Infrastructure: an emerging asset class for institutional investors

Transcription

1 Infrastructure: an emerging asset class for institutional investors Dr Rajiv Sharma School of Geography and the Environment University of Oxford

2 Agenda Infrastructure: an emerging asset class for institutional investors -Emergence of the Infrastructure Financial Product -The wider benefits of infrastructure investing -Case Study 1: Auckland International Airport Ltd. -Case Study 2: Ferrovial-led ADI Acquisition of BAA -Questions/Discussions

3 Background Information Urban Infrastructure Assets

4 Background Information Urban Infrastructure Assets Infrastructure (transport, telecommunication, electricity, water) are networked structures that provide essential services that a society cannot do without. (OECD) The Infrastructural fabric contributes to the urban landscape by helping to define the material and social dynamics of urban spaces. Investing in economic infrastructure has positive societal and economic impacts.

5 Research Overview Investment Drivers Global Infrastructure Deficit: Rising populations into urban areas, increasing economic growth and internationalisation of economies have all placed an increasing strain on infrastructure facilities.

6 Research Overview Investment Drivers Not to mention The Global Financial Crisis: -Global Public Debt Crisis austerity measures, dramatic cuts for public spending -New Normal stagnant growth, lost decade Infrastructure investment needed for stimulation

7 Research Overview Evolution of the Infrastructure Financial Product: Through privatisations (trade sales, leasing arrangements, IPOs), infrastructure is now defined in terms of investment not physical characteristics -Stable cash flows linked to inflation, long term -Low risks, low returns and low volatility, natural monopoly chracteristics -Long term (10, 20+ years) infrastructure investing ideally suited to pension funds (liability matching)

8 Research Overview The political economy of infrastructure investing: Issues of Interest: Privatisation/Regulation Provision of infrastructure for urban and national economic development Key Questions: How does privatisation affect the provision of infrastructure services? Are private actors working by themselves? What is the role of government? What are important corporate governance considerations?

9 Auckland International Airport Ltd.

10 Auckland International Airport Ltd. Background Information Accounts for over 70% of international visitors to NZ 1987 Corporatisation 1998 Privatisation (Initial Public Offering)

11 $ NZD (000s) Passenger Volume (000s) Auckland International Airport Ltd. 30 Financial Performance ( ) 14, , ,000 8,000 Revenue per Passenger 15 EBITDA per Passenger 6,000 Profit per Passenger 10 4,000 Passenger Volume 5 2,

12 $ NZD Auckland International Airport Ltd. 4 Investment Performance ( ) Share Price Dividend per Share Annualised Rate of Return of AIAL: 11.12% -Annual Return of Market (NZX50): 6.51% -Second most robust performance of S&P Global Infrastructure Index constituents through GFC

13 Auckland International Airport Ltd. -Economic Impact Assessment -Study conducted in 2007 showed that AIAL contributes 13% to national GDP and 21% to Auckland s GDP (Market Economics 2010) -Performance (Operating and Productivity): -Productivity measures higher than Europe, North American and Asia Pacific productivity means (Air Transport Research Society, Transport Research Laboratory, Forsyth 2006, Oum and Yu 2004). -Customer Satisfaction (Independent Skytrax Awards) -Top 10 Airport last three years -Best Airport in Australia Pacific last three years

14 Auckland International Airport Ltd. Findings: -Factors that have contributed to the successful performance of AIAL: Privatisation Process Corporate Governance Government Decision-Making Conservative Capital Structure Light-Handed Regulatory Environment

15 Auckland International Airport Ltd. -Airport Pricing Regulation in NZ (Dual Till) -Aeronautical Charges no formal price control. Airports are only required to consult with airlines before making charges. -Two Commerce Commission Reviews Minister of Commerce overturned recommendation of price control no price control required, however input methodologies should be disclosed. Airports still able to set prices as they see fit. - AIAL has freehold land and has been able to use favourable market revaluations in its RAB calculation for allowable aeronautical revenues.

