left, having dropped by 86 percent to just over $2
billion (see fig.  4). 

   Figure 4:  Projected Phaseout
   of OPIC's Portfolio

   (See figure in printed
   edition.)


--------------------
\33 OPIC issues a "commitment letter" when it approves a project.  As
of the end of fiscal year 1996, OPIC's insurance commitment letters
covered $3.4 billion, 25 percent of its total insurance portfolio;
its finance commitments stood at $1.6 billion, or 38 percent of its
total finance portfolio (excluding investment funds).  Any
legislation phasing out the agency should recognize the existence of
the commitment letters.  According to OPIC officials, legislation
that does not give effect to these commitments would result in a U.S. 
government liability. 

\34 Our analysis compared OPIC's assumed 10-percent rate of decline
to past experience regarding OPIC's insurance cancellation rates.  We
also subjected OPIC's calculations to a 15-percent annual decline and
compared this to the previous results to determine the sensitivity of
OPIC's assumption.  Using OPIC's 10-percent assumption, 35 percent of
the insurance portfolio would remain after
10 years, versus 20 percent if the 15-percent assumption is used. 


      DISPOSAL OF PORTFOLIO ASSETS
      COULD BE REVISITED IN THE
      FUTURE
---------------------------------------------------------- Letter :5.4

Although the government may wish to divest OPIC's portfolio before
its expiration by selling it to the private sector, such a decision
would need to account for the relative riskiness of OPIC's portfolio
and any discounts such a disposal would necessitate.  According to a
recent study, a privatization of OPIC's current assets could only be
accomplished at a discount.\35 As OPIC's portfolio matures during a
phaseout, external factors may affect the riskiness of the portfolio,
either negatively or positively, and thus any potential privatization
discount. 

If existing economic and political trends continue in the markets
where OPIC currently operates, OPIC's portfolio may become less
risky.  With each year that passes, the length of the government's
obligation decreases and the insured as well as the government
becomes more familiar with the risks and issues inherent in a given
transaction.  As stated earlier, OPIC's clients tend to cancel their
insurance coverage after a few years as they feel more comfortable
with the political risks.  On the other hand, OPIC's portfolio may
experience greater risk.  In general, long-term transactions are
riskier than similarly situated short-term loans, guarantees, or
insurance transactions.  Also, according to OPIC officials,
cancellations are more likely to occur in the lower-risk segment of
OPIC's portfolio, thus making the portfolio riskier in the future
than it is today.  Either situation--less risk in the portfolio or
greater risk--may occur. 

Regardless of the risk characteristics of the portfolio over time,
OPIC's portfolio will decrease.  As the portfolio decreases, the
amount of the discount will decrease for a given risk in the
portfolio.  If the quality of the portfolio improves as a result of
improvements in OPIC markets, then the rate of discount will likely
be much lower or even disappear.  If, on the other hand, the
portfolio becomes more risky over time, the rate of discount is
likely to increase.  Since the condition of this portfolio a decade
or more from now is unclear, the government has the option of
revisiting its choice to sell the portfolio if the risk is reduced. 


--------------------
\35 Overseas Private Investment Corporation:  Final Report on the
Feasibility of Privitization
(Feb.  7, 1996). 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :6

OPIC provided written comments on a draft of this report.  OPIC
generally agreed with the information and analyses in the report.  In
commenting on the draft, OPIC provided additional information to
further clarify its view of (1) the role of the private sector, (2)
risk mitigation opportunities, and (3) phaseout issues.  OPIC also
orally provided technical corrections and updated information that
were incorporated throughout the report where appropriate.  OPIC's
comments are reprinted in appendix VI, along with our evaluation of
them. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :7

