Infrastructure and Environment Finance Group

A Message from the Global Head of the Group

It is often noted that there is a huge gap globally between the demand and supply of investment in infrastructure projects. The matter was in fact even mentioned in the G7 Ise-Shima Leaders' Declaration. Since a stable supply of high-quality long-term funds is required to alleviate the gap, JBIC is prepared to provide long-term financing and to work for the further mobilization of long-term private financing.

In terms of project formulation, it is expected that high-quality projects will attract long-term investment by private-sector investors, especially in the case of public-private partnership (PPP) projects. JBIC will strive to develop such projects by partnering with host country governments, international institutions, and other entities.

Under its Medium-term Business Plan (FY2015-2017), JBIC will support the diversification and advancement of overseas infrastructure projects in which Japanese companies participate. JBIC will focus particularly on the power sector, where support shall be extended to what currently is beyond the ability of countries, schemes, and structures to provide. At the same time, JBIC will pursue stronger engagement with social infrastructure projects, such as those involving railroads and water supply, and aggressively work to preserve the global environment by, among other things, mitigating climate change.

Hideo Naito
Managing Executive Officer
Global Head of Infrastructure and Environment Finance Group

 

Business Environment and Priority Issues

Japan's Growth Strategy and the Need to Tap into Overseas Infrastructure Demand

  Participation by a Japanese company in a natural gas-fired combined cycle power plant project and desalination project in Qatar

Global demand for infrastructure development is projected to increase, reflecting economic growth and rapid urbanization in emerging-market countries. Overseas infrastructure demand in the power, nuclear power, ports, as well as the information and communications technology sectors is expected to increase at an annual rate of about 2.2%, 2.4%, 5%, and 4%, respectively.*1

Such demand can be met by expanding Japanese companies' investment in the projects abroad and providing integrated infrastructure systems that involve not only the delivery of infrastructure-related equipment from Japanese companies with advanced and eco-friendly technologies, which they have gained through infrastructure projects in Japan, but also the transfer of expertise in designing, constructing, operating, and managing infrastructure.

Providing such infrastructure systems and investments will contribute to the development of quality economic infrastructure that is necessary for the stability and growth of the global economy. At the same time, it will help Japanese companies expand their business and secure greater market share overseas.

With this in mind, the Japanese government set up three strategic policies: (1) the Japan Revitalization Strategy, endorsed by the Cabinet in June 2013, and revised in June 2016; (2) the Infrastructure Systems Export Strategy, adopted in May 2013 at the Ministerial Meeting on Strategy Relating Infrastructure Export and Economic Cooperation, and revised in May 2016; and (3) the Basic Policy on Economic and Fiscal Management and Reform, endorsed by the Cabinet in June 2013, and revised in June 2016.

The objective is to lead efforts to attain sustainable and robust economic growth in Japan by aggressively capturing the huge global demand for infrastructure through the maximum use of Japan's l eading technologies and know-how.

Under these policies, in May 2015, Japanese Prime Minister Shinzo Abe announced the Partnership for Quality Infrastructure and, in the lead-up to the G7 Ise- Shima Summit in May 2016, the Expanded Partnership for Quality Infrastructure initiative. This latter initiative aims to contribute to the development of high-quality infrastructure around the world, and to facilitate Japan's economic growth through the promotion of infrastructure exports by providing approximately USD 200 billion in funding over the coming five years. Through these initiatives, the Japanese government will strive to make sufficient infrastructure investment in terms of both quality and quantity, by further mobilizing private-sector funds and know-how, in collaboration with various countries and international organizations.

JBIC will continue to actively support the participation of Japanese companies in overseas infrastructure projects by taking advantage of its experience with such projects in a range of fields, including electric power systems, railroads, and water supply systems, and the trusting relationships JBIC has built with host countries over the years. Through such efforts, JBIC will translate the Japanese government's policies into action and contribute to the stability and development of the global and Japanese economy.

Public-Private Partnership-based Infrastructure System Export Strategy

  Participation by a Japanese company in a geothermal power generation project in Iceland

The export of infrastructure systems generates various benefits: orders; footholds for Japanese companies; enhanced supply chains through the development of local infrastructure; and, eventually, local market share.

These exports also entail some major challenges: exposure to fierce international competition; the need for large upfront investments; substantial business risks, such as long recovery periods; and the need to negotiate with host-country governments. It is difficult for private-sector companies to handle these challenges on their own.

