The global economy and industrial structure are facing dramatic changes amid the rise of emerging countries, ongoing globalization, the digitization of economies and the progress of innovation. Under these conditions, there continues to be an enormous gap between supply and demand for financing in the global infrastructure field. Due to the SDGs (Sustainable Development Goals*1), there is growing global demand for low carbonization. In order to adequately respond to such a trend, it is important to promote the mobilization of private funds by proactively taking risks in financing, while working on low carbonization and global environmental protection towards reduced environmental burden.
Under such an environment and in accordance with JBIC's Medium-term Business Plan (FY2018–2020) formulated in June 2018, the Infrastructure and Environment Finance Group will collaborate with other financial institutions on identifying and developing the following projects: i) projects that promote innovation of technology, ii) social infrastructure projects such as airports, seaports and railways that are highly important on the policy front, iii) projects for building energy value chains such as for gas and hydrogen and iv) projects for low-carbon infrastructure. Geographically, we will strengthen our business activities in areas such as the Mekong region, South Asia and Africa in addition to regions where many Japanese companies have already expanded.
Managing Executive Officer
Global Head of Infrastructure and Environment Finance Group
Business Environment and Key Challenges
Toward Enhancing International Competitiveness of Japanese Companies
There is enormous global demand for infrastructure, particularly in emerging countries, and overseas markets are expected to continue expanding in response to rapid urbanization and economic growth. On the other hand, there is concern about a shrinking of the domestic market due to further declines in birthrates and aging of the population, which makes it more important for Japanese companies to expand abroad. Moreover, the business environment surrounding Japanese companies is changing significantly as a result of the emergence of new business models driven by innovation of technologies such as the Internet of Things (IoT), Artificial Intelligence (AI) and Big Data. When looking at climate change measures and the environmental field, it is further required to work towards a sustainable world and a low-carbon society.
In view of this business environment, the Infrastructure and Environment Finance Group will strengthen its activities in the following fields.
(1) Growth areas, new fields
In January 2016, the Japanese government announced "Society 5.0," an initiative aimed at solving various social issues utilizing the most advanced latest technologies. This initiative aims at creating a society where people can supply power stably based on power demand forecast "achieve local production of energy consumed locally"; "shift energy supply between regions"; "optimize energy savings at home using supply predictions." The initiative also states that these objectives can be achieved by analyzing data, using AI, such as the operational status of power stations as well as the discharge/charge status of electric vehicles (EVs) and energy usage of every household. With such new type of infrastructure anticipated to be exported from Japan, it is important to take this changing business environment as an opportunity to respond to innovation of technology in a flexible and appropriate manner.
Benefitting from growth in emerging markets is one of the challenges Japan faces. As Japanese companies are expected to further expand overseas, it will be necessary to strengthen relationships with and cultivate markets in countries in the Mekong region, South Asia and Africa, which are defined as "frontier markets" in our Third Medium-term Business Plan.
(2) Support infrastructure projects that are highly important on the policy front
The "Export Strategy for Infrastructure System" revised in June 2019 emphasizes the importance of encouraging Japanese companies with technological strengths and knowledge to go overseas markets not only by exporting equipment, but also by obtaining more orders for infrastructure as systems including design, construction, operation and management of infrastructure as well as increasing investments in local businesses.
(3) Low-carbonization and global environmental preservation
The Paris Agreement, an international framework for cooperative action on climate change after 2020, was adopted in December 2015. Following this, guidelines for implementing the Paris climate accord were developed in December 2018. Against these backdrops, there is rising demand for low-carbon or carbon-free infrastructure across the entire world, including in developing countries. The developing countries are facing demand for high-quality drinking and industrial water due to the progress of rapid urbanization and that for infrastructure for treating increasing volume of waste. In addition to this, plastic rubbish floating in the seas of the world is recognized as a global issue.
Approach to Identifying and Developing Potential Projects
JBIC will strengthen its business activities in the above-mentioned fields and encourage Japanese companies to participate in infrastructure projects and receive orders of infrastructure system by being proactively engaged in identifying and developing potential projects. In order to achieve these objectives, JBIC will take the following actions:
Responding to various risks: Infrastructure projects are considered to be exposed to various risks as the projects are large in size and also require a long time span from the planning and bidding phases of the project to construction and the recovery of invested funds. For example, infrastructure projects might carry a counterparty risk of central or local government of a host country with a low credit rating, i.e. the risk of failure to perform their contractual obligations, as well as a risk of uncertainty in future demand or sales of products and services delivered by the project. Profits generated by infrastructure projects are denominated in local currencies. However, if the domestic financial market of a host country is not mature enough and if they need to rely on long-term overseas financing sources denominated in foreign currencies, a currency exchange risk is also an issue to be addressed. In this case, the investment appetite of investors who are interested in the project might decline or long-term funds enough to implement the project might not be provided by financial institutions.
