6. Classification of Grant Aid

    The Japanese government's budgetary classification of Grant Aid comprises six categories: (i) General Grant Aid, (ii) Grant Aid for Fisheries, (iii) Emergency Grant Aid, (iv) Grant Aid for Cultural Activities, (v) Food Aid, and (vi) Aid for Increase of Food Production. According to the broader classification scheme used in formulating government budget items, types (i) through (iv) are included in the Budget for Economic Development Assistance, while types (v) and (vi) are included in the Budget for Food-Related Assistance.

General Grant Aid

    As explained earlier, General Grant Aid is the name given to a diverse range of grant aid offered in sectors other than the specific categories of fisheries, cultural activities, disaster relief and food. Measured by the size of its budget allocation, General Grant Aid constitutes the central core of grant aid extended by Japan. This form of assistance includes: Grant Assistance for General Projects, Grant Aid for Debt Relief, targeting developing countries faced with serious debt repayment problems, Non-project Grant Aid for Structural Adjustment Support, designed to assist countries in Africa and elsewhere that are attempting to implement economic structural adjustment policies, and Grant Assistance for Grassroots Projects, intended to support relatively small-scale projects implemented by NGOs and other organizations in developing countries.
    Broadly speaking, the sectors covered by Grant Assistance for General Projects comprise (i) medical care and health, (ii) education and research, (iii) agriculture, (iv) public welfare and environmental improvement, and (v) transport and communications.
    Analysis of individual projects in these sectors shows that they tend to be scarcely profitable, and as a result, present investment challenges for developing countries, either using their own or loaned funds. Typically, such projects are either directly related to the improvement of living standards or contribute to human resources development. In response to the increasingly diverse needs of recipient countries, aid has recently been extended in sectors such as export promotion and, for countries such as LLDCs, cooperation has also been extended for basic infrastructure projects such as bridges and roads.
    The following list presents some examples of successful projects completed to date using Grant Assistance for General Projects.

(i) Medical Care and Public Health
Biomedical research center, community medical center, teaching hospital, tuberculosis research center, medical research center, gastrointestinal disease research center, rehabilitation center for the physically handicapped, nursing school, and free child health services.

(ii) Education and Research
Experimental equipment and materials for an engineering college, equipment and materials for selected research centers, technical training schools, construction of elementary and junior secondary schools, and educational and cultural centers.

(iii) Agriculture
Research building for a central agricultural research laboratory, experimental and training facilities for an experimental rice farm, citrus and vegetable seed research center, wheat research center, research center for the popularization and development of agricultural techniques, regional education center, irrigation system for a mulberry plantation, foodstuff warehouses, rice hulling and cleaning facilities, a facility for manufacturing foot and mouth vaccine, a forestry seedling training center, and a plant genetic resource center.

(iv) Public Welfare and Environmental Improvement
Well-digging equipment, construction of a water supply and sewerage system, construction of small-scale hydropower facilities, projects to develop domestic water supplies, and projects to improve regional environmental hygiene.

(v) Transport and Communications
Telephone and other communications facilities, a television station, a domestic telecommunications network, a telecommunications research center, equipment and materials for repairing a road network, and bolstering transport capacity.

(vi) Export Promotion
A trade training center, metal processing and machining industry, and research and development center.

(vii) Basic Infrastructure in Countries such as LLDCs
Bridge construction, communications.

Grant Aid for Fisheries

    Briefly, this form of aid is intended to foster the development of fishing industries in developing countries. It provides funds for cooperation with such fisheries-related projects as the construction of fishery training centers, training vessels, fishing port and harbor facilities, and fishery research centers.
    In order to address the increasingly serious food problems that have become evident in recent times, developing countries are not only seeking to boost agricultural production, but are also attaching greater importance to the promotion of fisheries, with a view to the development and utilization of marine resources as a source of protein. In many cases, however, developing countries lack the capital, technology, and experience to promote fisheries and develop a fishing industry, and they are often unable to adequately develop and harness the available resources. Since Japan possesses world-leading fishery technology and ample experience in this field, it is frequently asked for cooperation in fishery development projects. Providing grant aid to these projects in response to such requests is a highly significant gesture, as it contributes to the economic and social development of developing countries, and also to maintaining and enhancing friendly relationships in the fishing industry with such countries.
    Many developing countries are seeking the correct path for the development of their fisheries industry, but due to a lack of experience, some appear to struggle. Japan's policy in such cases is to, first, gain a thorough understanding of the actual conditions of the fisheries industry in these countries. By taking into account the technological level of the fisheries industry in the developing country, Japan endeavors to offer cooperation for projects which are particularly suited to each specific location, thus contributing directly to the promotion of the fisheries industry in that country.
    Aid provided by Japan within the framework of this program includes funds required for supply of equipment and materials for the promotion of the fishing industry (e.g., fishing tackle, simple refrigerators, ice-making machines, cold-storage trucks), equipment and materials for fisheries research, outboard motors, small fishing boats, fisheries training vessels, fisheries survey ships, and funds for the construction of such facilities as fisheries training colleges, marine industry centers, research stations, fish farms, and fisheries industry centers.