To identify trends in private sector investment in developing markets
and the public sector's role in these markets, we focused on various
characteristics.  Specifically, we obtained and analyzed World Bank
data on the extent and types of private capital flows going to
finance infrastructure and the trend of these flows over time.  To
identify the recent developments in the volume and types of
investment support provided by the public and private sectors for
investments overseas, we obtained and compared information from (1)
five large private providers of political risk insurance; and (2) the
largest public providers of investment support representing France,
Germany, Japan, Canada, Italy, the United Kingdom, and the United
States.  (see app.  II) and the Multilateral Investment Guarantee
Agency.  We also discussed with the Berne Union information on the
nature of political risk insurance and the role and capability of the
public and private sectors.  We obtained total insurance exposure
data directly from the Group of Seven (G-7)\36 insurance providers. 
Regarding financing, we obtained information from major financial
institutions that provide financing to U.S.  investors, including the
Chase Manhattan Bank and Citibank, and the International Finance
Corporation.  We also discussed the international finance environment
with Standard & Poor's Ratings Services and Moody's Investors
Service, two large financial rating agencies.  An important component
of our analysis of private sector investment was the identification
of the kinds of investment services U.S.  investors have utilized in
various developing countries or economies in transition as well as
countries in which OPIC is not open for business (for example, China
and Mexico).  To obtain this information, we surveyed a judgmental
sample of 34 U.S.  investors that had made major investments within
the last
5 years in the power and telecommunications sectors.\37 We selected
the power and telecommunications sectors because they (1) are listed
as the major sectors of growth in emerging markets\38 and (2)
represented two of the four largest sectors supported by OPIC.\39
Since these sectors have considerably different resource requirements
and risks, their inclusion allowed us to make several important
distinctions regarding the investment environments in which they
operate. 

To survey firms in the power and telecommunications sectors operating
overseas, we (1) reviewed relevant literature including the Directory
of American Firms Operating in Foreign Countries and U.S.  Security
and Exchange Commission data, (2) contacted appropriate Department of
Commerce officials, (3) reviewed OPIC's annual reports that list
overseas investors, and (4) asked the firms contacted to identify
their major competitors.  We attempted to contact the 54 firms
identified and successfully interviewed 34.  We asked each firm to
identify the projects it was involved in over the past 5 years, how
these projects were structured, their views on the nature of the
risks involved, and how it mitigated the risks.\40

To determine OPIC's risk management strategy and the steps that OPIC
may take, if it is reauthorized, to further reduce portfolio risks
while pursuing its objectives, we obtained and reviewed documents on
OPIC's risk assessment policies and financial reports that detailed
the condition of OPIC's portfolio.  We also gathered and reviewed
information on the risk assessment policies of two World Bank
institutions (the Multilateral Investment Guarantee Agency and the
International Finance Corporation), organizations that have programs
comparable to OPIC's insurance and finance programs.  To support our
analysis of these policies, we interviewed OPIC, Treasury, and State
Department officials.  Furthermore, we interviewed officers of
private banks, investment institutions, and political risk insurance
companies about steps that OPIC could pursue in reducing the risks
associated with its portfolio. 

To determine the issues that would need to be addressed and the time
it would take to phase out OPIC if it is not reauthorized, we
reviewed laws and regulations and discussed applicable policies and
practices with officials from the Office of Personnel Management, the
General Services Administration, and the Office of Management and
Budget.  In addition, we reviewed our past work on the closure of the
Resolution Trust Corporation and interviewed the Federal Deposit
Insurance Corporation official responsible for managing the phaseout
of the Resolution Trust Corporation.  To determine how long it would
take for OPIC's obligations to expire, we obtained documents from
OPIC on (1) its current financing and insurance obligations, (2) its
insurance policy cancellation rates, and (3) its projections on the
duration of its existing portfolio and the resources it would require
to manage the portfolio.  To assess the reasonableness of these
projections, we reestimated OPIC's analysis using a higher projected
phaseout rate.  With regard to which agency might be best suited to
manage OPIC's existing portfolio until the obligations expire, we
interviewed officials from the Agency for International Development,
the Commerce Department, the U.S.  Eximbank, the National Economic
Council, the Office of Management and Budget, OPIC, the State
Department, and the Treasury Department.  We also obtained Office of
Personnel Management documents showing job classifications at OPIC
and two other agencies--the Agency for International Development and
the U.S.  Eximbank. 

