5. Prerequisites of Grant Aid

   Since it is not accompanied by an obligation for repayment, grant aid is extremely advantageous for developing countries, as compared with loan-based aid packages. Naturally, however, certain conditions must be satisfied before a country can be accepted as a recipient of grant aid.
    These conditions are broadly classified into two categories. First, are those conditions used by the Government of Japan as a donor in determining whether or not to extend grant aid (otherwise known as "Criteria for Approval of the Aid Request"). Second are the conditions to be met by the developing country in appropriately implementing the grant aid package (otherwise known as "Conditions for Grant Aid Implementation" and stipulated in the E/N by agreement between the government of the recipient country and the Government of Japan.)

Criteria for Approval of the Aid Request

(1) Eligible Recipient Countries and Regions
    In principle, priority for grant aid is given to developing countries with relatively low income levels. One benchmark adopted for this measure in fiscal 1998 is a per capita GNP (Gross National Product) of less than $1,505 in 1996, according to World Bank statistics.
    Special efforts are being made to extend grant aid programs to Least Less Developed Countries (LLDCs). At present, around 50% of all general grant aid is provided to LLDCs. Analysis of the geographical allocation of grant aid reveals that most aid to date has been provided to Asian countries, with which Japan has strong political, economic, historical, and cultural ties. With the recent pace of economic development in Asian countries, however, the region's share of Japan's total grant aid outlays has been on a declining path, countered by a growing share for the African region, most notably sub-Saharan countries.
    Comparison of the total amounts of grant aid provided per country shows, however, that Asian countries remain priority recipient countries, exemplified by the fact that seven of the ten major recipient countries in fiscal 1997 were from the Asian region.

(2) Eligible Sectors for Grant Aid
   The sectors covered by grant aid are essentially areas of low profitability, where loans would be difficult to obtain, and those that address basic human needs -medical care and public health, domestic water supply, and rural and agricultural development- or human resources development. In the latter sector, special emphasis is being placed on the vital areas of education and research.
    Given that economic conditions in developing countries today are diverse, they also have a variety of aid needs, and endeavors are being made to appropriately address these needs with closely tailored programs.
    By way of example, in sectors such as export promotion to assist in alleviating economic hardship and improving the balance of payments, areas that can be addressed with grant aid are being aggressively identified. While cooperation in the basic infrastructure sector, including transport and communications projects, has hitherto been addressed basically with ODA loans (yen loans), efforts are being made to provide grant aid to countries such as LLDCs in this field on a case by case basis.
    In recent years, global environmental concerns have become a major issue, and grant aid has been strategically used to improve the capabilities of developing countries to address environmental problems and preserve the natural environment.

Conditions for Grant Aid Implementation

(1) Japan's Budget System
    As outlined in the earlier section describing the process of grant aid implementation, Japan issues grant aid under a single-year budgetary framework. Hence, the procedural steps for each project -from commitment (signing of the E/N) to the prospective recipient country, through conclusion of the contract, to payment of funds- must be completed within one fiscal year.
    In practice, however, a special exception to the fiscal laws may be made in certain unavoidable circumstances, for instance, when adverse weather conditions cause delays in construction, or when circumstances affecting the recipient country after the signing of the E/N arise (e.g., change of government, administrative reform, etc). In such cases, implementation of the commitment can be carried over to the next fiscal year and the budget lines Budget for Economic Development Assistance and Budget for Food-Related Assistance may be brought forward to the next fiscal year. In summary, the period of implementation of the aid can be extended up to a maximum of one year by extending the period originally stipulated in the E/N.
    A flexible approach to implementation is adopted for large-scale projects which cannot be completed within one year, either by subdividing them into a number of periods, or by utilizing the Treasury multi-year defraying system which, if approved by the Diet, allows expenditure to be made over several fiscal years.

Example of E/N
     For the purpose of contributing to the execution of the project for (project name) by the Government of (name of the recipient country), the Government of Japan will extend to the Government of (name of the recipient country) a grant up to (amount) yen. The grant will be made available during the period between the date of coming into effect of the present arrangements and 31st March of the fiscal year, unless the period is extended by mutual agreement between the authorities concerned of the two Governments.

(2) Aid Conditions
(i) Contracting Parties
Contracts for General Grant Aid must be made directly between the government of the recipient country (or its designated authority) and a Japanese national corporate entity controlled by Japanese in accordance with the stipulations of the E/N.
A Japanese corporate entity controlled by Japanese nationals must satisfy the following three conditions: a) the corporate entity must be established in accordance with Japanese laws; b) the majority of the stocks or investments in the corporate entity should be either owned or controlled by Japanese nationals; and c) t he majority of the members of the body which makes decisions relating to the execution of the duties of the corporate entity and the majority of the officers who represent the corporation should be Japanese nationals (in the case of joint-stock companies, the majority of its board of directors and the majority of the representative directors should be Japanese nationals).

Example of E/N
    The Government of (name of the recipient country) will enter into the contracts in Japanese yen with Japanese nationals for the purchase of the products and services.

