ODA and ODA Loans at a Glance This chapter provides essential information on Japan s official development assistance (ODA) and ODA loans. What is ODA? Official development assistance (ODA) is the assistance to developing countries undertaken by the government sector of the donor countries. Assistance to developing countries is undertaken by various organizations, including multilateral institutions, governments of industrialized countries and private-sector organizations. ODA, as defined by the Development Assistance Committee (DAC) of the Organization of Economic Cooperation and Development (OECD), must meet the following three requirements: ODA Official Development Assistance It should be undertaken by governments or government agencies. The main objective is the promotion of economic development and welfare in developing countries. It has concessional terms, having a grant element of at least 25%. Note: The grant element measures the concessionality, or softness of financial terms, of a loan. The lower the interest rate and the longer the maturity period, the higher the grant element, which means it is more beneficial to the borrower. The grant element for a grant is 1%. What is an ODA loan? An ODA loan is a loan extended to developing countries on soft terms, characterized by a low interest rate and a long maturity. Basic economic and social infrastructure provides indispensable underpinnings for national development. The major objective of ODA loans is to provide financial assistance required for this sector and thereby support self-help efforts of developing countries to achieve self-sustainable economic development. JBIC is an official agency with a statutory mandate to provide Japan s ODA loans. How much money is provided as ODA loans, and what percentage of Japan s ODA do ODA loans make up? ODA loans account for about 3% of Japanese OD Of the total volume of Japanese ODA in 2 amounting to $13,58 million, $3,943 million, or roughly 3%, went for ODA loans. ODA Loans $3,943 million 29.1% Japanese Net ODA Flow in 2: $13,58 million 6
Are there different types of ODA? ODA may be broken down into bilateral and multilateral assistance based on specific channels of financial flow. Bilateral assistance consists of bilateral grants and ODA loans. Bilateral grants are further divided into grant aid and technical cooperation. Multilateral assistance refers to contributions and subscriptions to multilateral development institutions. Types of ODA ODA Bilateral assistance Cooperation directly aimed at a recipient country Multilateral assistance Cooperation through the UN and other multilateral development institutions Contributions and subscriptions to multilateral development finance institutions are handled by the Ministry of Finance, while the Ministry of Foreign Affairs handles contributions to organizations in the UN family. Grants Assistance without an obligation for repayment, especially targeting poor countries ODA loans Concessional loans to be repaid over an extended period of time JBIC is in charge of undertaking ODA loan operations. Technical cooperation Technology transfers to support developing countries toward self-sustainable economic development by sending Japanese experts or by accepting trainees from developing countries for training in Japan Technical cooperation is undertaken by the Japan International Cooperation Agency (JICA). Grant aid Grant aid is provided primarily in the health and education sectors to finance the recipient countries in building schools and hospitals or importing food, etc. The Ministry of Foreign Affairs is undertaking grant aid operations, receiving cooperation from JIC How large is Japan s ODA contribution to the international community? Japan is the world s second largest provider of ODA, accounting for 2% of the total ODA flows around the world. 18, 16, 14, 12, 1, 8, 6, 4, 2, Net ODA Flows from Major Industrial Countries Japan United States France Germany England 11,151 1,952 11,259 13,239 Unit: US$ million 14,489 9,439 9,358 1,64 15,323 13,58 1,884 9,678 4,879 4,659 4,293 35 337 3 25 2 15 1 5 Per Capita Net ODA Flows from Industrial Countries 298 291 21 23 138 112 Unit: US$ 88 83 81 69 68 67 62 55 54 34 34 34 29 29 22 CY91 92 93 94 95 96 97 98 99 1 Notes: 1. Figures do not include assistance to East European countries and the countries that graduated from Part I of the DAC List of Aid Recipients (ODA recipients). Notes: 2. All figures are on a net flow basis. Notes: 3. For 21, preliminary figures are indicated (derived from the press release of the DAC in May 22). Denmark Luxemburg Norway Holland Sweden Switzerland Japan France Belgium Finland Germany England Ireland Austria Canada Australia United States New Zealand Spain Italy Portugal Greece 7
