4 FILP-target Projects

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1 I 4 FILP-target Projects Japan Bank for International Cooperation (JBIC) JBIC provides investments, loans and guarantees to support stable securement of resources reduction of import cost, diversification of supply source and other initiatives, as well as Japanese companies overseas investment and expansion into overseas regions where infrastructure demand is robust. Planned scale of business for its FY07 budget worth.6 trillion yen on the scale of projects include 44 billion yen in Fiscal Loan, 85 billion yen in Industrial Investment and.4 trillion yen in Government Guarantee. Project example Geothermal power generation project in Indonesia (approved in FY06) As electricity demand is increasing due to stable economic growth in Indonesia, the country is aggressively promoting geothermal power generation development taking advantage of its rich geothermal resources. Under the situation, JBIC signed a project finance contract to lend up to about $98 million to PT. Supreme Energy Muara Laboh, an Indonesian corporation in which a Japanese company has invested. JBIC thus provided the long-term loan to support a project to build and operate a geothermal power plant in West Sumatra for electricity sales over 30 years. JBIC s support for the project meets the Japanese government s policy of the Infrastructure Export Strategy revised in May 06, contributing to the maintenance and improvement of Japanese companies international competitiveness. Japan Bank for International Cooperation/Muara Laboh Geothermal Power Plant Project/ Geothermal Power Plant/Republic of Indonesia Japan Finance Corporation (JFC) (Micro Business and Individual Unit and SME Unit) JFC supports fundraising by SMEs and micro enterprises as a policy-based institution that aims to complement financial activities carried out by private financial institutions. Planned scale of business for its FY07 budget is worth 4.69 trillion yen including.88 trillion yen in Fiscal Loan, 44 billion yen in Industrial Investment and 85 billion yen in Government Guarantee. Project example Utilizing subordinated capital loans for venture businesses A person, who has established his independent business after engaging in soft drink manufacturing for a long time, launched a venture business and required funds for a new plant to introduce new production lines and sales approaches and to differentiate the firm from others. As the startup, this venture needed a strong financial profile; JFC provided the venture with a subordinated capital loan that financial institutions treat as capital rather than debt when assessing borrowers financial profiles. The loan allowed the venture to simultaneously expand its business operations and enhance its financial profile, contributing to facilitating the venture s fundraising by triggering loans from private financial institutions. Business scheme National government Industrial Investment Japan Finance Corporation Subordinated capital loans SMEs and micro enterprises Fiscal Loan Private financial institutions (Pump-priming effect) Loan

2 I Loan terms and conditions (for SME Unit) Loan targets New business loan borrowers : Those who launch new businesses, expand into other industries or fields, expand into foreign countries and succeed businesses* *Including successors who are not relatives of business owners. Business turnaround loan borrowers: Those who tackle business reconstruction Loan limit Loan period Loan interest rate O t h e r s 300 million yen 5 years and month, 7 years, 0 years, 5 years (bullet maturity repayment) Interest rates indexed to business performances (0.40% to 5.95% depending on borrower categories, periods and business performances) Unsecured, unguaranteed Even in Micro Business and Individual Unit, subordinated capital loans are provided. Loan limit: 40 million yen Loan period: 5 years and one month to 5 years (bullet maturity repayment) Loan interest rate: Interest rates indexed to business results (0.90% to 6.05% depending on borrower categories, periods and business performances) Actual loans FY05:,076 loans worth 63.9 billion yen FY06:,068 loans worth 6. billion yen Japan Student Services Organization (JASSO) JASSO implements grant-type and loan-type scholarship programs (see below) as the government s key educational project under the philosophy of equal opportunity in education to allow motivated and capable students to study at