ppps in north america – a private sector partner’s perspectiverepair work later, and give us...

STRICTLY CONFIDENTIAL

Nicholas HannManaging Director

Macquarie North America Ltd. December 6, 2006

PPPs in North America – A private

sector partner’s perspective

UBC P3 Project – Research Workshop 2STRICTLY CONFIDENTIAL

Contents

PAGE

PPP Overview 3

Macquarie Road Experience in North America 18

Chicago Skyway 19

SR 125 24

Highway 407 29

Detroit-Windsor Tunnel 34

Dulles Greenway 37

Sea to Sky Project 39


1. Public Private Partnerships


Infrastructure Investment Paradigm Shift

Governments have traditionally been the prime facilitators of infrastructure investment

In recent years, however, pressure to lower taxes and still provide services has forced governments globally to reorder their priorities

Role of government evolving to that of regulator of assets rather than provider of services

This trend is likely to continue, providing ongoing opportunities for private sector investment in infrastructure assets

Secondary market is growing

Government infrastructure investments as a % of total outlays in OECD countries¹

0%

2%

4%

6%

8%

10%

12%

14%

16%

USA Canada UK France Germany Aust ralia

1970 1980 1990 1997

Source: National Accounts, OECD¹ 1997 figures are the most recent available. The OECD is publishing these results again in 2004

Private investment in infrastructure is growing as alternatives to government funding become increasingly necessary


Infrastructure Sub-Sectors

Throughput Regulated Contracted Social Infrastructure- Related

Roads

Tunnels

Bridges

Airports

Rail Links

Electricity Distribution /Transmission

Gas Distribution / Transmission

Water Distribution

District Energy

Renewable Energy

Power Generation

Communications Towers

Hospitals

Long-Term Care

Schools

Courthouses

Prisons

Car parks / parking garages

Telecoms Systems

Directories

Expanding the definition of infrastructure

Over the past decade, the term infrastructure has been applied to an increasing number of assets

The Infrastructure Investment Spectrum


Why the Shift to PPPs?

Governments have successfully decreased deficits and debt, in part, by cutting infrastructure investment, despite…

— Increasing need for investment due to population growth and demographic factors

— Desire to improve efficiencies in the public procurement process

— Aging capital stock and needed investment in key infrastructure

Because it:

— Encourages whole life costing approaches

— Encourages innovative solutions to meet schedule and performance requirements

— Focuses all stakeholders’ attention on “value for money”

— Results in the management of risk in a transparent manner

— Rewards performance consistent with the objectives of the project

— Refocuses the investment decision from an asset to a service: allows the private sector to determine the mix of capital and operating inputs required to produce the desired service


PPP’s Deliver!

Source: HM Treasury July 2003

Recent UK Treasury study into PPP projects showed:

— 89% coming in on time or early

— No cost overruns on construction borne by public sector

Noting:

— 70% of Non-PPP were delivered late, and

— 73% ran over budget

UK National Audit Office Study of Highway PPP’s found savings of:

— 19% on capital costs

— 34% on operating costs

— 17% overall lifecycle savings

Reasons for cost savings in UK PPP’s

— Transfer of “whole life” responsibility to private sector

— Transfer of risk to private sector

— Broader competition (not just contractors, but also operators, suppliers)

— Reduction in scope for claims against governments

— Economies of scale in project management, design, construction, operation


Why do PPP’s Bring these Benefits?

Transfer “whole life” responsibility to private sector (not just construction)

Transfer of risk to private sector

— Each party manages risks they are best able to handle

— Creates incentives for private sector to perform

Public sector has ability to penalize for poor performance; replace poor service

— Right to terminate contract

Broader competition

Reduction in scope for claims against governments

— Clear accountability

Economies of scale in project management, design, construction, operation

Note key differences:

Traditional: Government specifies design

PPP: Government specifies outcome or service


Government Attitude in the United States

There are many politicians who support the privatization of tollroads in the USA…..

“I want to be very clear on where the Bush Administration stands on public-private partnerships (PPP). We like them, we want to encourage them, and we support them.” – Mary Peters, US Secretary of Transportation (Former Federal Highway Administrator) December 2004

"Our goal is to encourage states to experiment and innovate, to become the laboratories of democracy and show us and each other how to work with the private sector to build roads that open faster, require less repair work later, and give us safer, smoother rides at less cost.“ – US Secretary of Transportation (Norman Mineta)

"We've got a major shortfall between the amount of money available and the infrastructure needs of this state, so we're going to look at every option, from tolling, to asset sales.” – Governor of Indiana (Mitch Daniels)

“It makes sense that when you take over a business that's struggling you look at ways to leverage your assets. There's a lot of assets the state has.“ – New Jersey Governor (Richard Codey - On leasing the NJ Turnpike)

"This transaction, which is the first of its kind in the nation, fulfills Mayor (Richard) Daley's continued commitment to pursue innovative financing techniques, and has provided Chicago taxpayers with an unprecedented single, up-front payment of $1.83 billion that we will use to invest in our people and protect Chicago's taxpayers both today and in the future." – City of Chicago Chief Financial Officer (Dana R. Levenson)


Report to Congress on Public Private Partnership – January 2005

US Department of Transportation, Report to Congress on Public Private Partnerships - January 2005, 197 Page Report

Report is very pro, private investment and involvement in transportation projects.

