Japan Bank for International Cooperation: Its Role and Activities

Japan Bank for International Cooperation: Its Role and Activities 1. Japan Bank for International Cooperation 2. International Financial Operations 3. Overseas Economic Cooperation Operations 4

1 Japan Bank for International Cooperation On October 1, 1999, the Japan Bank for International Cooperation () was established as a result of a merger between the Export-Import Bank of Japan (JEXIM) and the Overseas Economic Cooperation Fund, Japan (OECF). is a governmental financial institution that conducts Japan s external economic policy and economic cooperation in response to a changing world economic and social climate. took over JEXIM and OECF operations as its core operations: International Financial Operations and Overseas Economic Cooperation Operations, respectively. expects to take advantage of synergies generated by accumulated expertise of operations and human resources inherited from the respective organizations, and to create further efficiency by reorganization. The Operations of 1. Export 2. Import 3. Overseas Investment 4. Untied 5. Bridge 6. Refinancing 7. Equity Participation 8. Studies The primary objective of International Financial Operations is to contribute to the promotion of Japanese exports and imports, as well as Japanese economic activities overseas, and to the stability of the international financial order. International Financial Operations Overseas Economic Cooperation Operations ODA 1. ODA 2. Private-Sector Investment Finance 3. Studies The basic activity of Overseas Economic Cooperation Operations is the provision of funds that encourage the self-help efforts of developing countries for self-reliance. Sources of Funds FILP Bond Issues Internal Funds, etc. Government Investment Funds FILP Internal Funds, etc. Sources of Funds Changing Makeup of Loan and Investment Commitments billion (%) International Financial Operations (Commitments) 1.0 (2%) 61.3 60.3 (98%) FY1955 Overseas Economic Cooperation Operations (Commitments) 2.7 (1%) 8.2 (4%) 7.9 (4%) 213.7 148.5 (69%) 46.4 (22%) FY1965 6.2 (100%) 6.2 974.4 888.4 356.4 (40%) 618.4 (63%) 233.5 (26%) 14.7 (2%) 120.1 128.2 80.5 FY1975 (12%) (13%) (8%) 12.5 (1%) 0.5 (0%) 14.2 (2%) 101.4 182.4 (21%) FY1985 (11%) 161.1 (88%) 552.0 (97%) 21.8 (12%) 16.5 (3%) 183.0 568.6 1,649.2 152.2 (9%) 132.2 (8%) 544.8 (33%) 661.2 (40%) 157.7 (10%) FY1999 1,053.7 (100%) 0.9 (0%) 1,054.6 Export loans Import loans Overseas investment loans Untied loans and others Governmental loans Guarantees ODA loans Private-Sector Investment Finance 5

