Financing Instruments and Services

5 Financing Instruments and Services 1. International Financial Operations... 26 2. Overseas Economic Cooperation Operations... 29

1 International Financial Operations Supporting International Activities of Japanese Businesses and Ensuring the Stability of the International Financial Order International Financial Operations (IFOs) aim to promote Japanese exports and imports, as well as overseas activities of Japanese firms, and contribute to the stability of the international financial order. employs a variety of financing instruments in IFOs. During the Asian currency crisis, extended untied loans to the crisis-affected countries in Asia in an effort to ensure the systemic stability of international financial markets and support Japanese affiliates in the region experiencing difficulties in deteriorating business conditions and a credit squeeze. The principal source of finance for IFOs is borrowings from the Fiscal Investment and Loan Program (FILP). Other sources include bond issues in international capital markets and internal funds, including collection from past loans and retained earnings. IFOs are predicated on the key principle of maintaining s financial soundness. Under the Japan Bank for International Cooperation Law, has a statutory obligation to ensure certainty of repayment and maintain sufficient revenues to cover expenditures. Principal Financing Instruments of International Financial Operations 1) Export Export loans support exports of Japanese plants and technologies. They include supplier credits (S/C) extended to Japanese exporters, buyer credits (B/C) to foreign importers and bank-to-bank loans (B/L) to foreign financial institutions. As plants such as power generation and communications facilities embody advanced technology and Export Japanese exporter (S/C) (B/L) (B/C) Export of plants, etc. financial institution etc. importer various technical features, their export serves to enhance the technological base of Japanese industries. At the same time, the developing countries that acquire plants gain economic benefits, including industrial infrastructure development, employment creation and acquisition of skills through technical assistance in plant operations, thereby promoting sustainable economic growth and development. However, provision of long-term financing for developing countries involves country risk, which arises from changes in domestic political situations, and interest rate and currency fluctuation risks. These risks are often so large that private financial institutions can hardly assume them. It is thus indispensable to fill this gap by the public sector for a well-functioning international economy: and its counterparts in other industrial countries have official finance facilities to fill this gap in their support for large-scale plant exports. They include the Export-Import Bank of the United States, Export Credits Guarantee Department (ECGD) of the United Kingdom, Kreditanstalt für Wiederaufbau (KfW) of Germany, Compagnie Francaise d Assurance pour le Commerce Extérieur (COFACE) of France and Export Development Corporation (EDC) of Canada. 2) Import Import loans support imports of natural resources, manufactured products and technologies. They are extended to Japanese importers or foreign exporters. As Japan is poorly endowed with natural resources, stable, long-term imports of natural resources are a basic building block of its economic activity. Import loans finance the development and import of oil, natural gas and energy resources, as well as mineral resources such as iron ore. Maintaining and promoting free trade is an important policy that supports Japan s prosperity as a trading nation. In order to achieve this policy objective, import loans are used for importing for- 26

Financing Instruments and Services Import Japanese importer Import of manufactured products, natural resources and technologies exporter eign products and technology. Imports are expected to raise the Japanese standard of living through inexpensively providing products which are not produced in Japan. Import loans, in parallel with deregulation, also serve as a financial means of helping foreign firms in their efforts to enter the Japanese market, harmonizing economic relations with foreign countries. economies with funds that do not place debt burden on the host countries. It is thus a source of such economic benefits as employment expansion, technology acquisition and foreign currency earnings, not to mention greater economic interchange between industrial and developing countries. For investors, however, foreign direct investment involves risks that they do not ordinarily take into consideration in domestic investments a sudden shift in economic policy, fiscal collapse and economic disorder. provides information and advice on the investment climate in other countries primarily for small- and medium-sized enterprises (SMEs). As an official lender, also makes an effort to mitigate such risks through negotiations with host country governments and government agencies. 4) Untied An untied loan is a sovereign lending facility aimed at creating an external environment conducive to Japan s global economic activities, including trade 3) Overseas Investment Overseas investment loans support Japanese direct investment in foreign countries by providing financing for Japanese investors, local Japanese affiliates, including joint ventures, and foreign governments or banks making equity investment in or extending loans to them. Increasing globalization has created a business environment where numerous Japanese businesses have to conduct their operations overseas. Greater investment abroad by Japanese firms will create an advanced industrial structure domestically and lead to more efficient international division of labor. Direct investment transfers a combination of capital, technology, and business expertise to developing Overseas Investment United importer government, etc. /bank/firm Imports of equipment and technology Project in the recipient country Exporter Japanese investor Japanese firm Joint venture partner Joint venture and / or equity investment equity investment and/or equity investment government, etc. / bank and investment, and supporting structural adjustment in developing countries. An untied loan is not conditional on procuring Japanese materials and equipment. Developing and transition economies are often burdened with a wide range of economic problems, such as external debt arrears, under-developed infrastructure and capital markets, industries that are unable to compete internationally and environmental pollution. Untied loans help ameliorate or resolve these problems, thereby revitalizing the economy 27

