With 131 offices in 71 countries, Marubeni, the diversified trading company, boasts of being one of Japan's most internationally oriented companies. But global though the company is and will remain, in the power sector, industry players can expect to see an important shift in Marubeni's geographic focus over the next five years.

?We are involved in projects all over the world but we do consider our base to be Asia and the Asia-Pacific and this is the region we will increasingly focus on going forward,? says Kenji Natori, head of Marubeni's Overseas Power Project Department. Marubeni Power's shifting focus will not just mean chasing more Asian deals but an overhaul of the company's internal organization and a shift of manpower and resources.

Therefore, whereas in the past overseas projects were simply assessed on a first come, first serve basis, Natori says that greater priority will be given to Asian opportunities. ?We already have $1 billion invested in numerous Asian schemes but we want to much expand this regional portfolio,? he says.

Market observers will note that this increased emphasis on Asian markets coincides with the region's growing importance for global power firms. The top growth markets for most aspects of the power business in the next five years are likely to be, says Natori, China, India, Vietnam and then, Thailand and Malaysia.

Set against Marubeni's ambitions, the Overseas Power Project Department will face considerable constraints within this market. In Indonesia, Marubeni as a group has heavy exposure to a wide range of industrial sectors. ?Marubeni Utility & Infrastructure (the division to which the power department belongs) doesn't own any assets in the country,? notes Natori, ?but other divisions have assets such as paper mills and petrochemical facilities.? Given the problems that Marubeni's Indonesian projects experienced in the Asian crisis and since (for example the rescheduling of debt in the Chandra Asri ethylene project), Natori admits that certain projects in Indonesia will be very difficult to get signed off. ?It would be very difficult for us to go for an IPP scheme, even if the returns on offer were 40% to 50%.?

Similarly, both the Chinese and Indian markets currently present problems for Marubeni Power and in the short term, Natori does not expect his division to be involved in new ventures in either country. What the precise difficulties for Marubeni are in the India market, Natori would not reveal. Marubeni is already involved as an IPP investor in India, for example in the 520MW BPL plant at Ramagundam. ?The problems in India surround highly sensitive issues, but are not specific to Marubeni alone, they are experienced by all IPP sponsors,? the executive says. One high profile problem facing private power companies in the Indian market has been political, labour union and other civil opposition to power sector reforms, sparked by environmental concerns and worries about extensive job losses.

The difficulty for Marubeni's overseas power department in China is one of perceived regulatory risk. ?The tariff scheme for IPPs in China was changed last year and regulatory risk is quite apparent in the market,? Natori says. ?As a result we have suspended activities until the situation becomes clearer.?

In the past Marubeni has been active in the Chinese power market in two similarly structured projects: the PuQi power project in Hubei province (in which Marubeni was a minority shareholder with Sithe China) and the Taishan power plant in Guangdong (with Entergy of the US the other foreign investor).

The Chengdu and PuQi projects were both handled as build-operate-transfer (BOT) schemes (formally a BOT project in the Chengdu instance, informally in the PuQi case). The Taishan project involved a minority partnership of Marubeni and Entergy, with the Guangdong Provincial Power Bureau holding majority control.

As two of the markets with the greatest potential for IPP players are currently no go areas for Marubeni, it might be concluded that the company is not planning significant growth for its IPP business, but quite the opposite is the case.

Along with engineering-procurement-construction (EPC) projects, the independent power producer business, (including development, investment, structured finance, plant construction and management) is, in fact, a key area of focus for future overseas business expansion. ?Out target in the medium term (the next five years) is to have 6,000MW to 7,000MW under our management in the IPP market, on a net capacity basis,? explains Natori. The executive says that at the moment Marubeni's IPP ventures add up to a total capacity of less than 5,000MW.

Acquisitions of existing power stations, while not a core part of Marubeni's power strategy, are also becoming an increasingly important part of the company's activities. This trend, says Natori, is simply a reflection of the opportunities available in today's market: ?since our origins as a player in the power market stem from our EPC business, we are naturally more focused on development stage projects. We do increasingly consider acquiring existing assets as there are fewer IPP opportunities than there were in the 1990s and quite a number of good power stations for sale.? Marubeni is currently looking at acquisition targets in the Philippines, Thailand, Australia, the UK and Spain.

Natori says Marubeni does tread very carefully in the acquisitions arena, having been burnt before in acquisitions in central Europe. ?Acquisitions in the power sector often carry with them hidden costs, in the form of environmental issues, or human resources issues or tax. We've learnt from experience that it can be difficult to uncover all these problems before a deal is signed,? he says.

