Nippon Keidanren released its "Recommendations on Overseas Economic Cooperation and Modalities of International Financial Operations" in June 2006. In May 2006, the government inaugurated the Council of Overseas Economic Cooperation chaired by the prime minister as the command center of Japan's ODA policy. And in August 2006, the Ministry of Foreign Affairs established a new International Cooperation Bureau with a view to strengthen its planning and policy-initiating capability on international cooperation. The government has also formally decided to set up a new Japan International Cooperation Agency (JICA) in October next year as the organ in charge of implementing ODA by merging it with the yen loan department of the Japan Bank for International Cooperation (JBIC). The non-ODA business of the JBIC will become the international finance arm of the Japan Policy Finance Corporation. (The department will be known in English by its old name, the Japan Bank for International Cooperation.) Nippon Keidanren takes this opportunity to reiterate its views on the four major areas of Japan's international cooperation policy.
Nippon Keidanren has always argued that there must be a command center for ODA policy. We appreciate the reform that has led to the establishment of an ODA command center in the form of the Council of Overseas Economic Cooperation chaired by the prime minister. Since members of the council are made up exclusively of Cabinet members, it is important to promote economic cooperation through policy measures by the Ministry of Foreign Affairs as well as various other ministries and agencies and aid implementing organizations, with actions based on the basic principles as spelled out by the council.
We hope that the new Japan Bank for International Cooperation (the international finance arm of the Japan Policy Finance Corporation) will make full use of its expertise in international finance and, as an effectively independent body, will play a greater role in backing the international operations of Japanese businesses.
Nippon Keidanren has argued that the operation of the three schemes of Japan's ODA program -- technical assistance, grant-in-aid and loan assistance (yen loans) -- must be coordinated in an organic manner. The new JICA should make this possible. Debate is being conducted on how to integrate the two constituent organizations, and this provides an excellent opportunity to carry out a complete organizational makeover. In addition to providing human resources training and humanitarian aid, the new JICA should put priority on economic and social infrastructure aid in order to foster economic growth in the aid-recipient countries. We also look forward to systemic changes (such as halving the length of time from the point when a yen-loan project is authorized to the start of construction work) to underscore the merits of setting up a new ODA-implementing agency.
With respect to the ODA budget, we should clearly realize that international cooperation is a Japanese obligation to the international community, and we should strive to maintain the scale of the ODA program at a certain level. We should also send a clear message to peoples at home and abroad that Japan will continue to make contributions to the world through ODA.
The year 2008 will be important for Japan to lay out what it will do in international cooperation: apart from the birth of the new JICA in October, the Tokyo International Conference for African Development will take place in May, and Japan will host the Group of Eight Summit at Lake Toya in Hokkaido in July. Nippon Keidanren takes this opportunity to offer the following recommendations on Japan's international cooperation and to spell out its expectations on the new JICA on some practical matters in line with the fundamental principles outlined above.
From its experience of post-World War II reconstruction and its experience of aid to Asian countries, Japan sees ODA as a means to help put developing countries on the path of autonomous economic development, and has provided them with assistance to build an economic and social infrastructure, train human resources and promote institutional building.
ODA is the catalyst for attracting and promoting trade and investment in the private sector, and the effect of development will be maximized by linking ODA to economic activities of the private sector. Especially in bilateral assistance, it is important to raise "the visibility of aid" by making full use of outstanding Japanese technology and know-how so as to cement stronger ties between Japan and the developing countries.
The present ODA program, however, is no longer regarded in the Japanese private sector as attractive business opportunities, for reasons that include a trend to untie ODA loans, lesser certainty to win business orders, smaller ODA budgets and other factors that tend to raise the risks and costs of doing business. In order to make it possible for Japanese business to maintain the commercial viability of aid and get involved in ODA in a sustained manner, the modalities of ODA operations must be reviewed through joint efforts of the government and the private sector. In making such reviews, it is necessary to realize once again that ODA is a national enterprise undertaken in cooperation with the public and the private sector, and debate various ODA issues on this basis, including the pros and cons of current international rules restricting tied loans.
