In the world of project finance multilaterals play a very important role in getting funds for projects, especially in the current environment. The personalities involved in the decision-making, and those leading the implementation of those policies, make the difference – such as Fumio Hoshi. By Minerva Lau.
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In the past decade or so, Japanese trading houses such are Marubeni, Mitsui, Nisshoi Iwai and Sumitomo are names that have frequently been seen leading the developments of projects, either as major sponsors or key engineering, procurement and construction (EPC) contractors. Behind this emergence of Japanese developers is Fumio Hoshi, who led the project finance department of JBIC from 2000.
Hoshi, chief operating officer and senior managing director of JBIC, is a true project finance leader and advocate. He headed JBIC’s project finance department at the bank in 2000, some 13 years ago. Then there was a relatively limited focus on the power sector and on IPPs, especially for Japanese trading houses. Hoshi says there was some hesitation to support Japanese trading houses then, mainly because their main business was not the power sector, nor did they have the facilities or equipment.
“But I thought this market would grow in the future. And many countries and developing countries would need power,” Hoshi told PFI. He said in the mid-1990s there were not enough engineers and there was lack of capital. This was, therefore, an area on which Japan could focus over the next 10 years. So when he became the director general of the project finance (PF) department in 2000, “I strongly promoted [investments in] IPPs, in Thailand, in the Philippines, in Indonesia and others”, he said. The result: Japanese trading houses, together with Japanese utilities, became key players in the power sector in the region.
The interest spread into other regions such as the Gulf and Mexico. The power sector was the focus of PF and many Japanese trading houses became major IPP players. “Marubeni became the second-biggest biggest developer, after GDF Suez. This is something I am proud of,” said Hoshi.
Hoshi’s first experience in limited recourse financing was in the Guangdong Zhuhai Power Station Co project, which was sponsored by Cheung Kong Infrastructure. The financing was signed in September 1996, during a period when foreign investors were invited to develop IPPs in China. A total of US$795.5m was extended to the Zhuhai project by commercial banks and JBIC, then called Japan Export-Import Bank (Jexim).
The package included US$670m of support from Jexim, which was its first financial involvement in a private power project in China. The package was split into a US$602m buyers’ credit facility and a US$268m facility funded by the then Mitsubishi Bank against insurance coverage from the then Ministry of Trade and Industry, seen as one of the most powerful agencies of the Japanese government.
Subsequent favourite projects for Hoshi included the Sakhalin 2 LNG project, the Shell Nanhai petrochemical scheme and the Baku–Tblisi–Ceyhan (BTC) pipeline. Another project that had an impact on him was the original Paiton debt financing and its restructuring. He said the restructuring of the deal (which was named PFI’s Asia-Pacific power deal of the year in 2003) was one of his most difficult transactions. In the end, sponsors agreed on a lower tariff but had the PPA extended; loan tenors were also extended with lower interest rates, and negotiations included not only bank lenders but also bondholders.
In 1996, the government-funded bank was not yet called JBIC. The export credit agency was then called Jexim and Jexim itself was formerly called Japan Export Bank – set up in 1950. The name was changed to Jexim in 1952 when its activities were expanded to include financing of imports. In October 1999, JBIC was set up by merging Jexim and the Overseas Economic Cooperation Fund. More changes were to come. In 2008, JBIC was separated from OECF and merged with three other domestic financial institutions to form Japan Finance Corporation (JFC).
JBIC retained its name and remained the international wing of JFC, but its project finance department was closed down. Its project financing activities and experts were distributed among the different units set up according to regions (Asia, Europe/Middle East/Africa and Latin America) and according to industries (natural resources). There was a team for corporate finance and a newly set-up Islamic task force as activities in the Middle East were brewing.
The latest change came last year when a new JBIC was set up and an independent organisation was formed, separated from JFC. However, a dedicated PF department was not revived, and instead the three main departments were based on industries – natural resources, infrastructure and manufacturing finance departments. JBIC has been a major supporter of PF projects, acting almost as the backbone for any financing requirement. Its presence in a transaction makes it easy for other financial institutions to secure approval from their credit officers.
Mention JBIC and many PF players would immediately think of Hoshi. Such is Hoshi’s link to the project financing world, especially in the Asia-Pacific region – its backyard. JBIC’s presence is almost expected when a Japanese trading house or utility is involved. During the financial crisis from 1997 until early 2000, JBIC worked hard to help its local firms get business in the region, especially in Indonesia, where a number of projects experienced defaults. With Indonesia coming under the umbrella of the IMF, the Indonesian government was not allowed to provide any guarantee to any project or funding requirement.
JBIC did indeed come to the rescue. In September 2006, Hoshi flew in from Jakarta and went straight to PFI’s annual conference on Financing Power Projects in Asia (FEPA 2006) bearing some good news. He said the new umbrella note that had been signed between JBIC and Indonesia’s finance ministry would support new lendings to projects in Indonesia. The note might not have been a government guarantee, and might not even have been legally binding in its original form, but it was sufficient for JBIC to provide financing to Indonesian projects, and with JBIC in, commercial banks were more confident to lend.
When Hoshi moved up to become an executive director he became involved in the policy department, which looks after all projects. This department decides if a project moves forward and will be presented during the board meeting, or whether more information is required. Hoshi was succeeded by Yasushi Momose and then by Ryuichi Kaga as head of the project finance department before the unit was disbanded and its members distributed to other departments.
With Hoshi as the new COO, changes are expected to continue within JBIC to meet new demands in the market. As the PF department has spread to other departments, the PF experts can become involved in other departments. At the same time, the corporate loan department is now being trained to do more project finance and structured financing.
“I am trying to introduce a financial package to be more practical and sponsor-friendly but one that has enough security for the lenders,” he said. One suggestion includes the adjustment of the escrow account or the amount that the sponsor has to keep in a financing. An example is that, instead of an amount representing three repayments for the debt coverage service account, maybe two repayments might be enough. He said there was a need to compromise with sponsors, so there could be higher returns. He stressed that terms and conditions could be adjusted on a country-by-country basis. “There is no single menu,” he said.
JBIC does not focus on the power sector alone. It is already looking at other sectors such as transport – railways, highways and subways – which offer big business opportunities. The Japanese agency, however, is strict when it comes to figures presented in feasibility studies. Many tend to show relatively optimistic traffic numbers. Indeed, a number of transport projects in the region have gone bankrupt or have been bailed out and acquired by their respective governments.
After the Lehman Brothers downfall, the euro crisis and the strict Basel III requirements, JBIC has started to look at Islamic financing, mini-perms and also the bond markets, although it is always a “difficulty satisfying both lenders and bondholders”. Hoshi said JBIC still needed legal consultants, especially on local laws, and it was likely that it might hire more consultants and engineers.
JBIC intends to widen its list of products to meet clients’ needs in the future. “There is a need for innovation in limited recourse financing. We bankers do not stick to a prototype. We need to be imaginative and creative to meet market demand,” Hoshi said. JBIC will have to come out with new products, especially under the new Japanese Prime Minister Shinzo Abe and his Abenomics.