> 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

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

// 2 1. 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

The Conundrum

> A perfect match?

// 3

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”

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

// 5 1. 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

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

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

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

>

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

>

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

>

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

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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.