As a result of severe fiscal conditions, the government has been compelled to trim the size of Japan's ODA program for 10 consecutive years. The ODA budget has become an extremely easy-to-understand international benchmark showing the degree of enthusiasm of a country in addressing the issues facing developing countries. As the world's second largest economy, Japan held the position as the No. 1 aid-donor country in the 1990s. According to 2006 data (preliminary figures), Japan was overtaken by the United Kingdom in ODA and dropped to third place. According to the OECD Development Assistance Committee, Japan is projected to slide to fifth place in 2010 in terms of ODA outlays.
In order to achieve the Millennium Development Goals, the economically developed countries have been making efforts to raise ODA outlays to a level equivalent to 0.7 percent of their gross national income. As mentioned earlier, 2008 is a year for the Tokyo International Conference for African Development and the G-8 Summit in Japan. As a responsible member of the international community, Japan should hold back further cuts in ODA when compiling the fiscal 2008 government budget, and make a public declaration that the size of the ODA program will exceed the amount spent in 2005 (13.15 billion U.S. dollars).
At the G-8 Gleneagles Summit in July 2005, then-Prime Minister Junichiro Koizumi made an international commitment that Japan "aims to increase the size of the ODA program by 10 billion dollars over five years." However, the 2006 edition of the government's "Basic Policies for Economic and Fiscal Management and Structural Reform" gave the international community the impression that Japan's ODA budget was moving backward, and this left a black mark in Japan's foreign policy. In order to make amends in such policy lapses, the government should limit ODA budget cuts as much as possible through fiscal 2011 when the government is hoping to achieve a positive balance in the state's finances, by making use of supplemental budgets or active use of yen loans, and send a clear message to the international community that Japan is once again expanding its ODA program.
One method to steadily increase the volume of ODA projects over the medium and long term is to make use of the funds of yen-loan repayments from developing countries (totaling about 600 billion yen in fiscal 2006). The new JICA should be allowed to pool the money under a separate portfolio and use the funds to expand studies to explore and arrange ODA projects as well as to finance new yen loans for STEP (Special Terms for Economic Partnership) and related projects.
International competition to acquire resources and energy is intensifying. It is vital for Japan, not only from the viewpoint of national security in securing the supply of resources and energy but also as a contribution to a steady global supply of energy and raw materials, to acquire concessions and transaction rights to petroleum, gas and mineral resources, including coal, through the private sector.
The Council for Overseas Economic Cooperation, as well as the New National Energy Strategy and the Outline of Economic Growth Strategy released last year, has advocated that Japan should make use of ODA strategically to strengthen economic relations with resources-exporting countries and actively provide indirect support to Japanese businesses in their efforts to secure resources and energy.
For resources and energy projects, the various government ministries and agencies should focus on infrastructural building (such as freight railway, roads and resources shipping ports) and human resources development, acting in close partnership with the new JICA, (which will be inaugurated in October 2008), JBIC (which will become the international finance arm of the Japan Policy Finance Corporation, the new government agency in charge of policy finance), and Nippon Export and Investment Insurance.
Additionally, as part of Japan's contribution to resolving global warming problems, the government should use our country's world-leading environmental and energy-saving technologies as part of the ODA program in a flexible manner, provided there is assurance the intellectual property rights are protected.
There should be no change in Japan's policy to put the primary focus of ODA in Asia, as clearly stipulated in the government's General Framework of Official Development Assistance. It is often said Japan's ODA has been a success story in Asia, but to further raise the effectiveness and trust of the Japanese ODA model, Japan should continue to focus on the economic development of Indonesia and the Philippines, the two Asian countries where the economic potentials have yet to be fully tapped. We must also strengthen our ODA program in the lesser developed ASEAN countries such as Cambodia and Laos as well as India, Pakistan and other South Asian countries where there are still vast pockets of poverty.
