The Japanese and the U.S. governments will help Asian and South American nations tap green energy, which generates fewer greenhouse gas emissions. As they project a switch from coal-fired power generation to high-efficient power generation using liquefied natural gas (LNG) will take place, they have launched a mechanism that allows their government-affiliated financial institutions to get involved in the development from the initial stage. While they are looking to attract investment money to green energy projects, they aim to draw a clear distinction with “debt-trap” infrastructure projects led by China.
The Japanese Ministry of Finance as well as Ministry of Economy, Trade and Industry have inked a memorandum of understanding with the U.S. Department of the Treasury. The three agencies will have discussions with government-affiliated financial institutions and produce results within the year. As the U.S. is well versed in infrastructure investment, the U.S. International Development Finance Corporation (DFC), the U.S. Trade and Development Agency (USTDA) and other U.S. government agencies may participate in the initiative.
The Japanese and U.S. governments eye extending aid to Asian nations with growth potential to help them build power plants and develop LNG import bases. According to the analysis by the Asian Development Bank (ADB), demand for infrastructure investments in emerging nations within Asia is projected to grow to 22.6 trillion dollars from 2016 to 2030. In particular, demand for energy is growing stronger, accounting for 52% of the total.
The U.S., which has increased natural gas output thanks to the country’s shale gas bonanza, envisages marketing LNG across the globe. Identifying Asia as a strategic market, it is looking to promote the use of LNG power generation. As Japanese firms have a technological edge in high-efficient LNG-powered thermal power generation, Japan and the U.S. will cooperate in exploring markets in Asia and other regions.
In Asia, many countries rely on coal-fired thermal power generation, which emits greenhouse gases in large quantity. As global interest in climate change is growing stronger, there is the view that calls for reducing reliance on coal. European financial institutions are already ceasing to offer credit to coal-fired thermal power projects. Japan and the U.S. will also support the use of renewable energy sources, such as solar power, for power generation.
Japan and the U.S. will build a system to assist developing nations from the planning stage. They will create projects that developing nations can easily get financing for and qualify for trade insurance by helping them develop personnel and establish laws.
Japan, on its part, will consider sending personnel from entities such as the Japan International Cooperation Agency (JICA), which have an edge in development. Then government-affiliated financial institutions of the two nations will extend credit from the planning stage and the Nippon Export and Investment Insurance (NEXI) will underwrite trade insurance to help lower business risks.
The construction of energy-related infrastructure in Asia will generate business opportunities for Japanese and American power companies as well as plant engineering firms. As investments focusing on environmental, social, and governance (ESG) factors are growing popular, the Japanese and U.S. governments will consider creating a framework to attract money from pension funds and other investors once the plan is on track.
But there are many unpredictable factors with projects that need involvement from the initial stage of planning and fund procurement, such as getting business permits from local governments and predicting demand. Some institutional investors are wary of investment risks in emerging nations. Whether Japan and the U.S. will be able to launch attractive investment projects will become a new challenge in the future.
The reason that Japan and the U.S. are stepping up their partnership is to play up their differences from the China-led “Road and Belt” economic initiative. China is making a big sales pitch in Asia and Africa to win infrastructure projects through public-private collaborations.
China is plowing massive amounts of money, but the approach is making some aid recipient nations unable to repay their debts and leading them into a “debt trap.” Japan and the U.S. believe that aid recipients will not be saddled with debt payments if high-quality, sustainable infrastructure is developed. They hope to bolster their competitiveness by leveraging the expertise of their governments and businesses.