- Japanese investment in Asean infrastructure is set to rise. The Japan Bank for International Cooperation (JBIC) has changed its lending rules to allow higher risk investment through a special account. We expect this type of investment to continue to rise in coming years.
- Power and transport infrastructure projects are likely to be the main targets for Japanese firms. JBIC currently has ¥1.6tn ($15bn) in outstanding commitments to Asean countries, with much of the investment in power plants and other power-related infrastructure.
- The rule change will allow Japanese companies to better compete for contracts with Chinese competitors, as the two rivals vie for influence across Asean.
The Japanese parliament approved a milestone change to the operating charter of JBIC on May 11. The Act for the Partial Amendment of the JBIC Act will be a boon for Asean, as it allows the bank to make riskier infrastructure investments through a special account. Many projects in Asean previously fell foul of stringent credit standards but now Japanese firms investing in the region with the support of the government — a cohort referred to as Japan Inc — will be able to compete more aggressively with rivals from China.
Bridging a financing gap
JBIC is the principal government entity providing support for overseas investments by Japanese corporations, funding projects that would be too large or risky for private-sector banks to support on their own or at interest rates acceptable to the borrowers. The organisation prioritises investments that secure natural and energy resources for Japan.
Yet unlike the Japan International Cooperation Agency (JICA), which funds international development projects that may not be profitable, JBIC must judge applications commercially viable. The JBIC amendment in effect bridges the gap between JBIC’s standard financing and the official development assistance loans provided by JICA.
JBIC disbursed ¥2.6tn in fiscal 2014-15 and ¥2.6tn in 2013-14, more than twice as much as JICA, which disbursed ¥1.1tn in fiscal 2014-15 and ¥1tn the previous year.
Under the revised charter, JBIC may finance infrastructure projects that benefit a country’s economy and will generate revenue but do not independently meet the bank’s strict credit requirements for commercial viability and cash flow. The bank’s standard funding requires that potential investments display a sufficient ability to repay loans on their own merit, on a project-level (rather than a company-level) basis and demands co-investment from the private sector — normally from one or more Japanese banks — generally funding at most 60 per cent of the debt for any individual project.
These new investments will be made through a special JBIC fund. As with the rest of JBIC’s operations, funding is approved on an annual basis, but the bank is expected to make its first investments through this fund in the current fiscal year 2016 (to March 2017), and to increase its investment significantly thereafter. JBIC is also making efforts to ramp up local currency loans and support for small and medium enterprises (SMEs).
JBIC approved ¥259bn in new commitments to Southeast Asia in fiscal 2014-15, and ¥304bn in fiscal 2013-14. However, a single large-scale power or high-speed rail project can exceed these entire annual totals, suggesting that looser JBIC lending requirements will be a boon for Southeast Asia.
For example, earlier this month JBIC committed $2bn (¥212bn) to fund a large 2,000 megawatt coal-fired power plant in Batang, Indonesia. The project, which will cost $3.4bn in total, will be built and operated by Bhimasena Power Indonesia (BPI), a joint venture between Indonesia’s Adaro Energy and Japan’s Itochu Corp and Electric Power Development Company.
While this project had been in discussion since 2012 and was approved under the regular JBIC lending criteria, the higher risk tolerance standards will make large investments of this nature more readily possible.
Removing a handicap in competition with China
The JBIC amendment is part of a broader initiative by Shinzo Abe’s government called the Quality Infrastructure Initiative. The plan calls for approximately $110bn in new investment in infrastructure in Asia for the period from 2016 to 2020, a 30 per cent increase over the previous five years. The scheme includes increased lending by JBIC, the Asian Development Bank — which is mainly funded by Japan — and JICA.
The amendment will help keep Japanese bids competitive for large infrastructure investments such as the Kuala Lumpur-Singapore high-speed rail project.
JBIC’s relatively strict credit requirements had limited its ability to invest in certain infrastructure projects that would be profitable for the Japanese firms involved but had overly long repayment horizons or faced other uncertainties, such as the risk of non-payment by a local government. As a result, Japan Inc, though active in infrastructure investments in Asean and elsewhere, has struggled to compete with the terms offered by the more overtly mercantilist Chinese.
This was best illustrated by the failure of Japanese bidders to win the tender for the planned Jakarta-Bandung high-speed railway, which instead went to a Chinese consortium. The Chinese government, through the China Development Bank, agreed to forgo a sovereign guarantee from the Indonesian government, while the JBIC-led consortium required one in order to meet its credit standards.
Power and transport to attract further funding
JBIC (and its predecessor, the Japan Finance Corporation) has nonetheless been very active in Asean over the past few decades. As of fiscal 2014-15, the bank had ¥1.6tn in outstanding loan and equity commitments across 343 projects in Southeast Asia (see chart), accounting for 11.2 per cent of JBIC’s current financial commitments. Indonesia is the beneficiary of nearly half of its regional commitments.
We expect the new funding to follow the existing flow of Japanese investment in power-related infrastructure, as well as into transport projects. JBIC has invested heavily in power in Asean. Recent projects include thermal, geothermal and hydroelectric power plants in Indonesia, coal and gas power plants in Vietnam and a combined cycle power plant in Thailand (see map).
Further investment in transport by Japanese companies will create a virtuous circle, with better infrastructure helping to encourage additional investment. FT Confidential Research has long found that Japanese companies cite insufficient infrastructure as one of the biggest challenges in operating in much of Asean, especially in its least developed areas.
Source : https://next.ft.com
Keyword : Japan Inc, to raise investment, in Asean infrastructure.
