The Gulf projects market boom that began in 2003 became synonymous with the emergence of Japanese firms winning contracts to build some of the regions most prestigious projects, from the pioneering Dubai Metro to the GCCs largest power and water facilities.
An important partner in financing many of these schemes, particularly in the energy and utilities sector, was Japan Bank for International Cooperation (Jbic), an export credit agency (ECA). A key player leading the agencys regional growth is Naoki Tamaki, who joined Jbic in 2002 and has been employed in several senior roles.
Building a portfolio
Jbic first provided financing, through direct untied loans, in the 1990s to the Omani government, says Tamaki. We also provided project financing for power facilities in Tunisia in the 1990s, but we properly began providing export credit for major project financings in 2005 with the Taweelah B project in Abu Dhabi.
Since then, Jbic has provided financing of more than $10bn to some of the GCCs largest utility schemes, including the UAEs Shuweihat 2 and Fujairah 2 independent water and power projects (IWPPs) and the Ras Laffan C IWPP in Qatar. With demand for power and water continuing to grow at a rapid pace across the region, Tamaki, now the banks chief representative in Dubai, says the Middle East and North Africa (Mena) region will form a key part of the ECAs future strategy.
We see very good signs coming from Egypt. There will be a lot of projects coming up
Jbic entered the Gulfs project finance sector at the height of the regions boom in 2005, and has continued to support Japanese firms in winning contracts in the period since the global financial crisis, as governments push ahead with infrastructure schemes to facilitate population and industrial growth, particularly in the utility sector. Tamaki says that while the global crisis undoubtedly affected the Gulfs projects sector, the high liquidity enjoyed by Japanese banks and ECAs allowed Japanese firms to boost their market share during the downturn.
After the global crisis, the market was shrinking, but it was a good time for Japanese companies to expand their IPP [independent power project] business in the region, says Tamaki. This is because the IPP business is very competitive, and one of the most important factors is financing. For Japanese firms, they have access to Jbic and also long-established and close relationships with Japanese banks.
Tamaki explains that high levels of liquidity and the merger of several of Japans banks has enabled the countrys banking and export credit sector to support Japanese ventures abroad.
Japanese banks were forced to shrink assets after the burst of the bubble in the late 1980s to early 1990s, he says. There used to be 10 big banks in Japan, and now there are only three. And they all have very healthy balance sheets.
If you compare it with the European banks, which have very high debt-to-loan ratio (more than 100 per cent), for Japanese banks, loans are only about 70 per cent of the level of total deposits. So Japanese banks are in a good position to support Japanese companies abroad.
Since the crisis, we have seen Japanese developers doing well in the power and water sector, and making competitive bids. First it was Marubeni, which was followed by Mitsui and Sumitomo; they have now become established developers in the region.
While Tamaki says the low price of oil may affect the progress of proposed major hydrocarbons projects, particularly in the petrochemicals sector, the demand for power and water will remain robust throughout the region, and Japanese companies are keen to be involved.
In Oman, despite concerns over its projects because of oil prices, OPWP [Oman Power & Water Procurement Company] says it needs to achieve the targets that have been set to meet future demand, says Tamaki. As well as the Salalah 2 IPP, which is under evaluation, they are planning large IPPs at Ibri and Sohar.
In the UAE, they have the Hassyan coal project, which Japanese companies have shown interest in even though it is coal, and in Saudi Arabia, they have the planned Fadhili IPP. There is also the Facility D IWPP in Qatar, in which Japanese firms are heavily represented.
Tamaki says Kuwait may offer the most lucrative market for developers in the coming years, because of rather than in spite of slow progress to date. Jbic is providing $645m of financing for the consortium selected in December 2013 to develop the countrys first IWPP, Al-Zour North. Sumitomo is the Japanese representative in the developer consortium.
As the yen depreciates, we will move more towards export and away from loans
Kuwait will be the biggest market for power and water in the GCC, says Tamaki. Oil prices wont affect their projects as their development of power is already delayed, so they need to catch up. The recent start of the prequalification process for Kuwaits next two major IWPPs, Al-Zour North and Al-Khiran, suggests that Tamakis prediction could well come true.
While Tamaki expects the GCC to remain the regional focus of Japanese developers in the immediate future, he is also becoming increasingly excited about the potential of the Egyptian market.
We see very good signs coming from Egypt, says Tamaki. [President Abdul Fattah] al-Sisi has already started to invest in and plan major infrastructure projects such as the Suez Canal redevelopment programme. There will be a lot of projects coming up, with solving electricity shortages a key priority. They are looking at conventional gas, coal, nuclear and renewables schemes to meet demand.