This said, support for African development has become the center of international attention. Since Japan is the world's second largest economy and has enjoyed the benefits of a stable and prosperous world, we have the obligation as a responsible member of the international community to provide assistance to Africa. Although most Japanese companies are not familiar with Africa and there are limits on the nature of contributions they can make on their own, Japan must increase aid to Africa amid all the attention in the world. In providing assistance to Africa, it is appropriate that Japan, while providing humanitarian aid to relieve absolute poverty, should put the weight on economic growth and focus on the infrastructure, human resources development and institutional building, the kind of ODA programs that has made big contributions to the economic development in Asia.
In this connection, Japan should, from the select-and-focus point of view, focus its assistance in countries that understand our country's international cooperation accomplishments in Asia and are ready to accept similar ODA projects. Producing a successful case of the Japanese ODA model in Africa is extremely important for promoting future African development and strengthening Japan's relations with African countries as a whole.
Japan is moving forward to conclude economic partnership agreements especially with East Asian countries. In the future, Japan is aiming to establish a comprehensive economic partnership pact for the entire East Asian region. This is the "East Asia EPA" concept designed for the ASEAN-Plus-Six group, which embraces the 10 ASEAN countries together with Japan, China, South Korea, India, Australia and New Zealand.
ODA is an important factor in forging EPAs with developing countries and building a mutually beneficial relationship. Take, for instance, the issue of cross-border people movement, an area of strong interest to countries such as the Philippines and Indonesia. In order to accept foreign technical workers, Japan should provide technical guidance and human resources training through Japanese language education in the countries concerned and promote cooperation more actively on a government-to-government basis. Within the Japanese government itself, efforts should be made to rise above inter-agency walls, forge a close partnership between EPA and ODA departments and ensure that EPA and ODA projects move in tandem.
Japan has contributed large sums of money to international organizations such as United Nations agencies and the World Bank group and has set up special-purpose funds. This policy of assistance through international agencies is effective in the fields that are not familiar to Japan; it is also an effective tool to provide assistance to multiple countries.
While the various government ministries and agencies have stepped up efforts to coordinate bilateral and multilateral aid, Japan's contribution to multilateral aid through international financial institutions for development has raised many questions, such as the view that Japan's multilateral aid policy is not well coordinated with bilateral aid and that multilateral aid projects are mostly in areas and in countries that are not familiar to Japanese companies. There is also complaint that international aid agencies seldom exchange information with private companies and that there is insufficient information disclosure concerning the use of multilateral aid funds. The government should discharge its accountability to the people of Japan and respond to these views. At the same time, the government should convince international agencies of the effectiveness of Japan's aid philosophy and aid policy, and make efforts to turn multilateral aid into opportunities where Japanese companies can expand their sphere of activity.
Japan's international cooperation has helped developing countries build their economic and social infrastructure through yen loans, thereby expanding trade and investment in the private sector. As a result, developing countries have been able to put their economies on their own feet, raise the level of income and reduce poverty. The role played by yen loans in the economic development in Asian countries cannot be overemphasized.
The various government ministries and agencies together with the new JICA should take every opportunity to present these facts to the OECD Development Assistance Committee and other international forums as testimony to the effectiveness of Japan's international cooperation policy and promote international understanding on the thinking of Japan's aid policy.
At the DAC, debates on how to compute the size of ODA have so far focused on the argument that it should be based on net outlays. Under the net-outlay formula, when aid is extended mainly through loans as in Japan's case, the size of ODA becomes statistically smaller every time a borrowing country pays back a loan. Properly paying back ODA loans is a proof that the borrowing country is conforming to the rules of market economy. It also means that Japanese ODA funds are circulating smoothly.
When the DAC released the preliminary 2006 data of ODA outlays on April 4 this year, gross outlays were also included in the preliminary figures. The Japanese government should take this opportunity to argue more vigorously about the effectiveness of Japan's international cooperation policy and the way it works.