Grant Aid for Disaster Relief (Emergency Aid)

    This form of aid is intended to provide urgent relief to assist victims of natural disaster and refugees or displaced persons in overseas trouble spots. Emergency aid may be provided directly to the government of the affected country or, indirectly, through the Japanese Red Cross Society or other international organizations. When calamities in developing countries such as earthquake, flood, or rebellion result in large numbers of victims, refugees, or displaced persons, the affected countries frequently seek disaster relief from Japan either directly or indirectly through international organizations. The Ministry of Foreign Affairs will consider the request for relief forthcoming from either the affected country or international organization, taking into account information provided by the local Japanese embassy, to determine whether the aid is needed, and if so, the amount and nature thereof. The Ministry of Foreign Affairs will then consult the Ministry of Finance regarding implementation. Several sources and forms of data play a key role in arriving at a decision on whether to extend this form of aid, including the death toll and other information on the extent of the disaster, and international public opinion, as reflected by the relief measures taken by other countries. Once the decision is made to provide disaster relief, the Japanese embassy in the particular country promptly exchanges a verbal note with the recipient country or international organization, in accordance with instructions issued by the Ministry of Foreign Affairs, and the flow of funds begins. Meanwhile, the Minister for Foreign Affairs makes an announcement in Cabinet to the effect that emergency aid is to be provided to the stricken country. Because of the nature of this form of aid, being one that demands urgent action, the required procedures for its implementation are extremely simple, unlike the normal steps adopted for General Grant Aid.

Grant Aid for Cultural Activities

    Formally known as Cultural Grant Aid, Japan began providing this form of aid in FY1975 as part of the country's program of international cooperation for cultural exchange.
    The intention of Grant Aid for Cultural Activities is to provide funds to purchase equipment and materials to be used in the promotion of education and research, preservation and utilization of cultural assets and relics, and for public performances and exhibitions of a cultural nature in developing countries. The upper limit for funding for this form of aid is ¥50 million for each project.
    The procedures for implementing grant aid for cultural activities are largely similar to those for General Grant Aid, except for one important difference; prior Cabinet approval is not required. Such approval is not needed because this form of aid is relatively uniform and simple in nature and because projects are required to be small in scale, valued at under ¥50 million. Prior Cabinet approval is thus not needed, and reports are submitted en bloc to Cabinet at an appropriate occasion after the aid agreements have been concluded.

New Types of Grant Aid (as a part of General Grant Aid)

(1) Grant Assistance for Grassroots Projects
    Grant Assistance for Grassroots Projects has now been made available to cover the cost of relatively small projects for which assistance under the Grant Assistance for General Projects has been difficult to obtain. This program enables assistance that better meets the diverse requirements of developing countries. Japanese embassies, which are well acquainted with the social and economic conditions of their respective locations, address requests made by local public bodies, research organizations, medical institutions or NGOs operating in developing countries.
    The program was first introduced in FY1989 following a recommendation in the First Administrative Inspection Report on ODA to establish such a grant aid system for grassroots projects, in light of the fact that the assistance needs of developing countries are becoming increasingly diverse and because other major donor countries have enjoyed significant diplomatic successes by providing small but flexible grant aid to NGOs and other organizations. A total of 95 projects valued at approximately ¥300 million were implemented in 32 different countries in the first year, FY1989. The budget allocation for the program has continued to grow each year, amounting to ¥5,000 million in FY1997. The Grant Assistance for Grassroots Projects has attracted significant local acclaim as a form of well-tailored aid.
    The implementation mechanism for this grant assistance scheme is described below.

(i) Evaluation of Aid Requests
Grant Assistance for Grassroots Projects is intended to address the diverse requirements of developing countries. It presupposes a relevant request to a Japanese embassy by a local public body, research organization, medical institution or NGOs operating in the country concerned.
    Upon receipt of such an initial request, Japanese embassy staff screen potential candidates for assistance by examining the suitability of the applicant organization and the details, scale and expected socioeconomic outcomes of the proposed project, as well as the diplomatic benefits for Japan in the event that the project goes ahead.