universities, etc. on their own choice and responsibility Fiscal Loan provides JASSO with funds required for lending interest-bearing scholarship loans under the loan-type scholarship program. In FY07, the government earmarked billion yen in Fiscal Loan in the FY07 FILP program for lending loans to all students willing to use interest-bearing scholarship loans. The number of borrowers of interest-bearing scholarship loans had been increasing due mainly to a rise in the university advancement rate. Recently, however, the number has been decreasing slightly due chiefly to the expansion of interest-free scholarship loans and falling birthrates (see below). Scholarship loan program JASSO provides interest-free and interestbearing scholarship loans to students at graduate schools, universities, junior colleges, technical colleges, etc. Academic score requirements for students eligible to borrow scholarship loans are tougher for interestbearing loans than for interest-free loans. While the requirements for interest-bearing loan borrowers include average or higher academic scores and ambition to study, those for interest-free loan borrowers include senior high school academic scores at 3.5 or more. In FY07, the government implemented a scholarship loan reform including the effective repeal of the academic scores requirements for interest-free loan borrowers from low-income households. Changes in annual scholarship loan borrowers and outstanding scholarship loans (Trillion yen) 7 Outstanding loans for interest-free loan 6 Outstanding loans for interest-bearing loan Number of borrowers for interest-free loan Number of borrowers for interest-bearing loan (0,000 students) (fiscal year)

3 I Local Governments The Fiscal Loan Fund purchases Local Government Bonds (see below) to provide local governments with long-term, low-interest funds that are difficult for private financial institutions to provide for social capital development. The Fiscal Loan to local governments plays a key role in post-disaster reconstruction and other projects for which the national government should be responsible and in water and sewage system and other social capital development linked closely to the people s life. Local Government Bonds The FY07 Local Bond Program sets the total Fiscal Loan to local governments at.868 trillion yen (up.% from the initial level for the previous year) to contribute to local governments smooth fundraising, in consideration of their respective spending purposes and fundraising capacities. 3 Local Government Bonds are debt that local governments owe for raising funds externally and repay over a period of time exceeding one fiscal year. In principle, they can be issued for raising funds for expenses of municipal enterprises, construction projects and other purposes cited in Article 5 of the Local Government Finance Act. Local Government Bonds are purchased by public funds (the Fiscal Loan Fund, etc. and Japan Finance Organization for Municipalities funds (see below)) and private funds (public offering funds and bank and other private placement funds ). Those purchased by the Fiscal Loan Fund are booked as Fiscal Loan to local governments in the FILP Plan. In principle, local governments should raise private funds for promoting their autonomous fiscal management. As the government has promoted the prioritization of Fiscal Loan to local governments in view of their spending purposes and fundraising capacities since the FILP reform, the share for Local Government Bonds purchased by the Fiscal Loan Fund has declined while that for purchases with public offering and other private funds has risen ( growth in market-issued local bonds ). Local Government Bonds Public Funds Private Funds Fiscal Loan Fund Japan Finance Organization for Municipalities funds Public Offering Funds Private Placement Funds Japan Finance Organization for Municipalities funds The funds are raised by Japan Finance Organization for Municipalities through bond issuance. The organization has been founded with investment from all prefectural and municipal governments to provide local governments with long-term, lowinterest funds. Kurume City/General Waste Disposal Project/Miyanojin Clean Center/ Kurume City, Fukuoka Prefecture Ine Town/Depopulated Area Development Project(tourist facilities development project)/ Tourist Entertainment Facility under "Town, People, Work" Comprehensive Revitalization Strategy/Ine Town, Yosa-gun, Kyoto Prefecture

