Session IV: Finding the Right Instruments, and Using them Correctly

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Session IV Finding the Right Instruments, and
Using them Correctly
Hiroto ARAKAWAExecutive DirectorJapan Bank for
International Cooperation(JBIC)July 4, 2006
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- Table of Contents -

• Judging the Right Instruments
• Various Instruments
• Flow from Private Sector
• Flow from Emerging Donors
• Flow from NGOs
• Domestic Funds
• Summary

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I. Judging the Right Instruments
Flow to developing countries
(unit billion dollar)
Note Figures in parenthesis are the percentage
compared to Total net ODA.
Source 2005 Development Co-operation Report
ODAs role is to mobilize these flows to
developing countries by providing efficient mix
of instruments. Dichotomy of Loan or Grant
is meaningless.
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II. Various Instruments1. Flow from Private
Sector

• Flow from Private Sector has large volume. But,
  its fluctuation add to rather than reduce to
  consumption variability of developing countries.
• Therefore, ODA flow has a role of lender of
  first resort to provide shock-absorbing as well
  as consumption-smoothing assistance. (e.g. Cohen,
  Jacquet, and Reisen)
• ODAs role is threefold
• (i) Reducing Risk for Private Sector
• (ii) Reforming Policy Institution / Investment
  Environment
• (iii) Assisting Bottleneck Facility in case of
  Infrastructure

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II. Various Instruments1. Flow from Private
Sector
Case study Assistance for Vietnams Electrical
Power Project


Generation Systems (thermal power plant)
Private Company

Investment


Phu My 1
Phu My 2
Phu My 3




Private Financial Institutions

Project Financing
ODA Loans

JBIC

Loans

Transmission Lines / Distribution Systems

International Institutions
(WB / ADB)
ODAs threefold roles on the ground (i)
Reducing Risk for Private Sector JBICs ODA
loan assisted the 1st generation plant for aiming
demonstration effects for the 2nd plant financed
by private investment. (ii) Reforming Policy
Institution / Investment Environment JBIC
co-financed PRSC, which paves the way for equal
treatment for domestic and foreign firms. (iii)
Assisting Bottleneck Facility JBICs ODA
loan assisted transmission line (Bottleneck
Facility) for making BOT work.
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II. Various Instruments2. Flow from Emerging
Donors

• Flow from Emerging Donors, especially of East
  Asia, has been increasingly significant.
• Aid community, especially DAC, need to work on
  building close partnerships with Emerging Donors.
• ltCasegtJBIC is building close partnerships with
  Emerging Donors.
• Thailand NEDA (Neighbouring Countries Economic
  Development Cooperation Agency )
• Memorandum of Understanding (May 2006)
• JBIC will support the organizational capacity
  enhancement of NEDA by drawing on its knowledge
  and know-how, thereby helping Thailand as an
  Emerging Donor.
• Korea EDCF (Korea Eximbank, Economic Development
  Cooperation Fund)
• JBIC aims to share its experiences and know-how
  of ODA loan financing operations.
• Philippines, Indonesia
• Memorandum of Understanding (May 2006)
• JBIC aims to transfer its monitoring and
  evaluation knowhow of ODA loan-financed projects
  to the foreign aid coordinating agency of
  Philippines and Indonesia.

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II. Various Instruments3. Flow from NGOs

• Role of grants financing from NGOs is growing.
• Those contributions through NGOs have a risk to
  exceed absorptive capacity of developing
  countries, if provided fragmentedly. ODA,
  especially loan facility, can provide some good
  practice (e.g. PRSC) to reduce fragmentation and
  to align with recipient country priorities and
  programs.
• ltCasegt Needs Assessment after Tsunami Disaster
• JBIC conducted joint needs assessments right
  after the Tsunami disaster at the end of 2004
  with Tsunami-stricken countries (Indonesia, Sri
  Lanka, and Maldives), the World Bank, the Asian
  Development Bank and other international
  institutions.
• The assessments contributed to paved the way for
  NGOs assistance activities.

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II. Various Instruments4. Domestic Funds
Case study Assistance for Philippines
Municipal Water and Sanitation Projects under
U.S.-Japan partnership
Private Lenders
JBIC
ODA Loan
Loan
USAID Guarantee
LGU/GC Guarantee
Development Bank of Philippines
Loan
Water Revolving Fund (to be established)
Water and Sanitation Projects by Local
Government Units, Water Districts

• JBIC provides long-term financing through the
  Philippines public institutions.
• USAID provides guarantee for the private lenders
  loan through the Philippines private guarantee
  corporation.
• JBIC, USAID, and the Government of the
  Philippines are trying to establish Water
  Revolving Fund which aims to institutionalize
  the municipal water projects financing framework.

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III. Summary

• ODAs role as a catalyst is significant.
• (i) Reducing Risk for Private Sector
• (ii) Reforming Policy Institution / Investment
  Environment
• (iii) Assisting Bottleneck Facility
• Challenges
• sub-sovereign financing
• local currency financing
• non-sovereign financing to private sector
• output-based financing
• Japan will provide seamless aid modalities of
  loan, grant, and technical assistance under a new
  ODA institution in 2008.