We conducted our review from January 1997 to July 1997 in accordance
with generally accepted government auditing standards. 


--------------------
\36 Canada, France, Germany, Italy, Japan, the United Kingdom, and
the United States. 

\37 We characterize our sample as judgmental due to the difficulties
associated with identifying the universe of firms with overseas
investments in these sectors.  As a result, we did not randomly
select the firms chosen. 

\38 According to International Finance Corporation data, the power
and telecommunication sectors represented about 67 percent of all
private investment in developing countries between 1990 and 1995. 

\39 The financial services and manufacturing sectors are larger than
the telecommunications sector.  We did not include the financial
sector in our sample because it is an intermediary activity that
combines investments in various sectors, including power and
telecommunications.  We did not include the manufacturing sector
because, although this sector has received a considerable amount of
OPIC support in the past, only a small amount of OPIC's business in
the last 5 years has been in this sector.




\40 Our analysis did not consider the implications closing OPIC would
have on the private sector.  Such an analysis would be highly
speculative; and as we discuss in the report, there are many public
and private sector alternatives to OPIC available to private
investors. 


---------------------------------------------------------- Letter :7.1

We are sending copies of this report to appropriate congressional
committees and the President and Chief Executive Officer of the
Overseas Private Investment Corporation.  We will also make copies
available to other interested parties upon request. 

This review was done under the direction of JayEtta Z.  Hecker,
Associate Director.  If you or your staff have any questions
concerning this report, please contact Ms.  Hecker at (202) 512-8984. 
Major contributors to this report are listed in appendix VII. 

Sincerely yours,

Benjamin F.  Nelson
Director, International Relations
 and Trade Issues


FIRMS CONTACTED DURING THE REVIEW
=========================================================== Appendix I

FIRMS SURVEYED


      POWER COMPANIES
------------------------------------------------------- Appendix I:0.1

AES Corporation
Coastal Power Energy
CalEnergy Company, Inc.
CMS Energy Corporation
Constellation Power, Inc.
Dominion Resources, Inc.
Duke Energy International, Inc.
Enron International
GE Capital Corporation
GPU International, Inc.
Houston Industries Energy, Inc.
Edison Mission Energy
Ogden Energy Group, Inc.
TECO Power Services Corporation
El Paso Energy International
The Wing Group Ltd.  Co. 


      TELECOMMUNICATIONS COMPANIES
------------------------------------------------------- Appendix I:0.2

Adelphia Communications International
African Communications Group, Inc.
Ameritech Corporation
Andrew Corporation
BellSouth Corporation
Comcast Corporation
Chase Enterprises
D & E Communications, Inc.
GTE Service Corporation
Hungarian Telephone & Cable Corporation
Lucent Technologies, Inc.
MCT of Russia, L.P.
Millicom International Cellular, S.A.
Motorola, Inc.
Radiomovil Digital Americas, Inc.
Telecel International, Inc.
SBC Communications Inc.
US WEST International Holdings, Inc. 


      OTHER PUBLIC AND PRIVATE
      ENTITIES CONTACTED
------------------------------------------------------- Appendix I:0.3

American International Group, Inc.
AT&T
Bechtel Corporation, Inc.
Berne Union
The Chase Manhattan Bank, N.A.
Citibank, N.A.
Citicorp International Trade and Indemnity
Citicorp North America, Inc.
Exporters Services
FCIA Management Company, Inc.
International Finance Corporation
MCI Communications
J.P.  Morgan Securities, Inc.
Lloyd and Thompson Insurance Co.
Multilateral Investment Guarantee Agency
Moody's Investors Service
NYNEX
Sedgewick Reinsurance Brokers Ltd.
Standard & Poor's Ratings Services
Taylor-DeJongh, Inc.
Unistrat Corporation of America


MAIN FEATURES OF THE GROUP OF
SEVEN INVESTMENT INSURANCE
PROGRAMS
========================================================== Appendix II

G-7 Country       Eligible          Eligible      Coverage    Maximum duration
Investment        investors         enterprises   limits      risks covered
----------------  ----------------  ------------  ----------  ------------------
France/COFACE     Legal entities    No            No limit.   15 years.
                  registered in     restrictions              Expropriation,
                  France.           .                         war,
                                                              inconvertibility,
                                                              breach
                                                              of government
                                                              commitments.

