Two Trillion yen Financing Framework Completed, and Japan will Make a Contribution to Trump Policy by Mobilizing Public and Private Money
August 31, 2017
Tadashi Maeda, Executive Managing Director of the Japan Bank for International Cooperation ("JBIC"), met with US Transportation Secretary Elaine Chao (Chao Xiao-ran) in Washington before the Golden Week holidays.Trump watchers must be aware of the true implication of the meeting. One of Trump's eye-catching policies of "America First" is to invest $ 1 trillion on the aged domestic infrastructure, and the President appointed the acclaimed Taiwanese- American Chao to steer the job.
Her father was a Mainland-born Taiwanese and was a classmate of Jiang Zemin at the Shanghai Jiao Tong University, and Elaine immigrated to the U.S. at the age of 8 and got an MBA from the Harvard Business School. Having been married with Republican senator Mitch McConnell, and served as the Secretary of Labor in George W. Bush administration, she is well connected inside the Washington Beltway. In her meeting with Maeda, Chao carried a thick file with many post-it attached―a file of "Texas bullet train" which JR Tokai has been promoting to the U.S. for years.
After the Chao-Maeda meeting, things started to move. In June, a Taiwanese businessman informed this newspaper: "The Texas bullet train looks like feasible". "TCP's American staff came to Taipei in June and visited the Taiwan High-Speed Railway who operates Taiwan Shinkansen."
Learned from "failure" of Taiwan high-speed railway
TCP stands for Texas Central Partners, which was established under the initiative of local businessmen as an operating body of the Texas bullet train. Former Defense Deputy Undersecretary Richard P. Lawless serves as chairman and CEO, raising funds, seeking approvals from the government, deciding stations and routes, securing land, etc. It plays the role of construction entity that will eventually become the railway operator. Lawless hired Tim Keith from Deutsche Bank as president to handle financing, and also hired Dr. Carlos F. Agiler of Bechtel Corp as the CEO.
The TCP staff who visited Taiwan used to work for the Taiwan American Association, which is the de-facto diplomatic channel between the U.S. and Taiwan, and joined the TCP to work for Lawless. The Taiwan High Speed Railway was the only case Japan succeeded in exporting Shinkansen, and TCP came to learn lessons from the "financing failure" of the Taiwanese case, and how to inject the state money.
The Taiwan High Speed Railway at start adopted the European system in 1997, but two years later Japanese Shinkansen system struck back to secure the order in electric and vehicle contracts. Therefore, completion delayed from initial target of 2005 to 2007. TCP came to confirm in Taipei, because "Taiwan High Speed Railway was built with BOT (Build, Operate, and Transfer) contract, and Texas is seeking the same method".
The BOT system is a contractual pattern in which a private business operator constructs, maintains, and operates facilities, and transfers ownership of facilities to administrators of public facilities after a certain predetermined period, and it is normally amortized in 35 years from the inception. In the European proposal, the total investment of NT$ 443.2 billion was all to be borne by private sector, and no government investment was necessary. As the project delayed, the amortization period was cut short to 26 years, thus the annual interest burden to banks of about NT$ 3.9 billion and annual depreciation expenses reaching NT$ 19 billion together weakened the finance in the initial few years.
"Democratic Party Chen Shui-bin administration injected public money to avoid the financial crisis, and Shinkansen now is somehow operating as a quasi-state-owned company"
Lawless's aide came to learn finances of the Taiwan Shinkansen and the process of injecting the public money. Texas bullet train, adopting BOT method, already raised $ 75 million seed money from investors in June 2015. Japanese quasi-public fund, Overseas Traffic and Urban Development Project Support Organization ("JOIN") also invested $ 40 million with a nod of the Ministry of Land, Infrastructure and Transport. Raising $300 million seed money was achieved, but approximately $ 17 billion to 18 billion (about 2 trillion yen) would be needed for construction, and that financing is critical.
The source in Taiwan said. "Japanese government financial institutions, including JBIC, have decided full-support, and that prospect made TCP to dispatch a staff to confirm a process of injecting public money." It seems Gary Corn, chairman of the National Economic Council of the White House (NEC) is standing behind Elaine Chao.
Noriyuki Kasai, tied up with Neo-cons, sticks to export of Shinkansen
The bullet train export has become Japan's national policy since the cabinet resolution of the Aso administration on June 23, 2009, right after the Lehman shock. As Obama administration announced a "Green New Deal" policy to boosting economy and reducing emission, then president of JR Tokai Noriyuki Kasai flew to Washington D.C. to meet with the Secretary of Transportation at the time, promoted N 900 Shinkansen used in the Tokaido Line.
Kasai himself commented; "high-speed railways are not an easy sell, but in this case the United States need it and we have the system and track record. Japan and the United States are economic and security allies, so it is certain we realize the project". The export to the US as well as the new linear Shinkansen became Kasai's pet project.
