REPORT
Research & Insights
Increasing infrastructure concessions in emerging and developing countries
Asia's infrastructure demand is $1.7 trillion annually.
With the domestic market shrinking due to an aging and declining population, Japanese companies are finding their way into overseas markets such as the United States and China. The same is true for companies involved in social infrastructures, such as railroads, power systems, and smart cities, which are trying to use the technology and know-how they have cultivated in Japan as a base to go global. This is what we call "infrastructure export.
Demand for infrastructure construction is growing rapidly in emerging economies that are experiencing rapid urbanization. According to the Asian Development Bank, infrastructure in Asia's emerging economies demand will reach $26 trillion over the 2016-30 period, according to the bank. The figure of $1.7 trillion in demand each year gives you an idea of the impact.
The Japanese government, in its "infrastructure system export strategy, has set a target of winning infrastructure orders of about 30 trillion yen by 2020. Thanks in part to the efforts of the public and private sectors, the amount of infrastructure orders received has expanded from about 10 trillion yen in 2010 to about 21 trillion yen in 2016. However, the growth has slowed recently, and it is widely believed that it will be tough to realize the target of 30 trillion yen by 2020.
One of the reasons is the rise of South Korea and China. Originally, infrastructure-related companies from China and South Korea used their low costs as a weapon to win infrastructure orders in emerging countries. Recently, however, their technological capabilities have been improving, and their overall competitiveness is at a level that cannot be underestimated. In general, while the infrastructure provided by Japanese companies boasts high quality, it tends to be expensive, and there is no denying the fact that it is over-specified for emerging countries.
Improved technological capabilities of Chinese and Korean manufacturers and the high-cost structure of Japanese companies. This is probably one reason why infrastructure orders have not increased as targeted.
ODA does not meet the needs of emerging economies.
Another reason is that Japan's infrastructure exports are ODA (Official Development Assistance) driven and do not match the realities of emerging economies.
Until now, Japan has used ODA, both paid and unpaid, to support infrastructure development in developing countries. However, development assistance in developing countries and emerging economies has been provided through concessions (a form of PPP in which the operating rights of existing infrastructure are sold to the private sector), BOT (Build Operate Transfer: a method in which the private sector is responsible for construction and financing, and ownership is transferred to the public sector after completion and after a certain period of operation), and BTO (Build Transfer Operate). BTO (Build Transfer Operate), in which the private sector takes responsibility for construction and transfers ownership to the public sector after completion, leaving the private sector in charge of the operation. ODA is becoming obsolete.
The reason why ODA does not meet the needs of developing and emerging countries is that ODA takes the form of loans to the partner country, which increases the government debt of the partner country.
ODA is divided into two types: bilateral aid, which is direct assistance to the partner country, and other countries' aid, which is provided through international organizations. In addition, bilateral aid is divided into two types: gifts, such as technical cooperation and grant aid, which are provided free of charge, and yen loans, which are subject to repayment. Yen loans are often used to support infrastructure development in Asian countries, and as ODA aid increases, government debt inevitably increases.
This has become a stumbling block for emerging economies. For example, Vietnam has been active in infrastructure investment, but in response to rising government debt, it set a debt ceiling of 65% of GDP (gross domestic product). The same is true in Africa, where concessions based on private investment rather than ODA are on the rise.
The truth is that private investment alone cannot be used to develop all infrastructure. The fact is that private investment alone cannot do all infrastructure development. It is true that there is a naive belief among government officials in emerging and developing countries that "everything should be done through PPP," but it is a global trend that infrastructure development is shifting from ODA to concessions and other PPPs.
The recent post "Ailing Society. Who's going to fix our infrastructure? , we wrote that the solution to aging infrastructure in Japan is the promising use of private funds through concessions. In the same way, I think you can see that on a global scale, there is a shift toward infrastructure development using private funds.
Remaining Trauma in Overseas Projects.
In light of these circumstances, Japan needs to switch its method of development assistance from ODA to PPP. However, Japanese companies cannot be said to be proactive in overseas infrastructure investment due to their past difficulties in project management of overseas projects. These traumas include contract default by the partner country, exchange rates, economic conditions, disaster risks, and receiving orders at low prices due to intensified competition. In particular, the construction industry, which has been painfully exposed to overseas projects, remains strongly allergic to the idea.
For example, in the 2000s, Kajima, a major general contractor, received an order jointly with other general contractors to build an expressway in Algeria. For example, in the 2000s, Kajima, together with other general contractors, was awarded a contract to build an expressway in Algeria, a 400-kilometer section of a 1,200-kilometer expressway that runs east-west through the country, a large-scale project worth 540 billion yen.
But a combination of various factors, including deteriorating security, delays in procuring materials, geology that was different from what was expected, and the Algerian government's demand for additional work, delayed the construction, which was supposed to be completed in 2010 after its completion in 2006. Ultimately, the project was settled in 2016 after filing for arbitration with the International Court of Arbitration, and the construction work was terminated and the project was withdrawn. The losses of the companies that participated in the joint venture were a whopping 80 billion yen. I can understand the feeling of blowing a whistle to get rid of it.
Overseas construction projects involve not only local site management but also various risks such as land expropriation, coordination with the government, and differences in business practices.
They also have to deal with unexpected buried treasure.
Also, since this is not Japan, contracts need to be drawn up in English, but in Japanese society, things are done with the breath of an agreement, and the culture is not as contractually binding as in the West. I think one of the reasons why Kashima got stuck in an ant's hell in Algeria was because of the laxity of contracts.
