THE USE OF INVESTMENT FUNDS FOR INFRASTRUCTURE DEVELOPMENT

African Stock Exchange Conference 20 September 2006 ALWAYS THINKING INVESTMENT

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What is Infrastructure?

What is Infrastructure?

a.

b.

the basic structural foundations of society or enterprises roads, bridges, sewers etc regarded as a country’s economic foundation

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Source : Concise Oxford Dictionary

4 Infrastructure characteristics 

Assets with:

- Essential assets - Long term, predictable cash flows - Low sensitivity to economic cycles - Not subject to competitive markets - Low risk/volatility

5 Infrastructure asset classes    

Patronage/Throughput

Patronage dependent Monopolistic elements Demographic factors e.g. roads, airports, railways, car parks and ports    

Regulated

Revenue level or tariffs regulated Natural monopoly Basic/essential service e.g. prison, electricity & gas distribution   

Social

Essential service, but not monopoly Basic social service provision e.g. hospital, school, government buildings   

Competitive

Compete in market for sale of product Volatile returns e.g. certain power pool generators Risk

6 Investment Needs   Investment Needs : High risk adjusted returns Diversification Absolute returns Low correlation alternatives Lower risk/volatility alternatives Returns that match liability profiles Balance capital growth with the security of cash yield Downside protection Other Needs : Seen to be contributing to upliftment Social responsibility

7     Different to listed equity, bonds & property  

Special Purpose Vehicles Essential Services High Barriers to Entry High Capital Costs/Low Operating Costs/High Financial Leverage High Gearing to Declining Risk Regulated

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Typical structure

PPP Structures

Actively monitor our investments and engage with management on regular basis. Board representation Interact with Lenders to extract maximum benefit for shareholders Lender Shareholder 1

Shareholders Agreement

Shareholder 2 Primary focus as a Non sponsor equity investor

Loan Agreement

Special Purpose Vehicle (SPV)

Concession Agreement Design and Construct Contract Facilities Manageme nt Contract

Contractor Operator Authority Interact with Authority on behalf of SPV

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Due diligence on project, assumptions and forecasts Ongoing assessment of performance

Asset Manager actively monitors its investments at various levels to extract maximum benefit for shareholders

10 Optimal risk allocation Risks appropriately allocated to the party that controls it e.g.:  Construction risk entirely back to back to D&C contractor  Operational risk back to back to O&M contractor  Revenue risk with concession company  Finance risk with concession company

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Investment Process

12 Infrastructure Management Process Deal Flow Investor Returns Investment Committee Financial Model Due Diligence Investment Committee Completion Initial Screening Investment Life Cycle Ongoing Management Disposal Restructuring Revaluation Refinancing

13 Active management    Management Asset management intensive Big stakes, few investments Often Concessions held by SPV i.e. influence brings obligations Understanding the asset class Few qualified asset managers Constant search of economic value add Valuation management and continuity Cross pollination of best practice (non-competitive) Government agency interaction Deal Flow Securing pipeline

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Listed Infrastructure

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Infrastructure index

 Constitution of index: All companies in Euro Top 300 Index with greater than 50% exposure to pure infrastructure were selected Separate infrastructure index was created using these companies Comparisons run to ther indexes

Listed Infrastructure Companies in Euro Top 300 Index 100% 80% Companies not included in Index 60% 40% 20% 0% Companies included in Infrastructure Index 16

Source: Based on broker ‘sum of parts valuations’ and Macquarie infrastructure definition

Correlation of Infrastructure Index compared to other Indices 0.4

0.2

0.0

1.0

0.8

0.6

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Source: Dow Jones STOXX website; indexes are based on total return data

Standard Deviation of Infrastructure Index compared to other Indices 18

Source: Dow Jones STOXX website; indexes are based on total return data

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Valuation

Risk and Capital Growth Project Life 20 Project Life Greenfield Risks: Legal, Environmental & Regulatory Risk Premium 9% - 12% Construction Risks: Construction Risk Premium 8% – 10% Ramp Up Risks: Ramp Up Rate, Natural Traffic Level Risk Premium 6.5% - 8% Growth Risks: Impacts on Traffic Risk Premium 5.5% – 6.5% Note: risk premium over risk free rate ( eg R153)

Source : African Infrastructure Investment Managers

Mature Risks: Major population shift Risk Premium 4% – 5.5%

21 Refreshing Concessions

SAIF

Revaluation exceeds cash available Cash distribution exceeds revaluation End of Concession

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Other benefits

23 Other benefits  Basis for a globally competitive economy  Stimulates stronger economic growth  -

1% increase in infrastructure stock = 1% increase in GDP

Redistribution of State Spending  Generates new jobs  Increases economic productivity  Alleviates Poverty

24 Why Infrastructure 

Government objectives: -

Reduce public sector borrowing & cost Operational efficiencies of private sector Focus on user benefits & service delivery Speed up infrastructure development Optimal risk allocation between public and private sector

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Conclusion

26 Investor appetite       Institutional appetite has broadened and deepened Initially through private equity funds or direct private investments Critical mass build-up Public listing – international precedent for both listed funds and direct investments Asset class diversification Liquidity

27 Government role 

Government vital to future of asset class



Will and competence



Stability of policy



Public entities with track record



Private sector efficiencies

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Regulatory Information

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