The impact of the international financial crisis that struck in the autumn of 2008 has spread to the real economy, hitting production, consumption and employment and triggering a global recession. Amid these trends, expectations are rising that Japan will harness its Official Development Assistance (ODA) and Other Official Flows (OOF) to address the difficulties in funding supply and demand and the worsening economic conditions faced by emerging and developing countries. With many countries prioritising inward-looking measures to secure jobs and protect domestic industries, Japan must take the lead in striving to create effective domestic and external demand so that the world does not slide into protectionism. ODA also has an important role in priming an expansion in the supply of private-sector finance and investment.
From the perspective of creating effective demand in the East Asia region, ODA must be used to implement concrete measures that improve people's lives directly, leading in turn to the stimulation of consumption, such as supporting major transnational infrastructure projects and the establishment of a social safety net. Another essential means of creating effective demand is to pursue East Asian economic integration through Economic Partnership Agreements (EPAs) that serve to energise free trade and investment in the region. To this end, Japan should make strategic use of ODA, predominantly to develop necessary physical infrastructure, while strengthening institutional infrastructure through EPAs.
Japan, like other countries, faces a tough economic climate, but as the world's second largest economy, this is the time for Japan to reaffirm its duty to fulfil the international pledges it has made and to turn the current difficulties into an opportunity to exercise international leadership by actively putting forward concrete countermeasures. At the same time, we must not allow the immediate difficulties to distract us from addressing important strategic issues like climate change and energy security (securing stable supplies of mineral resources and energy).
According to the government's proposed ODA budget for fiscal 2009 (April 2009 to March 2010), while the amount of grant aid provided by Japan will rise by a modest 1.3% from the previous year, the total amount of ODA disbursed will fall by 4% to ¥672.2 billion — the twelfth consecutive annual decrease. Figures released at the end of March 2009 by the Organisation for Economic Cooperation and Development's Development Assistance Committee (DAC) on ODA spending by DAC member countries, show that Japan has slipped to fifth place in the ranking of the world's ODA donor countries. The government must undertake a sustained expansion in the ODA project budget while at least halting the decline in funding from the general account budget.
As well as increasing the financial resources available for ODA, it is important to implement ODA effectively. As one means to achieve this, Japan should leverage partnerships between the public and private sectors to pursue strategic, enhanced international cooperation. For example, using ODA to build infrastructure connected with a private-sector development project would not only increase the developmental effect of the project but also create business opportunities for the local companies and further facilitate improvement of business environment. This would eventually make a major contribution to revitalising the Japanese economy.
In April 2008, Nippon Keidanren announced a proposal on the pursuit of public-private partnership titled "The Future of International Cooperation." Inspired by this proposal, Japan's public and private sectors agreed "to strengthen cooperation between ODA and Japanese corporations." Following this announcement "the Public-Private Partnership for Boosting Growth" in developing countries was launched. We welcome the fact that, since this agreement, two sessions of public-private dialogue on economic cooperation have been held as a new effort by the government to involve the private sector in Japan's international cooperation. At present, however, recognition of the importance of public-private cooperation is not sufficiently widespread.
Acknowledging this situation, we have compiled the following requests relating to how ODA should be implemented amid a global recession and to items in the April 2008 proposal that are of particular importance and urgency in terms of pursuing smooth public-private cooperation.
As part of Japan's efforts to combat the international financial crisis, it is important to use the Japan Bank for International Cooperation (JBIC) and Nippon Export and Investment Insurance (NEXI) to secure sufficient liquidity for overseas affiliates and projects of Japanese companies. Although it is a temporary measure, from December 2008 to March 2010 the government is increasing the amount and flexibility of funds available to JBIC to support overseas investment loans and to NEXI to provide loan assistance through trade insurance. The government must expand the amount of support and extend the period in which it is available to reflect the use of this support by private-sector enterprises.
To address climate change and other global issues, the government should consider a substantial temporary expansion of the amount of grant aid which is rapidly disbursed compared with yen loans. The maximum amount disbursed for a single project should also be increased to several billion yen. Projects likely to have immediate effects include the restoration or augmentation of power plants and other existing infrastructure (so-called rehabilitation projects, such as efficiency improvements that contribute to environmental measures or the installation of environmental equipment).
Grant aid projects of this kind would serve to transfer Japan's outstanding environmental technology to developing nations and to standardise this technology. This would be a great opportunity for Japan to lead the negotiations at the Conference of the Parties (COP) to the United Nations Framework Convention on Climate Change.