(ii) Conclusion of Contract with Applicant Organization
Following a favorable decision to provide funds for a project, a grant contract is concluded between the Japanese embassy and applicant organization, specifying the name, objectives and details of the project, the name of the applicant organization, the maximum amount of funds to be provided, the uses to which the funds will be put, and the conditions attached to the grant to ensure that the funds provided are used in an appropriate manner.

(iii) Provision of Funds
Once it has signed the grant contract, the applicant organization (hereinafter referred to as the recipient), concludes a contract with a private company for the procurement of goods and services. If a formal contract is not possible, a written quotation must be submitted. The Japanese embassy checks the prices of the goods and services detailed in the contract or quotation, then provides funds up to the maximum amount specified in the grant contract.

(iv) After Project Implementation
Following the commencement of implementation, the recipient is required to submit reports on the status of the project and the Japanese embassy is required to carry out onsite checks at the project site, to ensure the appropriate use of the grant funds.

Volume of Grant Assistance for Grassroots Projects

(2) Non-project Grant Aid for Economic Structural Adjustment Support (Non-project Grant Aid)
    Some developing countries, including those in sub-Saharan Africa, are struggling under the weight of grave economic problems such as spiraling external debt and growing balance of payments deficits, caused by population growth, sluggish production, and inefficient economic and fiscal management. To overcome these problems, it is vital that developing countries themselves have a firm resolve to carry out structural improvement of their economies, assisted by a financial commitment by industrialized countries. Faced with this challenge, the World Bank, IMF and other donor countries have been bolstering their non-project type assistance programs since the late 1980s to assist the economic structural adjustment process in developing countries.
    Against this background, Japan resolved in its Urgent Economic Measures issued in May 1987, to make available some $500 million over three years to countries in Africa and elsewhere as Non-project Grant Aid for Economic Structural Adjustment (Non-project Grant Aid), a commitment that was announced at the Venice Summit. In accordance with its pledge, Japan donated ¥61.7 billion in the three years from FY1987 through FY1989 to 26 countries in Africa, achieving its original target of providing some $500 million in this period. Despite receiving this substantial aid, however, developing countries in Africa and other regions have found it impossible to free themselves from their serious economic difficulties, requiring further assistance for structural improvement measures with more immediate benefits. At the Arch Summit in July 1989, Japan announced its commitment to provide a second phase of Non-project Grant Aid to the tune of some $600 million over a three year period commencing in FY1990. True to its commitment, Japan donated ¥79 billion in the three years up to 1992 to 34 countries in Africa, Asia, and Central and South America.
    Due to the excellent outcomes of the second phase of Non-project Grant Aid, widespread acclaim for the program from both recipient and major donor countries alike, and an awareness of ongoing demand, Japan announced a further commitment at the Munich Economic Summit of 1991 to extend similar grant aid in the amount of between $650 million and $700 million over the three-year period commencing in FY1993. Japan again attained its target in this period, providing a total of ¥78.8 billion in aid to a growing band of recipient countries, including some in Central Asia, the Middle East, Eastern Europe, and Oceania, in addition to the more traditional recipients in Africa, Asia, and Central and South America. Japan eschewed three-year programs in 1996, preferring instead to make its commitments for single-year periods.

(i) Disbursement of Funds
Following the signing of the E/N, grant funds are remitted to an account opened in the name of the government of the recipient country at a bank in Japan. As a general principle, the recipient country's government must use the grant aid funds within one year of its disbursement. Any funds remaining after this period are to be returned to the Japanese Government.

(ii) Procurement by a Third Party
To ensure the appropriateness and transparency of the procurement process when grant aid is involved, goods and services shall be purchased by an independent third party procurement agency on behalf of the recipient country. As a rule, for procurement in English-speaking African countries, the British procurement agency Crown Agents is entrusted with this role. Similarly, the United Nations Office for Procurement Services (UNOPS) carries out this function for Francophone Africa and Central and South America, and the Japan International Cooperation System (JICS) is charged with the duty in Asian countries.

(iii) Procurement Methods
Goods and services to be procured with Non-project Grant Aid can be sourced from any country or region, except the recipient country. As a general rule, procurement is conducted by international tender, pursuant to the tendering guidelines adopted by the responsible procurement agency. The procurement agency concludes contracts with suppliers and acts as the conduit for payments.

