Why HSBC participated in Japanese project financing arena?
Bloomberg Businessweek reported "HSBC Japan Unit to Boost State-Backed Project Finance Lending" on 6th Jan 2011.
HSBC Holdings Plc’s Japanese banking unit plans to increase financing for state-backed projects as profitability in domestic corporate lending declines.
I would like to add some backgrounds on this news.
Japanese government is currently focusing on "New Growth Strategy" to overcome long-term economic sluggishness and to prepare for shrinking of population. Supporting private sector's "infrastructure export as a package" is one of twenty one high priority national projects that were determined in June 2010.
"Infrastructure export as a package" means Japanese companies should obtain broader scope of business opportunities in infrastructure projects abroad than just selling equipments in narrower scope. As readers may know Japan has relatively strong manufacturers not only in automobile and electronics but also in heavy electric industry. However, domestic vendors for infrastructure construction projects abroad had a tendency to be satisfied with just selling products, and they wouldn't aim for long-term revenue from services such seen in operation of international water business.
Typical case of infrastructure project would give only 5% of revenue stream for the equipment vendor and the rest would go to the operator of the infrastructure service. It hasn't been long since this notion became common among Japanese policy makers and private sector. (There are a few exceptional players in so-called "trading house" or "trading company" sector who are accustomed to refined business model of IPP and water.) So, policy of "infrastructure export as a package" is the story about uniting Japanese companies with full backup of public agencies such as Japan Bank for International Cooperation (JBIC) and Nippon Export and Investment Insurance (NEXI) to get the whole. This movement of policy makers was accelerated particularly after Japan's defeat on Russia in nuclear plant sales for Vietnam as of February 2010.
As every infrastructure project needs huge amount of CAPEX, financing is the key even when any Japanese companies would try to join in. JBIC is a Japanese government funded international lending agency essentially for projects involving Japanese company. It can lead project financing for infrastructure projects abroad as international large banks do. Japan has three "mega banks", namely Bank of Tokyo-Mitsubishi UFJ, Mizuho Corporate Bank and Sumitomo Mitsui Banking Corporation, that provide project finance for international infrastructure projects. But they are also favorable if JBIC would lead syndicated loan for a special purpose company of infrastructure project established by Japanese player considering risk mitigation...and profitability. The same thing can be said for other international banks including HSBC.
NEXI is a government funded agency for providing import-export insurance service that can cover political risks of infrastructure project abroad usually difficult for private companies to cover. According to Japanese government policy, the agency determines priorities of the projects.
JBIC is reportedly having US$20 billion money pool for project financing abroad. With JBIC's money and with NEXI's insurance, Japanese companies can appeal more attractive infrastructure proposal to foreign countries. However, providing service by using infrastructure abroad is relatively new business to most of them, so acquiring necessary know-how, for example by M&A, would be the next agenda.
In any case, some other banks are expected to follow HSBC in the arena of Japanese project financing backed by the government.