(ii) Verification of the Contract
Verification of the contract involves the following process. Original contract documents are forwarded to Japan, through the embassy in the recipient country. The Grant Aid Division of the Economic Cooperation Bureau of the Ministry of Foreign Affairs then verifies the format and the substance of the contract. The verification process is intended primarily to check that the contract is in compliance with the provisions of the E/N. The major check points are as follows:

· Are the purposes to which the grant funds will be directed appropriate? (e.g., Are goods and services not mentioned in the E/N to be procured? From where will they be procured?)
· Does the contract amount exceed the limit of the funds to be provided?
· Is the contracted party (a Japanese national) appropriate?
· Is it explicitly stated that the contract (as well as any amended contracts to be concluded later as required) will come into force only after verification by the Government of Japan?
· Is the method of payment appropriate?
· Are the mediation and other general clauses adequate?
· Are the obligations of the recipient country, such as exemption from tax liability, in accordance with the stipulations of the E/N?

Example of E/N
    The Government of (name of the recipient country) will enter into the contracts in Japanese yen with Japanese nationals for the purchase of the products and services. Such contracts shall be verified by the Government of Japan to be eligible for the grant.

(iii) Goods and Services to be Procured with the Aid
The procurement of equipment, materials and services with General Grant Aid is not "tied", that is, limited only to Japanese products and services provided by Japanese nationals. Rather, products and services originating in the recipient country may be purchased when the grant aid is intended for construction of facilities. Furthermore, as a rule, goods and services originating in third countries may also be accepted when necessary. In fact, nearly all procurements made with General Grant Aid fall into the latter category of "untied" grants. The "tied" or "untied" nature of goods and services to be procured will be stipulated in the E/N.

Example of E/N
Example 1: Local Untied
    The grant will be used by the Government of (name of the recipient country) properly and exclusively for the purchase of the products of Japan or (name of the recipient country) and the services of Japanese or (name of recipient country) nationals.

Example 2: Third Country Untied
(1) (Example 1 stipulation above).
(2) Notwithstanding the provisions of (1) above, when the two governments deem it necessary, the grant may be used for the purchase of products of the kind which are products of countries other than Japan or (name of the recipient country) and services of the kind which are services of the nationals of the countries other than Japan or (name of the recipient country).

(iv) The Role of the Bank and Issue of the Authorization to Pay
To meet the obligations incurred by the government of the recipient country under the verified contract, the Japanese government remits grant aid funds in yen to a special account opened in a bank in Japan by the government of the recipient country. To this end, the government of the recipient country must conclude an agreement with the bank after the signing of the E/N, a process that occurs within one month in most cases. After the contract is verified, an Authorization to Pay is issued for each contract in accordance with the terms and conditions of the Banking Arrangement.
    The Authorization to Pay is a document that empowers the designated bank to make payments to the Japanese contractor after the recipient country has received a request for payment from the Japanese contractor, made in accordance with the terms and conditions of the verified contract. The recipient country then requests payment for the relevant assistance funds from the Japanese government, and receives payment into a grant account opened by the recipient country's government or its designated authority. By means of this document, the Japanese bank that is the party to the banking agreement can act on behalf of the recipient country's government, to meet requests for payment made by the Japanese contractor.

Example of E/N
(1) The Government of Japan will execute the grant by making payments in Japanese yen to cover the obligations incurred by the Government of (name of the recipient country) under the contracts to account to be opened in the name of the Government of (name of the recipient country) in a bank in Japan designated by the Government of (name of the recipient country).
(2) The payments referred to in sub-paragraph (1) above will be made when payment requests are presented by the bank to the Government of Japan under an authorization to pay issued by the Government of (name of the recipient country).
(3) The sole purpose of the account referred to in sub-paragraph (1) above is to receive the payments in Japanese yen by the Government of Japan, and to pay the Japanese nationals who are parties to the verified contracts. The procedural details concerning credits to and debits from the account will be agreed upon through consultation between the bank and the Government of (name of the recipient country).

(v) Measures to be Taken by the Recipient Country
In implementing a grant aid program, the recipient country is also required to take certain measures. While the specifics of the measures to be taken by the government of the recipient country will depend upon the form of aid, the following list of requirements is typical in the case of building facilities, the most common purpose of this type of aid.

a) Secure the land required for the facility and prepare the land for construction;

b) Provide ancillary facilities and utilities to the boundary of the site, including electricity, water supply, drainage and telephone services;

c) Ensure prompt customs clearance and land transportation for the equipment, goods, and materials required for the aid project;

d) Exempt Japanese nationals working on the aid project from duties, taxes and any other levies and charges;

e) Bear all expenses, other than those for which the grant from Japan will cover, necessary for the completion of the project;

f) Ensure that, after the construction is completed, the facilities are maintained and used properly and effectively for the purpose for which the aid was granted.

    Special attention should be paid to tax exemption measures for Japanese nationals working on the aid project, as mentioned in item d) above. The position taken by the Japanese government is that customs duties, taxes and other levies and charges imposed in the recipient country should not be paid from grant funds provided by Japan. Accordingly, all grant aid hitherto offered by Japan has required exemption from all such taxes and charges. If the legal framework in the country does not allow for exemption from tax to be granted, the recipient country is requested to shoulder the burden. In such circumstances, prepayment of taxes by the Japanese contractor responsible for the aid project and later reimbursement by the recipient country shall, as a general rule, be avoided.
    The nature and scope of tax exemptions will, of course, differ in accordance with the tax laws in the country concerned, but, in principle exemption from income tax and other direct taxes should be granted. Excises levied on equipment and materials purchased locally by the Japanese company should as a matter of principle also be subject to the requirement for exemption. However, if such excises are an integral part of the pricing system and application of an exemption would present technical difficulties, the requirement may be dropped. As well, the requirement for tax exemption will not apply to any personal belongings of Japanese private-sector engineers or other workers engaged in the aid project.

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