2 International Financial Operations International Financial Operations Support Japanese Corporate Activities and Ensure the Stability of International Financial Order s International Financial Operations contribute to the promotion of Japanese exports and imports, as well as Japanese economic activities overseas, and to the stability of the international financial order. In response to the Asian currency crisis, extended untied loans to Asian countries in order to stabilize the international financial order, and at the same time to support Japanese affiliates in the region which experienced difficulties in deteriorating business conditions and credit constriction. An important source of finance is funds from the Fiscal Investment and Loan Program (FILP), which manages postal savings deposits, employee pension funds and national pension funds. Other sources include bond issues in international capital markets and internal funds including retained interest income from past loans. International Financial Operations are bound by an obligation to maintain financial soundness in order to ensure effective and efficient undertakings. Specifically, the Japan Bank for International Cooperation Law requires that repayment for the loans and guarantees should be ascertained ( certainty of repayment ) and that expenditures should not exceed revenues ( sufficient revenues to cover expenditures ). Function of International Financial Operations 1) Export supports exports of plants and technologies by Japanese firms by providing supplier credits (S/C) to Japanese exporters, and buyer credits (B/C) or bank loans (B/L) to foreign importers or foreign financial institutions. Export (B/L) Foreign financial institution, etc. subject to country risk, interest-rate risk and foreign exchange risk. These risks are often too large for private financial institutions to act under their own initiative. Because mitigation of such risks is beneficial for the international economic community, other advanced industrial countries also have official institutions similar to, promoting plant exports: the Export-Import Bank of the United States, the Export Credits Guarantee Department (ECGD) of the United Kingdom, the Kreditenstalt für Wiederaufbau (KfW) of Germany, the Compagnie Française d Assurance pour le Commerce Extérieur (COFACE) of France, and the Export Development Corporation (EDC) of Canada. (S/C) 2) Import supports imports of natural resources, manufactured products and technologies. are provided to Japanese importers or foreign exporters. Japanese exporter (B/C) Foreign importer Import Export of plants, etc. Since plants such as power generation and communication facilities embody advanced technology and various technical features, plant exports have contributed to lifting the industrial base of developing countries to higher levels. At the same time, countries that acquire these plants gain from economic benefits that stimulate economic independence and development through industrial infrastructure development, expansion in employment opportunities and acquisition of skills through operational guidance. However, long-term financing for developing countries is Japanese importer Import of manufactured products, natural resources and technologies Foreign exporter 6

Due to scarcity of natural resources, stable and long-term import of natural resources is essential for Japan s economic activities. Import loans are utilized for supporting development and import of energy resources, such as oil and natural gas, and also mineral resources such as iron ore. For Japan s prosperity as a trading nation, promotion of free trade should continue to remain a cornerstone of Japanese policy. In particular, improving Japan s trade imbalance is a priority to prevent the world economy from reverting to protectionist policies in order to ensure sound development of the world economy. Import loans are designed to facilitate entry of foreign firms into the Japanese market as a way to achieve this policy goal in line with domestic initiatives for deregulation. Accordingly, the Japanese government promotes imports of manufactured products from abroad, allowing Japanese users to benefit from high-quality, inexpensive goods and equipment. It is expected that such imports will raise the level of sophistication of Japanese industries and increase the standard of living in Japan. 3) Overseas Investment supports overseas investment through providing loans to Japanese investors, joint ventures where Japanese firms have equity interests, and to foreign governments or banks making equity investment in or providing loans to such joint ventures. Overseas Investment employment, transfer of technologies, and acquisition of hard currencies will accrue to recipient countries, which in turn will lead to greater economic interchange between industrial and developing nations. However, overseas investment entails initially unforeseen risks to investors, such as a sudden change in economic policies, financial collapse and economic disorder. provides advice and information on the investment environment in foreign countries, primarily to small- and medium-sized enterprises. Also, as a public-sector lender, works to mitigate such risks through negotiations with the host country governments and governmental institutions. 4) Untied An untied loan is a form of financial assistance provided to developing countries attempting to establish the basis for economic activities or implement structural adjustments. Provision of loans is not conditional on procurement of equipment or machinery from Japan. Untied Japanese firm Foreign government, etc./bank/firm Project in the recipient country Japanese investor Joint venture partner and/or equity investment Equity investment Joint venture and/or equity investment Foreign government, etc./bank In parallel with the accelerated trend toward globalization, a number of Japanese companies are engaging in international operations. Progress in Japanese overseas investment enhances the Japanese industrial structure and contributes to building a harmonious international division of labor. Overseas direct investment transfers capital, technology, and management expertise in an integrated fashion to developing countries with less of a liability to the recipient countries. Accordingly, economic benefits such as expanded Foreign importer Imports of equipment, technology Exporter Developing and transition economies are often burdened with a wide range of economic problems such as difficulties in serving external debt, underdeveloped infrastructure and capital markets, a lack of internationally competitive industries, and environmental pollution. Untied loans are provided to help overcome these difficulties and stimulate economic activities of recipient countries. This revitalization contributes to the overall development of the international economy. Specifically, untied loans bring about the following significant benefits: (1) maintaining stability in the international financial order; (2) expanding opportunities for international economic activities such as trade and foreign direct investment; (3) securing energy resources for Japan; and (4) reinforcing efforts to improve environmental problems. 7

