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

1. Session IV: Finding the Right Instruments, and Using them Correctly Hiroto ARAKAWAExecutive DirectorJapan Bank for International Cooperation(JBIC)July 4, 2006

2. - Table of Contents - • Judging the “Right” Instruments • Various Instruments • Flow from Private Sector • Flow from Emerging Donors • Flow from NGOs • Domestic Funds • Summary

3. 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 ODA’s role is to mobilize these flows to developing countries by providing efficient “mix of instruments”. “Dichotomy” of “Loan or Grant” is meaningless.

4. 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) • ODA’s role is threefold; (i) Reducing Risk for Private Sector (ii) Reforming Policy & Institution / Investment Environment (iii) Assisting “Bottleneck Facility” in case of Infrastructure

5. II. Various Instruments1. Flow from Private Sector ≪Case study≫ Assistance for Vietnam’s 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) ODA’s threefold roles on the ground; (i) Reducing Risk for Private Sector JBIC’s 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” JBIC’s ODA loan assisted transmission line (“Bottleneck Facility”) for making BOT work.

6. 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. <Case>JBIC 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.

7. 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. <Case> 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.

8. 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 Water Revolving Fund (to be established) Loan 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.

9. III. Summary • ODA’s 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.