OPIC funding to provide opportunities for growth

By Shanuka Tissera

Leading bankers were given the opportunity to discuss the method of approvals of OPIC funding and political risk insurance, facilitated by the International Executive Service Corps (IESC) and the American Chamber of Commerce Sri Lanka (AMCHAM) for US equity sponsored projects.

The keynote address was delivered by the Governor of the Central Bank Ajith Nivard Cabraal at the event which took place on 24 August at Colombo Courtyard.

What is OPIC?

Overseas Private Investment Corporation (OPIC) is the US Government’s development finance institution and uses private capital to help solve challenges around the world. OPIC services are available for new and expanding business enterprises in more than 150 countries worldwide.

To date, OPIC projects have generated $ 74 billion in US exports. The chance for the Sri Lankan financial system to benefit from this long term debt financing is now on the table.

In his keynote address, Cabraal explained why Sri Lanka needed FDI and how funding could be obtained.

“Currently, we are on a good path, economic growth is strong and there will be difficult challenges ahead to maintain growth. In 2010-2011 savings rates were not high yet we still managed 8% growth, preparation and intelligent investing needs to further strengthen.”

Reality must be accepted and only then can confident analysis be conducted.

Factors to take into consideration

Capacity is still utilised in many industries such as tourism, agriculture and energy. New areas such as food, fisheries and construction for example have immense room to grow. These are all new potential investment sectors that have yet to be maximised. Foreign Direct Investment is set to double up to a value of $ 2 billion and with banks meeting tier 2 capital requirements, this safety cushion will allow new capital to flow in the market.

Portfolio investment can be lost as quickly as it is received, however, tier 2 capital will not have a quick departure as long terms agreements are established. We have seen that within 12 hours, bonds totalling $ 1 billion were oversubscribed thus releasing confidence into the markets. With investor confidence on the rise, a strong outflow of Rs. 28 billion is around the corner. Currently savings rates are moderately low; levels of 33-34% of savings are what the Governor of the Central Bank wishes to turn into reality.

All this FDI and realistic potential of further credit lines bring a total of approximately $ 4 billion, a hefty sum for a country that ended a civil war in only 2009.

2013

Some tweaking may be necessary, the Governor noted. There may be a slight hit on the levels of growth but confidence will not be affected as all other targets are set for fulfilment. There is huge import demand, credit growth and the trade deficit which is now at a 16-month low in June is set to meet target levels by December 2012.

“We are likely to also see exchange rate stability and a balance of payments surplus by the end of the year. Stability will be evident with the policies currently being implemented and we believe that the future of the financial markets in Sri Lanka is to be strong, the surplus will happen with an estimated 7-7.2% level of growth,” said Cabraal.

This will give the Sri Lankan economy a good platform to maintain monies coming in. Local investment is set to grow as per capita grows.

Changes in the stock exchanges will help get to a level of a $ 100 billion economy with a market cap of 50-60%. In turn, stocks are set to rise and there will be greater liquidity within the market.

Interest rates will begin to stable, inflation will be calm and the record for longest 1 digit inflation will continue. Tough but necessary policy measures along with the help of the government will build good shock absorbers in the economy to deal with any potential emergencies such as high unemployment.

An example of this is when the Central Bank had Rs. 8 billion in reserves and was able to stabilise the economy without letting panic settle in. Credit growth is set to grow from 18-23% is enough to support the plan of the Government.

Why OPIC funding?

Numerous projects have already been undertaken with thanks to OPIC in all sectors. The International Executive Service Corps (IESC) along with AmCham, the American Chamber of Commerce provides strategic guidance for long-term debt financing.

IESC has worked with many countries all over the world and currently in America, interest rates are close to 0%. For companies to qualify for this funding, they must have a strong plan and require between the sum of $ 1 million to $ 250 million.

The long-term financing can last from three to 15 years where Sri Lanka can qualify with interest rates between 5-6%. There have been cases where countries like Pakistan have been declined funding with interest rates at 7-8%.

This is a fixed interest rate loan, the only problem is that the company must have US stakeholder ownership of at least 25% or franchise rights. This debt-financing product with the help of the IESC/AmCham and OPIC will help you find partners in like fields.

Requirements for OPIC funding

There is a pre-qualification stage of three to four weeks with no charge from the International Executive Service Corps. It is wise to note that after IESC evaluation, OPIC financial intervention success rates are at 90%. For those that tried to go straight to the Overseas Private Investment Corporation, the success rate has been 45%.

There is a $ 5,000-$ 10,000 retainer with monthly payables of $ 5,000 until the project is ready to launch. Clear and concise programmes are needed unlike those of Millennium Challenge for example, where Government intervention was needed to continue the building of infrastructure.

Further backlash with lowering interest rates since 2007 means that one will benefit from extending credit lines. Sri Lanka is no longer a captive market, the equity component is structured well and hence why competition is fierce.

Each case will be unique; what is on offer except for funding is expert advice and networking with some of America’s most influential. The more information one has on their company, the less time the application process will take.

OPIC is quite efficient and both IESC and AmCham will look to help pilot any viable project. This will, in the long run, ease credit constraints such that investor confidence stays afloat.