Nicholas Hann

1
PPPs in North America A private sector
partners perspective

• Nicholas Hann
• Managing Director

Macquarie North America Ltd. December 6, 2006
2
Contents
3
1.

• Public Private Partnerships

4
Infrastructure Investment Paradigm Shift
Private investment in infrastructure is growing
as alternatives to government funding become
increasingly necessary

• 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

Source National Accounts, OECD ¹ 1997 figures
are the most recent available. The OECD is
publishing these results again in 2004
5
Infrastructure Sub-Sectors

• 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

6
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

7
PPPs Deliver!

• 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 PPPs
  found savings of
• 19 on capital costs
• 34 on operating costs
• 17 overall lifecycle savings
• Reasons for cost savings in UK PPPs
• 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

Source HM Treasury July 2003
8
Why do PPPs 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

9
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)

10
Report to Congress on Public Private Partnership
January 2005

• 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
• Tolling Allow States to Toll the Interstate /
  Variable Pricing Initiatives
• Private Activity Bonds Allow issue of up 15bn
  of private Activity Bonds (Tax-Exempt Bonds that
  allow private equity investment), for new build
  projects
• Environmental Streamlining Defined Timeframe for
  process / Permits
• TIFIA Amendments lower threshold (100m to
  50m)
• Design Build Lower threshold for use
• Commercialization of Rest Areas
• Debt Service Reserve Allow Federal Grant Funds
  to be used for debt service reserves

US Department of Transportation, Report to
Congress on Public Private Partnerships - January
2005, 197 Page Report
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Since thenLegal environment has developed
Indicates states with a broad PPP legal framework
Indicates states likely to enact PPP legal
framework in future
Indicates states with a limited PPP legal
framework
12
Since thenSuccessful examples have shown PPPs
are a reality

• ILLINOIS Chicago Skyway
• INDIANA Indiana Toll Road
• TEXAS Trans-Texas Corridor
• VIRGINIA Pocahontas Pkwy, Capital Beltway, I-95
• OREGON PDA development of 3 projects

VIRGINIAN PILOTJUNE 5, 2006
CHICAGO SUN TIMESOCTOBER 28, 2004
THE INDIANAPOLIS STARMAY 24, 2006
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Since then Concession model has shown real
benefits
TRADITIONAL PROCUREMENT
CONCESSION MODEL

RevenueEfficiencies
ADDITIONAL Infrastructure EconomicDevelopment Jo
bs
CAPEXEfficiencies

OPEX Efficiencies
VS.

Equity

Additional Debt

Standalone Bonding Capacity
Standalone Bonding Capacity
Examples
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Government Attitude in Canada

• Federal Government now embracing P3 model
• British Columbia P3s 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 P3s in roads and
  social infrastructure

15
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 PPPs increasingly seen as a
  distinct asset class with low correlation to
  other investment
• 145bn of MA 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 IRRs below 6)
• Reducing cost of equity for public sector
  sponsors

16
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)

17
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

18
Macquaries Road Experience in North America
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• Chicago Skyway

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Chicago SkywayPress
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Chicago SkywayOverview of Transaction

• 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

• 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)

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Chicago SkywayOverview 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) US33 m
• Understated due to construction rehabilitation
  program
• Average Passenger Vehicles per day 50,000

Chicago Skyway
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Chicago SkywayOverview 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

24

• SR-125 (San Diego California)

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SR-125

• Franchise originally granted in 1990 part of
  California States 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

26
SR-125Overview of Transaction

• 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

27
SR-125Overview 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

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SR-125Overview 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 Groups 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 Groups purchase of the
  project

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• HIGHWAY 407 (Ontario, Canada)

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Highway 407 ETRHistory of Transaction

• History of Transaction
• 1998/99 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

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Highway 407 ETROverview of Transaction

• 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

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Highway 407 ETROverview of Transaction Cont

• 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

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Highway 407 ETROverview 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.

34

• Detroit Windsor Tunnel (Linking US and Canada)

35
Detroit Windsor TunnelOverview of Transaction

• 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.

36
Detroit Windsor TunnelOverview 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.
37

• Dulles Greenway

38
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

39

• Sea to Sky Highway

40
Sea to SkyCase 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
• Overview of Transaction
• Located in Vancouver B.C.
• Upgrade of an existing road
• Capital cost of C600MM
• 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

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Contacts
NICHOLAS HANN Managing Director Tel (604)
605-1779 Fax [phone] Emailnicholas.hann_at_m
acquarie.com
1055 Dunsmuir Street Four Bentall Centre Suite
2664 Vancouver, BC