May 2014

Role of sustainability in Infrastructure Finance - From Development Banks to Institutional

Investors Adam Nicolopoulos, President and CEO

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200

400

600

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

year of concession

Mill

ion

s of

US

$ n

om

inal

Opex Capex

Senior debt interest & fees Senior debt repayment

Dividends Tax

Equity subscribed Debt drawdown

Total Revenues

Sustainability…

Contractors ACS Dragados

Vinci

Bouygues

Skanska

Fluor…

Asset Operators Port operators (PSA)

Road operators (Autostrade)

Airport operators (TBI)

Rail Operators (Virgin)

…Public Agencies

Developers

Cintra

Abertis

Hochtief PPP

Macquarie

Serco and others

…Public Agencies…

Institutional Investors

Infrastructure Funds

Private Equity

Pension Funds ?

Institutional investors ?

Key Project Investors / Stakeholders

Project /

Corporate

RelationshipsMulti-Laterals

Development Banks

Export Credit Agencies

Others

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Have Institutional Investors Officially Entered the Game?

Institutional Investors’ AUM in OECD, Dec 2013:

Allocation to Infrastructure:

Australia and Canada:

> $70 trillion

< 3%

~ 10-15%

Source: OECD Report, 2013

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Have Institutional Investors Officially Entered the Game?

Institutional Investors’ AUM in OECD, Dec 2013:

Allocation to Infrastructure:

Australia and Canada:

> $70 trillion

< 3%

~ 10-15%

Source: OECD Report, 2013

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Unlisted Funds, AUM

2004: $24 billion

2010: $210 billion

about 10x

Institutional Investors Overview

(*) Date source: Prequin 6

Small and medium-sized institutions make up the majority of all infrastructure investors

Institutional Investors Overview

Small and medium-sized institutions make up the majority of all infrastructure investors

(*) Date source: Prequin 7

81%

Largest Pension Funds Globally (sample)

Data source: Preqin

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Identifying the Suitable Capital Match for your Project

• Pension Funds • Infrastructure

Funds • Insurance

Companies• Private Equity• Endowments • Banks• Wealth Managers• Family Office• SWFs• Multi-laterals

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Risk free rate (treasuries)

+Construction risk

+Revenue model / sector

premium +

Operation risk+

Upside / Ownership premium

+Exit

Risk free rate (treasuries)

+Project risk premium

+ Swap rate

+Country risk

[Premium]

...so how much do I pay for capital?

Equity Debt:

Expected ReturnsIRR [low teens – 20s]

Margins [250 – 400bp]

Credit insurance wrap

Upfront fees

Or

Amortised

Credit Enhancement

depends

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Rise of Infrastructure Debt Providers

Benefits for fixed-income investors (“Shadow Banking”):

Traditional lenders such as banks and governments are under much economic pressure.

• Stable businesses

• Limited exposure to competitive forces and

economic environment

• Stable cash flows, often with inflation linkage

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Pro

ject

’s e

quit

y p

erf

orm

ance

– V

alu

e

Cre

ati

on

Development Construction Operation

Project life

Primary Market

Equity 20%

[Subsidy 30%]

Debt 50%

Ramp-up

Capital Investment

Financial Close ConstructionCompletion

Risk to investor

Project Stages

Secondary /Refinancing

Equity 10-15%

Debt / Bond85-90%

Investor’s Exit?

Concept

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Key Challenges – the Institutional Investors View

Greenfield projects are highly complex

Long construction periods

Upfront development costs

Entitlements & permits can be long and challenging

Require careful analysis and preparation

Require specialists to assess this asset class

Higher risk profile / who pays for the risk and how

Must prove profitability AND affordability

Highly capital intensive (maintenance)

Highly contested projects (unions; citizens; etc..)

