Growing Interest in Exporting Mega-Infrastructure Projects

As part of Abenomics, Prime Minister Abe Shinzo proposed to boost Japanese infrastructure exports and set a goal of tripling the current volume to thirty trillion yen (US $250 billion) by 2020. Energy, transportation, water, telecommunication, medical and construction industries were targeted as growth areas. There are four major hurdles to realizing the government’s goals. The first is the competitiveness of Japanese firms. Infrastructure projects typically require the capacity to mobilize many players globally over an extended period. While some Japanese firms in the auto and power plant sectors have the necessary ability, many others including rail, telecommunication, and medical industries primarily have experience catering to the domestic market. They are also less competitive in managing complex projects involving multi-firm integration, restraining client expectations, and controlling project costs. To illustrate, a Japanese joint venture won a US $2 billion contract for Dubai Metro in 2005. The cost subsequently surpassed US $6 billion, but much of the cost overrun was not recovered. Another example is a US $4.5 billion contract in 2006 for an Algerian highway project, which ended up with a billion-dollar cost overrun and caused a dispute with the Algerian government. Japanese firms’ newest competitors are Chinese SOEs, which have substantial cost advantages. Japan’s second challenge is the exchange rate. While the depreciation of the Yen by 50% since 2013 has been a boon, Yen volatility creates considerable uncertainty, which contrasts with the stable exchange rate Japan’s Chinese rivals enjoy. Third, the government does not have a capability to align ODA, export finance, and other diplomatic tools with a private sector for-profit project. In fact, Japan’s recent failed bid for the Indonesian high-speed railway project was partly blamed on its inability to align export finance with the proposal. Finally, the government needs to enhance transparency, accountability and fair competition.