Promotion of Privately Funded Infrastructure Projects
in Developing Countries

January 27, 1998
(Japan Federation of Economic Organizations)

It is indispensable that the economies of developing countries must steadily grow in order to ensure the healthy expansion of the global economy; furthermore, well-developed infrastructure is a key to stable economic growth in developing countries. Demand for infrastructure development is high among developing countries, particularly in Asia, and expectations for cooperation from Japan are equally high. Generally speaking, infrastructure projects should be implemented by the government of a country on its own initiative for the benefit of its citizens. In reality, however, many of the developing countries have fiscal troubles that severely limit the funds available for such projects.
As a result, developing countries have turned to private-sector capital and are actively pursuing privately funded infrastructure projects, which are also likely to be more efficiently implemented than their public-sector counterparts. For the promotion of privately funded infrastructure projects to proceed smoothly, as developing countries would like, it is essential not only that their governments sufficiently listen to ideas of the private-sector (specifically those of the enterprises primarily conducting the projects), but also more extensive public assistance should be provided by the Government of Japan through various means in consideration of the public nature of the projects and higher risks of the projects.
In April of 1997, Keidanren published a policy proposal entitled, Reforming Official Development Assistance (ODA) in Japan, which called for an integration and simplification of government ministries and implementing organizations involved in planning and proposing ODA. The proposal contained a section asking that efficient, high-quality assistance is best obtained by combining ODA and private-sector economic cooperation. Considering the current fiscal environment, which has necessitated ODA budget reductions of over 10% over the next three years, the time has come for Japan's public and private sectors to work together to formulate international cooperation policies that make use of private-sector capital.
The following recommendations concerning the implementation of public assistance (vis-à-vis the Export-Import Bank of Japan and the trade insurance system), and the combined implementation of privately funded infrastructure projects and ODA (as well as other assistance programs), constitute the foundation for policies that will facilitate cooperation on infrastructure projects deemed important by developing countries.

  1. Methods of public assistance for privately funded infrastructure projects
  2. Privately funded infrastructure projects are capital intensive, and their high-profile nature affords complicated and diverse exposure. It is extremely difficult for the private sector alone to proceed with such projects; therefore, public assistance programs implemented by way of the Export-Import Bank of Japan and the trade insurance system are essential. In both cases, positive efforts have been made recently toward establishing a framework for supporting privately funded infrastructure projects. Unfortunately, however, the current framework is still insufficient. Keidanren would like to put forth the following recommendations for improving these programs.

    1. Export-Import Bank of Japan
    2. The success of privately funded infrastructure projects depends largely on the role of a financial organization capable of providing long-term capital and accepting risk. In this respect, the Export-Import Bank of Japan, with its diverse set of financing programs (including export financing, investment financing, untied loans and guarantees) is a key candidate. Furthermore, organizational reforms and fundamental operational changes are slated for implementation in conjunction with merger of the Export-Import Bank of Japan and the Overseas Economic Cooperation Fund (OECF) scheduled to take place in 1999.

      1. Functionality of Export-Import Bank and merger with the Overseas Economic Cooperation Fund (OECF)
        Merger of the Export-Import Bank of Japan and the OECF is scheduled for 1999 as part of overall reform of governmental financial institutions. It is Keidanren's strong desire that this merger brings its highest potential through improved efficiency and the elimination of redundant operations within the two organizations. Throughout the merger process, it is essential that the Export-Import Bank's dynamism and flexibility remain unhindered.

      2. Expected role as public financing organization
        The new, integrated organization must reflect a strengthened capacity to support privately funded infrastructure projects by making recommendations to target country governments, ensuring that appropriate measures are made available for such projects (i.e., electric power purchase guarantees for electric power generating facilities, foreign currency conversion and profit transfer guarantees) and that these measures are properly implemented. Additionally, the organization shall actively pursue public role to assist financing that supplement private-sector services in areas such as long loan periods (over 10 years), guarantees and capital participation.

