Diversified Utilization of Yen Loans


『International Development Journal』2019 October edition

High Quality Infrastructure Special

Current status of the Indian High-Speed Railway Project

In December 2015, a memorandum of understanding was signed between the Japanese and Indian governments regarding a high-speed railway, and it was clearly stated that the Japanese Shinkansen system would be adopted for high-speed rail in India. The Japanese method will be adopted for the approximately 505 km route between Mumbai and Ahmedabad, which is positioned as the first priority development route among the seven candidate routes in India. The total project cost is approximately 1.8 trillion yen. About 80% of the total will be covered by yen loans from bilateral ties. As it was an unprecedentedly large-scale project, there were various concerns at the beginning of the project as to whether the opening in 2023 and land acquisition would be successful.
According to Japan International Cooperation Agency (JICA), on the progress, it is said that public works tender for civil works such as elevated and undersea tunnels and vehicles are being announced one after another. Elevated construction is publicly announced for Indian companies, and highly difficult undersea tunnels are publicly announced for Japanese companies. As for land expropriation, about 30% of the total has already been completed due to the active efforts of the Indian government. JICA says that it is moving at a very good speed compared to other public works in India.
In relation to human resource development, construction of training facilities in Vadodara and Sabalmati in Western Gujarat has already started. I have heard that the completion of both facilities will be more than a year away. To that end, there will be training to develop human resources who will play a central role in the operation of high-speed railway.
In addition, although it was not initially planned, Japan also supports the development in front of the station. Looking at these moves, the business seems to be progressing accordingly. However, it is also true that it is not straightforward.
As public announcements are made one after another, one of the challenges will be the participation of Japanese companies. Up to now, the tender failure has been seen as a problem in the Japanese technology utilization conditions “Special Terms for Economic Partnarship (STEP)” application cases, and such a concern cannot be wiped out even with the Indian high-speed railway. In fact, I hear that many companies are carefully considering the difficulty of doing business in India and the profitability of high-speed rail.
However, Yamamoto said, “Only other high-speed rail projects such as Indonesia and Brazil are in the midst of India, and only India has reached the bidding stage. India also has other planned routes. The market scale is extremely large in the long run, not just looking at profitability on the route. ” Companies such as France, China, and Germany seem to be actively selling with emphasis on such potential. That said, it’s still in the bidding phase, and it’s likely that we will need to see a little more into the future.

Ministry of Foreign Affairs aims to expand budget

As seen in the Indian high-speed railway, Japan’s export of “quality infrastructure” has focused on the quantitative expansion of yen loans and the promotion of all Japan. However, the export of infrastructure in such a narrow sense of “national interest bias” is changing. Long-term business participation, including third-country collaboration and “Operation and Maintenance (O & M)”, will be promoted, and soft infrastructure like human resource development will be emphasized more than ever.
Under such circumstances, the Ministry of Foreign Affairs also intends to strategically utilize ODA to support the continuous involvement of private companies, such as O & M, in exporting high-quality infrastructure. Specifically, when private companies use ODA loans and JICA’s Private Sector Investment Finance, JICA aims not only to provide O & M services, including facility maintenance and parts and materials supply, but also to localize O & M that is attractive to developing countries. JICA plans to package new support measures for human resource development and capacity building.
It is not without precedent. One of them is support for the construction of Sihanoukville Port in Cambodia. The project has been implemented since 1999 through ODA loans, grant aid, and technical cooperation, and has also been involved in management such as investing in Sihanoukville Port Corporation as JICA’s Private Sector Investment Finance, and dispatching a non-executive director recommended by JICA. It covers assistance for capacity building related to logistics in general.
From the perspective of promoting “quality infrastructure investment” to strengthen regional connectivity, the Ministry of Foreign Affairs believes that it is important to expand the ODA budget including the JICA general account budget. In fact, of the estimated demand for the budget for FY2020 compiled by the Ministry of Foreign Affairs in August of ¥ 793.7 billion (an increase of ¥ 63.0 billion from the original budget for FY2019), ODA was ¥ 55.1 billion, an increase of ¥ 67.5 billion.
In the future, MOFA expects JICA to improve the budget execution management system and make efforts to prevent the recurrence of problems related to budget management. It has been highly evaluated as a Japanese ODA implementing body that promotes global development, and it will continue to play such a role in the future. He also mentioned that JICA would play a role in nurturing Japanese human resources who are active in the international community. He also pointed out that JICA will continue to work closely with the Ministry of Foreign Affairs to form projects in line with foreign policy.
In order to continuously carry out Japan’s responsible development cooperation, particularly in the field of consulting, the issue is to strengthen the international competitiveness of Japanese companies. The MOFA has a policy of actively providing support with the cooperation of relevant ministries and agencies for the fundamental resolution of issues. MOFA said to the development consultants, “I want consultants to continue to actively work on the challenges of further improving the quality of various operations and increasing price competitiveness through the use of digital technology and diverse human resources. ”.

