first railway project finance loan - jbic · pdf filewith jbic and european investment bank...
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SpotLight
With Director Kazushige Gobe and Deputy Director Hideki Hiramoto*,Unit 1, Transportation and Telecommunication FinanceDepartment, Infrastructure Finance Group
Partnering Up with U.K. Intercity Express Programme
British rolling stock made and maintained by a Japanese company
JBIC signed in July 2012 a loan agreement with Agility Trains West Limited in the United Kingdom (U.K.), in which Hitachi, Ltd. (Hitachi) has equity stakes, to fund the Intercity Express Programme (IEP). This is one of the most prominent projects for the British government and is the first Public Private Partnership- (PPP) based project for procurement and maintenance of rolling stock to be undertaken in the U.K. Increased demand to upgrade and replace rolling stock is expected in the foreseeable future, as are greater business opportunities for Japanese companies.
Overcoming the Stagnation Caused byFinancial Crisis
The April 2010 amendment to the Japanese cabinet orderpaved the way for JBIC to support intercity express projectsfor developed countries in which Japanese companies take
part, including the IEP. Although Hitachi had preferential negotiating rights for the IEP, feeling the impact of continuing instability in financial markets triggered by the financial crisis, the newly formed U.K. government at the time had decided to conduct a spending review, which placed the IEP in de facto suspension. Against this backdrop, the Japanese government made the decision to revise the cabinet order to enable JBIC to provide financial support for the IEP. In October 2011, structuring banks for the loan were brought in and negotiations for the project finance began. Nevertheless, the road ahead would not always be straight.
Interest Adjustment Was the Big Hurdle
Many hurdles had to be crossed before the deal was finalized, some of which arose because there were many aspects which were ”firsts” for all participants. The IEP was the first project finance in the railway sector for JBIC, the first rolling stock PPP project for the U.K. government, and the first full-scale PPP project in the U.K. for Hitachi as well. It therefore required the establishing of entirely new precedents satisfactory to all parties. Director Gobe remembers facing “the negotiations with a determination to make the deal a model for future railway
infrastructure finance.” A number of private banks in Japan and the U.K. joinedwith JBIC and European Investment Bank (EIB) in thedeal, and the financing structure became quite complex.Testifying to the complexity, Deputy Director Hiramoto says,“The lawyer specializing in structured finance, who was supporting us in the deal, claimed he’d never seen anything so complicated.” There was a challenge to seek equitable adjustment of interest among the parties, and an agreeable compromise was difficult to reach, prolonging the tough negotiations. “Realizing that the deal was key for the integrated overseas infrastructure deployment promoted by the Japanese government, we faced negotiations with a strong will to succeed,” recalls Director Gobe.
Understanding the True Goal of Our Partner
On July 27, 2012, after protracted discussions and justbefore the London Olympics, the loan agreement was finallysigned. An important factor in the negotiations was to maintain close communication in order to understand the counterparts’ true intention. “As it was the first project in which JBIC had been involved in the U.K. PPP market, we strived hard to comprehend the issues of the counterparts and the priorities of respective issues,” says Director Gobe. On this subject, Deputy Director Hiramoto recalls that “Luckily, as a governmental institution, JBIC was positioned to access various parties. Through synergistic communication, we had firmly established mutual trust between private banks, sponsors, and the U.K.’s Department for Transport, which culminated in bringing the deal to a successful close.” The track record of bringing the deal to a financial close within the given time frame proposed by the U.K. government will have a positive impact on our future projects. To this end, JBIC will continue to support overseas infrastructure projects in which Japanese companies participate.
First Railway Project Finance Loan
Deputy Director Hiramoto
Director Gobe
Project Finance SummaryJBIC signed in July 2012 a loan agreement totaling up to one billionSterling Pounds (JBIC portion) with Agility Trains West Limited,in which Hitachi has equity stakes, to fund the Intercity ExpressProgramme. The project finance loan is co-financed with private financial institutions as well as the EIB for an aggregate total up to 2.2 billion pounds. Nippon Export and Investment Insurance (NEXI) will provide overseas untied loan insurance partially for the loan provided by private financial institutions.
