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Promoting Regional Infrastructure Development for a Prosperous Asia

March 16, 2010

Nippon Keidanren

Promoting Regional Infrastructure Development for a Prosperous Asia (Outline) <PDF>


Last autumn Nippon Keidanren formulated an Asian economic growth strategy with two pillars -- promoting regional economic integration and developing broad "hard" and "soft" regional infrastructure to support integration -- as outlined in two proposals, one entitled "Overcoming Crisis, Opening a Path from Asia to Global Economic Growth" (October 20, 2009) and the other entitled "Toward Realization of the Action Plans for Asian Economic Growth" (November 17, 2009). The strategy has the aim of reducing intra regional disparities and creating a foundation for growth through various initiatives, such as promoting regional economic integration to expand markets and invigorate trade and investment and removing growth bottlenecks by investing in both hard and soft infrastructure. As a result, a prosperous Asia would come into being.

Keidanren dispatched missions to members of the Association of Southeast Asian Nations (ASEAN) in November 2009 and January 2010. The missions made it clear to observers at home and abroad that the Japanese business world attaches great importance to Asia, and they secured support for and approval of Keidanren's Asian growth strategy in policy dialogues with government and business leaders of these nations, which are currently undergoing recovery.

At this juncture, expectations have been pinned on Asia to serve as a powerful locomotive pulling the world economy forward. It has been forecast that the growth rate of developing Asia in 2010 will reach 8.4% of real gross domestic product.#1 Now is the time for Japan to step up its contributions, particularly those aimed at installing broad hard and soft regional infrastructure, so that Asian countries can harness the latent growth power of Asia and make growth yet more dynamic. Through these contributions, Japan can grow together with the rest of Asia.

In this connection, the ASEAN Secretariat, the Economic Research Institute for ASEAN and East Asia (ERIA), and the Asian Development Bank (ADB) are putting together a "Comprehensive Asian Development Plan." Keidanren is engaged in policy discussions in regard to this plan with these three international institutions.

Large-scale projects are now going forward overseas under strong government leadership, with nations pouring all their energy into them. There are also cases, however, in which Japanese corporations are withdrawing. There is thus a need to consider how to pursue public-private collaboration and organize an all-Japan setup for the development of infrastructure.

The Japanese government has positioned Asian development as a core element of its new growth strategy. Taking this opportunity, we present our views below on the response needed to deal with five tasks, each of which is vital for implementing Keidanren's Asian economic growth strategy. These tasks are (1) promoting regional economic integration, (2) implementing priority projects in the Comprehensive Asian Development Plan, (3) reviewing official development assistance (ODA) and other funds to promote broad regional infrastructure development, (4) advancing public-private partnerships (PPPs), and (5) pursuing top-level diplomacy for large-scale overseas projects. In line with the basic vision that Japan grows together with the rest of Asia, we call on the Japanese government, which has begun to execute its new growth strategy, and concerned organizations at home and abroad to realize Keidanren's strategy.

1 International Monetary Fund, World Economic Outlook Update, January 26, 2010.

1. Promoting Regional Economic Integration

In order for Asia to realize dynamic, sustained growth, it needs to promote regional economic integration and build open and flexible economies and societies premised on the free movement within the region of people, goods, money, and services.

The countries and regions of East Asia have concluded numerous free trade agreements (FTAs) and economic partnership agreements (EPAs), which are contributing to the promotion of trade and investment. It is to be desired that these economic networks be actively utilized, geographically expanded, and improved in quality for the sake of realizing economic integration on a broader level. Agreement has already been reached on furthering discussion on the government level of the ASEAN+3 and ASEAN+6 frameworks.

As Japan is to host this year's gathering of the Asia-Pacific Economic Cooperation (APEC) forum, it needs to go a step further and promptly promote study of and aim to realize desirable forms of regional economic integration, including the concept of the Free Trade Area of the Asia-Pacific (FTAAP). In the process, it needs to fill in the FTA/EPA vacuum in Northeast Asia and conclude a comprehensive EPA with India at an early date. In addition, it should pursue substantive dialogue with the concerned countries on developing hard and soft infrastructure, making use of the business environment improvement subcommittees under FTA/EPA arrangements.

2. Implementing Priority Projects in the Comprehensive Asian Development Plan

In order to provide broad infrastructure that can support regional economic integration as well as infrastructure at connecting points, Japan must ascertain needs accurately through adequate policy dialogue with each country and region. From the perspective of effectively utilizing the technology and know-how of Japanese companies, the following projects should be assigned a high priority.