Germany/C&L       Domestic German   No            No limit.   15 years.\a
                  entities.         restrictions              Expropriation,
                                    .                         war,
                                                              inconvertibility,
                                                              breach of
                                                              government
                                                              contracts.

Japan/EID/MITI    Persons and       No            $500        15 years.\b
                  entities          restrictions  million     Expropriation,
                  existing in       .             per         war,
                  Japan.                          project.    inconvertibility,
                                                              bankruptcy after 2
                                                              years of
                                                              operation.

Canada/EDC        Persons or        No            No limit.   15 years.
                  business          restrictions              Expropriation,
                  beneficial to     .                         war,
                  Canada.                                     inconvertibility.

Italy/SACE        Persons or        Developing    No limit.   15 years.
                  entities          countries                 Expropriation,
                  domiciled in      only.                     war,
                  Italy.                                      inconvertibility,
                                                              natural
                                                              catastrophe.

U.K./ECGD         Persons and       No            No limit.   15 years
                  entities          restrictions              extendable to 20.
                  carrying on       .                         Expropriation,
                  business in                                 war,
                  United Kingdom.                             inconvertibility,
                                                              breach of contract
                                                              by host
                                                              government.

U.S./OPIC         U.S. citizens     Developing    $200        20 years.
                  and entities and  countries     million     Expropriation,
                  foreign entities  only.\c       per         war,
                  95% owned by                    project.    inconvertibility,
                  U.S. interests.                             breach of contract
                                                              by host
                                                              government.
--------------------------------------------------------------------------------
\a Twenty years if a project involves long construction period. 

\b Longer periods for projects with long construction periods;
commercial risk for 10 years with longer periods possible. 

\c Bilateral agreement required; host government attitude toward
human rights, worker rights considered; environmental impact
considered. 

Source:  Overseas Private Investment Corporation (OPIC) Insurance
Department. 


REGIONAL INVESTMENT INSURANCE
EXPOSURE OF THE MAJOR GROUP OF
SEVEN PROVIDERS
========================================================= Appendix III

                            (U.S. dollars in millions)

Major
insurance          Asia/                                       The      Reported
providers        Pacific      Europe\a      Africa\b    Americas\c         total
==========  ------------  ------------  ------------  ------------  ============
Japan        Unavailable   Unavailable   Unavailable   Unavailable       $13,943
 MITI/EID
U.S.             $ 2,740        $3,517       $ 1,554       $ 6,622     $13,386\e
 OPIC\d
Germany            2,751         3,826           650           608         7,835
 C&L
France             1,050           730       1,590\f           100         3,470
 COFACE
Canada                50           250            40           910         1,250
 EDC
U.K.                 380           110            48             2           540
 ECGD
Italy                  2   Unavailable   Unavailable            39            41
 SACE
================================================================================
Total                N/A           N/A           N/A           N/A       $40,465
--------------------------------------------------------------------------------
Note:  All data are as of 1996; exchange rates as of December 31,
1996. 

\a Europe includes the former Soviet Union, Eastern Europe, and
Turkey. 

\b Africa includes the Middle East. 

\c The Americas includes Central America, South America, and the
Caribbean. 

\d OPIC data as of September 30, 1996. 

\e The sum of the geographic regions exceeds the reported total by
$1,048,133 due to a client-specific stop loss adjustment that limits
OPIC's liability. 

\f French data for Africa include Middle East and Turkey. 

Source:  Group of Seven Insurance Providers. 


