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
Water today, water tomorrow The treatment of regulated and unregulated business in setting price controls for monopoly water and sewerage services in England and Wales a discussion paper www.ofwat.gov.uk
the true value of any business is in its people annual report 2008 contents profile 3 our services 4 our mission, global presence and culture 5 our core values, unit model and strategic approach 6 profile
Water today, water tomorrow Financeability and financing the asset base a discussion paper www.ofwat.gov.uk About this document This document focuses on two of our primary duties, which are to: further
SCOTLAND'S INFRASTRUCTURE Delivering Firm Foundations for the Future Scotland Means Business The Scotland Means Business reports have been prepared for N-56 by a study team that includes: This report has
Standard Life plc Annual Report and Accounts Group financial highlights for Standard Life plc is an asset managing business with around 1.5 million shareholders in over 50 countries and 156.8bn of assets
World Economic Forum Mining & Metals Industry Partnership In collaboration with Accenture January 2014 Scoping Paper: New models for investment in the mining and metals sector 1 TABLE OF CONTENTS 1. EXECUTIVE
Towards Green Growth FOREWORD Introduction by the Secretary-General The OECD Green Growth Strategy: A lens for examining growth The world economy is slowly, and unevenly, coming out of the worst crisis
8 Steps for Analysing Listed Private Equity Companies Important Notice This document is for information only and does not constitute a recommendation or solicitation to subscribe or purchase any products.
British Airways 2009/10 Annual Report and Accounts 21 The markets we operate in our business MATCHING CAPACITY TO DEMAND The longest and deepest recession in living memory has meant we have had to move
Tasmanian Energy Strategy Department of State Growth Restoring Tasmania s energy advantage Ministerial foreword Restoring Tasmania s Energy Advantage I am very pleased to release the Tasmanian Energy Strategy
Structural Challenges for the Mexican Economy Remarks by Manuel Sánchez Deputy Governor The Bank of Mexico at The Hong Kong University of Science and Technology Hong Kong, China November 14, 2014 It is
BUILDING TOGETHER Guide for Municipal Asset Management Plans Ministry of Infrastructure Letter from the Minister of Infrastructure and Minister of Transportation Infrastructure investments are vital to
Water today, water tomorrow The form of the price control for monopoly water and sewerage services in England and Wales a discussion paper www.ofwat.gov.uk _ About this document This document considers
Network Pricing Trends Queensland Perspective 20 January 2015 Foreword This report has been prepared for Infrastructure Partnerships Australia (IPA). Its purpose is to help build community understanding
BANIF - BANCO INTERNACIONAL DO FUNCHAL, S.A. (incorporated with limited liability in Portugal) 3,000,000,000 COVERED BONDS PROGRAMME BASE PROSPECTUS BANIF - Banco Internacional do Funchal, S.A. (the Issuer
Two trillion and counting Assessing the credit gap for micro, small, and medium-size enterprises in the developing world OCTOBER 2010 Peer Stein International Finance Corporation Tony Goland McKinsey &
Philip Lowe: Productivity and infrastructure Speech by Mr Philip Lowe, Deputy Governor of the Reserve Bank of Australia, to the IARIW (International Association for Research in Income and Wealth) - UNSW
Briefing Note to Government on the Review of the Tasmanian Electricity Supply Industry 1 Disclaimer Infrastructure Partnerships Australia provide no warranties and make no representations in relation to
September 29 UBS research focus Infrastructure: a strong foundation Massive fiscal stimulus boosts infrastructure spending Economic recovery supports end-user demand, revenues Structural trends favor both
www.pwc.com/financialservices Fit for business: Preparing for dramatic change within the eurozone Capitalising on market growth opportunities and addressing the emerging risks November 2014 2 PwC Fit for
Who would pay for a new runway? A study by Brendon Sewill March 2014 The environmental impacts of new runways often take second place to economic considerations. While the economic benefits appear to dominate
Our finances explained May 2014 Contents Page 3 Chief Executive s introduction Page 4 Thames financial highlights Page 5 Executive summary Page 6 Investment the facts Page 7 A brief history of Thames and
EN EN EN EUROPEAN COMMISSION Brussels, 18.1.2011 COM(2011) 5 final REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL Mid-term review of the European satellite radio navigation programmes
Corporate Real Estate : Investment and EU Cities Foreword RICS members in Europe are highly qualified professionals working internationally to support businesses, governments and society as a whole. Covering
SUPPLY CHAIN FINANCE REPORT OF THE SUPPLY CHAIN FINANCE WORKING GROUP JULY 2010 Published by ACT on behalf of the working group: EXECUTIVE SUMMARY Contents page 1.0 Executive summary 3 2.0 Introduction