Institutional investors worldwide could play a major role in the rebuilding of northeast Japan as they and Japanese banks investigate how they can help rebuild the crippled infrastructure that resulted from the devastating March 11 earthquake and tsunami.
“Over the last four to five days I've had discussions with sovereign wealth funds and government pension funds,” said Michael Underhill, chief investment officer at Capital Innovations LLC, Hartland, Wis., an infrastructure investment firm.
”Ninety-eight percent are not in Japan. They are interested in investing in Japan infrastructure.” Mr. Underhill declined to identify the interested funds.
The amount of investment could be vast. Current estimates put the cost of reconstruction in Japan at $180 billion and growing.
Capital Innovations has business relationships with Bank of Tokyo-Mitsubishi UFJ Ltd. and Daido Life Insurance Co., among the financial institutions that head up business “fraternities” known as keiretsu that pool money to make investments. It is possible the discussions could prompt a banking keiretsu to make infrastructure investments in Japan.
In addition to the pool of money that could be formed by a keiretsu, there might also be room for institutional investors to form a consortium to assist in the rebuilding effort, investment managers said.
“Organizations may be successful in creating a "club' so that money could come together and make meaningful investments in infrastructure to complement the existing budget for infrastructure projects in Japan,” Mr. Underhill said. (Last year, the Japanese government budgeted $1 trillion for infrastructure projects over five years beginning in 2012.)
Much of investors' focus is on rebuilding Japan's energy infrastructure — particularly with the crisis at the Fukushima Daiichi power station forcing a critical look at the country's use of nuclear power.
“Thirty percent of energy in Japan is from nuclear energy,” said Mr. Underhill, who is a member of the infrastructure work stream, an advisory committee to the United Nations Principles for Responsible Investment.
“Replacement of some of that with natural gas or clean energy infrastructure could be helpful. The investment industry sees some issues around nuclear energy maintenance and investing in nuclear energy.”
Historically, most of Japan's infrastructure has been financed publicly, but “in Japan, there was talk (before the crisis) about bringing in private investment in infrastructure,” as recently as last year, said Joe Lyons, managing director, infrastructure investment group, in the Boston office of RBC Global Asset Management.
”Right now, there is a human tragedy,” Mr. Lyons said. “Most natural disasters follow a similar pattern: You have disruptions in production, usually followed by a fairly quick recovery. It may be different here; we're not sure what the entire outcome will be with the nuclear plant.”
”This will continue to play out on a long-term schedule. Infrastructure takes a long time to plan, a long time to build and it lasts a long time,” he said.
There's some recent history of institutional investors assisting in earthquake-related rebuilding efforts. After the February 2010 earthquake in central Chile, a number of the country's pension plans began infrastructure investing to help in the rebuilding, Mr. Underhill said. According to the U.S. Geological Survey, Chile's earthquake and tsunami caused $30 billion in damage.
In addition, Chile's government also raised corporate taxes, drew on revenue from its copper mining sovereign wealth fund and encouraged large Chilean companies to invest, he explained.
Industry insiders expect that institutional investors, inside and outside Japan, could play a part in financing Japan's future infrastructure.
Long-term, the effort to rebuild Japan's infrastructure should not be hampered by the current tight credit markets, Mr. Lyons said.
“I don't foresee long-term changes as far as impact of the credit markets. It may affect projects short-term, getting off the ground and the prices for insurance, but otherwise the outlook remains positive for infrastructure,” Mr. Lyons said.
However, before private capital can come in to help finance infrastructure projects, Japan's parliament would need to pass legislation approving such investment, Mr. Lyons said.
“Like other governments they are proceeding down a path that won't be linear and recent events will probably accelerate” allowing private investment in infrastructure, Mr. Lyons said. “It will start with a project or two and, if they are successful, there will be more momentum; and, if not, they may pull back for a time.”
U.S. engineering and construction firms also are in contact with insurance companies, real estate investment trusts and other property owners in Japan to assist in the rebuilding.
Leonard Joseph, principal with Thornton Tomasetti Inc., an Irvine, Calif.-based engineering firm that specializes in commercial real estate and public projects, has been contacting clients and prospective clients with large real estate holdings regarding their concerns with their commercial property holdings.
The situation in Japan is difficult to evaluate because of the nuclear crisis, Mr. Lyons noted.
“We are in the embryonic stages of understanding the crisis,” Mr. Underhill added.