Untied loans also serve to strengthen partnerships with international organizations. exchanges information and views about economic conditions and investment climates in developing countries. Moreover, holds regular consultation meetings annually with international organizations. 5) Guarantees provides guarantees for sovereign bonds issued by foreign public entities and loans extended by private financial institutions. Mostly, guarantees sovereign bonds to help governments in developing countries mobilize private-sector funds. Guarantees Bridge Foreign government, etc. / bank Conditionality Imports or other external transactions from IMF, World Bank, etc. Guarantees Guarantees 7) Equity Participation Equity participation is the investment of financial capital in joint ventures of Japanese firms planning an overseas project. Private financial institution, etc. Foreign government, etc. Issue of public bonds, etc. Investors Equity Participation 6) Bridge Bridge loans are provided for short-term financing of foreign currencies as required for external transactions to the governments of developing countries, which have difficulties in international balance of payments. Joint venture of Japanese firm, etc. Equity Participation 8

3 Overseas Economic Cooperation Operations Assistance for Nation Building in Developing Countries s Overseas Economic Cooperation Operations consist of two operations: ODA loans and Private-Sector Investment Finance. These are a part of Japanese official development assistance (ODA) extended to developing countries with an obligation for repayment. The objective of these operations is to assist developing countries in their self-help efforts to develop social and economic infrastructures and stabilize their economies through provision of concessionary finance with a long-term repayment period and low-interest rate. This financial assistance is designed to meet various needs of recipients, while research with regard to development issues and projects is conducted to reinforce the operations. Specifically, ODA loans are a key form of financial assistance for developing social and economic infrastructures that are essential for economic development in recipient countries. ODA loans account for 46% of Japan s ODA, making Overseas Economic Cooperation Operations a main pillar of Japanese ODA policy. Recent trends are the increase in financial demand for poverty alleviation and social development, and rising requirements to address global issues such as environmental conservation. This represents a diversity of development needs in different countries, calling for varied and sophisticated functions of assistance. The sources of finance for Overseas Economic Cooperation Operations are comprised of contributions from the general budget, funds from the Fiscal Investment and Loan Program (FILP) and others. The former comes from tax revenues and government bond issues, whereas the latter is borrowings under the FILP, which manages postal savings deposits, employee pension funds and national pension funds. Official Development Assistance (ODA) Bilateral ODA Multilateral ODA Grants Grant Aid Technical Cooperation Overseas Economic Cooperation Operations Function of Overseas Economic Cooperation Operations 1) ODA On December 1, 1999, announced the Medium-Term Strategy for Overseas Economic Cooperation Operations, which sets forth the priority focus of ODA loan operations. ODA The government of the developing countries/ governmental institutions, etc. ODA loans are long-term, low-interest, concessional credits with a grant element of at least 25%, and are provided to developing countries to assist their development efforts. The basic approach of in providing ODA loans is to assist self-help efforts toward economic takeoff and ownership in development. With a particular focus on the Asian region, ODA loans are provided to cover three priority areas: (1) poverty alleviation and economic and social development; (2) problems that are global in scale; and (3) economic structural reforms. Specifically, seeks to strike a desirable balance between (1) sustainable economic growth through economic and social infrastructure development and industrial development, and (2) a fair distribution of the fruits of growth through measures that reduce poverty and enrich social development. will also intensify its efforts to address problems related to the environment, energy and food. Economic stabilization plan Project for development 9