Nippon Keidanren has all along argued for the necessity to set up a command center for Japan's ODA program and the importance to operate the three schemes of ODA -- technical cooperation, grant-in-aid and loan assistance (yen loans) -- in a well-coordinated manner. In this sense, we expect the Council of Overseas Economic Cooperation, inaugurated in May 2006, to serve as a genuine command center. We have high expectations on the new JICA, which will be created in October 2008. From our point of view, it is essential that the new JICA act in line with the principles formulated by the council and the policies of the various government ministries and agencies, forge a closer partnership with the private sector, and operate the three schemes of ODA in an integrated manner. To do so, the new agency must overhaul practices that have been criticized as ineffective and bureaucratic, and strive to become an aid agency that is competitive and well-regarded internationally. In line with this thinking, we strongly urge the new JICA to especially take note of the following points:
In ODA operations, it is necessary that developing countries get to see the benefits of economic development as early as possible. However, promptness is something lacking in Japan's ODA program as a whole, whether it is grant-in-aid, technical cooperation or yen loan. This is particularly the case with yen loans. From the point when a request for yen loan is made to the point where feasibility study is done and the yen loan project gets off the ground, it takes at least three to four years. In some cases, it is not unusual to see the process lasting as long as seven years. During all this time, ODA projects are exposed to all sorts of political and economic risks, such as policy changes in the recipient countries or a downgrading of the project priority as a result of a change in government or other factors as well as rising construction and material costs. To respond to the requirements of developing countries swiftly, and to avoid or reduce such risks, the timeframe required for approving a yen loan should be radically shortened.
We have heard that the government and aid implementing agencies are seriously considering shortening the process of yen loans. We hope that specific measures of time-halving reform such as those outlined below will be swiftly implemented.
(i) Set up a system to identify and form high-grade aid projects.
The first step toward a swift decision-making process is to identify a good ODA project. Traditionally, the initiative of finding a potential ODA project has been relegated to the private sector. However, partly because the certainty of winning business orders has declined owing to the trend in recent years to untie aid loans, fewer private companies are willing to take up the task of searching for ODA projects. While the government has tried to build up a stronger administrative framework to promote ODA programs, such as setting up local ODA taskforces, drawing up country-specific aid plans and establishing rolling plans, the government still does not have adequate human resources to quickly identify and arrange high-grade aid projects.
There is no lack of such talents in the private sector, people who are familiar with the situation in the developing world and know about their development needs. We urge the government to set up a mechanism to make use of these private-sector resources. To bolster local abilities, the Japanese government has established local ODA taskforces made up of personnel from the local Japanese Embassy, JICA, JBIC, JETRO (Japan External Trade Organization) and related government agencies. Depending on the local situation, representatives from local Japanese chambers of commerce and Japanese-owned businesses should in the future be allowed to participate in these taskforces. Inside Japan, it is important to have a forum where the new JICA and the business sector can regularly exchange views. We propose to set up a "Regular Consultative Council" between the new JICA and Nippon Keidanren.
(ii) Integrate development studies in the yen loan process.
Since JICA currently treats development studies as technical cooperation, the result is not necessarily linked to yen loans. Requests for development studies from developing countries are handled separately from yen loan requests. Therefore, the ratio of development study projects that will lead to yen loans is extremely low, at just about 20 percent. This is simply not efficient. Also, it has been pointed out that development studies are time-consuming, and it is not clear what results these studies have accomplished.
After Japan's aid agencies are unified under the new JICA, development study projects should be integrated in the yen loan process and treated as preparatory studies for the implementation of yen loans. If such a policy is adopted, we strongly hope there will be a big increase in the development study budget and that development study projects will be implemented swiftly.
(iii) Accept ODA applications around the year.
Under existing rules, there is a specified period of the year when requests from developing countries for ODA projects must be submitted. Requests submitted after the deadline are treated as requests for the following year and, consequently, requests for aid can sit idle, at the maximum, for more than a year. To avoid such a situation, there should be more flexibility, and ODA applications should be accepted and processed anytime of the year.
While we should uphold the principle that ODA must be based on requests, it is necessary to devise a system to inject an element of flexibility in the application of this principle. What is important is to have a process where the quality of the original ODA proposal can be improved through policy dialogues with the country concerned, and a process that is convincing to both the aid recipient country and Japan. The government should also consider introducing a mechanism that would allow a particular ODA project to be treated on the fast track and processed swiftly under a separate ODA category, once agreement has been reached through the consultation process that the project is important to both countries.