Taking these factors into consideration, the Japanese government has promoted integrated public-private efforts and, in the above-mentioned Japan Revitalization Strategy and Infrastructure Systems Export Strategy, it has set a clear target of raising the total value of infrastructure system orders received by Japanese companies to some ¥30 trillion by 2020.

Further, since the government has called on the prime minister and other cabinet ministers to conduct vigorous sales promotions, they have gone so far as to integrate economic missions into their visits to ASEAN member states, the Middle East, North America, Africa, and India. This has resulted in the winning of orders for infrastructure systems and, in FY2014, the total value of orders was approximately ¥19 trillion.*2

The Infrastructure Systems Export Strategy divides emerging-market countries targeted for overseas infrastructure development into three groups: (1) China and ASEAN; (2) Southwest Asia, the Middle East, Russia, the Commonwealth of Independent States (CIS), as well as Central and South America; and (3) Africa. Designating China and ASEAN as top-priority regions, the strategy states that Japan wil l encourage the introduction of high-quality and robust infrastructure systems that lead to greater connectivity within the ASEAN region.

In addition, the Infrastructure Systems Export Strategy calls for promoting Japan's advanced low-carbon technologies overseas, and steadily implementing Actions for Cool Earth: ACE 2.0, a strategy that seeks to provide assistance to developing countries and encourage innovation. These efforts will not only contribute to the economic growth of those countries and the reduction of greenhouse gas (GHG), but also promote the overseas development of infrastructure systems, in which area Japan has a comparative advantage.

Three Challenges Japanese Companies Face in Overseas Infrastructure Projects

As discussed earlier, the Infrastructure Systems Export Strategy, which unites the activities of public and private sectors, is underway and is beginning to produce some positive outcomes. Many Japanese companies face several difficulties when implementing infrastructure projects overseas. These concerns are: (1) the ability to offer competitive prices; (2) a shortage of versatile operators; and (3) the lack of schemes to ensure project feasibility in emerging and developing countries.

The first challenge, the ability to offer competitive prices, can be addressed by shifting the production base for noncore parts to countries where costs are lower, and combining the parts with core parts produced in Japan, as many Japanese companies have already done. Another approach is not to stick to the "All Japan" principle of mobilizing only Japanese entities but to adopt the "Japan Initiative" strategy, by which the best mix of Japanese and foreign products is achieved by using the core part of plants made mainly by Japanese companies with a technological competitive edge, while managing the other parts in cooperation with foreign companies.

The second challenge is most evident in the Japanese water and railway sectors, in which knowledge and expertise related to construction and operation are spread among several companies, including public corporations. There is a shortage of Japanese companies that possess the experience to comprehensively conduct business from upstream operations (creation of master plans) to downstream operations (operation and maintenance of facilities and collection of charges and fees). Therefore, Japanese companies are not always able to adequately meet the needs of host countries that call for integrated plans of infrastructure systems. In the sectors where Japanese companies lack expertise in comprehensive business operations, effective measures may involve establishing international alliances or acquiring overseas companies that will help them accumulate such expertise.

The third challenge is best represented by infrastructure projects in emerging and developing countries, in which there are cases where the system places excessive risks on project owners. These risks include inadequacies in the legal system related to the responsibilities of local governments and state-owned companies in electricity purchase agreements, and insufficient compensation by the local government regarding ridership risks*3 in transportation projects. Furthermore, for construction projects that involve several governments agencies or occur in several local governments, it is not uncommon for the central government to lack the ability to coordinate related parties and monitor the project. Under these conditions, it has to be said that, when looked at from the perspective of a private-sector company considering participating in the project, the feasibility of the project scheme is extremely low, which makes it difficult to obtain private investment for the project.

In these situations, the expected approach is for the public and private sectors to have an extensive exchange of opinions and to form a partnership from the early stages of the project, so that the project will be feasible in the eyes of both parties. By engaging in activities of the host country government as early as the project formulation phase (the early stage when the business plan and risk distribution are proposed by the government) through, for example, creating a company to facilitate project formulation or regular dialogues with the host country government, the Japanese side will be able to offer appropriate support to the host country government in such aspects as the project's basic scheme, as well as its implementation and management. It will also allow the adoption of bidding criteria covering all aspects of the project, including life-cycle costs.*4 These actions will, in turn, increase the probability of developing highly feasible projects that meet the realities and needs of all participants.

JBIC's Activities

Support for Export of Infrastructure Systems

Expectations are rising for JBIC's role in the Japanese government's Infrastructure Systems Export Strategy and Expanded Partnership for Quality Infrastructure initiative. In response to such expectations, JBIC is creating and reinforcing its support system to help Japanese companies overcome any of the above challenges they may confront.

