JBIC New Drive to Secure Upstream Interests of Resources for Japan

Tuesday, January 25, 2011

By Anthony Rowley

China has been upsetting the US and other advanced nations recently (while making commodity suppliers from Australia to Latin America happy) by competing to secure energy and other natural resource deposits around the world, in order to feed its dynamic economy. Now Japan is also eager to get into the game.

The Japan Bank for International Cooperation (JBIC), a globally low-key and yet immensely wealthy state-owned institution, intends to finance acquisitions by Japanese private companies of anything from oil and gas fields to copper mines, so that Japan is assured of a stable long-term supply of such natural resources.

This, as JBIC president and CEO Hiroshi Watanabe points out, is a new departure because up to now Japan has relied upon its great trading houses or "sogo shosha" - firms such as Mitsubishi, Sumitomo or Itochu - to keep Japanese industry supplied with natural resources and raw materials via long-term supply contracts with overseas producers.

"The first priority is how to secure a stable supply of resources," says Watanabe. "Relying on long-term trade contracts is not sufficient. It is better for Japanese companies to get an upstream interest and to buy an oil or gas field or a copper mine etc. We are going to encourage them to acquire such up-stream interests."

By "encourage," the JBIC president means not only lending money, as it has in the past, to Japanese companies wishing to invest in overseas ventures but also joining them in taking equity participations in such ventures as well as by offering guarantees in order to reduce certain types of risk.

In what appears to be an example of the new policy in action, the Japanese government has decide to join Russia's gas giant Gazprom in studying natural gas projects in the Russian Far East. Gazprom has agreed with Japan's Ministry of Economy, Trade and Industry to conduct a full scale feasibility study on a liquefied natural gas plant near Vladivostok.

Japan has gone from being competitor to co-partner with the leading Russian energy entity. Some time ago, JBIC, Toshiba and Tokyo Electric took an equity participation in a Canadian uranium companies with operations in Canada and Kazakhstan. But after Gazprom took a majority stake, the Japanese partners withdrew, acknowledging Russia's dominance in Central Asia.

Japan will meanwhile be looking for energy and other natural resource investments further afield, in the Middle East, Africa, North America and elsewhere, sources say, as it competes with emerging economies such as China and India as well as with advanced economies to lock in sources of supply under its own control.

Japan may be coming relatively late into the game (so far as acquiring upstream interests is concerned rather than signing long-term supply contracts) but it is entering with some major advantages on its side. One is its strong technology base in oil and gas especially. Another is finance, according to JBIC's Watanabe.

While acknowledging that competition from China and others will be tough is acquiring upstream resource ventures, he points out that "Japan has a huge amount of money.” Even though China has nearly $3 trillion in foreign exchange reserves, Japan's household savings are around 1600 trillion yen or nearly $20 trillion and these can be employed by Japanese banks and securities houses, to finance acquisitions, Watanabe says.

"Equity participation is a theme for us to develop," he notes. "Up to now, more than 90% of the operations of JBIC have been lending and only a [small part] in equity participation and guarantees. But now we are going to have a more active equity participation and more frequent use of guarantees."

Formed in 1999 from an earlier merger of the former Overseas Economic Cooperation Fund and the Export-Import Bank of Japan, JBIC became the international wing of the Japan Finance Corporation (JFC) under an earlier plan to privatize state financial institutions.

But with the change to a Democratic Party of Japan-led government since September 2009 and a switch in the political ideology that prevailed under the Liberal Democratic Party, the plan now is to de-merge JBIC again from the JFC in order to give it greater operational flexibility.

JBIC has greatly increased its financing activities in recent years, partly in response to the financial crisis in 2008. "We began [post-crisis] operations very quickly," says Watanabe. "From 2001 to 2007, our average operations were around $10 billion each year but in 2008 it was expanded to $15 billion and in 2009 to $30 billion. This year it will be maybe a little less than $20 billion."

One of JBIC's strengths is that it does not have to rely on funding from Japanese taxpayers. It issues bonds and while this means JBIC is at the mercy of sometime fickle capital markets, this is preferable to being tax dependent in a Japan where outstanding direct government debt has reached nearly 200% of GDP and where fiscal retrenchment is a priority.

JBIC will not only be financing energy and natural resource investments by Japan but also playing a major role in promoting Japanese sales overseas of infrastructure package such as high-speed rail system, nuclear power plants and others.

The Asian Development Bank (ADB) has estimated a need for $8 trillion of infrastructure spending in Asia over the next ten years while the OECD has an estimate of about $40 trillion for global demand over two decade - truly colossal needs.

The Japanese government has stood back from promoting Japan's infrastructure sales overseas until recently, declaring this to be a private sector responsibility. But now that attitude has changed.

An important event influencing the change of thinking in Japan was in 2009 with Japan's "failure to secure a nuclear energy project in the UAE." says Watanabe. "We thought Japan could secure the contract but it went to Korea [where] there was nationwide coordination. Coordination between public and private sectors is needed to show the quality of Japan's industry."

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