Supportive of Design – Build as a procurement method quoting cost savings of between 6 to 40%

Key Recommendations:

1. Tolling: Allow States to Toll the Interstate / Variable Pricing Initiatives

2. Private Activity Bonds: Allow issue of up $15bn of private Activity Bonds (Tax-Exempt Bonds that allow private equity investment), for new build projects

3. Environmental Streamlining: Defined Timeframe for process / Permits

4. TIFIA Amendments: lower threshold ($100m to $50m)

5. Design Build: Lower threshold for use

6. Commercialization of Rest Areas

7. Debt Service Reserve: Allow Federal Grant Funds to be used for debt service reserves


Since then… Legal environment has developed

Indicates states with a broad PPP legal framework

Indicates states with a limited PPP legal framework

Indicates states likely to enact PPP legal framework in future


CHICAGO SUN TIMES OCTOBER 28, 2004

THE INDIANAPOLIS STAR MAY 24, 2006

ILLINOIS:Chicago Skyway

INDIANA:Indiana Toll Road

TEXAS:Trans-Texas Corridor

VIRGINIA: Pocahontas Pkwy, Capital Beltway, I-95

OREGON:PDA development of 3 projects

Since then… Successful examples have shown PPPs are a reality

VIRGINIAN PILOT JUNE 5, 2006


Since then… Concession model has shown real benefits

TRADITIONAL PROCUREMENT CONCESSION MODEL

Standalone Bonding Capacity

Additional Debt

Equity

OPEX Efficiencies

CAPEX Efficiencies

Revenue Efficiencies

Standalone Bonding Capacity

VS.

State’s estimate of value Private Sector Valuation Additional Value

Indiana Toll Road $2.0bn $3.8bn Approx 90% more

Chicago Skyway $1.0bn $1.8bn Approx 80% more

Examples

ADDITIONAL:

Infrastructure

Economic Development

Jobs+

++

++


Government Attitude in Canada

Federal – Government now embracing P3 model

British Columbia – P3’s now well established. Recent announcement by Provincial Government that all capital projects with a Provincial contribution of more than $20m must be considered for P3 delivery.

Ontario – Infrastructure Ontario currently progressing over 50 “Alternate Service Delivery” projects

Quebec – current P3 transactions in roads, hospitals and social infrastructure

Alberta – successful P3 Projects in roads – expanding into hospitals, schools and water treatment

Atlantic Canada - Successful P3’s in roads and social infrastructure


Key Trends: Infrastructure Funds

Focus on yield has driven private sector investment in infrastructure

Pension funds typically have very long dated liabilities which are well matched by infrastructure assets

Peculiar to Canada has been the development of the income trust sector which has a particular focus on infrastructure assets – now with its tax advantages taken away

There is a growing base of infrastructure investors globally:

— Traditional players (dedicated funds, construction groups etc)

— Pension funds

— Private equity

— Retail

There is now a sophisticated and diverse global market for investment in infrastructure and funding new infrastructure

Specialized Infrastructure Investment Funds now a significant feature of market

As much as $150 billion of funds raised globally

Infrastructure and PPP’s increasingly seen as a distinct asset class with low correlation to other investment

$145bn of M&A activity in sector in 2006 (up 180% from 2000)

Concerns over high multiples paid for assets (27.5x EBITDA for London City Airport)

Low rates of return on investment (PPP transactions trading in the UK secondary market at IRR’s below 6%)

Reducing cost of equity for public sector sponsors


Key Trends: Strong and Maturing Credit Markets

Canadian transactions initially done largely in European bank market due to inability to obtain committed finance at bid

European banks increasingly providing better financing than traditional tax exempt municipal bond markets in US

Canada now has maturing debt markets:

— Choice of European bank, monoline insurance, “bought bond deals”, private placements

— Credit rating agencies making huge effort better to understand construction risk in PPPs

— Cost of debt and flexibility of terms is falling

Concerns emerging over high levels of leverage (debt to EBITDA multiples increasingly above 20x)


Key trends: Government Approaches

Volume of transactions increasingly stretching the market for Design-Builders and Facility Managers

Increasingly jurisdictions are competing for human resources and capital to drive projects

Increasing shortage of high quality advisors to Government

Market is increasingly becoming global

Investors gravitating to efficient (quick and cost effective) procurement processes and larger projects

Governments increasingly

— Standardising documentation

— Improving procurement processes

— Simplifying transactions

— Bundling smaller projects to create larger ones

STRICTLY CONFIDENTIAL

Macquarie’s Road Experience in North America


Chicago Skyway


Chicago Skyway Press


Chicago Skyway Overview of Transaction

Overview of Transaction

City of Chicago sold a 99yr concession for the Chicago Skyway

Competitive process involving 5 qualified parties

Cintra-Macquarie consortium was the successful bidder

Final Sales proceeds of $1.83 billion (49 x 2005 EBITDA)

Process run by Goldman Sachs

First privatization of an existing toll road in the U.S.