*Deputy Director Hiramoto is currently assigned to the Representative Office in Manila.
JBIC Today
January 2013P
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No part of this magazine may be reproduced without the written permission of JBIC.JBIC publishes this magazine quarterly.Printed in Japan
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JBIC Today January 2013 3
特 集FEATURESpecial
The demand for infrastructure development has never
been greater, not only in emerging countries where
populations and economies are booming but also in
developed countries where antiquated infrastructure is
in dire need of upgrading. Power grids, water and sewage
facilities, railways, airports and telecommunication─
in these and many other related fields, Japanese
companies face intensive competition with enterprises
from developed countries as well as emerging countries.
Given the massive, long-term funds required for
overseas infrastructure development and the financial
constraints of host countries, public private partnerships
(PPP) have become an attractive means of realizing
these projects. However, success depends on several
factors including the proper division of roles between
public and private sectors.
PPP was the main theme of the JBIC Infrastructure
Development Seminar held in October 2012 during the
International Monetary Fund (IMF) and World Bank
Annual Meetings in Tokyo. Some 200 people from
domestic and foreign firms, private financial institutions,
government offices and foreign embassies, etc.,
attended, reflecting a high level of international interest
in the subject.
JBIC has been providing financial support to
Japanese companies for exports of plant components
and for their participation in overseas infrastructure
projects. In this issue, we will examine how the roles
are best divided between public and private
sectors to ensure a successful project outcome.
At the beginning of the JBIC Infrastracture
Development Seminar, Governor Okuda discussed the
JBIC stance on overseas infrastructure development.
Fueled by economic growth, demand for infrastructure
development in emerging countries is expanding, while
at the same time, governments are finding it harder to
fund such projects as they once did. Bridging the growing
gap between the infrastructure investment needed for the
future and the capacity of the public sector to meet those
requirements from conventional public finance sources,
including foreign aid, has been a critical priority for
emerging countries to fully utilize their potential growth.
The strong demand for infrastructure has been seen as a
great new opportunity as the private sector needs to tap
into new engines of growth.
Thus, infrastructure development through the use of
PPP has gained more attention as an attractive alternative
Hiroshi OkudaGovernorJapan Bank for International Cooperation
JBIC Infrastructure Development Seminar held in October 2012
Natural gas-fired combined cycle power plant project, Oman
Subway project, EgyptPort expansion project, South Africa
Power and desalination project, United Arab Emirates
Renewable energy project, India
Division of Roles Between Public and Private SectorsThe Key to Overseas Infrastructure Development─
The Key to Overseas Infrastructure Development─ Division of Roles Between Public and Private Sectors
as one effective measure to deal
with such a widening gap. However,
it should also be noted that a
successful PPP relies heavily on
building an effective institutional
framework in which an adequate
risk-sharing and cooperative
scheme is designed among related
parties, including the public and
private sectors. Moreover, such institutional framework has to
be transparent.
JBIC has extensive experience with infrastructure
development projects around the world. We contribute
to global infrastructure development that would promote
international trade and investment by supplementing the host
government’s effort to introduce an effective institutional
framework towards successful PPP projects and by enriching
our financial menu.
1 A report on the Practitioner’s Review Meeting, Infrastructure System Export
Sub-Group, Trade and Economic Cooperation Committee, Industrial Structure
Council, Ministry of Economy, Trade and Industry (June 2012)2 Asian Development Bank estimate3 Dealogic Project Finance Review: First Nine Months of 2012
Status of Worldwide Infrastructure Development and Fund Procurement
Global infrastructure development is projected to reach
US$24 trillion between 2011 and 20301; in Asia alone, some
US$8 trillion2 will be spent on infrastructure from 2010 to
2020.
