Japan leads the charge

Europe’s bad fortune has been Asia’s opportunity, as infrastructure players from the region have risen to fill the funding gap. Japanese organisations have been at the forefront of this change, writes Mirzaan Jamwal

When the Japanese Cabinet approved the country’s growth strategy in July this year, it formalised the country’s increasing role in Asian infrastructure. 

The ‘Rebirth Strategy for Japan’ shows greater ambition with respect to Asia, with plans to increase the export of integrated infrastructure systems in the region to ¥19.7 trillion (€19.0 billion; $24.7 billion) by 2020. This is to be done through “active engagement in regional development, capacity building to find and formulate projects, and enhanced public financing support”. 

Opportunities in infrastructure have seldom looked as good for Japanese investors – the country has a strong currency, solid deposit base and liquidity, and also strong sponsor relationships to take overseas.


According to the Asian Development Bank, $8 trillion will be required to finance infrastructure development in Asia, and under-investment is creating a bottleneck to economic growth in the region. 

This is an opportunity for Japanese banks, which are already among the top lenders in the region, gaining much of the ground lost by European counterparts since the financial crisis.
But the region has also seen an increase in the volume of deals supported by state-run export credit agencies (ECAs) such as the Japan Bank for International Cooperation (JBIC) and the Export-Import Bank of Korea (KEXIM), which use their ample foreign reserves to support national enterprises in winning  projects in emerging East Asian nations.

James Murray, a partner at law firm Milbank, Tweed, Hadley & McCloy says: “The support of agencies such as JBIC and KEXIM has really filled the funding gap and has facilitated deals that commercial banks wouldn’t be able to do without them in there – for example, long-tenor financings in places like Indonesia at still fairly competitive pricing.”

Murray acted as adviser to JBIC and commercial banks on JBIC’s first project finance loan and guarantee deal, which was designed to help Japanese companies acquire stakes in existing independent power plants (IPPs). The deal was for the acquisition of the CBK power project in the Philippines in 2005. The parties involved were Japanese firm Electric Power Development (J-Power) in a joint venture with Sumitomo Corp, which acquired CBK from the IMPSA (Argentina)-Edison Mission Energy consortium for ¥23 billion.

JBIC’s 2011 annual report shows as of March 2011 the ECA had ¥8,467 billion in outstanding loans and other financing, and ¥2,443.2 billion in outstanding guarantees.  As of March 2012, 28 percent of JBIC’s project finance loan commitments were in Asia, second only to the 33 percent committed to projects in the Americas. Another 20 percent was concentrated in the Middle East.

Sector-wise, the biggest chunk of loans – 46 percent – is committed to power and water projects. Oil, gas and liquid natural gas (LNG) is second, with 18 percent. 

Rajiv Kannan, head of Sumitomo Mitsui Banking Corporation’s (SMBC) new project and export finance department, says that there are three sectors in which SMBC is most active.

Generation deficit 

“One is the resources sector. Particularly with 3/11 in Japan last year the energy mix is changing and the need for import of LNGs is important so we are supporting clients in projects that will lead to import of LNG. Secondly, most Asian countries are still deficient in power generation so that’s another area where our clients are active. The third is resources, which includes mining, iron ore, copper.”

This emphasis is also reflected in ECA lending, as they work together with private banks and contractors to win projects.

According to John Walker, senior managing director, infrastructure, (head of Asia) at Macquarie Group: “Particularly Japan and China are working very effectively to bid for projects from the emerging markets. The lending banks work alongside equity investors in those countries, and alongside EPC [Engineering, Procurement and Construction] and O&M [Operations and Maintenance] to try to make their country’s players the most cost competitive so they can win. And it’s competition across components – the cost of the equity, the cost of the debt, and the quality of the O&M and EPC – and most of these things are being won or lost on the cost of the capital,” he explains.

Some of the ECA players driving infrastructure projects in Asia are Japan’s Nippon Export and Investment Insurance (NEXI) and JBIC; China’s Export-Import Bank of China (CHEXIM) and China Export and Credit Insurance Corporation (Sinosure); and Korea Export-Import Bank (KEXIM) alongside Korea Trade Insurance Corporation (K-Sure).

According to the State Council of the People’s Republic of China, CHEXIM has disbursed $11 billion worth of concessional loans across 76 countries, of which 61 percent was for infrastructure.

KEXIM is also providing increasing support for overseas investment by Korean firms. In 2011 it announced plans to increase total lending to 150 trillion won by 2020, compared with 64 trillion won in 2010. 

There have also been a number of projects, including in the power and mining sectors, that have been co-developed by Japanese and Korean sponsors, or have involved off-take to either or both countries. 

Rise of the locals

Another trend is the rise of local banks in the financing of projects in Asia. Milbank’s Murray says he’s seen more of the smaller regional banks get involved in infrastructure financing over the last year, stepping up and finding a way into deals that they might have been crowded out of previously by the international banks. 

“Some of the infra deals we’re seeing are being done now with a far bigger local partner’s share in the deal. So previously you might have had a local partner taking on 10 or 20 percent of the deal, now it’s quite common in some countries that they take on 30 to 50 percent or a relatively much larger number.

“It’s an interesting development because the way they view country risk will be quite different. For example a Malaysian bank looking to lend in Indonesia might have a more robust view of the country or counterparty risk than, say, a European bank.”

Currency issues often pose significant risks if there is a local currency payment stream but the debt is owed in a different currency. In many developing countries there is no hedging market to speak of so investors need to consider ways of dealing with this risk. 

Walker says: “One of the issues about local lenders is that they don’t have the disadvantage of having to do hedging, which is the disadvantage the international lenders suffer. That’s why in markets like Korea over the last 10 years the local project financing market has been dominated totally by the local lenders.

“The domestic lenders are not a huge presence in the market but they’re lending on a pretty regular basis to power projects, water projects, and they’ve been doing that in Korea for the last 13 years, so if the development of Korea from developing to developed is anything to go by, you can expect the same thing in Indonesia and the Philippines.” 

As emerging Asian markets develop and domestic banks get more involved, there might be a lesser role for international lenders to play. But for now, the bigger regional players are helping to make the transition.

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