The Japanese government is engaging in an aggressive sales drive to help the private sector win transport contracts against ultra-competitive Chinese rivals. Its efforts including using diplomatic channels, reforming state-backed lenders and setting up investment funds to make Japanese exporters more attractive.

Low cost isn’t always cheaper

Prime minister Shinzo Abe pledged in 2015 to triple Japan's quality infrastructure exports to ¥30 trillion ($293 billion) over the next decade. Since then, the Japanese government has been preparing the ground to support private sector companies to win contracts. 

The Japanese government’s official position is that 'quality infrastructure' means “high quality infrastructure that appears more expensive but is easier to operate, lasts longer, is more environmentally friendly and contributes to natural disaster prevention which is actually cheaper in the long-term,” according to Ministry of Land, Infrastructure, Transport and Tourism (MLITT) documents obtained by IJGlobal.

However, officials at the ministry conceded that Japanese manufacturers cannot compete on cost against their Chinese and South Korean rivals and need support from the state to win deals, both in developed and emerging markets.

Public backs private

Shinzo Abe, and a succession of MLITT ministers and senior officials, visited 32 countries in 2015 to pitch for 94 projects. Much of the effort has been focused on South and South-East Asia, where the government sees the most growth. Last year, ministers and senior ministry officials made 53 visits to ASEAN countries and 12 to South Asia.

At least some of the sales visits have paid off: during his state visit to India last December, Abe signed a $12 billion financing package to build India’s first 508km high speed rail (HSR) line between Mumbai and Ahmedabad in western India.

Along with trade missions, the government has been introducing legislation to support exporters. One key policy reform is the expansion of the risk taking capacity of export credit agency Japan Bank for International Cooperation (JBIC).

The law that required JBIC to obtain a sovereign guarantee was reformed and passed in May. Under Japanese law, government agencies are given a set time to work out the details of the law after the legislation has been passed. JBIC now has until April 2016 to prepare the legal structure to carry out its expanded, riskier mandate.

“The new framework should be ready by the end of 2016 because we need some breathing space before the April 2017 deadline,” a JBIC official in Tokyo told IJGlobal.

JBIC will no longer need to focus on the certainty of redemption of a loan, although the export credit agency will still need to take into account adequate compensation payments. While the details have yet to be finalised, JBIC will no longer be required to obtain a sovereign guarantee for its loans, sources told IJGlobal.

JBIC will also be allowed to provide long-term loans in local currencies to local banks, as well as two-step loans to banks, invest in project bonds and arrange Islamic financing.

Widening funding sources

JBIC will not be the only state-backed lender that will be expanding its funding for Japanese infrastructure exporters.

Japan International Cooperation Agency (JICA), which provides overseas development assistance, is teaming up with the Tokyo-backed Asian Development Bank to ramp up lending by $10 billion over the next five years. Another $1.5 billion has been earmarked to fund PPP projects in Asia.

In addition, the government has set up a ¥20.9 billion ($201 million) private-public fund, Japan Overseas Infrastructure Investment Corporation (JOIN), to make minority equity investments in infrastructure projects that have Japanese sponsors. For the current fiscal year, the government has increased its funding for JOIN by ¥38 billion as well as providing a ¥52 billion sovereign guarantee for any bond issues by the fund.

JOIN has so far invested in four projects, including ¥4.9 billion in the $10 billion HSR project Texas Central Railway, which is being developed by JR Central, and ¥5.6 billion for the four urban rail network contracts totalling $2.67 billion in three Brazilian cities including Rio de Janeiro and Sao Paulo that are being developed by JR West and Mitsui & Co. 

Slow no more

The government is also aiming to speed up JICA’s loan approval process. The goal is to shorten the period from the commissioning of feasibility studies to start of construction to a maximum of a year and a half from what could until now take up to three years. Another initiative will be to outsource feasibility studies to independent technical advisers. 

The final goal is to speed up the process to compete against nimbler state-backed Chinese bidders, who can not only undercut Japanese exporters on cost, but also offer financing and promise to deliver projects at a faster pace. 

“We have had a lot of complaints about the slow pace of loan approvals and we know we need to fix it,” a MLITT official said.

With all the reforms in place, Japanese officials are optimistic about the prospects for infrastructure exports - in part because what appeared to be successful Chinese state-backed bids have been cancelled. 

In mid-June, US railway firm Xpress West ended its joint venture with China Railway to build a 370km HSR line between Las Vegas and Los Angeles citing its Chinese partner's "difficulties associated with timely performance." And earlier this year in March, disagreements over costs and terms prompted Thailand's government to shelve indefinitely a $4.3 billion 867km China Railway-backed project. 

"A window of opportunity is opening up for Japan infrastructure exports," the MLITT official told IJGlobal.