(iv) Introduce a workflow that is based on program units.
Technical cooperation, grant-in-aid and yen loan vary in the length of time of implementation. Because of this and other factors, each category of ODA has developed its own operational procedures and pattern of work. With the new JICA, the government is reportedly considering an organizational structure that is not based on the nature of aid but on geographical regions, with existing JBIC and JICA employees put to work in the same department and the flow of operations to be unified wherever possible. This is a welcome direction, as the workflow at the new JICA should be organized in such a way as to make it possible to properly manage ODA operations on the basis of program units that bundle together various projects.
(v) Make progress management rational and flexible.
Rules on "standard processing periods" have been set for the three schemes of ODA: 9 months for yen loans, 10-12 months for grants-in-aid (the period from basic design study to the exchange of official documents), and 7 months for technical cooperation. In reality, there are often delays, and we strongly feel that the rules must be observed. Also, it is necessary to conclude agreements with the aid-recipient countries not only on the contents of the project but also on the period of implementation. Since factors of delay are often found in the developing countries, there should be a mechanism for Japan and the recipient country to jointly manage the progress of the project, with the Japanese side also providing its own monitoring personnel. Progress management should also include cooperation to promote the process within the government of the recipient country.
(vi) Strengthen internal control and ensure transparency.
At the new JICA, once the three schemes of technical cooperation, grant-in-aid and yen loan are integrated in an organic manner and aid implementation is conducted on a regional basis, each department would be managing and paying out huge amounts of aid money, to the tune of 100 - 200 billion yen a year in the case of Indonesia or India where ODA is provided on an annual basis. Therefore, it is necessary to pay close attention to internal control, and the government should consider introducing an oversight system with personnel to be appointed from the private sector and other third parties.
Yen loans contain an extremely high concessional element and have contributed greatly to the economic development of many developing countries. Since yen loans are denominated in the Japanese currency, exchange-rate risks are borne entirely by the borrowing country. As many developing countries use the dollar for trade settlement and as a foreign currency reserve, some of the loan-recipient countries have strongly urged Japan to provide loans denominated in U.S. dollar or their local currency.
It is possible for the new JICA to issue bonds denominated in a foreign currency. Also, financial derivatives are in extensive use. The new JICA should be able to make use of these financial instruments and use foreign-currency funds to widen its lending menu by making loans available either in the U.S. dollar or in the currency of the borrowing country, whichever they choose. This will surely make Japan's lending system more attractive. The relevant Japanese ministries and the new JICA should review Japan's basic policy of lending to developing countries while addressing their requests in a flexible manner.
STEP (Special Terms for Economic Partnership) was introduced in July 2002 as a tied yen loan with the objective of promoting "the visibility of aid" by using Japan's outstanding technology and know-how. While there is a growing trend to untie loans made to developing countries, a certain portion of the loans extended by various countries remains tied. Japan should study these practices, consider the possibility of expanding the tied-loan system and take measures to bolster the number and total funding of projects in the stagnating STEP program. There should also be greater flexibility in the application of the STEP program, which can include, for example, rehabilitation (reform and modernization) of the projects that Japanese companies had been involved in, energy-saving projects, projects to address global warming, and inter-city railway projects.
In addition, the government should give grant-in-aid treatment to the funds used in project maintenance and other operational services and for pilot use of Japanese products, and turn part of the STEP program into grant.
Some developing countries have little knowledge about the STEP program. The Japanese government should vigorously publicize the STEP program and raise its level of recognition and understanding among developing countries.
The management of part of the grant-in-aid program will be shifted from the Ministry of Foreign Affairs to the new JICA. Grant-in-aid should, by its very nature, be implemented under a proper partnership between the government and the private sector. Certain practices of the present grant-in-aid system are really behind the times. For instance, many grant-in-aid projects are in the form of one-sided contracts where no change is allowed in the cost estimate or in the project design after the tender has been accepted even as a result of unforeseeable factors such as skyrocketing rises in the costs of equipment and materials and major foreign exchange movements. There is also a rigid requirement that projects must be completed by the targeted date even if construction work is affected by abnormal weather or by deterioration in public security. Companies involved in grant-in-aid projects are exposed to excessive risks, and recently there have been many cases of unsuccessful tenders of grant-in-aid projects. The government should overhaul the grant-in-aid program by, for instance, recognizing the practice of setting apart contingent funds as in the case of yen-loan projects, and allowing flexibility in the construction deadline.