From the perspective of creating effective demand and stimulating consumption in the East Asia region, with which Japan has deep economic ties, it is necessary to build a network of EPAs that invigorate trade and investment. To advance East Asian economic integration through the construction of this EPA network, Japan should make strategic use of ODA and OOF to support the establishment of legal and institutional foundations and the development of distributional and industrial infrastructure. Specifically, in view of the developmental impact of the wide-area infrastructure (East Asia Industrial Corridor #1 ) proposed by the Japanese government, all possible development tools should be mobilised to secure the approximately ¥3 trillion in funds said to be needed for this project in the interim, including not only yen loans and donations but also private-sector investment finance (equity and loans) from the Japan International Cooperation Agency (JICA), which is currently suspended, investment loans from JBIC and trade insurance from NEXI. Regarding yen loans, the government should provide these with Special Terms for Economic Partnership (STEP) #2 and special low-interest yen loans. #3
It is also vital to expand consumption by improving the living standards of low-income groups. This can be achieved by the establishment of social safety nets, including health and unemployment insurance, and the expansion of education supported by the Economic Research Institute for ASEAN and East Asia (ERIA) #4 and other organisations. The government of Japan should take the opportunities afforded by gatherings such as the East Asian Summit to propose to the governments of related countries that frameworks be put in place for cooperation in establishing such safety nets.
Based on the above situation, it is crucial that the government commit to a sustained expansion in the ODA project budget while at least halting the decline in funding from the general account budget.
In the past few years, the Japanese government has made a series of international pledges. In addition to its commitment to the United Nations Millennium Development Goals and its promise at the G8 Gleneagles Summit in 2005 to increase funding for ODA projects by $10 billion by 2010, it pledged at the Fourth Tokyo International Conference on African Development (TICAD IV) to double ODA to Africa by 2012 and develop the investment environment and support the private sector with the aim of doubling private-sector investment; at the 2009 World Economic Forum in Davos to provide over ¥1.5 trillion in ODA; and at the G20 London Summit on April 2, 2009, to implement additional assistance measures. Expanding the ODA budget is essential if the government is to fulfil these international commitments.
To ensure that Japanese taxpayers understand the importance of an expanded ODA budget, the government should actively publicise the objectives of these international pledges and the ODA achievements so far. Eventually the ripple effects that ODA has in reinvigorating the Japanese economy and industry will be felt.
To pursue effective cooperation between the public and private sectors, bottlenecks must be removed in both donor and recipient countries. In cases where the recipient country has no system for accepting a Public-Private Partnership (PPP), for example, assistance to build such a system should be provided. At present, requests to the Japanese government for ODA are usually made by the recipient country based on proposals to the country's government by Japanese companies. In the future, however, it will be necessary to boost developmental effects through private-sector expertise by linking applications by companies for resource development or PPP project rights with ODA requests from recipient countries' governments while ensuring procedural transparency.
The scheme should enable public and private sector parties, including the government of the recipient country, to share information on the whole timeframe from project development to the start of construction by, for example, having JICA draw up an overall project schedule. This would make it easier to harmonise the scheduling of ODA provision and private sector investment, potentially increasing substantially the effectiveness of PPPs.
To expand the Preparatory Survey that is the first step in the development of a cooperation project and to conduct studies that take into account the need for projects with substantial development benefits, information should be provided to private enterprises, and private sector expertise and experience should be leveraged, right from the initial stage of project development.
The majority of "hybrid projects" combining ODA and private sector investment have so far been split into an infrastructure part (a port) and an operation part (port management) or divided by function (a power plant for generating electricity and power lines for delivering it). For future projects, even those that cannot be divided physically, a system must be built for assessing and examining what proportion of the total cost of a project should be covered by public funding and what proportion by private sector investment.
The government of Japan should actively assist Japanese companies to secure the rights for projects deemed by the government to be particularly important from the perspective of Japan's energy security. Projects that focus on the need to secure resources or have particularly great developmental benefits in the recipient country, even if the project has not yet been officially recommended to the government of the recipient country as a PPP, should also be supported.
Furthermore, some of the technical assistance funds in the ODA loan account should be used to enable consultants commissioned by JICA to undertake consulting from a neutral standpoint, including such aspects as project scope, the need for related infrastructure, costs of environmental measures and the specifications of the financing plan. This would serve both to clarify to the government of the recipient country the Japanese government's commitment to assistance and to create an environment conducive to the receipt of orders by Japanese corporations.
Developing the public infrastructure that developing countries urgently need requires vast sums of investment; yet some projects are unlikely to be break-even because the prices for using the resulting infrastructure are set low as a matter of policy. To make such projects viable as private sector undertakings, the government should establish a new system in which grant aid or low-interest yen loans can be provided as Viability Gap Funding (VGF). #5 Trial projects should be implemented as a precursor to the early establishment of a VGF system.
Leveraging public-private cooperation is essential in order to implement ODA effectively and strategically, but some projects involve only a single company. Even if this is the case, the government should support these through ODA as "designated projects," providing that the transparency of the project selection system, operation, and process is guaranteed and that the project corresponds to Japanese government policy and meets standards for the developmental effects of a partnership with private sector investment and for benefit to the public good. In addition, it should actively support projects for which a competitive bidding process has been completed, such as a tender for project development rights, viewing these as meeting transparency standards.
Recipient countries, meanwhile, should build and operate competitive selection systems that can evaluate not only the prices of bids but the outstanding technology that Japan possesses in terms of its compatibility with the country's fundamental plan and its developmental benefit. To this end, capacity building should be actively implemented in recipient countries.
