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ALWAYSTHINKINGINVESTMENT
THE USE OF INVESTMENT FUNDS FOR
INFRASTRUCTURE DEVELOPMENT
African Stock Exchange Conference20 September 2006
2
What is Infrastructure?
3
a. the basic structural foundations of society or enterprises
b. roads, bridges, sewers etc regarded as a country’s economic foundation
Source : Concise Oxford Dictionary
What is Infrastructure?
4
Assets with:
- Essential assets
- Long term, predictable cash flows
- Low sensitivity to economic cycles
- Not subject to competitive markets
- Low risk/volatility
Infrastructure characteristics
5
RegulatedRevenue level or
tariffs regulated
Natural monopolyBasic/essential
servicee.g. prison,
electricity & gas distribution
Patronage/Throughput
Patronage dependent
Monopolistic elements
Demographic factors
e.g. roads, airports, railways, car parks and ports
SocialEssential service,
but not monopoly
Basic social service provision
e.g. hospital, school, government buildingsCompetitive
Compete in market for sale of product
Volatile returnse.g. certain power
pool generators
Risk
Retu
rnInfrastructure asset classes
6
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
Investment Needs
7
Special Purpose Vehicles
Essential Services
High Barriers to Entry
High Capital Costs/Low Operating Costs/High Financial Leverage
High Gearing to Declining Risk
Regulated
Different to listed equity, bonds & property
8
Typical structure
9
PPP Structures
Shareholder 1 Shareholder 2
Contractor Operator
Lender AuthoritySpecial Purpose Vehicle
(SPV)
Shareholders Agreement
LoanAgreement
ConcessionAgreement
Design and Construct Contract
Facilities Management Contract
Interact with Lenders to extract maximum benefit for shareholders
Due diligence on project,
assumptions and forecasts
Ongoing assessment of performance
Actively monitor our investments and
engage with management on
regular basis. Board representation
Interact with Authority on behalf of SPV
Primary focus as a Non sponsor equity investor
Asset Manager actively monitors its investments at various levels to extract maximum benefit for shareholders
10
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
Optimal risk allocation
11
Investment Process
12
Ongoing Management
Disposal
RevaluationRefinancing
Restructuring
Investment
Life Cycle
Initial Screening
Financial ModelDue Diligence
Completion
Investor Returns
Deal Flow
Infrastructure Management Process
Investment CommitteeInvestment Committee
Investment Committee
Investment Committee
13
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
Active management
14
Listed Infrastructure
15
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
Infrastructure index
16
Listed Infrastructure Companies in EuroTop 300 Index
Source: Based on broker ‘sum of parts valuations’ and Macquarie infrastructure definition
Companies included in Infrastructure Index Companies not included in Index
0%
20%
40%
60%
80%
100%
Infr
ast
ruct
ure
Exp
osu
re
BG G
roup
Bouy
gues
Union
Fen
osa
FCC
Elec
tricid
ade
de P
ortu
gal
Ende
saSu
ez
PPC
Enel
Iber
drol
aE.
ONRW
E
Vive
ndi E
nvvi
ronm
ent
Scot
tish
& Sou
ther
n En
ergy
Scot
tish
Power
Gas N
atur
al S
DGVi
nci S
A
Seve
rn T
rent
Unite
d Util
ities
Aces
a
Natio
nal G
rid T
rans
co
BAA
Plc
Auto
stra
de
Snam
Ret
e Gas
17
Source: Dow Jones STOXX website; indexes are based on total return data
Correlation of Infrastructure Index compared to other Indices
-0.0
0.2
0.4
0.6
0.8
1.0
Auto
Tele
com
Med
ia
Const
ruct
ion
Tech
no
Health
care
Non C
yclic
al
Chem
ical
Banks
Infra
stru
ctur
e In
dex
Food
& Bev
Ener
gy
Utiliti
es
Basic re
sour
ces
Retail
Auto
Tele
com
Const
ruct
ion
Cyclic
al
Fina
nce
Indu
stria
l goo
ds& S
erv
Insu
ranc
e
18
Source: Dow Jones STOXX website; indexes are based on total return data
Standard Deviation of Infrastructure Index compared to other Indices
0%
10%
20%
30%
40%
50%
0%
10%
20%
30%
40%
50%
Infra
stru
ctur
e In
dex
Utiliti
es
Non C
yclic
al-
Health
care
Retail
Const
ruct
ion
Fina
nce
Banks
Basic re
sour
ces
Indu
stria
l goo
ds&cy
clical
Serv
Auto
Insu
ranc
e
Med
ia
Teleco
m
Tech
no-
Food
& B
ev
Retail
Chem
ical
Ener
gy
Med
ia
Teleco
m
19
Valuation
20
Source : African Infrastructure Investment Managers
Risk and Capital Growth
MatureRisks: Major
population shift
Risk Premium4% – 5.5%
GrowthRisks: Impacts on
Traffic
Risk Premium5.5% – 6.5%
Ramp UpRisks: Ramp Up Rate, Natural Traffic Level
Risk Premium 6.5% - 8%
Construction Risks: Construction
Risk Premium 8% – 10%
Greenfield Risks: Legal,
Environmental & Regulatory
Risk Premium 9% - 12%
Ass
et V
alue
Project Life
Ris
k Le
vel
Note: risk premium over risk free rate ( eg R153)
Project Life
21
Refreshing Concessions
Concession
Pro
ject
Valu
e
Cash distributionexceeds revaluation
Revaluation exceedscash available
End of
SAIF
22
Other benefits
23
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
Other benefits
24
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
Why Infrastructure
25
Conclusion
26
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
Investor appetite
27
Government vital to future of asset class
Will and competence
Stability of policy
Public entities with track record
Private sector efficiencies
Government role
28
Old Mutual Asset Managers (South Africa) (Pty) Ltd Physical Address:MutualparkJan Smuts DrivePinelands 7405 Telephone number: +27 21 5095082 (Mike van Heerden)Internet website: www.omam.com Old Mutual Asset Managers (South Africa) (Pty) Ltd (“OMAM (SA)”) is a licensed discretionary financial services provider approved by the Registrar of Financial Services Providers (www.fsb.co.za) to provide intermediary services and advice in terms of the Financial Advisors and Intermediary Services Act 37 of 2002. OMAM (SA) is a wholly owned subsidiary of Old Mutual South Africa Limited. Market fluctuations and changes in rates of exchange or taxation may have an effect on the value, price or income of investments. Since the performance of financial markets fluctuate, an investor may not get back the full amount invested. Past performance is not necessarily a guide to future investment performance. All returns are rand returns, unless otherwise stated. Investment deals done on behalf of clients with a company in the Old Mutual Group are all done on an arms length basis.
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