U.S. Aging Infrastructure: Which Sectors Are Primed for Private Investing Growth?

U.S. Aging Infrastructure Which Sectors are Primed for Private Investing Growth? Date Ken Herbert V.P./ Partner Business & Financial Services Bernice Lee Consultant Business & Financial Services June 2, 2009

1 2 3 CONTENTS Market Overview Infrastructure Sector Focus 4 Conclusion Public – Private Partnerships

Infrastructure investing has always been a sector of interest for investors for its stable and long-term returns

Recently, a few major factors have combined to push infrastructure investing to the forefront:

PRIVATE CAPITAL Public-private partnerships are essential to bridge the gap between government funding and infrastructure need CREDIT CRISIS In the midst of a credit crisis, investors are eyeing infrastructure – a stable source of return LACK OF GOVERNMENT FUNDING Obama’s stimulus package allocates $72 billion to infrastructure AGING INFRASTRUCTURE Current ASCE estimation of $2.2 trillion over the next five years is needed for infrastructure Infrastructure Investing At-a-Glance

Infrastructure Definition Facilities, systems and equipment required to provide public services and support private sector economic activity Transportation Infrastructure, Regulated Infrastructure, Communication Infrastructure, Social Infrastructure Transportation Infrastructure Bridges Tunnels Rails Transit Airports Seaports Regulated Infrastructure Electricity Transmission and Distribution Oil and Gas Pipelines Water Waste Water

China:

Chinese government stimulus package of $586 billion stimulus (mainly to infrastructure, rural)

India:

Plans to spend 8% of GDP a year on infrastructure projects

Australia:

Infrastructure deficit is estimated at A$20 billion

Australia is one of the first countries to embrace PPPs and expanding access to private infrastructure funds

UK & Europe:

For the EU, OECD estimates 4 trillion Euros will be needed with the bulk for the water sector

Estimate of 100 billion Euros of Public-Private Partnerships (PPPs) have been entered into in UK, Italy, Spain, Portugal, France

UK leads the PPP market while Europe continues to develop

Global Infrastructure Opportunity

USA:

ASCE estimates $2.2 trillion needed over five years for infrastructure

Government stimulus package allocate $72 billion for infrastructure

Infrastructure asset privatization is slower compared to other countries

Rest of World:

Latin America will need to invest $100 billion a year for the next 20 years for its infrastructure

South America’s biggest infrastructure needs are roads, bridges, waterways and ports to help lower cost of exporting

Africa’s infrastructure needs are estimated at $75 billion a year with power being the greatest infrastructure challenge

Source: ASCE, World Bank, Reuters

Global Infrastructure Private Equity Growth $ in billions In the face of the liquidity crisis private infrastructure funds were able to raise close to $25 billion Source: Probitas Partners Currently 77 Infrastructure Funds are Seeking $92 Billion in Committed Capital Four Out of The Top 10 Funds are U.S. Based – Seeking $19 Billion

A Sample of U.S. Based Infrastructure Funds Transportation, energy and utilities, communications, social infrastructure $1.4 billion Morgan Stanley Infrastructure Fund Morgan Stanley Infrastructure Partners Roads, bridges and tunnels; airports, ports and rail; water supply and wastewater treatment; gas transportation, storage and distribution; power generation and electric transmission; and utility services for residential, commercial and industrial customers $3 billion Alinda Infrastructure Fund II Alinda Capital Partners LLC Bridges, tunnels, toll roads; pipelines, energy transmission and distribution; water and waste water systems; airports, seaports; rail; contracted power generation $3.1 billion JP Morgan Infrastructure Investments Fund JP Morgan Asset Management No sector focus given but current and past investments include: energy, waste management $4 billion KKR Infrastructure Fund Kohlberg, Kravis Roberts & Co. Transport, utilities, energy, social infrastructure $4 billion Citi Infrastructure Partners Citi Infrastructure Investors Roads, airports, regulated gas, water & electrical utilities $7.75 billion GS Infrastructure Partners II GS Infrastructure Investment Group Fund Manager Fund Size Sector Interest