(1) Regions and Projects Requiring Priority Attention

(2) Sectors Requiring Priority Attention

(3) Others

3. Reviewing ODA and Other Funds to Promote Broad Regional Infrastructure Development

(1) Mobilizing All Available Development Schemes to Realize the Comprehensive Asian Development Plan

According to "Infrastructure for a Seamless Asia" (2009), a report by the ADB and the Asian Development Bank Institute, demand for infrastructure in Asia will reach an estimated $8 trillion over the 11-year period from 2010 to 2020. Massive financial resources are needed to meet this demand constructively, and they cannot easily be furnished by drawing only on fiscal spending by the region's governments and ODA supplied by concerned countries.

In this situation, the best way for Japan to help out in the Comprehensive Asian Development Plan being prepared by the ASEAN Secretariat, ERIA, and the ADB will be to utilize the resources of all available schemes for development. They include the capacity of the Japan International Cooperation Agency (JICA) for conducting research, formulating plans for public works and other projects, and assembling specific projects; other official flows (OOF) from such institutions as the Japan Bank for International Cooperation (JBIC) and Nippon Export and Investment Insurance (NEXI); private-sector investment; and public-private partnerships. Recently JICA has been reorganized as "New JICA" so that it can simultaneously provide technical cooperation and grant aid in addition to ODA loans. It will be important to make use of these three functions in combination with JICA's Private-Sector Investment Finance, which is expected to be resumed soon.

(2) Fundamentally Reviewing Japanese ODA

Active involvement of Japanese ODA will be of great assistance in securing the use of Japan's outstanding technologies for developing broad regional infrastructure and improving important infrastructure at connecting points in line with the goals of the Comprehensive Asian Development Plan. Toward this end, a fundamental revision of Japanese ODA should be undertaken. In this regard, funding resources should be expanded. The ODA amounts allocated in the initial budgets of the general account reached a peak in 1997 and have since been declining, and this trend must be brought to a stop.

Centered on yen loans, Japanese ODA has boosted the self-help efforts of many nations, especially in the Asian region, and it has won high praise for contributing to economic development. In recent years the developing countries have seen the speed of their economic growth accelerate, and many of those in Asia have moved into the category of middle-income countries and ceased to be eligible for ODA loans. Meanwhile, the business models of Japanese companies are shifting away from their former primary focus on exporting plants and toward investment in overseas resources and infrastructure, and the overseas bases of these companies are moving toward sustained operations. In addition, business affairs now need to be handled more speedily. Under the circumstances, infrastructure construction that relies only on ODA loans to assist the public works projects of developing countries can no longer satisfy the needs of the times.

In acknowledgement of this situation, the government is planning to cut in half the time involved in extending yen loans (from project formation to contract signing) from seven years to three and a half years. The Japanese business community appreciates this move, but it believes that a more fundamental revision of the ODA system itself cannot be avoided. More than 50 years have passed since this system went into operation, and difficulties are arising in responding appropriately to the front-line needs in international cooperation. The system should be reorganized so that it can, for example, incorporate the framework of a broad definition of development financing, which would enable organic linkage with JBIC's overseas investment loans. The government has already begun a further review of the ODA setup, and as it conducts this review, it should bear in mind that while JICA has many staff members who are experts in this field, Japanese firms are also key actors in overseas development projects. In its new growth strategy in particular, the government must not forget that its ODA promotes Asia's economic growth by assisting industrial development and, as a result, boosts the growth of Japan's national economy and companies.

(3) Expanding Grant Aid

Japan needs to make positive use of grant aid in its cooperation to meet the various forms of development demand, notably that for setting up social infrastructure in Asia's low-income countries. For instance, when the housing environment is being improved in areas where Japanese companies have plants, in order to facilitate the employment of a high-quality workforce, thought could be given to providing grants proactively for urgently needed housing, schools, and health facilities. Toward this end, the Japanese government should greatly expand the budget for grant aid and increase the amounts allowed per project, which are reported to be held within ¥1 billion. Another need is an expansion of directly managed grant aid schemes, in which the Japanese side serves as the party authorizing design and construction work and hands the facility over to the recipient country when the project is completed. The expansion of these grant aid schemes is expected to realize projects promptly.