The synergy of an integrated ODA program of technical cooperation, grant-in-aid and yen loan should be brought into play by its fullest possible extent. To achieve this goal, it is necessary to unify the different procedures in various ODA programs and remove as much as possible all institutional obstacles.
Technical cooperation projects should be implemented strategically to promote institutional building and human resources development, projects that would lead to a better infrastructure in the recipient country. For instance, Vietnam and Cambodia have taken steps to improve their civil code and other aspects of their judiciary system while training judiciary and administrative personnel with technical cooperation from Japan. Improvements in these areas have helped establish the rule of law, which in turn will lead to a better investment environment in the medium and long term. Drawing up specifications and standards for industrial products and the training of personnel in the manufacturing sector will also spur trade and investment in the private sector and eventually will contribute greatly to the economic growth of both developed and developing countries.
In the future, technical cooperation should be used more extensively in areas such as the protection of the environment and energy conservation where the know-how of private enterprises can be put into use.
The demand for funds in the developing countries for infrastructural building is huge. According to estimates by the World Bank, the Asian Bank of Development and JBIC, East Asia alone will require 200 billion dollars (24 trillion yen) in annual funding in the five years from 2006 to 2011. Such a scale of demand simply cannot be met through ODA funding or the resources of developing countries alone. It is necessary to use private-sector funding in the developed countries.
However, there are financial risks such as sudden changes of the law or radical foreign exchange movements in developing countries, risks that private companies cannot afford to bear on their own. This has become a major obstacle for the private sector to undertake infrastructural projects in these countries.
While trying to satisfy the strong demands for funds, we should promote the "Public-Public Partnership" program, which allows the use of ODA to cover the financial risks. At the same time, the new JICA should diversify Japan's ODA by developing new yen-loan programs (such as extending loans to local governments and expanding O&M [operation and management] projects) and linking yen loans to grant-in-aid projects and should implement, particularly in the Asian region, ODA projects that can serve as catalysts to attract and promote investment in the private sector.
From the viewpoint of strengthening the international competitive power of Japanese companies, securing the access to resources and energy, and promoting Public-Private Partnership, the new JICA should strengthen its partnership with the new JBIC, NEXI and other related bodies so that Japan can provide a varied menu of ODA projects.
In promoting international cooperation, it is vital to have the understanding and support of the Japanese people. In school education, we need to teach our students about the contributions Japan's international cooperation has made toward helping developing countries put their economies on their own feet, raise their national income, reduce poverty and make other socio-economic achievements. At the same time, we must emphasize once more that to carry out an effective international cooperation program requires expert knowledge and know-how.
If we define the sum total of international cooperation extended by both the public and the private sector as Japan's "total ODA power," then this Japanese power has been in decline in recent years. As an independent administrative agency, the present JICA is under obligation to reduce operational costs, and to achieve this objective the agency has been trying to cut the unit costs while keeping up the volume of ODA projects. This method of doing things has led to a sharp decline in Japan's ability to perform consulting work and explore and arrange new ODA projects.
The skills and the human resources to explore and arrange good ODA projects that satisfy the needs of the developing countries are vital to Japan's international cooperation efforts. Without them, international cooperation has no effect on development. Slashing operational costs has the effect of a body blow, and could severely damage Japan's total ODA power in the long run. In addition to technical knowledge, we must try to keep and train people who are proud and passionate about their job.
The new JICA should strengthen the structure of Japan's ODA, review its relations with ODA consultants and other private businesses, and get rid of the old-fashioned mentality of acting like order-placing merchants in dealing with their clients. The agency must strengthen its spirit of cooperation with the private sector, and treat private companies as partners to promote Japan's international cooperation efforts.