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Economy

How accepting is Japan of international investors buying into public infrastructure?

Osaka Prefecture cancels the sale of Semboku Rapid Railway to a U.S. investment fund.

TOKYO -- Japan is facing a test of its acceptance of international investors managing public services. The rejection of overseas participants that were invited to bid for businesses is fueling distrust among investors worldwide. The result of which could well be that they avoid future investment opportunities in Japan.

     "Japan simply does not want foreign companies to manage public infrastructure," said a senior official of an international private equity firm operating in Tokyo. 

     They referred to the sale of a communal rail line in Osaka last winter. The Osaka prefectural government in November awarded the exclusive negotiating rights to Lone Star Funds of the U.S. to buy Semboku Rapid Railway, which operates in Osaka's residential suburbs of Izumi and Sakai. The U.S. company offered 78.1 billion yen ($756 million), outbidding rival Nankai Electric Railway by more than 6 billion yen.

Tarnished reputation

Osaka Prefecture entered into a provisional agreement with Lone Star, but the situation quickly changed when the prefectural assembly put the sale of Semboku to a vote. Four members of the ruling Osaka Restoration Association, the local chapter of the Japan Restoration Party, broke ranks. The bill was voted down by a majority, forcing the prefecture to scrap the deal with the U.S. firm and sign a free contract with Nankai for about 75 billion yen.

     The cancellation of the sale of Semboku to Lone Star tarnished Japan's reputation as an attractive investment destination among global investors. Disappointed by this closed-door stance, the investment fund in Tokyo is now considering downsizing its Japan-focused portfolios. 

     Behind the aborted Semboku deal was strong opposition from the municipal governments where the railway operates. They learned through news reports that Nankai had offered an 80 yen cut in transit fees in its bid proposal, whereas Lone Star proposed cutting fees by only 10 yen. "With unified local elections slated for next spring, I had to weigh up the opinions of the local electorate," said an assembly member.

     The contentious point was not limited to the fee reduction. "Can we leave the rail service to our grandchildren by selling it to a foreign firm?" questioned one member from the ruling party at a prefecture assembly session. Nozomu Takahashi, a professor at Kansai University, explained that those opposed to the deal feared Lone Star may sell Semboku for a profit after acquiring it.

     The Semboku sale is sending repercussions to Kansai International Airport, which is located close to the areas serviced by the railway. Management of New Kansai International Airport Co., which operates Kansai International Airport and Osaka International Airport, frets about the spillover of the local sentiment that rejected Lone Star's ownership.

Non-committal 

The state-run operator of the airport is to sell its management rights to the private sector by tender this fiscal year to pay debts amounting to about 1.2 trillion yen. It will invite bids from deep-pocketed investors from across the world as the sale is expected to start from at least several hundred billion yen, but it may face difficulty in attracting overseas interest.

     "Foreign investors who know about the botched Lone Star deal think Japan is not an easy place to invest in," said a Japanese bank official who recently took a business trip overseas to gauge the level of overseas interest in the airport deal.

     "We welcome foreign investment and encourage foreigners to invest more in Osaka," said Osaka Gov. Ichiro Matsui. But rumors that Japan does not want foreigners to take control of public infrastructure are spreading.

     Allowing offshore parties to manage public infrastructure may entail risks. Japan must know about the benefits and disadvantages of letting international investors take control of public property. But if it continues to take a non-committal approach to attract foreign investment, it may get the cold shoulder from investors from across the world in the end. 

(Nikkei)

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