and contributing to the overall development of the international economy. Specifically, untied loans produce the following benefits: (1) maintaining stability in the international financial order; (2) expanding opportunities for international economic activities, including trade and foreign direct investment; (3) securing access to energy resources for Japan; and (4) reinforcing international cooperative efforts to address environmental problems. In the process of providing untied loans, develops closer relationships with international institutions. Such collaboration leads to the exchange of views and information with respect to economic conditions and the investment climate in developing countries. Moreover, holds regular consultation meetings with major international institutions annually. 5) Guarantees provides guarantees for loans made by privatesector banks and public bonds issued by foreign governments. Guarantees for government bonds primarily aim to support governments in developing countries in their efforts to mobilize privatesector funds. 6) Bridge Bridge loans are short-term financing to governments in developing countries to meet their foreign exchange needs for external transactions when they face balance-of-payments difficulties. Bridge government, etc. / bank Conditionality from IMF, World Bank, etc. Imports or other external transactions Guarantees 7) Equity Participation Equity participation is investment in the equity of those joint ventures set up by Japanese firms to undertake overseas projects. Equity Participation Guarantees Guarantees Private financial institutions, etc. government, etc. Issue of public bonds, etc. Investors Joint venture of Japanese firm, etc. Equity participation 28

Financing Instruments and Services 2 Overseas Economic Cooperation Operations Supporting Nation Building in Developing Countries provides financial assistance, primarily in the form of loans, to developing countries in its Overseas Economic Cooperation Operations (OECOs), which constitute part of Japanese official development assistance (ODA). The objective of such financial assistance is to support developing countries in their self-help efforts to develop economic and social infrastructure and stabilize their economies through concessionary financing. OECOs consist of ODA loans, Private-Sector Investment Financing, and their supporting services. ODA loans are extended in many forms to meet various development needs and supporting services include studies related to OECOs projects and development. In particular, ODA loans are an indispensable financing instrument for developing economic and social infrastructure, which is required for economic development in the developing world. OECOs account for approximately a third of Japanese ODA (in terms of net disbursement), making it a main pillar of Japanese ODA activities. Recent trends in OECOs are increased financing demand for poverty reduction and social development, and growing needs to address global issues such as conservation of the global environment. These are reflections of increasingly diverse development needs in individual countries, with broader and highly specialized demands on what development assistance has to accomplish. Principal sources of finance for OECOs are capital contributions from the Japanese government s General Account Budget, which comes from tax revenues and government bond issues, and borrowings from the FILP. Official Development Assistance (ODA) Bilateral ODA Multilateral ODA Grants Grant Aid Technical Cooperation Overseas Economic Cooperation Operations Principal Financing Instruments of Overseas Economic Cooperation Operations 1) ODA designated the priority areas for its ODA loan operations in the Medium-term Strategy for Overseas Economic Cooperation Operations, launched on December 1, 1999. ODA loans are concessionary loans, offering long-term, low-interest funds with a grant element of 25% or higher to developing countries to assist their development efforts. extends an ODA loan following an exchange of notes between the governments of Japan and recipient countries. The basic approach of in providing ODA loans is to assist self-help efforts toward economic takeoff and ownership in development. ODA loans are primarily extended to the Asian region in three priority areas: (1) poverty reduction and economic and social development; (2) global issues; and (3) support for structural reform. Specifically, seeks to strike a desirable balance between (1) sustainable economic growth through economic and social infrastructure development and industrial development; and (2) equitable distribution of the fruits of economic growth through poverty reduction measures and social development. will also intensify efforts to address problems related to the environment, energy, food and others. ODA Economic stabilization plan The government of developing countries/ governmental institutions, etc. Project for development 29

