1. Rethinking Catalytic Roles of ODA November 30, 2008 HIROTO ARAKAWA

2. 2 - Table of Contents - I. Background: Financial Flow to Developing Countries II. Challenges Ahead III. Rethinking Catalytic Roles of ODA

3. 3 I. Background Financial Flow to Developing Countries 1. Impact of Current Financial Turmoil Real GDP Growth and Trend (%) Source: IMF staff estimates (World Economic Outlook Update, November, 2008)

4. 4 Source: IMF staff estimates (World Economic Outlook Update, November 2008) I. Background 2. Impact of Current Financial Turmoil Overview of the World Economic Outlook Projections (unit: %) Financial Flow to Developing Countries Private flow to developing countries seems to decrease in 2008 and 2009 due to the slowdown of GDP growth rate.

5. 5 (unit: 100 million $) I. Background Financial Flow to Developing Countries 3. Whos Major Players? *2007 data is based on estimation. Source: OECD. Stat Extracts, DAC1 Official and Private Flows, 2008 * 2008?

6. 6 Private FlowODA Could be Large and Small according to Economic Situation Gradually Increasing but yet Small VolatileStable and Predictable Profit-oriented: Tend to specific sectors and countries Could touch upon Policy & Institutional Reform for better administration I. Background Financial Flow to Developing Countries 4. Characteristics

7. 7 Before Asian Currency Crisis in 1997 Before Financial Crisis in 2008 Way Forward 2008 and beyond II. Challenges Ahead Trend of Development Agenda and Way Forward + Pro-poor Growth: Inclusiveness + Revalue of Infra-development Basic Human Needs Infra-development: Public-led Private Sector Investment Huge Infrastructure demand (Acceleration of PPP) Global Climate Change MDGs (2000) ODA further promoted private investment

8. 8 Inclusive Development Model (Connecting East Asia (ADB/JICA/WB flagship study)) Accountability and Risk Management Coordination Inclusive Development II. Challenges Ahead Huge Infrastructure Demand Implication from East Asian Economic Growth led by Private Sector Development, encouraged by Infrastructure Development, supported by Public Finance -East Asia: $200 BILLION/ year (2006-10) (Connecting East Asia, ADB/JICA/WB, 2005) -Africa: $20 BILLION/ year (An Africa Action Plan, WB, 2005)

9. 9 Conceptual Figure: Expected Share of Private Investment with PPP PRIVATE INVESTMENT PUBLIC INVESTMENT ODA GRANT ODA LOAN LOW INCOME COUNTRY HIGH INCOME COUNTRY MIDDLE INCOME COUNTRY GRADUATION FROM ODA Expected share of private investment with PPP II. Challenges Ahead Share of Finance Income Level

10. 10 II. Challenge Ahead (1) The Common Characteristics of High, Sustained Growth - Strategic integration with the world economy - Mobility of resources, particularly labor - High savings and investment rates - Capable government committed to growth The Growth Report: Strategies for Sustained Growth and Inclusive Development (Commission on Growth and Development, 2008) (2) Policy Ingredients of Growth Strategies (should be customized, though) - High levels of investment - Macroeconomic stability - Urbanization and rural investment - Effective government - Competition and structural change - Export promotion and industrial policy, etc.

11. 11 II. Challenge Ahead (i) Higher Densities No country has grown to high income without urbanizing (ii) Shorter Distances Growth seldom comes without the need to move closer to density (iii) Fewer Divisions Growth seldom comes to a place that it isolated from others How to get both unbalanced growth and inclusive development? > Economic Integration (from spatial targeting to spatial integration) 1. Geographic Transformations: 3D Needed for Progress 2. Challenges for policy makers > Infrastructure development: Important tool to improve spatial connectivity World Development Report 09 Reshaping Economic Geography

