> PPPs - A Super Opportunity?
4 June 2014
Julie-Anne Mizzi
Investment Director, Social infrastructure and PPPs
AMP CAPITAL
A super appetite for infrastructure
> On average, Australian superannuation funds are estimated to have invested
approxima...
The Conundrum
> A perfect match?
// 3
The super opportunity
PPPs are the perfect match for superannuation funds:
> Long term liabilities matched with long term ...
The dilemma for long-term capital pools
PPP procurement framework does not encourage “up-front” super
participation:
> His...
Investment criteria for super funds
// 6
The perfect PPP
> Social infrastructure is expected to be
the most defensive comp...
Benefits of a secondary market in PPPs
> Recognise that there are two different risk profiles over time
within the one PPP...
Benefits of a secondary market in PPPs
> Benefits for long term investors
// 8
Limited or no
construction risk
Constructio...
>
Location: • Greater Melbourne
Business: • Availability based PPP
Source: • Existing relationship with vendor - RBS
• Pro...
>
Location: • Regional South-West Victoria
Business: • Patronage risk BOOT water asset
Source: • Direct approach to vendor...
>
Location: • Greater Adelaide region, South Australia
Business: • Availability based PPP
Source: • Existing relationships...
// 12
Important note
// 13
While every care has been taken in the preparation of this document, AMP Capital Investors
Limited (A...
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Julie Ann Mizzi - AMP Capital - PPPs – A Super Opportunity?

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Julie Ann Mizzi delivered the presentation at 2014 National PPP Summit.

The National PPP Summit is the leading annual event for industry stakeholders to gather and discuss the issues across the national and global PPP markets. The 2014 agenda reviewed current and emerging financing models as well as showcasing best practice strategies for the procurement process, risk transfer and whole-of-life project management.

For more information about the event, please visit: http://www.informa.com.au/PPPSummit14

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Julie Ann Mizzi - AMP Capital - PPPs – A Super Opportunity?