Growth Opportunity Profitability Low High Low High Infrastructure Investing Outlook By Sector Power & Clean Energy Rail & Mass Transit Water Waste Management Roads Airports Seaports Bridges & Tunnels

FACTORS AIDING Independence of infrastructure assets from business cycle risk Stimulus package by U.S. Government Pension funds ideally matched for infrastructure investing States are cash-starved -heightened need for private investment U.S. PRIVATE EQUITY INFRASTRUCTURE INVESTING Aging U.S. infrastructure Market Forces Driving Infrastructure Investing The Strong Market Dynamics Will Push Growth in Infrastructure Investing A Growth Rate of 14-18% is anticipated

U.S. Infrastructure Funding Need by Sector Other includes: Parks & Schools Source: ASCE $ in billions $1.2 trillion over 5 Years is Needed via Private Capital 2009 ASCE U.S. Infrastructure Report Card D Transit C+ Solid Waste C- Rail D- Levees D+ Energy D Dams D- Drinking Water D Hazardous Waste D- Inland Waterways D Overall D- Waste Water D- Roads C Bridges D Aviation

$72 Billion Stimulus Package Designated for Infrastructure U.S. Government Stimulus Package Source: Committee on Appropriations Summary

1 2 3 CONTENTS Public – Private Partnerships Infrastructure Sector Focus 4 Conclusion Market Overview

Public – Private Partnerships $2.2 trillion Estimated Amount Needed For U.S. Infrastructure Improvements Over Five Years $975 billion U.S. Government Funding of Infrastructure Need (Actual Spend plus Stimulus Package) $1.2 trillion Significant Gap in Funding Public – Private Partnerships (PPP) PPPs have the greatest advantage to tap private capital.

The 2010 administration budget provides a National Infrastructure Bank to expand public-private sector spending

Initial funding expected to be $5 billion and increase to $25 billion by 2019

The federal stimulus package will also give help to pension funds by creating investment opportunities for their infrastructure allocations

CalPERS

In the past CalPERS grouped its infrastructure investment with other alternative assets such as private equity

CalPERS has stated it would allocated up to $7.2 billion for infrastructure with a net target return of 5% over inflation over a period of five years

Successful examples of PPP investing

In 2006, leasing of the 75 year old Indiana Toll Road for $3.8 billion to Statewide Mobility Partners and Macquarie Infrastructure Partners

In March 2009, Florida closed a $1.6 billion concession to develop toll lanes on I-595 with Madrid-based ACS Infrastructure Development

Public – Private Partnerships

Over half of U.S. states have legislation authorizing PPPs transactions for

Long-term leasing of existing infrastructure

New development of transportation infrastructure

Public – Private Partnership Outlook Examples of Current Deals in Development California’s Port of Oakland: 50 year $700 million transaction to specific port facilities with Ports America Group Wisconsin’s Mitchell International Airport: Investigating feasibly of a long-term lease to raise $1 billion for transit system over 50 years Wisconsin’s Water Works: In an effort to reduce city tax increases and budget cuts, the hope is to raise more than $500 million for leasing of water system

Potential Risks to U.S. Infrastructure Investing U.S. Government regulations could hinder private investment in infrastructure projects Extent of time to bring a project to fruition could also miss the window of opportunity of viable investors The slow evolution of PPPs in the U.S. could see investments moving towards other parts of the world U.S. Government reallocation of infrastructure budget and resources to other higher priority initiatives

Opportunities are available for the savvy and disciplined investors

Increasing ROI due to price moderation

Less leverage available

Infrastructure Investing Outlook

U.S. Government fiscal budget shortfalls are apparent

Combined with budget shortfalls, the increasing awareness of failing infrastructure leads to more PPP opportunities

President Obama administration is focused on infrastructure and clean energy

Independence of infrastructure assets from business cycle risk – relatively recession resistant

Tangible, real assets are more attractive if global stimulus leads to inflation

Political Factors Economic Factors Credit Crisis Factors

1 2 3 CONTENTS Infrastructure Sector Focus 4 Conclusion Market Overview Public – Private Partnerships

Municipal Water and Wastewater Market Dynamics EPA estimates and investment of $390 billion for waste water municipalities Municipalities for safe drinking water face $11 billion shortfall this year Current Size of North American market is $2.74 billion Market emphasis on water reuse and recycling Forecasted five-year CAGR is 7.04%

Strict drinking water and effluent quality regulations are forcing utilities to upgrade current systems.