12. 12 III. Rethinking Catalytic Roles of ODA (1) Enabling Environment for Private Investment - Reforming Policy & Institution / Investment Environment (2) Risk Mitigation for Private Investment - Mitigating Risks Political Risk, Implementation Risk (ex. land acquisition), Demand Risk, etc. - Burden Sharing (ex. Bottleneck Facility) 1. Huge Infra-Demand: Mobilization of Private Capital

13. 13 III. Rethinking Catalytic Roles of ODA Model: Mobilization of private capital catalyzed by ODA Case of PRSC and related ODA projects in Vietnam) Capital market development Market infrastructure (legal system, settlement system), Capacity building for market players (S EC, privatized SOEs) Investment climate Legal reform for Investment, FDI, BOT(PPP), procurement -do- for SOE reform, equal footing between private & public Enabling Environment Infrastructure development by public sector (governments, municipalities, SOEs, PPPs) Private sector investment Fund raising from capital markets and private financial institutions to develop borrowers credibility and debt capacity to induce investments ODA Private ODA grant/loans, technical assistance for capacity building ODA technical assistanceODA grants/loans Private capital Enabling Environment Actions in PRSC Matrix

14. 14 Policy and Institutional Reform : PRSC in Viet Nam 5 Banks5 Banks WB, ADB, WB, ADB, AFD, KfW AFD, KfW UN, DFID and others JICA Improvement of business investment environment: Legal reform for Investment, FDI, BOT(PPP), procurement, SOE reform, equal footing between private & public 5 Banks initiative in procurement Prime example: Public Procurement System Local Competitive Bidding Project Level Now LCB Standard for use in Vietnams overall procurement systems With JICAs well-focused T/A Public Expenditure Management (PFM, MTEF) Govt. of Vietnam III. Rethinking Catalytic Roles of ODA Donor Coordination

15. 15 Phu My 1Phu My 2Phu My 3 ODA Loans Project Financing Private Financial Institutions JICA Japanese Company Transmission Lines / Distribution Systems Generation Systems (thermal power plant) Investment Loans WB & ADB Phu My Electrical Power Project in Vietnam ODAs roles on the ground: (i) Mitigating Risk for Private Sector JICAs ODA loan assisted the 1 st generation plant for aiming demonstration effects for the 2 nd plant financed by private investment. (ii) Reforming Policy & Institution / Investment Environment JICA co-financed PRSC, which paves the way for equal treatment for domestic and foreign firms. (iii) Assisting Bottleneck Facility JICAs ODA loan assisted transmission line (Bottleneck Facility) for making BOT works. III. Rethinking Catalytic Roles of ODA JBIC

16. 16 III. Rethinking Catalytic Roles of ODA 2. Global Climate Change Multi-sectoral approach Mitigation/Adaptation

17. 17 III. Rethinking Catalytic Roles of ODA 1. Approach: Climate Change and ODA Mitigation and adaptation projects Implementation of climate change policies based on agreed matrix Private sector investments for sustainable growth Policy Dialogue with Partner countries to monitor implementation and develop next steps Identification of necessary investments Technical assistance (advisor/expert) Climate Change ODA agreement on policy matrix for climate change ODA grants/loans Enabling Environment to induce investments Private capital ODA Private

18. 18 III. Rethinking Catalytic Roles of ODA Pillar 1 Mitigation ProjectTAProjectTAProjectTAProjectTA 1.1 LULUCF (Land Use, Land Use Change and Forestry) -Reforestation -REDD -Forest management 1.2 Energy -Power plant -Industry, domestic and commercial -Others Pillar 2 Adaptation Pillar 3 Cross-cutting Issues 3.1 Understanding the Impact of Climate Change 3.2 Mainstreaming Climate Change in the National Development Program Multi-donor fund and other donors projects mutually complementary relationship Assistance to executing agencies (line ministries) 2.1 Water Resource Management, Water Supply and Sanitation -Watershed management -Water supply and sanitation 2.2 Agriculture 3.3 Improving Spatial Plans 3.4 CDM 3.5 Co- benefits 3.6 Fiscal Incentives 3.7 Early Warning System 2. INDONESIA Climate Change Program Loan