What characteristics do Japan s ODA loans have? Japan s ODA loans have the following six characteristics. ODA loans take up a significant share of total Japanese OD Japan s ODA comprises a significant share of ODA loans compared with ODA offered by other industrialized countries. The main reason for this characteristic is that Japan provides ODA based on the principle of supporting self-help efforts of developing countries. 14, 12, 1, 8, 6, 4, 2, 2, Breakdown of ODA in DAC Members by Type of ODA (net flow in 2) 13,58 3,74 4,9 2,43 3,248 9,955 2,55 4,316 3,777 688 5,3 2,343 1,64 1,56 1 Japan United States Germany England France 146 685 4,51 1,792 1,878 Unit: US$ million 4,15 1,276 1,283 1,833 287 Multilateral institutions Loans Technical cooperation Grants Supporting self-help efforts Japanese ODA presupposes self-help efforts on the part of developing countries. To achieve selfsustainable economic development, it is important that there is awareness in recipient countries that they will use funds efficiently. The significance of ODA loans may be derived from the fact that loans, as opposed to grants, will impose a certain discipline on the part of the borrower in the use of funds. A focus on economic infrastructure development, at the same time addressing poverty reduction and environmental conservation ODA loans are provided primarily for economic infrastructure development projects. While varied economic achievements among individual countries may result from different economic policies and exogenous conditions, one of the main reasons for lagging development in developing countries is inadequate economic infrastructure. In recent years, there have been increasing financial demand for poverty reduction and social development and growing needs to address global environmental conservation and other global issues. Accordingly, facing more diverse development needs, developing countries are looking toward development assistance for more diverse functions and technical sophistication. Able to finance large projects with a small cost ODA lending can provide efficient development assistance with a relatively small cost to Japanese taxpayers, because loans are eventually repaid by the borrower. The prospect of repayment enables ODA loans to finance large-scale projects that have a major development impact. Borrowings from the Fiscal Investment and Loan Program ODA loans Japan Capital contributions from the general budget JBIC Recipient countries Repayment Repayment 8
A small percentage of non-performing loans When a recipient country falls into debt repayment difficulties, debt relief will be arranged under the international framework (the so-called Paris Club), whereby JBIC will be able to collect its loans. The ratio of non-performing loans to the total loans outstanding on the overseas economic cooperation account was 4.21% at the end of fiscal 21. This is far smaller than comparable figures for major Japanese commercial banks. The Ratio of Non-Performing Loans to Total Outstanding Loans (at the end of fiscal 21) Bank Ratio OEC Account (JBIC) 4.21% Major Japanese Commercial Banks 6 14% Microeconomic and macroeconomic effectiveness ODA loans have contributed to economic development in developing countries. In the table below, the macroeconomic effect of ODA loans was measured quantitatively in Thailand and the Philippines (trial calculation). Macroeconomic Effect of ODA Loans Effect Thailand The Philippines Increase in GDP (1999) 1 3.2% 1.4% Increase in annual GDP growth 2.17%.8% Notes: 1. Increase in GDP in 1999 created by ODA loans which were provided 198 to 1999 Notes: 2. Increase in GDP growth created by ODA loans Microeconomic effects of ODA loans are measured by ex-post evaluation of individual projects. For example, JBIC conducted the comprehensive impact study on the Eastern Seaboard Development Project in Thailand, an impact study on the Rural Electrification Project in Pakistan and studies of the effect of infrastructure development on poverty alleviation in Sri Lanka and Pakistan to measure the quantitative development impact of these projects. ODA Loan Commitments over Time 1, 8,999 8, 9,31 Unit: 1 million Source: JBIC (gross figures; except debt relief) 7,874 6, 6,731 6,574 6,242 6,545 6,1 6,457 6,953 6,559 4, 2, FY 1991 1992 1993 1994 1995 1996 1997 1998 1999 2 21 9
What countries receive ODA loans from Japan? Primarily developing countries in Asia. However, 94 countries in the world have received ODA loans to date. ODA Loan Commitments by Region Units: Number of commitments and billion Latin America and the Caribbean 27.9 (4.1%) Africa 3.5 (4.4%) Europe 12.9 (1.9%) FY21 Total: 58 687.8 Asia 616.5 (89.6%) Countries and areas which have received ODA loans What kinds of projects are targeted by ODA loans? ODA loans are provided for projects that aim at developing economic infrastructure and improving the living conditions. ODA loans primarily support the development of economic and social infrastructure including power, gas, transport, communications and agriculture because this basic infrastructure provides indispensable underpinnings for national development. In addition, amid emerging new challenges in global environmental conservation, human resource development and income disparities between the rich and the poor, ODA lending has been growing in social services, including water supply, sewerage systems, insurance, health care and education, and for supporting ODA Loan Commitments by Sector Units: Number of commitments and billion Agriculture, forestry Mining and manufacturing and fisheries 5.2 (.8%) 8. (1.2%) Irrigation and flood control 45.4 (6.6%) Social services 118.9 (17.3%) Electric power and gas 139.4 (2.3%) FY21 Total: 58 687.8 Transportation 37.9 (53.9%) the poor in rural and peripheral areas. Such support is based on the basic philosophy of Japanese ODA that encourages self-help efforts of developing countries to achieve self-sustainable economic development. Where does the