OPIC INSURANCE PROCESS
========================================================== Appendix IV



   (See figure in printed
   edition.)


OPIC FINANCE PROCESS
=========================================================== Appendix V



   (See figure in printed
   edition.)




(See figure in printed edition.)Appendix VI
COMMENTS FROM OPIC
=========================================================== Appendix V



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)


The following are GAO's comments on OPIC's letter dated August 6,
1997. 

GAO COMMENTS

1.  The points that OPIC highlights are there own interpretation of
our analyses.  Several points discussed by OPIC, such as the health
of their reserves, filling a commercial void and the impact of its
activities on U.S.  employment, are not our specific conclusions. 
Rather, the report provides factual information and our analysis of
the trends in private sector investment, the public sector's role in
emerging markets, OPIC's portfolio and risk management strategy, and
issues to be addressed if OPIC were not reauthorized. 

2.  Information in the report on OPIC's risk management strategy is
not restricted to a discussion of how OPIC limits exposure in any one
country or sector.  The report also includes a discussion of OPIC's
pre-approval review process and underwriting guidelines.  Appendixes
IV and V contain information on the application, approval, and
monitoring processes for the insurance and finance programs. 

3.  Although the report notes that the larger finance projects tend
to be less risky than smaller projects, we do not agree that the same
is necessarily true for OPIC's insurance projects.  Financing
involves commercial risks that well-capitalized and experienced
private participants have greater influence in mitigating.  However,
political risk insurance only covers actions taken by
governments--actions that are less within the control of the private
sector. 

4.  The report discusses only the recent growth in privately provided
political risk insurance.  The extent to which the private market
capacity for political risk insurance would be affected by changes in
demand for property/casualty coverage is not certain. 

5.  We recognize that OPIC has in some cases pursued the risk
mitigation options discussed in the report.  However, we believe that
the private sector's current high level of interest in investing in
emerging markets has created opportunities for OPIC to further reduce
portfolio risk through greater use of the options presented. 

6.  The report provides OPIC data that show 18 (now 12) cases since
1988 in which OPIC coinsured with the private sector.  Although there
may be other cases in which the private sector provided insurance to
investors also insured by OPIC, this information is more anecdotal
and these instances would not represent cases in which OPIC formally
sought to coinsure with the private sector. 

7.  We revised the report to reflect that any loss that was covered
by a drawdown in reserves (that are comprised of Treasury securities)
would become a budgetary outlay.  However, we do not agree that such
an outlay should then be compared to the offsetting collections that
OPIC receives.  If it were necessary for OPIC to redeem Treasury
securities, then it would need more cash to cover losses than it
would be taking in. 

8.  The report states that under the Federal Credit Reform Act of
1990, agencies are to estimate and budget for long-term costs of
their credit programs on a present value basis.  Subsidy costs arise
when the estimated program disbursements by the government exceed the
estimated payments to the government on a present value basis.  The
subsidy cost data in our report are based on OPIC's reported
estimates.  In order to show lower subsidy costs, the costs must be
reestimated, with key factors such as the credit risk of the
borrowing country showing improvement.  OPIC identified $72 million
in subsidy costs for fiscal year 1997 programs. 

With regard to OPIC's statement about its interest earnings, only
those earnings properly allocable to its credit program are relevant
to the discussion of its credit subsidy estimates.  Under credit
reform requirements, interest earned on credit-related reserves is
required to be included in estimating the subsidy cost. 

9.  We modified the report to include this information. 

10.  We modified the report to include this information. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix VII

NATIONAL SECURITY AND
INTERNATIONAL AFFAIRS DIVISION,
WASHINGTON, D.C. 

Jaime Dominguez
Kay Halpern
John Hutton
Patricia Martin
Tom Melito
Rona Mendelsohn
Eluma Obibuaku

OFFICE OF THE GENERAL COUNSEL,
WASHINGTON, D.C. 

Ernie E.  Jackson

LOS ANGELES FIELD OFFICE

Tom Zingale


*** End of document. ***