Furthermore, although Japanese companies are good at manufacturing in the sense of EPC (engineering, procurement, and construction), they cannot achieve success in overseas infrastructure projects simply by building infrastructure. Also, no matter how high the quality of the product you provide, if it does not meet the needs of the other country, it will be over-specified and not price-competitive. It is impossible to compete on the world stage with only technical capabilities.
Overseas Infrastructure Business.
When we are awarded a PPP project overseas, the first step is to negotiate with the partner country.
Countries that are active in PPPs have a list of projects that they will pursue.
Therefore, in order to take up toll projects abroad, there is a process of knee-jerk negotiation with the partner country to select the projects that have the best chance of success. In August 2019, Index Consulting, of which I am President, signed an MOU with the Government of Ghana for the future concession of two expressways with sufficient traffic volume. The memorandum of understanding (MOU) is to proceed with a feasibility study of the two routes in order to acquire the rights to operate the expressways in Ghana in the future. This is the result of our employees flying to Ghana and persistently negotiating with the Director General of the PPP Department of the Ministry of Transport and other officials.
The Ministry of Land, Infrastructure, Transport and Tourism (MLIT) is also aware of the problem of high-quality information on projects. The Ministry of Land, Infrastructure, Transport and Tourism (MLIT) is also aware of the problem and collects information on high quality projects through the Ministry of Foreign Affairs' diplomatic missions abroad, and participates as an observer in the Organization for PPP Promotion and Support (OPPS), which disseminates information on identified projects to the private sector. The OPPS is in the process of identifying prime projects, and if good projects are brought to the private sector through the OPPS, it will be possible to develop infrastructure concessions overseas.
Next, there is the process of forming a consortium of companies to participate in the PPP.
In the case of an expressway PPP, in addition to road construction, various other tasks such as toll setting, toll collection, road maintenance and management, and roadside development will occur during the pre-agreed period (generally 30 to 60 years). It is impossible for a single company to take on these tasks, so we need to gather companies to work together on the project. In doing so, it is necessary to thoroughly discuss the risks of the project, decide on the division of roles, and create a win-win scheme for the participating companies so that everyone can participate with peace of mind. Identifying the risks derived from the project and how to allocate and reduce each risk to the participating companies is one of the top priorities of a PPP contract.
Global companies ravaging the ASEAN market.
In addition, an SPC (Special Purpose Company) will be created in the area when the project is actually operated, so it is important to consider the investment ratio of the SPC, where the investment money will come from, whether it will be invested only by private companies, local capital, or Joint Organization for Overseas Transport and Urban Development (JOIN), and how to procure the remaining financing. We also have to decide how to procure the remaining loans. We also need to examine the extent to which we can use insurance such as NEXI to cover risks that the private sector cannot, such as foreign exchange, economic and disaster risks.
If you want to win a good infrastructure PPP project like this, it is essential to think about everything from upstream to downstream, from negotiating with the partner country to forming a consortium, constructing the infrastructure and operating it afterwards. However, there is an overwhelming shortage of "PPP creators," people who can do this. As I mentioned earlier, it was a 27-year-old woman who moved to our company who promoted the MOU for the highway in Ghana. We need to strategically nurture PPP creators like her, who have the ability to break through and excel in communication and speed.
It is certain that the demand for infrastructure will explode in the ASEAN (Association of Southeast Asian Nations) in the future, but Japanese companies are latecomers in the world of infrastructure concessions, and global players such as France's Bouygues and Bansi and Australia's However, in the world of infrastructure concessions, Japanese companies are latecomers and global players such as France's Bouygues and Banshi and Australia's Macquarie are dominating. In addition, China's AIIB (Asian Infrastructure Investment Bank) and South Korean companies are making inroads into the market. If this trend continues, we may miss out on the ASEAN market, which is extremely important for Japanese companies.
Although we have focused on emerging economies, infrastructure demand is not limited to emerging economies. The U.S., Europe, and other developed countries, where urbanization has progressed at an early stage, are also facing aging infrastructure and are struggling to secure financial resources. We should expect to see more infrastructure investment using PPPs not only in emerging countries but also in developed countries.
In order to turn overseas infrastructure exports into a new source of revenue, and to avoid losing valuable overseas markets like ASEAN, it is imperative to increase the number of domestic and international examples to create successful experiences, and to train PPP It is an urgent task to train PPP creators who can compete on the world stage.
Overseas infrastructure investment is suitable for Japanese companies.
I mentioned that Japan is a latecomer in the world of PPPs, but the Japanese government is also trying to promote infrastructure investment through public-private partnerships by expanding government agencies such as JOIN and NEXI. Since the Meiji Restoration, there has been a tendency in this country not to favor cooperation between the public and private sectors, saying that "the government is the government" and "the private sector is the private sector," but a system of cooperation between the public and private sectors should be established as soon as possible. Although Bouygues and Banshi are private companies, they are working together with the French government to acquire projects. In this context, it would be unreasonable to expect the private sector alone to take on the risk of overseas infrastructure investment.
Japanese companies have excellent technologies that excel in the world. It is no exaggeration to say that Japan has the world's best environment for raising funds for project finance. In Japan, there is a philosophy of "sampo yoshi" that satisfies the three parties of "seller", "buyer" and "society". PPPs, in which the public, private, and beneficiary sectors are involved over the long term, are truly an area in which the concept of sampo yoshi is indispensable. I believe that overseas infrastructure investment is a business that is essentially suited to Japan.
その他のレポート｜カテゴリから探す