money come from for ODA lending? ODA loans are financed from three major sources. ODA loans and equity investments in overseas economic cooperation operations are financed by (1) contributions to its capital, from the general account of the fiscal budget, which is financed by taxes and government bonds; (2) borrowings from the Fiscal Loan Investment and Loan Program; and (3) internal funds. Funding from the general account of the government budget enables JBIC to extend ODA loans to developing countries at very low interest rates and with long maturity periods. What are loan terms? The average interest rate of ODA loans committed during fiscal 21 was 1.43%. Average maturity was very long, at 34.5 years. This period includes a grace period during which no repayment is made on the principal. Are there any conditions ODA loan projects have to meet in the procurement of goods and services? ODA loan projects must meet either of the three different sets of conditions for such procurement. The borrowing country uses the proceeds of an ODA loan to purchase various materials and equipment as well as services for project implementation. These purchases, or procurement, must be made by following one of these three sets of conditions: A general untied loan allows procurement from any country in the world. A partially untied loan allows procurement only from Japan and developing countries. A tied loan allows procurement only from Japan. Procurement is made, in principle, based on competitive bidding. This procedure enables the borrower to purchase high quality goods and services at the minimum cost. 1
What are priority areas for which ODA loans are provided? JBIC designated seven thematic priority areas for ODA loans in the Medium- Term Strategy for Overseas Economic Cooperation Operations released on April 1, 22. The basic approach JBIC adopted for ODA loan operations is that ODA loans should support self-help efforts of developing countries for sustainable growth based on their ownership. Geographically, the central focus is placed on Asia, and priority is assigned on the following seven areas. Strengthening support for poverty reduction Addressing poverty, including reduction in income disparities, is one of the major tasks of development assistance. Achieving sustainable development is essential for overcoming problems of poverty in developing countries. From this perspective, JBIC will continue to place priority on developing economic and social infrastructure that provides underpinnings for economic growth in developing countries, seeking to reduce poverty through this channel. Developing infrastructure for economic growth Promoting economic growth and increasing employment and income opportunities are necessary conditions for poverty reduction. In many developing countries, inadequate economic and social infrastructure including power, transportation, irrigation, water supply and sewerage is posing a major bottleneck to economic growth. Therefore, JBIC will continue to support economic and social infrastructure development to promote economic growth. Supporting environmental improvement and anti-pollution measures As the economy grows, air and water pollution and the waste disposal problem created by industrial activity or urban living as well as increasing populations in urban areas are deteriorating the urban environment in developing countries. With abundant experience in pollution control and improving the urban environment, Japan can make an effective contribution to this area. Addressing global issues JBIC will be active in addressing global issues that may have a major impact on the international community. They include global environmental problems, such as global warming and acid rain, as well as energy, food, water resources, population growth, and communicable diseases, such as HIV/AIDS. Supporting human resource development Human resource development is a critical factor for promoting the participation of the poor and socially disadvantaged in politics and society and increasing their incomes. It may become a significant driving force of economic growth by supplying a broad range of human capital, which constitutes underpinnings for development. In this sense, supporting human resource development has a substantial impact on the economy. Therefore, ODA loan operations have been vigorously moving forward human resource development projects. Supporting the dissemination of information technology (IT) in developing countries Advances in IT have increased the efficiency of economies. At the same time, the IT gap, coined the Digital Divide, has emerged. Since a reduction in the IT gap contributes to a reduction in income disparities, and the use of IT will make ODA loan operations more efficient, JBIC is supporting efforts to disseminate IT. Supporting development in provincial areas In developing countries, disparities in income levels and standards of living are increasing between large urban areas and provincial areas. Excessive migration to large urban areas as well as the concentration of industries and factories there have given rise to poverty and environmental problems in large urban areas. To alleviate these problems, developing rural and provincial areas by relocating industries and reducing regional disparities have become important policy agenda items for developing countries. 11