The Japan International Cooperation Agency (JICA) is the development aid agency of the Japanese government, tasked with distributing the bulk of Japan’s Overseas Development Assistance (ODA). It is one of the largest bilateral development organizations in the world with 96 overseas offices, projects in 150 developing countries, and approximately USD 1,5 billion approved for Finance and Investment Cooperation in 2019. JICA is increasingly active as a blended finance actor in the Asia-Pacific region.
We spoke to Ms. Megumi Muto, Vice President, and Mr. Hiroyuki Tomita, Deputy Director General, Governance and Peace Building Department, about current blended finance transactions JICA is undertaking, outcome measurement, applying a gender lens to deals, and the challenges JICA faces when engaging in blended finance.
Why has JICA started to put its capital into blended finance transactions instead of doing pure stand-alone grants?
Megumi: Being a bilateral agency, we tend to start our stories from the relationship of Japan with our counterpart country, but more and more we're finding that we cannot reach scale within the scope of bilateral relations only, especially in the era of the Sustainable Development Goals (SDGs). So, we wanted to get into blended finance structures to expand our impact collectively and help achieve the SDGs.
At the same time there is an appetite for blended finance in Japan itself. There's so much pension/institutional capital in Japan. We are an aging society, and increasingly we have many retirement funds that are looking for investment opportunities for purpose. So far, we have been issuing bonds, like social bonds - we've launched a gender bond in September, and that has primarily been the channel, but more and more investors, like these pension funds, require individual structures that give them an opportunity to invest. So, we’re also looking at blended finance as way to appeal to this class of investors.
Can you describe one or two blended deals JICA has been involved in? What was the outcome?
Megumi: Currently we have partnered with the Asian Development Bank (ADB) on an innovative scheme called Leading Asia’s Private Infrastructure Fund (LEAP), an infrastructure co-financing trust fund that aims to increase access to finance for quality-oriented infrastructure projects in Asia, in sectors such as energy, water, wastewater, transport, ICT, and health. LEAP’s unique offering, combining both commercial and concessional capital, is designed to fill critical infrastructure gaps and reduce bankability constraints in a wide range of quality private sector-led infrastructure transactions. JICA has capitalized the fund with $1.5 billion in equity, while ADB deploys and administers the fund’s capital. In this way, we are learning from ADB’s expertise as well as participating as the co-financier for the projects. We see this partnership, with its expansiveness and scale, as something we hope to replicate in the future.
Before our partnership with ADB, we were mostly engaged in individual blended finance transactions on an ad hoc basis. For example, in the 2000s in the Philippines, we teamed up with USAID and set up a water revolving fund so that municipalities’ water utilities could get access to large volumes of private finance. This was possible through a loan JICA made to the Development bank of the Philippines and a guarantee coming from USAID- then Development Credit Authority (DCA), this combination ultimately catalyzed the commercial banking sector within the Philippines to invest. More recently, we teamed up with the European Bank for Reconstruction and Development (EBRD) in establishing a wind farm in Mongolia, which was first initiated by the SoftBank group. The Tsetsii Wind Farm can generate 50 megawatts, enough to cover approximately 5% of Mongolia's energy requirements. The project utilized the Japanese government’s trust fund established in EBRD to fund the necessary substation associated with the project, which was under the Mongolian government.
As we expand our blended finance activities, we are aiming to replicate more ambitious blended finance initiatives, like our partnership with ADB, to do more at scale.
How are outcomes from blended finance transactions measured differently from traditional grant making?
Megumi: There are things that are the same and things that are different. What remains the same is development impact. Whether it’s a straightforward government to government (sovereign) loan, as we have been doing in the past, or blended finance, we always look at the development impact. We measure ex-ante as well as ex-post and we publish the results in an independent evaluation report.
What’s different is that with blended finance we are also aiming to measure the capital mobilized, because we cannot achieve the SDGs at scale with only ODA. We must bring in the private sector as well. I’m part of the technical working groups of OECD-DAC identifying how to measure the capital mobilized. These are ongoing discussions and there are some methodologies developed already, which we will eventually follow and internalize as our key performance indicators. We’re eager to show how we're doing in terms of mobilization, but we’re still in the process of formalizing things.
Does JICA apply a gender lens when making blended finance deals?
Megumi: Right now, we only apply a gender lens to individual deals. We decide ahead of time which deals will specifically target women. We have been an active participant from the very beginning of the 2X challenge, which encourages development finance institutions to ramp-up direct development finance for women lead entrepreneurship. We have participated in funds that target women, for example with fund manager Women’s World Banking, and that is helping us reach women beneficiaries. With Blue Orchard we have also participated in the Japan ASEAN Women Empowerment Fund (JAWEF), which is a blended fund that provides loans to microfinance institutions that serve female entrepreneurs in the ASEAN region.
So, we have deals that specifically support women, but when it comes to gender, we know it’s not enough for specific transactions to target women, we must mainstream a gender lens into all types of projects. We know there is much more work to do there.
As one of the main donor agencies active in blended finance in the Asia Pacific what are some interesting or unexpected challenges you faced?
Megumi: For us there are two types of areas that we think pose different challenges, one is in climate-adaptation/resilient infrastructure and the other is supporting the start-up ecosystem in developing countries.
In terms of the first challenge, historically we have done a lot of concessional finance for traditional government-supported infrastructure, but more and more, blended finance schemes and public private partnerships are required in the areas of green, sustainable, and climate adaptation/resilient infrastructure. But producing a pipeline of bankable infrastructure projects in that arena is really a challenge, because usually they are areas where there isn’t real underlying cash flow. A flood control project doesn’t create cash. So, making something like that blended is a big challenge. Blending in climate adaptation and disaster risk reduction is really a challenge.
Hiroyuki: Based on its long history of government-to-government (G-to-G) concessional finance and technical assistance, JICA has a strong channel to national governments in many sectors. In addition to the current expansion to blended finance, we are now trying to refocus and utilize this G-to-G technical assistance and concessional finance to encourage governments of developing countries to create an enabling environment for social impact start-ups and impact investing. The ultimate goal is to encourage the development of policies that create an ecosystem that provides financial opportunities and enables socially-motivated entrepreneurs to start businesses, and encourage investment into these businesses.
So, JICA is going to work with each national environment to bring about the changes needed to create an ecosystem that supports these start-ups and businesses, and thus mobilize private investment into emerging markets. Now, we are implementing pilot projects in South and Southeast Asian countries.
How do you see JICA’s engagement in blended finance evolving in the future?
Megumi: Blended finance is not the end goal. To achieve the SDGs, we really need to work together with other partners and it is one of the powerful tools available to facilitate that. I believe we can work together with the private sector, combining their capital with our capital, tools, knowledge and ecosystem, to get more capital flowing to the SDGs. We consider blended finance as one of the very promising options for our work moving forward and we really wish to learn from the Convergence community.