4 I C O L U M N Outline of FILP-like Systems in Foreign Countries. Utilization of Loans in Foreign Countries Loans in fiscal policy are widely used not only in Japan, but also in Western countries. However, the specific mechanisms differ from country to country because of their different historic backgrounds and financial market conditions, etc. For example, in Japan, funding for loans is primarily procured from the market through FILP bonds without Examples of Utilization of Loans in Europe and the US any tax revenue being used, whereas the funding is raised through taxation and government bonds in the United States, Canada, the United Kingdom, Germany and France. Although the specific mechanisms differ among countries, the utilization of loans plays an important role as a means of fiscal policy. US Canada UK Germany France Japan Comprehensive unified credit accommodation by the government Federal Credit Program None None None None FILP Plan 4 Government loan balance (as of the end of FY05) 3,445.0 billion dollars <379 trillion yen> 76.8 billion Canadian dollars <6 trillion yen> 06.7 billion pounds <3 trillion yen> 79.7 billion < trillion yen> 0. billion <5 trillion yen> 4 trillion yen SMEs Small Business Administration (SBA) Business Development Bank (BDC) British Business Bank (BBB) KfW Mittelstands bank Bpifrance Japan Finance Corporation (Micro Business and Individual Unit) (Small and Medium Enterprise Unit) Major institutions Housing Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC), Federal Home Loan Bank (FHLB) Canada Mortgage and Housing Corporation (CMHC) KfW Privatkunden bank Caisse des Dépôts et Consignations (CDC) Japan Housing Finance Agency Trade and foreign aid Export-Import Bank of the United States (EXIM) Export Development Canada (EDC) UK Export Finance (UKEF) KfW Entwicklungs bank, KfW IPEX- Bank, DEG, Euler Hermes Agence Française de Développement (AFD), COFACE Japan Finance Corporation Japan Bank for International cooperation, Japan International Cooperation Agency Policy financial institution loan balance (as of the end of FY05) 5,997.0 billion dollars <660 trillion yen> 36.0 billion Canadian dollars <7 trillion yen> 73.3 billion <33 trillion yen> 04.6 billion <5 trillion yen> 97 trillion yen () Domestic nonfinancial sector debt (as of the end of FY05) 45,5. billion dollars <4,978 trillion yen> 8,989.3 billion Canadian dollars <746 trillion yen> 8,694.8 billion pounds <,348 trillion yen> 8,88.8 billion <,077 trillion yen> 3,99.3 billion <,63 trillion yen> 3,450 trillion yen (Notes). Figures are based on foreign currency conversion rates as stipulated by the No. 366 MOF announcement on December 7, 06.. Figures may change in accordance with the revision of statistical data in each country. 3. The government loan balance represents loans and guarantees under federal credit programs for the US, central government data for Canada and the UK, general government data for Germany and France, and the Fiscal Loan balance in the FILP Plan for Japan. 4. The policy financial institution loan balance represents outstanding loans and guarantees of government supported enterprises (GSEs) for the US, outstanding loans of the Business Development Bank of Canada (BDC), Export Development Canada (EDC), Canada Mortgage and Housing Corporation (CMHC) and Farm Credit Canada (FCC) for Canada, outstanding loans of Banken mit Sonderaufgaben for Germany, and outstanding loans of Caisse des Dépôts et Consignations (CDC) and Bpifrance for France. 5. The KfW Bank Group consists of KfW Mittelstandsbank, KfW Kommunal-und Privatkundenbank/ Kreditinstitute, KfW Entwicklungsbank, KfW IPEX-Bank and Deutsche Investitionsund Entwicklungsgesellschaft (DEG). (Sources) Analytical Perspectives - Budget of the U.S. Government Fiscal Year 07 (US:OMB), Z. Financial Accounts of the United States Flow of Funds, Balance Sheets, and Integrated Macroeconomic Accounts Fourth Quarter 06 (US: Board of Governors of the Federal Reserve System), OECD Stat Extracts (Canada: OECD), Annual Report of each agency (Canada: BDC, EDC, CMHC, FCC), United Kingdom Economic Accounts, Quarter 4 05 (UK: Office for National Statistics), Financial Accounts for Germany 00 to 05 (Germany: Deutsche Bundesbank), Banking statistics April 07 (Germany: Deutsche Bundesbank), Semi Definitive Financial accounts and financial balance sheets Year 05 (France: Banque de France), Bpifrance Financement Annual Report 05 (France: Bpifrance), Rapport Financier 06 (France: Caisse des Dépôts Group), etc.