JR Tokai announced two joint ventures with two US companies on January 25, 2010, when the LDP was out of power; USJHSR for the marketing of the Tokaido Shinkansen and USJMAGLEV with the linear train . At this time Kasai hired ex-CIA Lawless and ex-Navy Torkel Paterson, two neocons served in the Bush administration, for the ground work of lobbying.
Lawless served as the Deputy Undersecretary of Defense for Asia-Pacific in 2002-07, and commanded the reorganization of the US military forces in Japan. His hardliner comment that 3 trillion yen was needed from Japanese side for the regrouping, jolted Shinzo Abe, then Chief Cabinet Secretary, as Abe said the amount as "tremendous amount of money".
Patterson, after serving as Deputy Assistant Secretary of State for South Asia and Senior Country Director for Japan in the Office of the Secretary of Defense, later worked as the head of Raytheon Japan, a defense contractor, then again served as a presidential special advisor.
When Shinzo Abe returned premiership in 2012, his mentor Kasai again urged the export of Shinkansen, and one "Japan revival strategy" was resolved in cabinet in June 2001. Abe is an avid traveler, and he does not shun top sales. In February 13, 2013, in his meeting with Barak Obama in Washington, Abe praised Obama's high-speed railway development initiative, and even offered to hand out superconducting linear technology free of charge and make it a symbol of Japan-US cooperation. When Obama visited Tokyo in 2014, Abe tried to let Obama visit linear experiment line in Yamanashi, but no avail. He even took a ride himself with Caroline Kennedy, then U.S. Ambassador to Japan, and commented in the top meeting.
However, the linear technology required to be tested in Japan first, and the oppositions from the conventional line and trade union were strong in the U.S. thus local consensus not obtained yet. Promotion to Florida project stalled, and JR Tokai zeroed in on the Texas project.
In February 2017, at the first summit after the inauguration of Donald Trump, Abe audaciously pitched the bullet train again: "By the leadership of President Trump, we can work together in large-scale infrastructure such as high-speed railway. If you have experienced Japanese Shinkansen, you understand its speed, comfort and safety, of which Japan can contribute to Mr. President's growth strategy with the highest technical standards and thereby generating employment."
However, just before the US visit, Nikkei newspaper reported that Japanese public money to be invested into the U.S. infrastructure, utilizing fund such as Government Pension Investment Fund ("GPIF"), whose asset size stands at 145 trillion yen. The news generated criticism in Japan that the Abe administration was currying favor Trump by spending pension money, and Chief Cabinet Secretary Yoshihide Suga, scurried to deny the rumor.
However, in April 2010, JBIC changed its charter to start making loans to the local business entities of Japanese companies related to major intercity high-speed railway in developed countries, and in May 2011 it was to start making loans to exporting equipment for high-speed railway in developed countries. HTeC, 100% U.S. subsidiary of JR Tokai fulfilled the condition for the former, and the USJHSR, USJMAGLEV, TCP fulfilled conditions for the latter. Many in the industry reckoned the GPIF money may be mobilized for the American high speed railway.
Construction starts in 2019, and operation starts in 2023
The final financing scheme seems like funded by equity of 20-30%, and debt for the rest, being contributed equally by the U.S. and Japan, debt portion amounting to $ 7 to 8 billion each. A person familiar with the deal is optimistic; "if debt is determined, equity will follow." The U.S. side is preparing to provide loan programs within the framework of the Federal TIFIA (Transport Infrastructure Funds and Innovation Law) and the RRIF (Railway Renovation and Improvement Fund) program embodying the Buy-American policy.
On the Japanese side, JBIC as a syndicate manager is talking to Japan Trade Insurance and private banks for the loan to form a public-private consortium, lending to 10 Japanese companies such as Hitachi who makes rolling stocks. (Kawasaki Heavy Industries, which is in partnership with JR East Japan for the California Project was intentionally eliminated by JR Tokai).
Kasai once boasted "Operation can be started in 2018, if everything goes smoothly", but now it is impossible. The envisaged schedule is as follows; project needs to clear regulations of Federal Railroad Authority (FRA) in 2018, and technology and environment assessment obtained in 1Q 2019, and financing close to follow. The construction starts in 2019, and the commercial operation starts in 2023.
On July 10, JR Tokai completed a low interest loan contract of 3 trillion yen using the government-sponsored Fiscal investment Loan Program ("FILP") in order to advance the construction of the Japan Linear Central Shinkansen, connecting Tokyo and Nagoya. Special interest of Kasai-Abe relationship materialized in order of trillions of yen, even encompassing the U.S. government. The packaged export of Shinkansen was supposedly the key component of the third arrow of the Abenomics. However, in the day of its realization in Texas, both Abe and Trump may not be in their office anymore......