Financial instability with infrastructure alone

How will JICA move under these policies? As for O&M promotion, the company will promote the utilization of O & M loans, which have not been proven so far.
O&M loans are infrastructure facilities such as power generation facilities established by local governments and other donors, with Japanese companies providing spare parts, human resource development, maintenance, and in some cases contracts with the executing agency using the funds of the loan. It will be responsible for management. Mr. Tetsutaro Kon, the JICA Planning Department, said, “As a Japanese aid philosophy, so far, even if we support the ability to make things and maintain them, the actual maintenance will be carried out by developing countries using their own funds. “O & M loans have not been implemented so much,” he said. However, from now on, it will be possible to actively promote O & M loans. “Rather than just supporting the financial side, we will also provide human resource development and capacity development in a package,” Mr. Kon added.
In addition, the amount of ODA loans that JICA has been working on, the use of Japanese technology, and the promotion of orders from Japanese companies are likely to be suppressed to some extent. In such circumstances, Mr. Kon said as future issues, “The efforts to form projects that are not directly linked to infrastructure exports are not progressing, and as a result, the number of borrowing countries is declining. We will also work on non-infrastructure projects required by borrowing countries”. Specifically, Mr. Kon said, “I want to increase social development projects” in ODA loans. For example, in India, ODA loan projects have been made to promote Sustainable Development Goals (SDGs), dairy development and water resources forest management.
The reason behind this idea is the awareness of the current situation that the current ODA loan is increasing only in limited fields such as railways and ports. In addition, there are concerns about JICA’s future finances. Net profit in loan aid account accounted for nearly 80 billion yen in both FY2017 and FY2018 under generous government investment. The capital adequacy ratio is about 80%, maintaining the highest level among other major FILP agencies, and the financial situation is stable. However, the interest rate on yen loans has been declining in recent years. In particular, the interest rate for infrastructure projects is low, and STEP is set at 0.01%. Looking at the breakdown of the current Japanese ODA loans, low-interest rates account for the majority, and if this continues, it may be a factor that will press profits in the future. The scale of technical support for paid accounts is also increasing along with the movement of infrastructure export promotion, but this movement may also have an impact on finances.
On the other hand, projects with untied general conditions tend to have higher interest rates than tied aid such as Indian high-speed rail and STEP-applied projects. Mr. Kon emphasized, “It may not be just the field that Japanese companies are interested in. However, in order to firmly work on infrastructure exports, it is necessary to work on these projects and perform appropriate financial management.

Will following wind blow?

What kind of impact does the aim of diversifying ODA loan projects have on ODA as a whole? For one thing, as Mr. Kon mentioned, it will lead to the expansion of borrowing countries. This is because the budget for grant aid and technical cooperation is limited, and more developing countries are considering using ODA loans to solve social development issues. In addition, if we think a little optimistically, we can use this financial support to create an opportunity to raise the need for technical cooperation.
Since the fiscal year of JICA’s lack of funds, the development industry has been faced with severe business conditions, mainly through technical cooperation and dispatch of experts. These changes in quality infrastructure exports and yen loans also seem to have the potential to turn the headwinds blowing into the industry into tailwinds. Of course, the current situation will not change immediately, but it is important to take action in anticipation of the coming days. And JICA is required to show a willingness to realize the concept without ending up as a pipedream. ( Saki Kawata)

多様化する円借款の活用 JICAは社会開発案件にも注力する方針