Outline of ODA Loan Procedures Project Cycle The provision of an ODA loan starts from project identification and preparation, proceeding to appraisal, signing of loan agreement, implementation, supervision and post-evaluation. The lessons learned from supervision and post-evaluation will be applied to the identification and preparation of future projects. This whole series of procedures is thus called the project cycle of ODA loans. Project Formation (SAPROF) 2. Loan Request 3. Examination/ Appraisal 1. Project Preparation 6. Completion/ Post-Evaluation and Follow-Up Activities 5. Project Implementation 4. Exchange of Notes/Loan Agreements Project Sustainability (SAPS) Project Implementation (SAPI) Procurement Management 1. Project Identification and Preparation A developing country draws up medium- and longterm development targets and strategies. Project identification is carried out with due consideration for these plans. conducts macroeconomic and sector surveys and examines the urgency and priority of the identified projects through policy dialogue with the government of the developing country. Before moving to implementation, the project plan comes under further analysis with respect to its economic, social, technical and environmental aspects. This feasibility study (F/S) is either carried out by the developing country government on its own or through technical assistance from the Japan International Cooperation Agency (JICA) or other international organizations. 2. Loan Request The government of developing countries file a loan application to the Japanese government, accompanied by documents produced in the project identification and preparation stage. 3. Appraisal and Ex-ante Project Evaluation examines the project application. At this stage, the Japanese government may dispatch a mission, if necessary, to consult with the country requesting the loan. then conducts project appraisal. This involves sending an appraisal mission to discuss with officials of the government and the project-executing agency, and for field visits to the project site. The mission analyzes the details of the economic, social, technical and environmental aspects of the project. If it is judged that a supplementary study is required prior to s examination or appraisal, may conduct a Special Assistance of Project Formation (SAPROF) study. An additional study through SAPROF helps the developing country in its efforts to make adequate preparation for a priority project when the country is constrained by inadequate funds and technical expertise. Ex-ante project evaluation 1 will be carried out for approved projects based on the appraisal results. 4. Exchange of Notes and Loan Agreement Based on the results of the appraisal conducted by, the Japanese government makes a decision over loan provision, including its amount, terms and conditions. The two governments sign a diplomatic document, the exchange of notes (E/N). Thereafter, and the borrower sign a loan agreement (L/A). 1 Ex-ante project evaluation will be conducted for projects whose appraisal is carried out after 1 April, 2001. 30

Financing Instruments and Services 5. Implementation After the signing of the loan agreement, the project enters the implementation stage. Essential inputs to the project, such as materials, equipment and civil works, will be procured through international competitive bidding, as it is the most economical and efficient method. Disbursements are made upon requests from the borrowing country. In principle, funds are released as their needs actually arise with the progress of the project. The borrowing country is responsible for carrying out the project, while offers advice as necessary for smooth project implementation. In recent years, project supervision has become increasingly important. Therefore, if deemed necessary, hires consultants under the Project Implementation (SAPI) to make a supplementary study aimed at ensuring smooth implementation and attaining objectives of the project. 2) Private-Sector Investment Finance (Support for Private-Sector Activities) Business activities of private enterprises in developing countries bolster their economies and yield economic benefits such as generating employment and improving people s standards of living. In addition, they bring significant advantages in terms of foreign exchange earnings and technology transfer. However, it is also true that high risks and the prospect for low returns often pose an obstacle to business projects in developing countries when they need loans from private financial institutions. supports private firms planning to undertake business in developing countries by offering loans and equity investment as a catalyst. Private-Sector Investment Finance 6. Project Completion, Post-Evaluation and Follow-Up Supervision conducts post-evaluation of completed projects in order to draw lessons for future projects. Even though the borrowing country should assume responsibilities for management and operation of the project, monitors the projects and gives advice as necessary. may, upon the request from the borrowing country, implement a study under the Special Assistance for Project Sustainability (SAPS), in order to sustain and improve the effects of completed projects. Japanese firm/ local joint venture, etc. and investment Project for development 31