(4) Resuming JICA's Private-Sector Investment Finance

The current system of ODA loans is constrained by a number of difficulties, such as the long time involved before loans are provided, the inability to extend loans in the event of rescheduling or other conditions in the partner country, and the decline in the number of target countries. In this context, there is a need for JICA, which has much experience in infrastructure assistance, to resume its overseas loans and investments for infrastructure projects in the Asian region in which Japanese companies are participating. Particularly in the case of projects that have a large development impact and deserve promotion as a matter of policy, JBIC's existing investment loans should be coupled with JICA's Private-Sector Investment Finance, which would be provided together with ODA loans. For instance, in PPP schemes divided into upper and lower tiers, these investment loans could be utilized for the private portion of the financing, thereby broadening the options for supporting projects. It might further be noted that from the viewpoint of countries facing difficulties in repaying debts, JICA investment would have the merit of not imposing an additional burden.

(5) Promoting Technical Cooperation

The tools of technical cooperation can be useful in infrastructure development in the Asian region. There is a need for using technical cooperation to amplify feasibility studies on infrastructure projects in which private projects are included; support the preparation of standard certification for, for instance, railway systems; assist operation maintenance of such facilities as power generators, ports and harbors, and water purification plants; and aid document preparation and bid evaluation for acquiring project development rights. It is also important to utilize JICA's ability to help in drawing up plans.

(6) Using Other Official Funds

  1. Broadening the Functions of JBIC
    From the perspective of its role of complementing private financial institutions, JBIC should provide support through overseas investment loans for environmental projects under the initiative on climate change announced by Prime Minister Yukio Hatoyama and for large-scale infrastructure projects in which Japanese firms are involved. It should also deal promptly with financial crises and other unexpected circumstances. In this regard, relevant legal provisions need to be revised so that JBIC can make a more dynamic and proactive response in cases where private financial institutions cannot handle the situation on their own. In addition, investment loans denominated in local currencies should be made available to local businesses -- including Japanese-affiliated companies -- that have advanced overseas, are engaged in operating infrastructure for such facilities as ports and harbors, railways, and power plants, and receive the bulk of their income in local currencies.

  2. Broadening the Functions of the Japan Oil, Gas, and Metals National Corporation (JOGMEC)
    From the perspective of achieving energy and resource security, JOGMEC needs to promote PPPs in the development of energy resources and to broaden its functions, such as those of providing financial assistance and using government guarantees to gain fund-raising approval from commercial banks.

(7) Improving Capital Markets in the Asian Region #2

Because huge quantities of funds will be needed to promote the Comprehensive Asian Development Plan, it will be important for Japan to make use of ODA, for all countries to mobilize fiscal resources, and for the ADB to extend cooperation. Furthermore, there is a need to accelerate the development of capital markets in the Asian region, press forward on the development of infrastructure funds through public-private collaboration, and open avenues for utilizing private funds.

2 See the proposal "Promoting Financial Cooperation for a Prosperous Asia" (March 16, 2010),
which makes detailed recommendations on how Asian capital markets can be developed.

4. Advancing Public-Private Partnerships

The advancement of PPPs will be indispensable for harnessing private-sector vitality, maximizing synergistic effects with ODA, and boosting the development effects of the projects involved. Among the forms public-private collaboration can take, one would involve the use of ODA in private investment projects to study the distribution infrastructure needs, formulate plans, and foster necessary human resources. There is also a need for capacity building, as legal systems in recipient countries require modification to accommodate PPPs.

With respect to projects with strong development effects, the government should take the initiative in enabling collaboration through ODA even in cases where only a single private firm is participating. One crucial need is the creation of schemes for "viability gap funding" (VGF), which can make use of grant aid to support various PPP models, such as those that divide the work into earlier and later stages or upper and lower tiers as well as those in which a private party is commissioned to operate a facility.

In this regard, early implementation is to be desired for a scheme now being prepared by JICA for PPP infrastructure projects based on private-sector proposals. This scheme, which is premised on ODA loans, would be used to carry out or supplement feasibility studies for the projects.

5. Pursuing Top-Level Diplomacy for Large-Scale Overseas Projects

It will be vital to put Japan's outstanding technologies to use in the development of broad regional infrastructure and large-scale infrastructure at connecting points. Especially when promoting projects in such areas as power generation, urban transportation systems, and water resource recycling, an effective approach is to have individual countries propose packages including the provision of not just facilities and materials but also know-how necessary for the project's operation (such as know-how for operating nuclear power plants and high-efficiency coal-fired power plants, running and managing train systems, and operating water supply facilities). An all-Japan promotion setup uniting the public and private sectors must be established, and it needs to be guided by a strategy reflecting Japan's national interests and backed up laterally by diplomatic establishments abroad and the concerned ministries and agencies. In this connection, when a consortium of Japanese companies participates in a large-scale national project overseas, it should be aggressively assisted with, for instance, a boldly orchestrated campaign of economic diplomacy led by the prime minister.

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