Promoting to develop bankable projects*2: In recent years, there has been an increase in infrastructure projects on a public-private partnership (PPP) basis. When it comes to the development of projects in cooperation between public and private sectors such as PPP projects and the Build-Operate-Transfer (BOT) model, especially in developing countries, there are cases where risks associated with the projects might not be properly assessed and shared among project participants, including the government of a host country. This results in private-sector participants being exposed to excessive risk. This situation occurs as a result of: i) a lack of integrity and clarity in the legal system in the host country, ii) a lack of ability and experience of the government agencies or organizations of the host country to organize the project, or iii) an absence of proper feasibility studies on the project. Under these circumstances, PPP projects face difficulty in obtaining funds from the private sector and the projects therefore do not progress in the way the host country's government expects. It is pointed out that it is important to share risk among all involved parties in a PPP project in an appropriate and equitable manner.
Mobilizing a wide range of private-sector funds: Global demand for infrastructure is expected to continue growing at a faster pace than actual investments amid economic and population growth and rapid urbanization, especially in emerging countries. To reduce the global demand-supply gap in infrastructure investment, it is indispensable to address the above-mentioned issues as well as mobilize funds from various private-sector financial organizations including life insurance companies, pension funds or investment funds. Financing from Multilateral Development Banks (MDBs) and public financial institutions alone in each country, such as JBIC, is not enough to meet the global demand for infrastructure investment in terms of quantity.
The Infrastructure and Environment Finance Group performed the following activities in FY2018:
(1) Support for building energy value chains
In FY2018, JBIC provided support for a gas-to-power project in West Java, Indonesia, to build a gas power station and related facilities in an integrated manner. This is the first gas-to-power project in Asia supported through project financing*3 as well as the first time for JBIC to finance such a project. In this project, JBIC not only provided financing for building the gas power plant, but also made a proposal to establish the entire gas value chain including construction of LNG gas terminals. As this suggests, JBIC facilitates the transition of energy to gas power generation in the host country and contributes to introducing low carbon energy.
(2) Low-carbonization and global environmental preservation
Apart from the above-mentioned project that helps to introduce low carbon energy, we provided support for the Moray East offshore wind power generation project, the largest renewable energy project, in the U.K. JBIC also provided its fifth credit line under its GREEN Operations to Banco Nacional de Desenvolvimento Econômico e Social (BNDES), Brazilian Development Bank, to finance renewable energy projects in Brazil. JBIC also provided its second credit line under its GREEN Operations to the Central American Bank for Economic Integration (CABEI) to support smart energy projects, such as for maintenance and upgrading of electric power transmission and distribution networks in Central America.
In the field of global environmental preservation, JBIC made a loan to a waste treatment plant project in Sweden using methane fermentation technology. This is the first time for JBIC to offer a loan denominated in Swedish krona. The loan in the local currency helps to reduce foreign exchange risks arising from a currency mismatch between project's revenue and expenditure. In addition to this, the project plans to introduce advanced technology of a Japanese company to utilize biogas generated from waste treatment as fuel. This will also help to protect the global environment.
Through financing for environmental projects, JBIC will contribute to responding to various global environmental problems that have an impact on the global economy, such as economic growth in developing countries, reduced greenhouse gas emissions and climate change measures.
(3) Collaboration with other countries and institutions
As for collaboration with institutions of other countries, JBIC regularly holds policy dialogues with the governments of Indonesia and Mexico. Additionally, in accordance with the Japanese government's "Free and Open Indo-Pacific Strategy," JBIC further expanded a cooperate framework established with U.S.-based Overseas Private Investment Corporation (OPIC) and concluded a memorandum of understanding (MOU) for business cooperation with the Department of Foreign Affairs and Trade (DFAT) and the Export Finance and Insurance Corporation (Efic), both of Australia. Based on this MOU, JBIC promotes projects where Japan, the U.S. and Australia can collaborate in third countries including the Indo-Pacific region. JBIC also signed an MOU with the China Development Bank (CDB) to support projects involving both Japanese and Chinese corporations in third countries. Based on this agreement, JBIC identifies potential projects in third countries and develops bankable projects, while providing financial support according to the global standards for lending for infrastructure projects such as openness, transparency, economic efficiency as well as financial soundness.
In "growth areas, new fields," JBIC signed an MOU for business collaboration with the European Investment Bank (EIB), the European Union's (EU) public financial institution, which also designates innovation of technology and environmental protection including low carbonization as priority areas. JBIC will strengthen support for projects utilizing new technologies, while sharing and deepening its knowledge of financing for innovation.
Regarding its activities in countries in frontier markets, JBIC had the opportunity for meetings with governments of countries such as Vietnam, Bangladesh and Egypt to request their support for facilitating business talks with Japanese companies. Furthermore, JBIC makes efforts to identify potential projects in countries in frontier markets, in collaboration with other institutions, as demonstrated by our continued discussions with the Export Credit Bank of Turkey about potential projects in Africa according to the collaborative framework for businesses in third countries.
- *1International targets for sustainable development by 2030 that were adopted at the UN Summit in September 2015
- *2Projects in which the feasibility, economic performance and the risk burden of involved parties in the relevant project have been confirmed and assured, and the participation of private-sector companies and long-term funding by financial institutions can be expected.
- *3Project finance is a financing scheme in which repayments for a loan are made solely from the cash flows generated by the project.