(iv) Procurement Items
Items eligible for procurement under this grant aid program are broadly defined as those contributing to the economic structural adjustment of the developing country, and deemed appropriate by prior agreement between the governments of Japan and the recipient country. Items which cannot be procured using Non-project Grant Aid include military goods, luxury items, sophisticated products that demand additional technical cooperation, buildings, facilities and other project-type items, and commodities for immediate consumption such as clothing.

Mechanism of Non-project Grant Aid

(v) Obligation to Set Aside Counterpart Funds
Similar to the situation for KR (Kennedy Round) aid and 2KR (Second Kennedy Round) aid programs, the recipient country's government is required to set aside the amount equivalent to the F.O.B price of the products purchased under the grant in local currency as counterpart funds under the terms of the Non-project Grant Aid. These funds are used for socioeconomic development purposes in the recipient country.

(3) Grant Aid for Debt Relief
    The third session of the 9th Trade Development Board (TDB) of the United Nations Conference on Trade and Development (UNCTAD) held in March 1978 passed a resolution encouraging donor countries to implement measures to ease the conditions attached to existing or earlier bilateral loan agreements or take alternative equivalent steps to relieve the burden on the many poorer developing countries facing serious debt repayment difficulties (TDB Resolution 165 (S-IX)).
    In compliance with this resolution, Japan began in FY1978 to provide new grant aid for the purpose of debt relief to LLDCs and MSACs that had concluded yen loans with the Japanese Government in FY1977 or earlier. When the debts on yen loans are repaid by the eligible developing countries for LLDCs, the amount of the new grant aid is equivalent to the total principal plus interest, while for MSACs, the funds provided is equivalent to the adjusted interest component of the repayment obligation (the difference between the real accrued interest and the interest that would have accrued if a lower rate had been agreed).
    The Japanese government announced its intention to extend the scope of its debt relief program in the 4th Medium-term ODA Targets document prepared in June 1988, noting the importance of these measures in assisting LLDCs. The measures involved extending the debt relief program implemented with LLDCs for yen loans up to FY1977 to cover yen loans provided from FY1978 through FY1987. Formal announcement of the measure, which commenced in FY1989, was made at the Toronto Summit. Through this measure, yen loans totaling some ¥680 billion ($5.5 billion) were included in the scope of the grant aid for debt relief to eligible LLDC countries under the scheme. At present, 20 LLDCs and six MSACs are benefiting from this type of grant aid.
    This aid is provided in the form of an untied cash grant, which the recipient country can use to purchase commodities from foreign countries, thereby improving its balance of payments problem. One requirement of the Grant Aid for Debt Relief is that the Japanese government and recipient country must agree on the list of items to be purchased prior to the signing of the E/N. Items can be procured from either any OECD member country, or from any developing country (except the recipient country) included in DAC statistics.
    Once the debt repayment in the fiscal year has been confirmed by the Japanese government, the grant funds are disbursed by the Japanese government into a bank account opened by the recipient country.

Food Aid

    Japan's food aid program is implemented in accordance with the Food Aid Convention of 1995. The food aid budget for FY1998 was approximately ¥14.4 billion, and together with ¥25.3 billion earmarked as Grant Aid for Increase of Food Production is included in the government's budget item, Budget for Food-related Assistance. The Food Aid Convention is an international agreement which stipulates the quantities of grain to be provided by convention signatories to developing countries facing serious food shortage problems. The members of the Food Aid Convention are presently Argentina, Australia, Canada, Japan, Norway, Switzerland, the United States of America, and the European Union and its member states. The total annual contribution required under the Convention is a minimum of 5,350,000 tonnes. Japan is obliged to contribute 300,000 tonnes per annum and, under the terms of the Convention, can meet this obligation by providing funds with which developing countries can purchase grain supplies. Hence, Japan fulfills its food aid obligations under the cash-conversion formula laid down in the Convention by providing funds to developing countries to enable them to purchase the equivalent of 300,000 tonnes of wheat equivalent grain.
    Food Aid is also known as KR aid, for the Food Aid Convention was first established at the Kennedy Round of GATT negotiations, which spanned the period 1964 through 1967. At the time, approximately one-third of the volume of wheat traded was handled in the form of special trade that included food aid. The agreement struck at GATT stipulated that food aid should not have adverse effects upon either agricultural production of the developing countries themselves or international trade itself, an outcome that was assured by including food aid in the Grain Agreement. The Food Aid Convention was incorporated into the Grain Agreement of 1967, one of the successful outcomes of the KR negotiations. The Convention has subsequently stood the test of time, being amended in 1971, 1980, 1986, and is now in its current manifestation, the 1995 Food Aid Convention.