      3. Expand foreign-currency-based financing
        Since privately funded infrastructure projects receive revenues in local currency, it is preferable that capital procurement be conducted in local currencies as well. However, the local currency markets of the countries requiring capital, particularly those in Asia, are immature. In these countries, dollar-based capital procurement is the standard. Although the Export-Import Bank of Japan has expanded its level of foreign-currency-based financing over the years, the amount remains insufficient and should be further increased. The diversity of currency requirements continues to rise as Asian currencies disengage linkage to the U.S. dollar, and a single European currency (Euro) will be introduced in 1999. It is imperative that responses to these trends be flexible.

    3. Trade insurance
    4. A well-established trade insurance system is essential for privately funded infrastructure projects because of the length of time to collect loan and diverse exposures that they entail. However, the idea of privately funded infrastructure projects is an entirely new concept with regard to the trade insurance system, and an entirely new approach seems to be required. Additionally, the current system, as a single division within the Ministry of International Trade and Industry, is problematic from the perspective of administrative reform; fundamental reform of this framework is expected.

      1. Construction of an efficient trade insurance system.
        Trade insurance operations necessitate able and experienced personnel in the field; therefore, this function should not be housed within the ministry that handles policy formation and planning. Rather, it should be established as an independent administrative entity (Dokuritsu-Gyosei-Hojin) in keeping with administrative reform. Throughout this process, organizational simplification and operational efficiency should be promoted to reduce costs, to effect transparency and to enhance the expertise of employees and service performance. It is also extremely important for the success of privately funded infrastructure projects that a framework for quicker acceptance and review should be established. These reforms should be implemented as soon as possible.

      2. Enhanced functions.
        The insurance system should apply more exhaustively and flexibly to privately funded infrastructure projects by allowing greater compensation for higher credit risk exposure, the expansion of underwriting criteria for overseas investment insurance applications and the extension of contract periods. Furthermore, cooperation should be provided to developing countries for the establishment of their own trade insurance systems while taking global standards into account, and a channel should be opened for utilizing the re-insurance underwriting system that currently exists within Japan's trade insurance framework.

  3. Combined implementation of privately funded infrastructure projects with Official Development Assistance (ODA) and other assistance programs.
  4. The Government of Japan must ensure that voices of the private sector are reflected in policy dialogue with target developing countries from the outset, in order to effectively implement economic cooperation (including privately funded infrastructure projects) for developing countries where Japan's private-sector companies are primary participants.
    Furthermore, project implementation would be effectively promoted if done so in conjunction with ODA and other assistance programs. In other words, providing technology cooperation in the following areas will make comprehensive promotion of such projects possible and improve overall project health and stability: Development surveys and feasibility studies in the initial phase; yen loans and/or Export-Import Bank of Japan financing for basic infrastructure and peripheral infrastructure in the implementation phase; and capital grants for environment-related facilities in the promotion of private-sector-funded infrastructure projects. Furthermore, flexible application on the part of OECF overseas investment financing and cooperation by international organizations such as World Bank guarantees are factors that will contribute to the success of privately funded infrastructure projects.
    Additionally, Japanese companies should be unilaterally promoting privately funded infrastructure projects in areas where Japan's technology advantage and prowess are best utilized, and in this regard, companies should be actively proceeding with transfers of management expertise and technology to developing countries. For example, environment-friendly projects built upon clean energy sources such as natural gas turbine to produce electricity represent an area where Japan's superior technology can be best utilized; these types of projects should be actively pursued through combined implementation of ODA and other assistance programs. The various organizations relevant to the combined implementation of public assistance including ODA and privately funded infrastructure projects should establish a forum and formulate privately funded infrastructure project assistance programs.
    Furthermore, as a neutral entity jointly established and funded by the public and private sectors, the Japan International Development Organization, Ltd. (JAIDO) should be granted an increasing role in promotion of privately funded infrastructure projects.

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