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Business

Japan faces a turning point

More than 40 banks, including export-import and private banks in Japan and the U.S., financed the Paiton Power Station on the Indonesian island of Java.

TOKYO -- China recently closed a deal with Indonesia to build a high-speed railway on the main island of Java. For Indonesia's government, which is not on the hook for even a rupiah, it's a pretty sweet deal.

     Japan was also bidding for the project, and its defeat suggests that it might want to rethink its strategy of using infrastructure exports as an engine of economic growth.

     Getting involved in overseas infrastructure projects has always been a high-stakes game. A lot of up-front money is required, and the payoff can be decades away.

     But these projects have also held a lot of promise. Emerging countries must build ports, railways, roads, power plants and more if they are to sustain economic growth. The companies that make the materials for these economic conduits stand to make a lot of money.

     Where that money comes from has always been a big hurdle. In countries like Indonesia, governments have limited funds at their disposal.

     This is one reason Jakarta took up China on its offer; the deal allows Indonesia to put its money into other pieces of infrastructure.

     Public coffers are not the only source for infrastructure funding. More and more, private businesses are getting involved in building the big pieces of our civilization that we all rely on, then hanging around as operators, collecting tolls and fees from users to recoup their investments and make some money.

     Gordon Wu is considered a pioneer of this model. The Hong Kong business tycoon is the leader of Hopewell Holdings, one of the metropolis's largest builders of roads, tunnels and bridges. In the early 1990s, Wu pumped money into constructing power plants and highways in China and Southeast Asia.     

     Japanese businesses immediately followed in Wu's steps.

     The business model requires large amounts of capital and virtual certainty that the project will be viable. The initial capital has to be paid back, and the risk takers would actually like their investments to become profitable. But this requires a lot of patience.

     For help with the capital, project financing was born.

     The risks that have to be considered are many, from the potential for political upheaval to the financial soundness of the contractors and operators. One wrong judgment could mean huge pools of money evaporating.

     In 1994, Japanese trading house Mitsui & Co. put together a multinational consortium with two U.S. companies -- Edison Mission Energy, then the world's largest independent power producer, and GE Capital, the finance arm of General Electric -- and raised money from more than 40 lenders, including export-import and private banks in Japan and the U.S. to build the coal-fired Paiton Power Station on the Indonesian island of Java.

     In other words, a lot of institutional investors were convinced the project would succeed.

     Then came the 1997 Asian financial crisis and the subsequent fall of the Suharto dictatorship. The sure-bet was nearly derailed. State-owned Perusahaan Listrik Negara, which had signed a contract to purchase electricity from the plant, stopped making payments to the consortium.     

     The export-import banks of Japan and the U.S. spearheaded negotiations with Indonesia's finance ministry. They managed to work out a new deal and put the business back on track. The unit price of power was lowered. This meant the state power company would pay less for the electricity it bought from the consortium. The deal also extended the period of time Perusahaan Listrik Negara would have to continue making payments.

     Infrastructure developers learned a lesson and began taking further precautions.

     Hideo Naito, managing executive officer of the Japan Bank for International Cooperation, formerly the Export-Import Bank of Japan, said that following the Paiton headache, the JBIC began including what are known as umbrella notes in some deals with the Indonesian government. These notes require the Indonesian government to, say, support the state power company so that it can continue to fulfill its obligations to buy power.

     The financial crisis cost Hopewell dearly. It was forced to downsize its infrastructure business, which caused it to fall behind competitors in the race to win contracts. Japanese companies, on the other hand, acquired experience that would help them identify and minimize risks. They emerged as major infrastructure developers.

     But now China Inc. is pursuing projects so aggressively that it does not seem to care much about taking on risks.

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