(1) Supply Format and Method for Food Aid
    Aid under the Food Aid Convention was formerly provided in the form of either wheat or coarse grain (e.g., rye, barley, oats, maize, sorghum). In the present Food Aid Convention, however, rice and secondary wheat products have been included in addition to wheat and coarse grain as eligible food products. Similar to the situation for grant aid described earlier, Food Aid is not supplied in kind. Rather, the government of the recipient country concludes contracts with Japanese suppliers for the purchase of grains, and the Japanese government later meets the financial obligations incurred by the recipient country in accordance with these contracts. In 1973, a budgetary measure was adopted to reduce the burden on developing countries and facilitate more efficient implementation of the aid, with part or all of the freight and insurance costs being shouldered by Japan.

(2) Implementation of Food Aid
    A large number of countries are potentially eligible to receive Food Aid. Requests for Food Aid presented through diplomatic channels are first scrutinized for eligibility, the determining factors being the food shortage circumstances in the country (e.g., production output, imports, aid offered by other countries), the economic and social conditions, balance of payments situation, and relations with Japan.
    The process of implementation of aid is described below. Once the government's budget has been approved, requests for Food Aid from developing countries are comprehensively scrutinized by the Ministry of Foreign Affairs and a draft plan for the distribution of aid to each country submitting a request is drawn up. The governments of developing countries are usually notified through the relevant Japanese embassy of the amount of the aid to be provided, and of the type of grain, transportation costs, and their obligation to set aside counterpart funds (to be described later). As far as the type of grain is concerned, the wishes of the developing country are respected as a rule.

Grant Aid for Increase of Food Production

    The most critical factor for solving food shortages in developing countries is undoubtedly the encouragement of self-reliant efforts aimed at increasing food production. To support such efforts, Japan began in fiscal 1977 to provide developing countries with supplies of selected agricultural equipment and materials to aid in boosting food production. Eligible agricultural supplies under this aid program include fertilizers, agrochemicals and agricultural machinery.
    Agricultural equipment and materials were formerly supplied as part of the food aid program, and under the new framework of Grant Aid for Increase of Food Production from FY1977 onward. Under the latter arrangement, this type of aid, together with the various forms of agricultural project aid implemented under the General Grant Aid program, has made a substantial contribution to those developing countries with agricultural development as a priority. Agricultural commodities furnished under the Grant Aid for Increase of Food Production are not limited to fertilizers, agrochemicals, and farm implements, but may also include transportation vehicles, and agricultural machinery, for example, cultivators, tractors, agrochemical sprayers, threshers, trucks, trenchers, and pumps.

(1) The Decision to Implement Aid for Increase of Food Production
    The developing countries eligible for this form of aid are those already engaged in self-reliant efforts to increase food production. Factors taken into consideration in determining a developing country's success or otherwise in gaining aid funds under this program include the country's overall food picture, economic situation, plans to boost food production, and the state of its relations with Japan. As well, in light of the purpose of this aid program, consideration is given to whether the goods donated by Japan will be effectively used in accordance with a well-defined plan for increasing the country's food production. To insure that the benefits of the aid are long-lasting, importance is attached to the relationship between this aid and Japan's technical cooperation programs in agriculture.

(2) Implementation of the Aid Program
    The implementation process for the Grant Aid for Increase of Food Production is similar to that employed for General Grant Aid and Food Aid. Prior to receiving aid funds, the government of the developing country must present to the Ministry of Foreign Affairs, via the Japanese embassy, specific information on its proposed project to increase food production (this will include the nature and quantities of materials required for the project), the destination region for the aid, (the reason for selecting the region and its relationship to agricultural technical cooperation programs) and other relevant data. The procedures for aid implementation are similar to those for General Grant Aid. In order to assess the specific benefits in terms of increase of food production, the recipient country may be required to present reports from time to time, or survey teams may be sent to perform an in-country assessment.

(3) Counterpart Funds Obligation
    Under both the Food Aid and Grant Aid for Increase of Food Production schemes, the recipient country is obliged to set aside funds in local currency, an amount equivalent to (at least an amount equivalent to two thirds of) the FOB value of the aid provided by Japan. These funds are used in other social and economic development projects, including agricultural development programs. Selection of the projects, for which these funds are to be used, is carried out in advance, after consultation between the government of the recipient country and the Government of Japan.

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