Yen Loan Projects in India

What is common between the Bhakra Nangal & Hirakud Dams, the Durgapur Steel Plant and the Metro’s at Calcutta & Delhi? -- They were all built using concessional loans under Japan’s Official Development Assistance (ODA), commonly known as “Yen Loans”.

Japan’s first Yen Loan was extended to India in 1958 in the wake of Prime Minister Nehru’s visit to Tokyo, to supplement funds for the Second Five-Year Plan. Since then the flow of ODA loans has steadily increased over the years. Last year's loan-commitment to India peaked to a record Yen 225.130 billion (~ Rs. 1000 Cr. / $ 2.085 billion).

India is now the largest recipient of Yen Loans, having surpassed China in 2003. As of 11th March 2008, 53 projects worth Yen 822.615 billion (i.e., about Rs. 30,436.75 Crores / $7.6 billion, at current rates) are under implementation with Japanese loan assistance. Cumulative Japanese ODA loan commitment to India has reached Yen 2662.56 billion (Rs. 101,497 Cr. / $ 25 billion).

To put these figures in perspective, the World Bank has 63 active projects in India, with a net commitment of about $ 12.7 billion (Jan. 2007). India's annual budget for 2008/09 is Rs. 7.47 trillion ($187.68 billion) and and its GDP crossed $ 1 trillion in April 2007.

Why does the Government of India borrow so much from a bilateral agency? How are the loan-projects selected? How is the money obtained and used? This article attempts to answer some of these fundamental questions.

Government of India has come a long way from the days when it mortgaged its gold reserves to meet a balance of payments crisis. It now sits on a pile of forex reserves worth over $ 300 billion. And yet, every year, it borrows money from the World Bank, ADB and Japanese ODA, especially for building social and physical infrastructure across the country. These “soft-loans” from multilateral and bilateral agencies are cheaper than commercial borrowings but they come with “conditionalties” that are not so easy to swallow, let alone digest. But it is precisely these conditionalities that make the loans worthwhile for the Government of India.

Loan projects are usually implemented under a tough set of guidelines that ensures the implementation of the projects using international best practices in contracting, technology-selection and project management. At the same time, they force the borrower to take a hard look at efficient management of their own institutions and resources. This, of course, is the expectation - the ground realities can turn out to be somewhat different.

Once a Loan Agreement (LA) and Project Memorandum get signed, the ‘die is cast’ and it becomes the template for duration of the project. The scope for political interference, mid-course changes, and corruption is rather limited. After all, this is borrowed money guaranteed by the State, and it has to be repaid.

INSTITUTIONS INVOLVED

The Japan Division at the Bilateral Cooperation Division of Department of Economic Affairs (DEA) at the Indian Ministry of Finance is responsible for raising and monitoring external borrowings. The DEA receives numerous loan requests every year from the states and quasi-government agencies. The proposals include detailed documents justifying the necessity, techno-economic feasibility, environmental & administrative clearances, as well as its relevance to national & state development plans.

On the Japanese side, ODA loans were originally administered directly by the Ministry of Foreign Affairs (MoFA). The Overseas Economic Cooperation Fund (OECF) handled the loans till 1st October 1999 when it was merged with the Japanese Exim Bank (JEXIM) to form Japan Bank for International Cooperation (JBIC), creating an agency with a portfolio of investments & loans totaling Yen 21.750 trillion (Rs. 870,000 Cr. / $ 174 billion).

From 1st October 2008, the yen-loan division of JBIC will be merged into Japan International Cooperation Agency (JICA). About 300 JBIC employees are expected to join JICA's existing workforce of 1400.

THE LOAN CYCLE

Once the applications are short-listed under a list of potential projects called the “Rolling Plan”and sent to the Embassy of Japan. The proposals then follow the following steps in what is broadly known as the “ODA Loan Cycle”-

1. Appraisal by relevant agencies in Government of Japan (GoJ)
2. Submission of a “Prior Notification” or “Pledge” by GoJ to Government of India (GoI)
3. Loan Agreement Consultation for finalizing the terms & conditions
4. “Exchange of Notes” between GoJ and GoI
5. Signing of “Loan Agreement” and “Project Memorandum” – this all important document specifies the legal rights and obligations of all parties concerned, with respect to purpose, scope, content, loan amount, duration, repayment period, procurement & disbursement procedures.
6. Implementation of the Project - Usually begins with the selection of an international Project Management Consultant (PMC) by the Executing Agency (EA-loan recipient), followed by procurement of materials and equipment required for the project.
7. Completion / Ex-post Evaluation and Follow-up - to draw lessons for future projects.
   
   

THE TERMS & CONDITIONS

The Yen Loans are primarily aimed at creating socioeconomic infrastructure. The present rate of interest is 1.2% for general projects and 0.65% to 0.75% for projects in the environment sector. The loans come with a “moratorium period” of 10 years and have to be repaid in 30 years (40 years for environmental projects). In effect, the repayment starts 10 years after the Loan Agreement (LA) and continues for the subsequent 20 or 30 years respectively.

Once a loan is committed, it is the responsibility of the borrower to avail the money within the agreed time frame. In order to improve the availment efficiency rate, and to discourage procrastination, a "Commitment Charge" of 0.1% (half-yearly) has recently been introduced on the undisbursed loan from the date of effectuation of the loan agreement. At the same time, the 0.1% "Service Charges" for each disbursement has been withdrawn.

Interest accrued during the implementation phase (IDC – interest during construction) gets deducted from the loan amount.

In order to ensure transparency and accountability, the borrower has to appoint a renowned international consultant to oversee the project. This consultant, in turn, helps the borrower not only in implementing the project according to the ODA guidelines, but also in generating the necessary progress reports.