5 I C O L U M N. Examples of FILP-like Systems in Foreign Countries (France/EU) FILP-like systems in foreign countries include initiatives by the following agencies in France and Bpifrance: France France traditionally had multiple organizations for supporting small and medium enterprises. As the importance of public finance was recognized amid the European debt crisis, however, France established Bpifrance, a public investment bank, in 03 to unify loans, guarantees, investment and fund management for SMEs. From 07, Bpifrance the EU. launched export guarantees. The unification has reportedly made companies access to each service easier, contributing to the optimization of financial services and the improvement of customer services. Agence des participations de l État (APE): France The French government invests in various large enterprises in aircraft, defense, energy and other industries. APE was established in 004 to integrally manage government-held shares in these companies. It partially sells government-held shares and positively engages with corporate governance for investment targets. 5 3 European Investment Bank (EIB): EU The EIB, a policy-based financial institution for the EU, was established in 958, owned by EU member countries. Under its mission to contribute to the integration of EU members, their balanced development and their economic and social unity, the EIB provides medium to long-term loans in major policy areas such as transportation infrastructure, energy security, research and development, energy conservation and renewable energy, and SME support. Breakdown of EIB loans by region Breakdown of outstanding loans by term and area (Unit: million ) Austria.9% Czech Republic.9% Scandinavia 3.% Hungary.9% Greece 3.3% Benelux 4.% Portugal 4.% Other EU members 5.7% Poland 7.% UK 8.% Non-EU countries 8.5% Spain 8.% France 8.9% Italy.8% Germany 9.0% year or less -5 years More than 5 years Total in 05 Share Transportation 7,508 9,69 93,68 30, % Energy 4,65,484 37,646 64,755 4.% Manufacturing 7, 0,800 6,8 34,93 7.5% Healthcare/education,450 8,669,388 33, % Water and sewage facilities,098 8,548 0,684 3, % Other infrastructure,34 5,74 9,73 6,3 5.7% Services,86 6,0 8,399 6,7 3.5% Communications,997 7,09 3,0,308.7% Agriculture/fisheries/forestry ,875, % Global loans 4,349 57,988 33,96 06,53 3.% Total in 05 43,6 66,480 47, , % Share 9.5% 36.4% 54.% 00.0% (Source) Financial Statements under EU Directives 4 EUROPEAN INVESTMENT FUND (EIF): EU The EIF is an EIB subsidiary established in Luxembourg in 994, serving as an asset manager specialized in equity investment and guarantees for small and medium-sized enterprises. The private sector as well as the EIB and the European Commission has invested in the EIF under the principle of public-private partnership.

6 I C O L U M N EIF's counterparts Transitions in total EIF outstanding Resources and mandators EIB EIF own resources European Commission Members States/ regions Corporates/ private Etc. EUROPEAN INVESTMENT FUND (EIF) Intermediaries/ counterparts Fund managers Commercial banks Guarantee institutions Business angels Micro-enterprises, SMEs and small mid-caps Etc. Small and medium-sized, and micro enterprises (Million ) 30,000 Private equity assets under management 97 5,000 Guarantee exposure Microfinance 0, ,734 5, ,93 7 5,576 0,000 5,574 4,696,5 9,97 8,80 5,000 6,95 7, (Year) 6 (Sources) EIF releases (Sources) EIF Annual Report 06 Recent investment promotion initiatives (EU) As an investment slump continued in the EU in the wake of the financial crisis, investment in 03 posted a 5% decline from 007. Given such conditions, European Commission President Jean-Claude Juncker announced the Investment Plan for Europe, nicknamed the Juncker Plan, in November 04 to address investment shortages affecting EU economic growth and competitiveness. In 05, as initiatives to promote investment the European Commission and the EIB created the European Fund for Strategic Investments (EFSI), which consists of EU credit guarantees and billion in EIB contributions and supports the infrastructure & innovation window through the EIB and the SMEs window through the EIF. The initiative is expected to attract public and private sector funds and trigger 35 billion in investment across Europe by 08. () In September 06, the European Commission announced the extension of the EFSI s duration and the expansion of its financial capacity. The duration was extended until 00, with the investment target planned to be increased to 500 billion by 00. EFSI structure EFSI investment targets (by sector) EU guarantees 6 billion EIB 5 billion Environment, resources efficiency 4% Social infrastructure 4% Infrastructure & innovation window 6 billion EFSI billion SMEs window 5 billion Transportation 8% Digital 0% Relatively small enterprises 3% EIB Long-term investment 40 billion Mobilizing private sector funds to achieve a 5-fold leverage effect SME support 75 billion EIF Research, development, innovation % Energy % (Sources) Prepared from EIB documents (published in April 06) (Sources) Published EIB documents (Note) In March 07, we conducted a survey on FILP-like systems in France and the EU. We reported survey results at the FILP Subcommittee of the Fiscal System Council on June 5, 07. See the following website for the survey results: (Japanese)