Increasing U.S. population growth is forcing municipalities to consider expanding current facilities.

Gap between investment required for infrastructure development and funds received by EPA is constantly increasing. Current funding is only $6 billion.

Municipal Water and Wastewater Infrastructure

Market Enhancers Drivers Market Inhibitors Expansions Triggered by Population Growth & Consumption * Length of arrows indicate impact and relevance of driver / constraint Municipal Water and Wastewater Infrastructure Upgrades & Improvements Needed Sizeable Customers/Scale Efficiencies Technology Enhancements Operational Cost Performance Failures Budgetary Restraints Reliance on Self-Sufficiency

Power Generation Market Dynamics Future investment is estimated at $900 billion over next 15 years 60% of circuit breakers are 30+ years old Current Size of North American market is in excess of $750 billion 70% of transmission and power transformers are 25+ years old Forecasted five-year CAGR is 3.9%

The U.S. Government fiscal package allocates $32 billion to transform energy systems by allowing for smarter and improved grid and focusing investments on renewable technology.

There is an existing gap between production and consumption of electricity due to limited capacity—hence need for new investments.

Developments in renewable energy generation are expected to drive power generation infrastructure investment.

Power Generation Infrastructure

Market Enhancers Drivers Market Inhibitors * Length of arrows indicate impact and relevance of driver / constraint Power Generation Infrastructure Aging Power Plants Environmental Regulations to Reduce Air Pollution Increasing Power Demand EPAct 2005 Tax Benefits & Incentives Increase in Renewable Energy to Boost Turbine Development Increased Raw Material Costs (Steel, Copper) Insufficient Capacity Lack of Power Project Financing Due to Long Payback Period

Airport Industry Market Dynamics FAA estimates $49.7 billion is required for infrastructure development in the next five years U.S. government stimulus package allocates $1.3 billion in funding Current size of North American market is $15-20 billion Over the past 30 years passenger air traffic has increased seven-fold Forecasted five-year CAGR is 5%

Capacity issues will either push airports to expand or new airports to be built – a clear indication of the future outlook of the airport industry.

U.S. airports will continually be facing a fluctuation of demand, and at the same time receiving modest funding increase.

There is a clear opportunity given the gap of government funding and the need for private investors.

Airport Infrastructure

Market Enhancers Drivers Market Inhibitors Air Traffic Growth Asset Management Real Estate Management Capacity Operations Efficiency Commercial Revenues Crises & Risk Congestion & Slot Allocation Safety & Security Requirements Sunk Costs * Length of arrows indicate impact and relevance of driver / constraint Airport Infrastructure

Road Industry Market Dynamics ASCE estimates $186 billion per year is needed for road development 36% of roads in the U.S. are continually congested costing $63 billion in time and wasted fuel U.S. highway road system is valued at $1.75 trillion 34% of roads are in poor or mediocre condition Forecasted five-year CAGR is between 5 - 6%

Passenger and commercial travel on U.S. highways continue to increase every year.

The American Recovery and Reinvestment Act only allocates $27 billion for roads. The Highway Trust Fund has a balance of $16 billion, mostly derived from user fees. The funding gap needs to come via private investment.

PPP toll road establishment has been proven in the U.S. (ex, Chicago’s Skyway, Orlando Orange County Expressway)

Roads Infrastructure

Market Enhancers Drivers Market Inhibitors Passenger and Commercial Travel Growth Road Congestion Aging Highway System Increased Population Growth Continual Maintenance Expense Lack of Prioritization by Government on Road Rehabilitation Road Safety Requirements Increased Fuel Costs * Length of arrows indicate impact and relevance of driver / constraint Roads Infrastructure Private Investment via Toll Roads

1 2 3 CONTENTS Conclusion 4 Market Overview Public – Private Partnerships Infrastructure Sector Focus