To materialize infrastructure projects, a large amount
of long-term stable funding is usually required. According
to an announcement by Dealogic3, the market size for
infrastructure-related project finance (limited-course
finance, PF hereinafter) as of 3Q FY2012 remains about
15% lower than the same period of the previous year,
affected by a series of European debt crises that originated
in Greece. In fund procurement we can also see a shift
from loans to “project bonds,” and in 2012, the ratio of
fund procurement through project bonds in the entire
PF has almost doubled from the previous year (approx.
3.8% in 2011, 7% as of 3Q 2012). Reasons for this include
an increasing need to procure funds from capital markets
through project bonds, etc., rather than those previously
supplied by overseas private financial institutions, which
were major PF bearers but whose long-term funding has
become constrained due to a lower credit rating and the
Basel III regulation. Further, expectations are rising that
Japanese financial institutions, public financial institutions
such as JBIC, and international organizations will enter the
field.
Sharing Risk and Responsibility Between Public and Private Sectors
Infrastructure fund procurement in the form of PPP
occupied about a quarter of all fund procurement in 2011,
up 25% from the previous year. One reason is an increasing
awareness, especially in emerging countries, that reducing
the debt of one’s own country and promoting infrastructure
development using private sector funds is crucial to
achieving sustainable growth. Various systems have been
developed in emerging countries to pursue infrastructure
development through PPP, but not all of them are workable.
For example, some schemes may lack a perspective of
“bankability” entailing excessive risk for the private sector,
while others fall short of profitability. Infrastructure is a
cornerstone of economic activity and people’s livelihoods;
the policies of a host country affect how prices are set,
how the project should be operated and so on. The risk
is one that private business operators alone cannot bear.
Therefore, a certain commitment by the host government
is an important factor in the success of a project.
In emerging countries in particular, many problems
have arisen including setting the tariff lower than the
project cost, inefficient and opaque administration
procedures, lack of consistency in institutional aspects
between central and regional governments, and inability of
the host country’s government to implement the PPP. This
is where JBIC comes in.
JBIC not only provides finance as a public financial
institution, but also works with governments to ensure
that they undertake a bankable PPP system that inspires
confidence in the private sector. In this regard, JBIC strives
to create a long-term synergy among the “5Ps”: “People,” the
beneficiaries of the service; “Providers of Finance,” the
private investors and financial institutions; and long-term and
constructive “Partnerships” with the “Public” and “Private”
sectors. By harmonizing the 5Ps, risk and responsibility
are shared between the public and private sectors.
Affordable good-quality service Social benefitEconomic growth Employment
People’s Perspective Project Operator’s Perspective
Harmony of 5Ps
Roles of Public Sector Fund Procurement
artnershipsPUBLIC PRIVATE
Appropriate risk- and
role-sharing
P ・Multilaterals・Bilaterals, ECAs
・Local Banks・International Banks・Bonds (Local, International)
・Beneficiary of Service・Stakeholders, NGOs
・Local and International Sponsors・EPC Contractors (Local, International)・O&M Operators (Local, International)
eople of the CountryP
・Municipalities・Contracting Agencies
・Central Government・Ministries・State-Owned Enterprises
ublic EntitiesP
rivate Investors and ContractorsP
roviders of FinanceP
Return on Investment Leverage comparative advantage (efficient service) Build relationship of trust
Appropriate legal system Government support Strengthen international competitiveness Attract investment Prepare bidding
Consider long-term loansBusiness foreseeability (country risk)
■ Feasibility of Projects in Emerging Countries: PPP Tasks/Challenges
4 JBIC Today January 2013 JBIC Today January 2013 5
0º
MOU with HCMC People’s Committee Vietnam
■ Examples of Infrastructure Development Projects with Participation of JBIC
Wind power project Bulgaria
Intercity Express projectU.K.