In October 2008, JICA merged with JBIC to form the new JICA with an expanded organisation and line-up. It is therefore hoped that from now on JICA will actively participate in planning Japan's international cooperation strategy. To ensure that it administers ODA in a flexible manner, for example, JICA should, through its newly established Office for Partnership with Private Sector, undertake comprehensive, integrated project planning and design that makes use of private sector expertise and information at every stage of a project, from the formulation of a basic policy through preparation and planning to construction and operation.
This will require effort from JICA to formulate strategically valid development visions and master plans through policy dialogue with the recipient country, while taking into account investment trends among Japanese companies. In the case of projects which are based on such master plans and also have beneficial developmental effects, the government should provide support by every available means, including technical assistance and JICA's investment finance program.
JICA's Private-Sector Investment Finance facility, in particular, has the advantage of involving public funds in a project that reduces the risks stemming from policy changes by the government of the recipient country. Efforts should be made to differentiate JICA's program from JBIC's investment financing facility and to enhance JICA's project screening and management capabilities so that the program can be used at an early opportunity to fund projects, especially those with a substantial developmental effect.
A policy document on accelerating yen loan procedures published in June 2007 by the Ministry of Foreign Affairs, the Ministry of Finance, and the Ministry of Economy, Trade, and Industry divides yen loan projects into the project development stage, request-through-provision stage, and project implementation stage and contains the following concrete policy goals: (1) to halve the duration of those projects in which development JICA was involved that have taken more than seven years from project development to the start of construction work, (2) to respect the standard processing time of nine months from a request for a yen loan to the signing of the loan contract, and (3) to shorten to less than two years the time needed for consulting and procuring the main construction work. These goals should be realised at an early opportunity through substantial improvements in the new JICA's operations.
Efforts on the part of recipient countries are also essential if yen loan provision is to be accelerated. JICA should exercise leadership by encouraging recipient countries to speed up procedures through capacity building by experts dispatched to governments of recipient countries.
Furthermore, to streamline procedures for individual projects, credit lines covering multiple development projects should be established. There have previously been mechanisms for supporting multiple small-scale projects with a single yen loan, such as sector loans #6 and two-step loans, #7 but, in addition to using these mechanisms, enabling the provision of credit lines for the funding of multiple larger development projects #8 would have a major accelerating effect.
STEP (Special Terms for Economic Partnership) is a system introduced in 2002 to advance technology transfers to developing nations by taking advantage of Japan's excellent technology and expertise. To make further use of Japanese technologies and products, which can maximise the developmental effect of yen loans, the range of fields in which STEP is applied must be expanded. This requires using ODA to implement trial projects aimed at demonstrating the superiority of technologies and products in new fields.
In addition, it is necessary to expand and operate flexibly systems for post-completion servicing and other intangible aspects and for the provision of grant aid for the introduction of Japanese products on a trial basis.
Furthermore, increasing understanding of STEP in recipient countries is also essential from the perspective of promoting the use of STEP.
It is increasingly evident that Japanese private sector companies are losing interest in ODA. The causes of this include the fractionalised division of roles in technical cooperation projects and the lack of reserve funds (particularly funds for coping with unforeseeable increases in work volume in grant aid projects). To boost private sector companies' commitment to ODA, the risks that the private sector is forced to bear must be reduced as a matter of urgency.
It is also important to expand the scale of individual projects, and measures should be devised to make ODA more accessible to the private sector.
To make yen loans more attractive to the borrowing side, meanwhile, ample consideration must be given to the alleviation of currency and other risks.
Responding flexibly to changes in the diverse needs of developing countries in the medium to long term will require a fundamental discussion of how ODA, including yen loans, is implemented.
As contributions to international organisations account for some 15% of Japan's ODA project budget (as of fiscal 2008 #9), it is important to explain the significance of this expenditure to gain the public's understanding.
The government should also be accountable to taxpayers for its management of the fund from which Japan's contributions to international institutions (so-called the Japan Special Fund) are drawn. From this perspective, it must actively urge international organisations through policy dialogue to ensure that fields in which Japanese industries are competitive receive appropriate attention in the development policy making process.
Alongside efforts to pursue East Asian economic integration, meanwhile, close collaboration with international organisations, including the World Bank and regional development banks, is essential to ensure the smooth implementation of large multilateral infrastructure projects. In East Asia, in particular, Japan needs to boost its presence through personnel and funding cooperation and policy dialogue with the Asian Development Bank (ADB) and ERIA.
Having already mapped out its course for pursuing cross-border, wide-area infrastructure development (the East Asia Industrial Corridor) in such regions as the Indian subcontinent and the Mekong region, the government plans to begin concrete studies in fiscal 2009 through ERIA and other means. The Japanese business community is committed to using all available resources in a wholehearted effort to overcome the global financial and economic crisis while strengthening collaboration with the above international institutions and national governments. It is expected that the government of Japan will steadfastly take bold, concrete action.