Expensive undertakings

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Other Challenges and Issues

Public sector as counterparty

Lack of resources trained in new implementation models

Managing procurement change

Easy targets to challenge / high level of scrutiny

Complex design – impact to costs

Necessity for sophisticated/experienced resources in Gov. teams

High uncertainty and risk

...suitable team and strategy is crucial to address these issues and achieve sustainability

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Future of Financing in Emerging Markets

Bonds from governments or institutions

Institutional Investors look to make new infrastructure investments to move closer to their strategic targets

Collaboration between investors and World Bank/Multi-Laterals

Banks managing a pool of assets based on a fee system. They have the connections but not the capital anymore. Will invest small amounts in long-term debt

SWF huge in emerging markets and could drive growth

Increased involvement of pension funds as they look for long term investments and risk is now shared with other collaborators

Example of ACTIS and RfI in Africa

Oil or mineral extraction rights are exchanged for turnkey infrastructure, complementing standard tax and royalty regimes

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Public Sector Actions for Successful Implementation

Sophisticated management team (leverage private-sector practitioners’ experience)

Clear priorities and objectives (public & project needs)

Standardize tender process / clear guidelines

Transparency throughout project development

Conduct competitive tender BUT accept unsolicited offers

Clear coordination between Minister’s / Mayor’s governance

Investment incentives (tax deferral, tax holiday, fiscal support)

Fast track permitting

Stick to the timetable

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Requirements for Successful Private Participation

Category Definition

Definition Tightly-bound, ironclad definition of project with good & clean limits

SizeLarge enough to attract strong international interest, but not so large as to force need for large bidding groups, thus limiting competition

TimeframeAdequate to bring project to completion – balanced, sufficient time to organize tender competition but short enough to maintain high level of bidder interest

Skill-setsShould not require extensive skillsets – avoid complex, extensive multi-purpose projects that require expensive and diverse skills

InterfacesComplex project structure and inter-organizational agreements take longer to implement than simpler networks

“Financeability”

Solid capital structure; financial equilibrium

RegulationRequired to establish project privatization with defined mechanisms on setting tariffs. Legal framework for the Government to regulate and monitor PPP performance

Technical Factors

Wealth of technical data available for more efficient monetization

Land &Permits Clear definition of ownership of land, right of way and permitting process

Competition Addressing competition from other projects or sectors

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What have I learned along the way?

Sound structures

Experienced advisors are worth the money

Clear guidelines and transparency

Process to resolve conflict

“Win-Win”

Multiple funding options

Delays destroy project value

... and…

Strong Partners; Leadership; Trust and Commitment

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Global Relationships and Track Record

Hato Int’l Airport, Curacao

Sangster Int’l Airport, Jamaica

Cheddi Jagan Airport, Guyana

South African Airports

Authority

Vienna Airport, Austria

Luis Munoz Marin Airport,

Puerto Rico

Trans-shipment Port

Facility, LA

Ngqura Container Port,

South Africa

Greek Port System

PrivatizationFerry Passenger Terminal, Caribbean

Container Port Terminal, TX

Port Privatization,

Bahrain

Conf. Port Terminal,

Mediterranean

Bina Istra Motorway,

Croatia

Road 1604, TX

Indiana Toll Road, IN

Ionia Odos Motorway,

GreeceHighway 2000, Jamaica

Maliakos – Kleidi Motorway, Greece

Sofia – Varna Road, Bulgaria

N4/N6 Motorway,

Ireland

Funding Alternatives,

Transport Infrastructure

Asser Monetization Program/PPP Development,

USA

Our Team has closed numerous successful transactions at a global level. Our experiencespans across all types of markets, to offer our (public or private) Clients the best possiblevalue proposition.

770 MW and 775 MW Power

Projects, UK

685 MW Sidi Krir Power Station,

Egypt

500 MW Power Project, Tunisia

770 MW, 1540 MW and 1520 MW

Power Projects, Turkey$200 million Power Gen.

Fund, Turkey

Road Transportation

Airports & Aviation

Ports

Power Projects

Northwest Parkway, CO

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Adam Nicolopoulos

+1 415 785 4613 (office)

+1 415 246 1765 (mobile)

anicolopoulos@adncv.com

Thank you

Sustainability Successful Infrastructure