Financing structure used taxable debt (no tax-exempt debt)

Tolls (Passenger Vehicle)

Increase at greater of CPI, GDP per capita and 2%

2004: $2.00

2005: $2.50

2008: $3.00

2011: $3.50

2013: $4.00

2015: $4.50

2017: $5.00


Chicago Skyway Overview of Asset

Overview of Asset

Built in the 1950s

7.8 miles in length

3 lanes in both directions

Mostly elevated structure

Completion of a $300m rehabilitation project expected in ’04

Manual tolling (no electronic tolls)

EBITDA (2002): US$33 m

Understated due to construction rehabilitation program

Average Passenger Vehicles per day: 50,000

ChicagoSkyway


Chicago Skyway Overview of Process

Overview of Process

City appoints Goldman Sachs to act as sell side advisor

RFQ issued March 2004

City selects qualified bidders in 5 bidders qualified (out of 10 responses) May 2004

Qualified bidders provided with access to data room June 2004

Bidders provide indicative bid and comments on concession agreement July 2004

Final and binding bids submitted October 2004

Successful bidder announced October 2004

Concession agreement signed October 2004

Financial close expected January 2005

Details on the City of Chicago website: www.cityofchicago.org/Skyway

http://www.cityofchicago.org/Skyway


SR-125 (San Diego – California)


Franchise originally granted in 1990; part of California State’s freeway plan since 1959

— Key delays were environmental, legal and prior to grant of concession to private sector, lack of finance

35 year concession

Macquarie acquired interest in September 2002

Transaction financed May 2003

Critical government involvement

Federal: USDOT TIFIA Loan

State: Caltrans granted franchise and land acquisition

County: San Diego / SANDAG project construction $138 million

City: Chula Vista undertook Master Planning & arranged developer land donations

Funding structure (at start of operations)

Numerous community and environmental commitments

Project currently under construction

Toll road opening scheduled for October 2006

US$ million

Senior Bank Loan 321

TIFIA debt 154

Equity 160

$635 million

SR-125


SR-125 Overview of Transaction


Located in San Diego California

Total cost $900 million

Green field toll road, under construction, due to complete in 2006

Significant congestion reliever

Strong demographic growth

First ever TIFIA concessional loan for a private toll road development in the USA


SR-125 Overview of Asset

Overview of Asset

SR125 South Toll Road

18km in length – 4 lanes wide in most sections

35 year concession from date of road opening

Flexible toll setting based on demand

Estimated opening is in 2006

Designed to reduce congestion on Interstates 5 and 805

Reduce congestion on local arterial roads in Chula Vista and Bonita

Serve existing and future development in the South Bay and Otay Mesa Area


SR-125 Overview of Process

Overview of Process

EGIS / PB Consortium awarded concession by Caltrans 1989

Delays due environmental and permitting issues 1993 to 2000

TIFIA application approved 2000

Macquarie Infrastructure Group’s purchased majority of EGIS / PB interest in company Sep 2002

Financial Close / Ground breaking May 2003

Anticipated opening Mid 2006

Concession ends Start of Operations + 35yrs

Financial Close was reached within six months of Macquarie Infrastructure Group’s purchase of the project


HIGHWAY 407 (Ontario, Canada)


Highway 407 ETR History of Transaction

History of Transaction1998/99 Advised a consortium, included the Infrastructure Trust of Australia (predecessor to the Macquarie Infrastructure Group (MIG)) among other international and Canadian institutions and pension funds, on the acquisition of the highway from the Province of Ontario.

— valuation, due diligence, managing independent advisors. negotiating the construction contract for 39km of tolled highway

— Although the bid was not successful, Macquarie arranged $3.5 billion of committed capital.

2001 Advised MIG on the $1.2 billion acquisition of 40% of Cintra Concesiones de Infraestructuras de Transporte S.A. (Cintra), the largest single shareholder of 407 International Inc. which owns 407 ETR.

— valuation and due diligence, managed external technical advisors, assisted with negotiations.

— co-led underwriting of $A1.7 billion of equity

2002 Advising MIG on the $493 million acquisition of a 16% interest in 407 International Inc.

— deal origination, valuation, due diligence, negotiation, managing advisors and documentation.