The Key to Overseas Infrastructure Development─ Division of Roles Between Public and Private Sectors
Panama Canal expansion Panama
Coal-fired power projectIndonesia
Submarine power cables Indonesia
Beltway project Brazil
Subway projectBrazil
0º
Support of Integrated Infrastructure Projects Overseas
The booming demand for infrastructure development is a
good opportunity for Japanese industry and local authorities
to maximize their proven technological strengths. A recent
development has been that export of infrastructure-related
components alone exposes manufacturers to fierce price
competition. Another is the desire in host countries for
“total infrastructure development” packages that include
cooperation in peripheral fields, facility operation and
maintenance, and even staffing. To respond to this vigorous
overseas demand and connect it to domestic economic
growth, the Japanese government is promoting
infrastructure deployment overseas. A quick glance at
Japan’s economic structure shows that its dependence on
foreign trade (export & import / GDP) is less than 30%,
behind the U.S. Japan’s recent expanding surplus shows
returns from overseas investment; securing further profit
by exporting Japan’s fine infrastructure technology suits
the country’s economic structure.
JBIC Supports Overseas Infrastructure Deployment by Japanese Companies
JBIC launched its Infrastructure Finance Group in July
2011 to provide detailed support to Japanese companies
across all infrastructure sectors. In April 2012, JBIC was
separated from the Japan Finance Corporation and became
a new entity. Since then we have been actively supporting
Japanese industries in their overseas infrastructure and
other projects.
Based on government policy regarding the
aforementioned integrated infrastructure deployment,
JBIC provides financial support to Japanese firms by
investing in infrastructure funds and business operators,
in addition to offering loans and guarantees for a wide
range of infrastructure fields such as power grids,
waterworks, railways and ports. Following the enactment
of the Japan Bank for International Cooperation Act in May
2011 and subsequent related legislation, JBIC’s financial
services expanded to include export finance for industrial
nations, and its scope of investment finance also expanded.
Further, its functions have been strengthened in the areas
of providing short-term bridge loans, financing in local
currencies, and support for M&A by overseas companies.
In addition to these financial tools, JBIC emphasizes
securing the bankability of PPP projects through appropriate
risk-sharing among the parties involved. In recent years
we have created a framework for policy dialogue to advise
host governments on the issues involved in PPP, and to
join the early stages of project formation by participating
in a master plan. Examples of this include projects with
the governments of Indonesia, Mexico and Brazil. Among
them, concrete results were seen in a project for a coal-fired
power plant in Central Java, Indonesia, for which Japan
received the order; discussion through the framework
resolved how the risk should be shared among the public
and private sectors. Other examples include a study of
investment in the Delhi Mumbai Industrial Corridor
Development Corporation Limited (DMICDC), and an
MOU signed in September 2012 with both Hanoi and Ho
Chi Minh City to promote private-sector initiative
infrastructure projects.
Thus, matching projects with Japanese industry
becomes possible when public and private sectors are
brought together and guided from the early stages. JBIC’s
experience and expertise in the areas of contracts, system
implementation and administration enable us to facilitate
the implementation of PPP.
JBIC will continue to actively support the participation
of Japanese industry in overseas infrastructure projects, in
addition to assisting with conventional exports of related
facilities and equipment, and through its role as a
governmental financial institution, help to promote
expanded business opportunities for Japanese industry
amid growing worldwide demand.
Dialogue with host country for adoption of conditions favorable to Japan
Utilization of studies to propose an attractive finance packageUtilization of equity participation to reduce initial project costs
Offering flexible financing to support bidding by Japanese companies
Proactive involvement from the early stages of the formulation of the projectProvision of financing based on the business plan
of the project operator
Dialogue with host country
Competitive bidding
Loan structuring
Offering financing
Project supervision
Awarded concession/orders
Study/response for project feasibility
Examination of the project
Negotiation for conclusion of contract
Maintaining continuous relationship with the government
Support for maintaining debt sustainability
Roles of JBIC
■ Involvement from the Early Stages of Project Formation
6 JBIC Today January 2013 JBIC Today January 2013 7
The Key to Overseas Infrastructure Development─ Division of Roles Between Public and Private Sectors
Cargo railway network project Brazil
Seawater desalination project Singapore
Natural gas-fired combined cycle power plant projectThailand