16 Auckland International Airport Ltd. -Regulatory environment has facilitated successful financial performance -Why was price control not enforced at time of privatisation? -Political Influences (Maximise Govt. revenue so minimise pricing restrictions/ AIAL contribution to regional and national GDP) -Example of positive relationship between government and private owner, without adverse affects of electoral politics -Light Handed Regulation emphasizes the need for a cooperative approach to wider stakeholder relationships

17 Auckland International Airport Ltd. -Implications: -Government is central to the process of private infrastructure provision -Provides an example/model of regulation, corporate governance and capital structure that can achieve favourable financial and wider economic performance. -Greater the significance of an infrastructure asset to a nation/region s GDP, the greater the return achieved by a private institutional investor investing into the asset.

18 Ferrovial-led ADI Consortium Acquisition of BAA

19 Ferrovial-led ADI Consortium Acquisition of BAA Perfect Storm of Events: 1.Governanance and Management Changes 2.Financial Implications 3.Deteriorating Terminals, Increased Security and Reputation Threats 4.Regulatory Backlashes almost all the negative scenarios have been played out and none of the positive (Head of Airports Division, Ferrovial, 2008)

20 Ferrovial-led ADI Consortium Acquisition of BAA Perfect Storm of Events: 1.Governanance and Management Changes June 26 th 2006 Deal Closed ADI acquire BAA for 16.4bn (Equity Value 4.6bn) 12 of existing Board replaced with 7 members from Ferrovial 2007 Chairman, CEO, CFO, Regulatory Affairs Manager all depart company CEO of Heathrow Airport leaves 2008 CEO BAA leaves COO Heathrow Airport leaves 2009 New COO Heathrow Airport leaves

21 Ferrovial-led ADI Consortium Acquisition of BAA Perfect Storm of Events: 2.Financial Implications

22 Ferrovial-led ADI Consortium Acquisition of BAA Perfect Storm of Events: 3. Deteriorating Terminals, Increased Security and Reputation Threats CAA Service Quality Rebates at Heathrow Airport

23 Ferrovial-led ADI Consortium Acquisition of BAA Perfect Storm of Events: 4.Regulatory Backlashes Competition Commission Review: Forced sale of Gatwick and Stansted and one of Edinburgh or Glasgow Civil Aviation Authority Pricing Regulation Round April 2008: Allowable cost of capital reduced from 7.75% to 6.2% Annual cash flows for firm reduced by 150 million

24 Ferrovial-led ADI Consortium Acquisition of BAA Failure in Corporate Governance on two levels: Firstly: ADI showed inadequate stakeholder or relationship based governance. - Tried to run from Madrid - Couldn t cope with deteriorating service standards - Could not get regulators on side Secondly: -Inappropriate method of shareholder or market based governance approach -Excessive leveraging in GFC leading to refinancing issues, sale of assets

25 Ferrovial-led ADI Consortium Acquisition of BAA Governance Implications for Infrastructure Assets:

26 Infrastructure: an emerging asset class for institutional investors Summarizing Points: Making comparisons for the asset class is difficult because of the associated heterogeneity. Despite this, there are crucial leverage variables that allow us to understand why one has performed better than the other. AIAL: Patient Investors Good Governance Favourable Regulation Good investment performance +ve Stakeholder Impact BAA: Patient Investors Disruptive Governance Unfavourable regulation Detrimental Investment -ve Stakeholder Impact Highlights the importance of relational form of regulatory contract and relational approach to governance.

27 Infrastructure: an emerging asset class for institutional investors Concluding Remarks: The two case studies have highlighted some of the key factors that affect the performance of privatised infrastructure companies Private infrastructure investment can lead to improvements in standard of living. The extent to which the social goals are met depends on how the private sector is brought on board. This paper provides important lessons of regulation and corporate governance for future private investment of infrastructure assets.

28 Infrastructure: an emerging asset class for institutional investors Thank you Questions/Comments