ODA Loan Procedures and the Project Cycle ODA loans are carried out in accordance with a series of steps which starts from project preparation leading to appraisal, signing of a loan agreement, project implementation, and then to post-evaluation and follow-up activities after project completion. Lessons learned in the final step of post-evaluation and follow-up activities are used as feedback for preparatory work in subsequent new projects. Because these procedures form a cycle, the whole process is referred to as a project cycle. Special Assistance for Project Formation (SAPROF) 2. Loan Request 3. Examination/ Appraisal 1. Project Preparation 4. Exchange of Notes/Loan Agreements 6. Completion/ post-evaluation and follow-up activities 5. Project Implementation Special Assistance for Project Sustainability (SAPS) Special Assistance for Project Implementation (SAPI) Special Assistance for Project Procurement 1 Project Preparation Projects are determined in developing countries based on the objectives and strategies of medium- and long-term development plans. Based on the findings of macroeconomic surveys and examinations in various sectors, engages in policy dialogues to exchange opinions on the urgency and priority of projects with the governments of developing countries. At this preparation stage, each project is also investigated and analyzed from economic, social, technical, and environmental aspects. This takes the form of a feasibility study, either produced entirely by the government of the developing country, or by technical assistance from the Japan International Cooperation Agency (JICA) or international organizations. 2 Loan Request The governments of developing countries submit loan requests, together with materials produced in the preparation stage. 3 Examination/Appraisal examines the materials submitted by the governments of developing countries. The Japanese government may dispatch teams and consult with the government of the borrower country. Following this step, dispatches a project appraisal team that will make a more detailed analysis of the project from economic, technical and environmental aspects based on discussions with staff and surveys at the project site. When it is judged that a supplementary study is required prior to examination and appraisal, may conduct a Special Assistance for Project Formation (SAPROF) study. Even if a high level of need is recognized, a lack of funds and technical expertise may pose obstacles to developing countries in their efforts to create a full project plan. The support provided by an additional SAPROF study can help overcome such obstacles. 4 Exchange of Notes and Loan Agreements The Japanese government determines the amount of loan and conditions based on the appraisal results. An 10

Exchange of Notes (E/N), diplomatic documents exchanged between the governments of developing countries and Japan, is then concluded. Thereafter, concludes a Loan Agreement (L/A) with the country receiving the loan. 5 Project Implementation After the conclusion of the L/A, the project enters into the implementation stage. The procurement of goods and services necessary for the project is carried out through international competitive bidding, which is the most economical and efficient method. The actual disbursement of funds is normally carried out in response to requests from the recipient countries as demand for funds arise. The entity implementing the project is the recipient country. However, cooperates by supervising and monitoring implementation and providing advice or consultation to ensure smooth progress. Such project supervision and monitoring have become increasingly important, and when considered necessary, undertakes a Special Assistance for Project Implementation (SAPI) study, in order to ensure smooth implementation of the project and achievement of its goals. By employing consultants and experts, SAPI carries out additional and supplementary investigations to find out what measures should be taken for improving project implementation. 6 Completion, Post Evaluation and Follow-up Activities Completed projects require a post-evaluation to make the best use of the lessons learned for future projects. Administration and operation after completion of projects are the responsibilities of the recipient countries, but endeavors to keep in touch with the situation and provides advice as the need arises. Also, if requested by the borrower country, may decide to undertake a Special Assistance for Project Sustainability (SAPS) survey to identify and recommend concrete policies and measures to sustain or improve effectiveness and performance of completed projects. 2) Private-Sector Investment Finance (Support for Private-Sector Activities) Business activities of private enterprises in developing countries generate employment and other economic effects that improve people s lives by activating the economies. Other effects, such as the acquisition of foreign currencies and technology transfers, can also be expected. However, such projects in developing countries tend to find it difficult to attract loans from private financial institutions due to obstacles such as high risks and low profit outlook. When such a situation is apparent, supports private enterprises planning to undertake business in developing countries with funds provided as either equity investments or loans. Private-Sector Investment Finance Japanese firm / local joint venture, etc. and investment Project for development 11