  1. 1. > PPPs - A Super Opportunity? 4 June 2014 Julie-Anne Mizzi Investment Director, Social infrastructure and PPPs AMP CAPITAL
  2. 2. A super appetite for infrastructure > On average, Australian superannuation funds are estimated to have invested approximately 5% of their total assets in infrastructure holding around $63 billion in infrastructure investments1 – this compares with an average of 3% globally2 > Superannuation capital is expected to increase from $1.8 trillion to $6 trillion by 20371 > Infrastructure investment could rise by $100bn in the near term and to as much as $200bn by 20253 > There is a $770bn infrastructure funding requirement over the next 10 years4 > Australia is focused on large-scale infrastructure but small scale infrastructure has capacity to deliver significant economic and social outcomes1 // 21. ASFA Submission on Public Infrastructure: Provision, Funding, Financing and Costs, 3 April 2014 2. OECD/NAB Source: Towers Watson: Global Pensions Assets Study January 2014 3. EY/FSC Superannuation investment in infrastructure 2014 4. Infrastructure Partnerships Australia April 2012
  3. 3. The Conundrum > A perfect match? // 3
  4. 4. The super opportunity PPPs are the perfect match for superannuation funds: > Long term liabilities matched with long term assets > Long duration assets > Defensive assets with low volatility > Attractive risk adjusted returns > Positive cash flow generation with stable yields > Strong diversifier against traditional asset classes > Beneficial for society at large links with ESG focus and members’ interests // 4 “There is a natural fit in terms of the long-term nature of those superannuation investments and the long-term nature of infrastructure investment”
  5. 5. The dilemma for long-term capital pools PPP procurement framework does not encourage “up-front” super participation: > Historical failure of patronage risk PPPs and construction risk > Timeframes are long and protracted (average 17 months)1 > Bid costs are too high (0.5%-1.2% of project capital value)1 and investment managers are unable to defray bidding costs across their other investments2 > Equity cheque sizes are too small with minimum investment sizes $100m- $200m+ for <50% > Refinance risks > Inconsistent and shallow pipeline of opportunities > Specialist skills / scalability > Restrictions on the transfer of equity in PPP projects limiting future liquidity > Uncertainty over taxation policy // 51. KPMG, PPP procurement – Review of barriers to Competition and Efficiency in the Procurement of PPP Projects, May 2010 2. ASFA Submission on Public Infrastructure: Provision, Funding, Financing and Costs, 3 April 2014
  6. 6. Investment criteria for super funds // 6 The perfect PPP > Social infrastructure is expected to be the most defensive component of an infrastructure portfolio – low risk and low return > Operational stage i.e. cash flow generative > Limited or no construction risk > Predominantly availability based cash flows > Strong preference for CPI linked cash flows > Minimal residual value exposure > Standardised terms and limited “uniqueness”1,2 1. Baker and McKenzie “PPP Procurement Process” 2. Infrastructure Partnerships Australia; A submission on the future directions for Public Private Partnerships” March 2013
  7. 7. Benefits of a secondary market in PPPs > Recognise that there are two different risk profiles over time within the one PPP contract: ― Development phase ― Operational phase > Benefits for government: ― Matching risk appetite with difference investors groups best able to price it ― Long term alignment with long term investors delivering the partnership approach > Benefits for equity sponsors ― Development phase sponsors concentrate on their key capabilities: bid risks, consortium selection, construction management and finance structuring ― Recycling of equity to gain capital appreciation – dependent on their success on delivery of their capabilities // 7
  8. 8. Benefits of a secondary market in PPPs > Benefits for long term investors // 8 Limited or no construction risk Construction is usually complete, with only minor defects outstanding – can be assessed and priced Immediate operating yield With the assets in operation, the cash yield supports investor requirements Operational history Likelihood and risk of potential abatements can be assessed to accurately gauge the volatility of cash flows Counterparty and operator relationships have been tested in a live operating environment Measurable refinancing risk No construction risk and a solid operational history improves credit margins Contract misalignments Operational performance review highlights any contracts misalignments and allows appropriate pricing of risk
  9. 9. > Location: • Greater Melbourne Business: • Availability based PPP Source: • Existing relationship with vendor - RBS • Proceeded through competitive process Transaction Overview: • 100% equity funded by AMP Capital managed vehicles • 23 years remaining on concession to 2036 with the Vic State to design and construct, operate and maintain 11 schools in Greater Melbourne • 8 primary schools, 1 secondary college, 1 primary to year 9, 1 primary to year 12 and 6 YMCA facilities • Enrolment capacity of 10,750 students • Core services (teaching, school administration, etc) remain with the State. Private sector provides non- core services, including design and construction (D&C) of the school facilities, and ongoing facility O&M which is fully outsourced to facility management subcontractor (FM), United Group Services • State makes availability-based quarterly services payments (QSP) to procure the non-core services • Put in place new debt, swap and equity financing • Financial close achieved in March 2014 Investment Thesis: • Availability-based payments from creditworthy government counterparty (AAA rated) • High quality stable and predictable fully CPI-linked equity cash flows with no patronage risk • Quality service provider and builder • Attractive risk-adjusted return and cash yield • Limited operational risk • Manageable refinancing risk • Long-term (23 year) investment horizon Value Proposition: • Utilisation of AMP Capital’s in-house SPV management expertise • Enhanced stakeholder relationship with a long-term investment mindset Vic Schools Project Victoria 9
  10. 10. > Location: • Regional South-West Victoria Business: • Patronage risk BOOT water asset Source: • Direct approach to vendor • Proceeded through exclusive process Transaction Overview: • 100% equity funded by AMP Capital managed vehicles • BOOT concession to 2027 with the Grampians Wimmera Mallee Water (“GWM Water”), a Victorian government owned entity • Owns and operates four water treatment plants in four regional towns in Victoria to deliver potable water to Ararat, Great Western, Halls Gap and Stawell • Currently process 25,000 ML p.a. and serve a total of 13,100 users. • No debt in the assets and will remain unlevered • Financial close in June 2014 Investment Thesis: • Contractually enforceable concession to provide treated water to GWM Water, a Victorian government owned water authority (Victorian Government AAA rated) • Operationally mature assets with a largely de-risked commercial exposure • Long 11 year water volume track record with little future volume downside risk due to long term drought restrictions • O&M risk passed through to an experienced operator, Trility under a 13 year contract including partial transfer of volume risk; • Low technology risk utilising known conventional processing technologies • No debt refinancing risk Value Proposition: • Utilisation of AMP Capital’s in-house SPV management expertise • Leverage in-house water expertise • Cement Trility strategic relationship for water opportunities • Potential to leverage scale with additional water acquisitions 10 AquaTower Victoria
  11. 11. > Location: • Greater Adelaide region, South Australia Business: • Availability based PPP Source: • Existing relationships with two 50% vendors • Proceeded through exclusivity for 100% Transaction Overview: • 100% equity • 30 year concession to 2039 with the South Australian State to design and construct, operate and maintain six schools in the Adelaide region • Core services (teaching, school administration, etc) remain with the State. Private sector provides non- core services, including design and construction (D&C) of the school facilities, and ongoing facility O&M which is fully outsourced to facility management subcontractor (FM) • State makes availability-based quarterly services payments (QSP) to procure the non-core services Investment Thesis: • Availability-based payments from creditworthy government counterparty (AA rated) • High quality stable and predictable nominal equity cash flows with no patronage risk • Quality service provider and builder • Construction risk completed with defect liability on foot • Limited operational risk • Manageable refinancing risk • Long-term (27.5 year) investment horizon Value Proposition: • Utilisation of AMP Capital’s in-house SPV management expertise • Enhanced stakeholder relationship with a long-term investment mindset SA Schools South Australia 11
  12. 12. // 12
  13. 13. Important note // 13 While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.
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