Consultants are usually expensive - they get paid up to 3.5% of the loan amount. Borrowers are usually queasy about spending so much of their loan on consultants - especially when they have to be selected only through a QBS (qualifications based selection) process. But the guidelines make it amply clear that their services are required for –

• Pre-investment studies: prioritizing projects, evaluating viability (economic, technical, financial, commercial), environmental & social matters;
• Preparation services: detailed investigations and review;
• Implementation services: supervising procurement procedures & construction work.

For the benefit of borrowers who may need additional help, there is a Special Assistance Facility (SAF) for project formation (SAPROF), for implementation (SAPI), for sustainability (SAPS), and for procurement management.

At the very outset, the loans are divided into “tranches”, and further sliced-up into contracts. Disbursement of the loan is linked to satisfactory implementation of the contracts through any of the following methods –

1. Reimbursement
2. Transfer – Direct payment to contractors on submission of attested “claims”
3. Commitment – Forex payments through a Letter of Credit (LC)
   
4. Special Account – Advance payment to borrower’s account

As soon as the moratorium period is over for each project, the Government of India starts repaying the loan through its designated bank (Bank of India) in Tokyo. All transactions related to disbursements and repayments are overseen by the Comptroller of Aid Accounts & Audit (CAAA – Ministry of Finance).

Until recently, the Indian Ministry of Finance used to pass on the loan to the recipient state government with a certain mark-up, through a complex “70-30” scheme. Following the recommendations of the 12th Finance Commission (1 April 2005), the Yen loans are now passed on to the borrowers “back to back”, at exactly the same rate that was agreed during the Loan Agreement.

A portion of the yen-loans also goes towards private sector investment, business activities in developing countries and development-related research work.

THE PRESENT SCENARIO

As of 10 March 2008, India has 202 active Yen-Loan agreements with the Japanese Government, aggregating to a total of Yen 2,662.56 billion (Rs. 106,502 Crores; ~ $25 billion). The earliest of the loans being repaid by Government of India is a 1976 “Commodity Loan” to DEA. It was a “partially untied” loan of Yen 7 billion (Rs. 280 Cr. today), lent at the rate of 3.5% payable over 25 years, after a moratorium or ‘grace period’ of 7 years. The range and scope of yen-loans has expanded over the years, while the interest rates have come down to the 0.65% - 1.2% range.

The loan projects vary in size and scale. The smallest loan now is Yen 84 million (Rs.3.36 Crores in 1990) towards engineering services for the Indira Gandhi Nahar project, and the largest single Loan Agreement(LA) so far has been for the Delhi Metro – Yen 59.296 billion (Rs. 2372 Cr., 2004).

The top five projects, in terms of amount committed, are –

1. Delhi Mass Rapid Transport Project (V) – Yen 59.296 billion (Rs. 2372 Cr., LA-31/3/2004; RoI 1.3%)
2. Anpara B Thermal Power Station Construction Project – Yen 49.801 billion (Rs. 1992 Cr.; LA 23/01/1991; RoI 2.5%)
3. Bangalore Metro Rail Project – Yen 44.704 billion (Rs. 1788 Cr., LA 31/03/2006; RoI 1.3%)
   
4. Gandhar Gas Based Combined Cycle Power Project (II), NTPC – Yen 42.599 billion (Rs. 1704 Cr.; LA 09/01/1992; RoI 2.6%)
5. Hyderabad Outer Ring Road Project Phase-I – Yen 41.853 billion (Rs. 1674 Cr.; LA 10/03/2008; RoI 1.2%)

Even a cursory glance at the projects reveals that some states are better than others when it comes to wooing external lenders. Presently, Uttar Pradesh leads the pack with 17 projects, taking 13.77% of the loan-pie. UP is followed by Andhra Pradesh (12.95%), Delhi (11.96%), West Bengal (9.37%) and Karnataka (8.52%).

The distribution of loans is closely linked to the priorities of both governments, as well as the ability of borrowers to make convincing, competitive packages of their loan requirements.

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Note 1: Exchange rate used - Yen 100 = Rs.40; $1 = Rs.40
Note 2: Japanese ODA & China - Even though net ODA to China has been declining since 2001, China continues to top the list of borrowers. As of December 2007, China had 365 active yen-loan projects, worth Yen 3316.48 billion (Rs. 132,660 Cr. / $ 34 billion) - about $10b more than India.

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References / Links:

* Indian Ministry of Finance - Department of Economic Affairs (DEA) – Japan Division
* Outline of Japan’s ODA to India - Ministry of Foreign Affairs (MoFA), Japan
* “Japan’s ODA Loans – 50 Years in India” – Booklet printed by JBIC in 2008

* “World Bank to Help India Achieve UN Goals”, IANS/IndiaPRwire, 12.02.2007

* Message from the JBIC Governor – Hiroshi Yasuda, JBIC Review (PDF)
* JBIC Financial Statement FY ending March 2008 - JBIC Homepage

* JBIC Homepage- Economic Cooperation (ODA) Division
* JBIC - Types of Japanese ODA Loans
* ODA Project Cycle
* ODA - Special Assistance Facility
* "Japan Cutting Yen Loans to China" - Reuters - 6 March 2007
* Overview of Japan's ODA to China : MoFA-Japan
* Country Assistance Program for India (2006): MoFA-Japan

* Aid Audits & Accounts Division, DEA, Ministry of Finance (India)
* "What Caused the 1991 Currency Crisis in India?" - IMF Staff Papers

* JBIC-Watch - An NGO network for monitoring Yen-Loan projects