The Overseas Private Investment Corp. is not your typical financial institution, and it funds unusual projects
With banks leaving the industry, last week journalist Chaim Even-Zohar broke the news that a rather odd party—the U.S. government—had agreed to finance Botswana diamond factories.
The Overseas Private Investment Corp. (OPIC), a financial institution that is part of the U.S. government, is now guarantying $125 million in loans to Botswana’s cutters and polishers. OPIC is assuming 75 percent of the risk associated with the first tranche; the other 25 percent will be held by Barclay’s Bank of Botswana.
OPIC has also committed to guarantying another $125 million in loans and hopes to get other local banks involved. If all goes to plan, $333 million will be available for cutters and polishers in Botswana over the agreement’s 13-year horizon.
Established in 1971, OPIC is not your ordinary financial institution, and the projects it gets involved with also aren’t typical. It funds projects that spur development in poor countries where there is limited access to capital—as that, in turn, advances U.S. foreign policy and national security priorities. (Stable African countries are considered an American interest.)
In this case, OPIC determined that opening cutting factories would be “highly developmental for Botswana,” James Polan, OPIC vice president of small- and medium-size enterprise finance, tells JCK.
“Our goal is to create sustainable businesses and factories in Botswana,” he says.
Lazare Kaplan International (LKI) has been listed as a loan partner, but Polan says the New York City–based diamond manufacturer will just be providing “training and assistance” for “a small fee.” Even though LKI had a factory in Botswana a long time ago, Polan says it is “highly doubtful” it will try again. “If they did, theoretically, they could be part of it,” he says.
While OPIC does direct lending, in this instance it is just acting as guarantor and letting Barclays (and any other banks) handle the actual transaction, which will be a standard loan at market rates. Regardless, OPIC has tough due diligence requirements for any loans it backs up—tougher than most banks. All companies must adhere to certain requirements as far as environmental polices, human rights, and workers’ rights.
Which all seems noble—and potentially risky. But Polan says that OPIC, like standard banks, does not just throw money around.
“Our net loss is under 1 percent, so compared to the commercial banks we do very well,” he says. “We underwrite very similarly to commercial banks, but we take longer-term risks that they don’t. We have proven over the course of 45-odd years we can be very successful doing that.
“We have a very strong balance sheet,” he continues. “We return about $300 million to $400 million a year to our shareholder, which is the federal government. We don’t use taxpayers’ money. We make the taxpayers money.”