A study by rating agency Standard & Poor’s (S&P) issued last week revealed that Japanese firms are being encouraged to reshape their relationships with business and financial partners as Southeast Asia’s increasing demand for infrastructure reinforces competition in the region, attracting larger groups with strong track records from Europe and the US, as well as highly cost-effective Chinese and Korean consortia.
The study also noted that infrastructure projects are scaling up and becoming more complex as increasing urbanisation and spending power outpace the capabilities of existing infrastructure.
“They [projects] are getting more complex because countries are not building from scratch but are constructing off existing infrastructure which often calls on more complex technology,” explained Thomas Jacquot, senior director at Standard and Poor’s corporate & infrastructure ratings, a co-author of the study.
Japanese firms are therefore left with much scaling up to do.
Furthermore, Japanese firms are quickly being caught up by rivals in areas of technology which were traditionally its preserve. “The country is having to push its innovation in high added value solutions to new ground to position itself in the infrastructure market in the region”, explained Jacquot.
In order to tackle the challenges at hand, the Japanese government is supporting key infrastructure players in putting together larger and more capable consortia, S&P said.
According to the study, reliance on export credit agencies and mega-banks for project loans is becoming less sustainable.
Consortia may instead seek to turn to alternative funding sources. Some pension funds and second-tier banks have been seen attempting to offer alternative sources of funding, and Japan’s ¥130 trillion Government Pension Investment Fund is considering a new policy of investing in infrastructure funds, which could set a trend among Japanese pension funds, according to the study.
But S&P believes that this may take time.
“This is due mainly to a lack of resource available on the ground in Southeast Asian countries. A medium-sized bank is unlikely to set up a dedicated team abroad without a pipeline of projects in a variety of sectors,” said Jacquot.
S&P also highlighted the risk that Japanese regulators may restrict bank funding in the medium term, as they implement Basel III and Insolvency II’s capital requirements.
The study recommended the development of infrastructure funding via project bonds given the parallels between bonds and the asset class in some of their key features (long term duration, large transaction sizes, and diverse funding sources) but stressed this would not happen overnight due to financial institutions’ lack of credit analysis know-how and the absence of a mark-to market pricing system.
Meanwhile S&P recommended that firms strengthen their relationships with key Japanese banks and ECAs. In parallel, EPCs and operators are advised to develop their after-service relationships with clients, and take advantage of the government’s pipeline of projects resulting from its long established assistance to neighboring countries.