Tamaki says that while Egypt is not quite investment ready, 2015 may be the year the country re-emerges as a major player in the Mena projects market.
[The US] Fitch Ratings has already upgraded Egypts credit rating from B- to B, and Moodys [Investors Service] outlook has improved from negative to stable, he says. The IMF report [issued since the interview in February] will probably say things are better just in time for the upcoming conference in Sharm el-Sheikh.
Tamaki is referring to the Egypt Economic Development Conference, which be held from 13-15 March and is expected to welcome heads of state and business leaders from around the globe as Al-Sisis government seeks to push ahead with its infrastructure programme.
While Japanese firms will be looking to leverage their technology and extensive expertise to participate in Egypts and the wider regions infrastructure development initiatives, its participation in nuclear programmes is less certain. There were several potential nuclear projects overseas for Japanese companies five years ago, but when [the] Fukushima [disaster] happened, the plans were suspended or dropped immediately, says Tamaki.
To do nuclear business abroad, companies need approval from the government, and after Fukushima, the authorities dropped all nuclear plans and shut down existing plants due to public pressure. Also, for Japanese firms to bid on nuclear projects, they need assistance from major power providers and operators in Japan such as Tokyo Electric Power Company [Tepco] which already have huge nuclear assets. But, of course, Tepco had to focus all of its attention to manage Fukushima and the aftermath. So Tepco, for example, could not provide any assistance or support to other countries.
Lobbying for nuclear
Fukushima also had an impact on the firms financial position, which prevented Tepco from targeting other opportunities abroad. Almost 30 per cent of Japans power was provided by nuclear energy, so all of the electricity providers had to find other fuel to burn for power, from expensive LNG [liquefied natural gas] imports to coal or even oil, and this affected their balance sheets, says Tamaki. So they stopped plans for any external investment.
He says that while opinion remains divided in Japan over nuclear energy, the countrys industries are lobbying for the restart of nuclear power generation, which will reduce the costs of electricity companies and enable them to start bidding on projects again. Tamaki says Tepcos participation in the consortium bidding on Qatars Facility D IWPP is the first international project the firm has targeted since Fukushima, and this is a positive sign for the future of Japans power sector, which has been constrained since the disaster.
While entering the regions potentially lucrative nuclear energy market will pose one difficulty, the return of competition from European banks will also provide another challenge.
However, new stringent regulations on international lending and the impending Basel III regulations will place banks under stricter guidelines and reduce their capacity to guarantee long-term tenor loans in the project financing market. Tamaki says this could put ECAs such as Jbic in a stronger position in the Middle East. It will not give us more flexibility, as Japanese banks will also be regulated under Basel III, he says. But it should give ECAs more opportunities to be involved in projects, as they will be preferred for longer loans.
While stricter regulations on banks may lead to more opportunities, Tamaki acknowledges that the international project financing market is gradually becoming more competitive again, particularly as Western banks recover from the eurozone crisis.
European banks are coming back to the market and bringing new financing products, such as mini-perm loans, and so sponsors will have more alternatives, he says. There is also Islamic financing, which will open up another avenue for every developer for financing.
This will signal greater competition from commercial lenders for project financing, but Tamaki says this is not necessarily a negative development. It is good for developers because they even Japanese [developers] have more alternatives for financing from more sources, he says. For us, as a financial institution, it will allow us to use funds for other regions and other sectors. We shouldnt be concentrating on one sector and one region as that is very risky. We would also like to diversify our portfolio, so now is maybe the time to do this.
Another trend that will shape the Mena project financing landscape in 2015 is the growing strength of the dollar and the depreciation of the Japanese yen. As an ECA, our major activity should be to support exports from Japan abroad, says Tamaki. But nowadays, we have two main products the first is export credit and the other is overseas investment loans, with loans now much larger than export financing.
Tamaki says that with the depreciation, the onus will shift back towards export credit. With the depreciation of the yen, the competitiveness of Japanese products and companies has been raised, he says. So, for Japanese developers, which previously may have used cheaper non-Japanese contractors, they will switch back to Japanese firms. As the yen depreciates, we will move more towards export and away from loans.
August 2014 Moved to Dubai to become chief representative
2009 Completed masters degree in business administration from London Business School
2002 Joined Jbic
1994 Graduated from Keio University, Tokyo, with a bachelors degree in economics, then began his career at Bank of Tokyo