Quite distinct from Marubeni's international focus, domestic power operations going forward will concentrate partly on the ¥15 trillion ($120 billion) retail market, and generating wind power. The domestic power department begun to retail electricity this year through the 32.6MW Mibugawa Hydro Power Station, acquired in August 2000. Marubeni plans to expand its power retailing business as Japan heads toward full power liberalization.

The domestic power department has also already begun generating wind power on a small scale. Projects include the 4.5MW Shimamaki and 14.8MW Wakkanai facilities in Hokkaido. The company is also building a 13MW plant in Kagoshima Prefecture.

In both the domestic and international market, top-level management efforts to improve Marubeni's return on equity and reduce risk assets has forced the power departments to take a more selective attitude to new ventures. ?We are very cautious about political risk and in any country where we consider there to be high political risk and no adequate means to mitigate that risk, we will not consider IPP schemes,? states Natori. The return that the company sets against project and political risk is typically calculated by analyzing the treasury bond spreads issued by the country in question, and adding the cost of financing and a premium for risk and profit. For the highest risk countries, Marubeni sets minimum return targets of 20% to 25%.

The percentage stake available to Marubeni in any particular project is also considered carefully. ?Usually we consider the optimum shareholding to be between a quarter and a third of the project company stock. But we may go into a venture as the sole investor and sell down at a later down in certain circumstances,? explains Natori.

The company relies heavily on political risk insurance, from the likes of NEXI, JBIC or US Ex-Im for projects in developing countries. ?And we look for additional risk packages in the form of government guarantees, fuel supply guarantees and often, hard currency payment,? Natori says. Marubeni strives to negotiate front-loaded tariff structures to reduce risk still further. Payback period via the tariff structure will often be six to seven years, while the PPA agreement extends to 20 years or more.

Financing

As a final risk mitigant, Marubeni seeks non-recourse funding for almost all its power projects. ?We also look for experienced project bankers, above all for merchant power projects where a good understanding of merchant risk is needed,? Natori says.

A non-recourse financing is to be arranged for the company's latest power project the 440MW, gas fired combined cycle Cubatao power station in Brazil. Marubeni partners with Petrobras (also the offtaker) in the project. The $400 million project is expected to be arranged by both Japanese and non-Japanese multinational banks.

?The deal will probably take some time to close because of the recent elections in Brazil,? says Natori. Although Petrobras is a privatized company, the Brazilian government (including the new left wing administration) does have the power to appoint new Petrobras board members. A change of board members is not expected to have any negative ramifications for the project, but it will mean that final approvals are delayed, for as much as three to four months.

While Marubeni takes a different view of project risk on its home turf, the company has sought limited recourse project finance for its recent ventures. True limited recourse or non recourse project finance is a relatively rare phenomenon in the Japanese market, but Marubeni and Kita Koudensha Corp raised ¥1.7 billion ($14 million) in a limited-recourse deal provided by Sumitomo Trust & Banking for a joint-venture company building a wind farm on the northern Japanese island of Hokkaido.

For international deals Natori says Marubeni considers the choice of bank lenders to be a particularly important financing decision. The company is especially concerned about which bank lenders are providing funds in those projects where it is acting as the EPC contractor. ?If we are involved in a BOT project as the EPC contractor we typically want some form of payment guarantee. We also want to see first class lenders involved, even if we aren't responsible for raising funding.? For large scale developments (above all in developing countries) Marubeni has never been comfortable for local banks to provide the bulk of the finance. ?Its simply a risk issue,? Natori explains.

For smaller projects, those under $100 million, the company does accept purely local funding. A local financing is expected for an upcoming deal to fund a wind project in Spain.

With its more conservative stance, one wonders if Marubeni will again involve itself in the sort of innovative project financings that it was happy to mandate in the past. Four years ago Marubeni mandated Chase Manhattan and Fuji Bank with one of the first limited-recourse power project financings in Colombia. This 240MW deal, co-sponsored by Marubeni, had a debt-equity ratio of 75:25. Chase and Fuji provided the construction financing with the term debt provided by the Inter-American Development Bank (IADB) and Financeria Energética Nacional. Chase, Sakura, BoT-Mitsubishi, ABN Amro, Marubeni Leasing and Fuji participated in the IADB B loan. What was noteworthy about the deal was that it centered on a contract to sell power to a regional public utility ? one which was not underpinned by a sovereign guarantee.

And arguably one of the most notable Asian power project financings of the last five years was another Marubeni deal ? the $500 million financing for the PuQi power project arranged by ANZ, KBC, Barclays and Bank of China. The financing was noteworthy for being the first wholly foreign owned enterprise development to have secured limited recourse renminbi funding. Contrasting with the current wariness towards local bank financings, most of the debt in the PuQi was indeed provided by domestic Chinese banks.