— co-lead the underwriting of $A1.0 billion of equity, including a $A200 million placement to Ontario Teachers’ Pension Plan Board.

2002 Advising Cintra on the acquisition of 5.8% of 407 International Inc., for $178 million.

— deal origination, valuation, due diligence, negotiations, managing advisors and documentation


Highway 407 ETR Overview of Transaction


Concession

— 99 Year concession Ending 2098

Time to Deliver

— Extensions opened and operational within 28 months, 4 months ahead of required deadline

Cost to Deliver

— Construction costs of extensions equal to $500 million

— $3.1 billion sale price, proceeds used to pay down debt

Economic Impacts

— Over 350 employees at 407 ETR

— Significant development of commercial and residential property around the road where only rural land existed previously

Private Sector Involvement

— Design, construction, financing of two extensions plus maintenance and operations of entire road

— Transfer of all associated risks including toll revenue, operations, maintenance, and construction of extensions


Highway 407 ETR Overview of Transaction Con’t

Public Policy Goals

— Congestion relief for Highway 401

— Barrier free access

— Off balance sheet, off credit

— Proceeds from sale

Public Acceptance

— Servicing over 300,000 customers on average weekdays

— Growing customer base of over 4.8 million people

— Over 500,000 transponders in use

User Fees (January 1, 2002 for vehicles with transponders):

— Passenger vehicles – 11.5 cents per km

— Recreational vehicles – 23.0 cents per km

— Trucks – 34.5 cents per km

Service Improvements

— Relief of congestion on major 400 series highways

— One of the safest highways in North America


Highway 407 ETR Overview of Asset

Overview of Asset

Largest Highway Privatization in the world

108 kilometre Multi-lane, toll highway

40 interchanges

Lane width varies between 4 – 8 lanes in each direction.

Opened to public traffic in June 1997

Tolling commenced in October 1997

Designed to be a congestion reliever to Highway 401, one of the busiest highways in North America (over 400,000 vehicles per day at its busiest points).

Uses a barrier free “transponder” electronic tolling system.

500,000 transponders in circulation for use on the Highway.


Detroit – Windsor Tunnel (Linking US and Canada)


Detroit Windsor Tunnel Overview of Transaction


January 200 - Macquarie North American Infrastructure Inc. (a wholly owned subsidiary of the Global Infrastructure Fund (GIF)) acquired Detroit Windsor Tunnel shares from DCTC owners.

The acquisition of DCTC was funded by $US53.5 million of senior debt supplied by WestLB, subordinate debt originally supplied by Macquarie Bank Limited, and equity provided by GIF.

DCTC currently holds a concession over the US side of the tunnel which grants it the right to collect toll revenue in return for maintaining and operating the tunnel. DCTC also operates and collects revenue from the Canadian side on behalf of the City of Windsor.


Detroit Windsor Tunnel Overview of Asset

Overview of Asset

Opened to public traffic November 3, 1930

one of only two road links between Detroit, USA and Windsor, Canada.

Primary link between the downtown core of both cities

Mainly used by light vehicles and buses.

Average vehicle crossings per day: 20,000

Second busiest border crossing between the USA and Canada

About 100 employees maintain the tunnel, collect tolls and provide administrative support.

Tunnel Specifications: Tunnel: 5,160 feet long (1,573 meters) with a height clearance of 13 feet 2 inches (4 meters).

Roadway: 22 feet wide (6.7 meters) and allows for two lanes of traffic in opposite directions

Maximum depth of the roadway beneath the river surface: i75 feet (22.8 meters).

Construction: took 26 months and cost $23,000,000.


Dulles Greenway


Dulles Greenway

Overview of Asset

Equity acquired by Macquarie Infrastructure Group

50 year concession

4 lanes, 58 miles

Enterprise Value ~ $750 m

Chequered past, but performing well experiencing strong growth


Sea to Sky Highway


Sea to Sky: Case Study

Overview of Asset

Upgrade of existing road between Vancouver and Whistler

105km in length – 2 and 3 lanes in most sections

25 year concession from financial close

Construction must be completed by 2009, prior to Winter Olympics

Operation and Maintenance for 25 years

Availability, safety and traffic payments


Located in Vancouver B.C.

Upgrade of an existing road

Capital cost of C$600MM

Shadow toll

Project is being procured as a Public Private Partnership by Partnerships BC

Macquarie selected as preferred proponent and reached financial close in June 2005


Contacts

NICHOLAS HANNManaging Director

Tel: (604) 605-1779Fax: (604) 605-1634

Email:[email protected]

1055 Dunsmuir StreetFour Bentall Centre

Suite 2664Vancouver, BC

ppps in north america – a private sector partner’s perspectiverepair work later, and give us...

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