JBIC tries to ensure project feasibility by (1) establishing companies to promote project formulation from the early stages and (2) holding regular dialogues with host country governments.

In the first scheme, JBIC invested in the Delhi-Mumbai Industrial Corridor Development Corporation Limited (DMICDC), which is responsible for developing master plans for the Delhi-Mumbai industrial corridor and conducting feasibility studies for individual projects in the region. JBIC also has set up project development promotion companies in Myanmar and Thailand to play a similar role. Currently, JBIC is holding discussions with the governments of Myanmar and Thailand with regard to day-to-day management of those companies.

Turning to the second scheme, a representative example is the Financial Policy Dialogue held between JBIC and the government of Indonesia. JBIC is expanding the same scheme to other countries (a similar dialogue scheme has already been established with the governments of Mexico and Vietnam). As part of its efforts to ensure the feasibility of infrastructure projects with a long payout time and whose revenues are generated in the local currency, JBIC provides loans in local currencies in order to reduce exchange risks associated with foreign-currency loans borrowed by Japanese project owners, and thus supports stable operations of the projects over the long term.

The Act for Partial Amendment of the Japan Bank for International Cooperation Act (Act No. 41 of 2016) was enacted in May 2016, to enable JBIC to take further risks regarding overseas infrastructures and other foundations for socioeconomic activities; expand its ability to provide loans in local currencies and diversify JBIC's assistance tools. With the strengthening of these functions, JBIC will step up its support for Japanese companies to further facilitate their deployment overseas.

JBIC will remain committed to upgrading and reinforcing its financing functions, which constitute its core business, to better accommodate markets and needs. Also, as an entity that coordinates the needs of the public and the private sector, JBIC will continue to support Japanese companies in a variety of aspects, so that the growing demand for infrastructure overseas will create and increase business opportunities for them.

JBIC's Commitment to Preserving the Global Environment

  Participation by a Japanese company in a offshore wind power generation project in the Netherlands

Achieving economic development compatible with environmental sustainability is now recognized as a common issue facing both developed and emerging countries alike. Thus, there are hopes throughout the world for the implementation of projects that will lead to environmental preservation and improvement. The Paris Agreement was adopted at the 21st Session of the Conference of the Parties to the United Nations Framework Convention on Climate Change (COP 21) in December 2015. It is a new international framework to reduce green house gas, and an alternative to the Kyoto Protocol. It is expected that the agreement will further advance initiatives that seek to combat global warming.

In this field, a wide range of efforts are being undertaken across the world. They include: (1) energy efficiency projects; (2) renewable energy projects using solar, wind, or other renewable sources of power; (3) highly-efficient coal-fired power generation projects that reduce CO2 emissions; (4) urban transportation projects, that help alleviate traffic congestion and air pollution, including rail transit projects; and (5) smart-grid projects aimed to efficiently supply electricity using IT technology, as well as smart-city projects aimed at realizing environmentally sustainable cities.

JBIC supports these efforts through its global promotion of Japan's advanced environmental technologies under the Infrastructure Systems Export Strategy. JBIC's support also goes to (1) projects for developing solar power plants and energy-efficient power plants in emerging-market countries that take advantage of advanced environmental technologies; and (2) projects that entail significant environmental preservation effects, such as those that introduce energy-efficient equipment. JBIC supports these projects with loans, equity participation, and guarantees while mobilizing private financing under the Global action for Reconciling Economic growth and ENvironmental preservation (GREEN) operations.

In addition to supporting the business activities by Japanese companies, JBIC will continue to provide financial support for efforts aimed at global environmental preservation by making most of the GREEN operations.

JBIC's Financing for Infrastructure Projects

JBIC's Financing for Infrastructure Projects

 

Note
  1. *1According to the Infrastructure Systems Export Strategy (2014 revised edition), adopted at the Ministerial Meeting on Strategy Relating Infrastructure Export and Economic Cooperation, held on June 3, 2014.
  2. *2The Fourth Infrastructure Systems Export Strategy Follow-up (Twenty-fourth Ministerial Meeting on Strategy Relating to Infrastructure Export and Economic Cooperation, May 23, 2016).
  3. *3Ridership risk refers to the risk of being unable to secure the minimum number of passengers or users that is necessary to secure project profitability.
  4. *4Life-cycle cost is the sum of all costs throughout a project — including those of maintenance, final dismantling, and disposal — not only for planning, design, and construction, or other costs that emerge in the initial phase of a project.