Infrastructure: A Perfect Storm

1
Infrastructure A Perfect Storm

• Lara OConnor Hodgson
• Insomnia, LLC
• January 2008

2
Table of Contents

• Definitions
• The Situation
• The Opportunity

Insomnia, LLC.
February, 2008
3
Infrastructure Definition

• The facilities, systems and real assets that
  enable and sustain economic activity and quality
  of life
• Economic Infrastructure operating facilities,
  systems in which the asset provides the service
  inherently through storage, handling and
  distribution. Generally Funded by user-based
  fees
• Utilities Water, Gas, Electricity,
  telecommunication
• Alternative Energy - wind, solar
• Transportation of people, goods and services
  (roads, bridges, airports, seaports, ferry,
  cruise, barge, auto, rail, truck bus, parking,
  storage, logistics systems, fee-based delivery
  systems)
• Alternative Communication (satellite, Fee-based
  Delivery logistics)
• Social Infrastructure operating facilities
  which enable the delivery of social services.
  Generally funded by tax revenue or tax-based
  subsidies
• Buildings (Education, Healthcare, Leisure,
  Housing, Govt Office, Judicial, Safety
  Security, Commerce)
• Parks recreation
• Waste
• metering
• By nature enjoys a monopoly and thus returns are
  long term and stable

Insomnia, LLC.
February, 2008
4
PPP in Transit - Definitions

• Form of Procurement
• Private entity is responsible and financially
  liable for performing all or multiple functions
  of a project
• Private partner has the opportunity to earn
  financial return commensurate with the risks it
  assumes
• Risk may be assumed in form of equity investment,
  liability for indebtedness, fixed price contract
• Joint Development, TOD
• Access to additional capital operating revenue
  via receipt of lease payments, access fees,
  increased fare revenue, direct private sector
  funding of access facilities

Insomnia, LLC.
February, 2008
5
PPP in Transit

• Build-Own-Operate
• Design-Build-Finance-Operate-Maintain
• Design-Build-Finance-Operate
• Build-Operate-Transfer
• Design-Build-Operate-Maintain
• Design-Build

Private Sector Role
Insomnia, LLC.
February, 2008
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The Situation/ The Need
Civilizations are built sustained by the
quality of their infrastructure.

• 2008 marks a major tipping point in the world
  1 out of every 2 people on the planet will live
  in cities
• Developed countries are crumbling while
  developing countries are building future shift
  of global competitive advantage!

Demand
Traditional Supply

• Governments (all levels) ability to fund
  infrastructure through taxes is declining

• The world is awash in capital looking for secure
  assets 50 funds in 5 years, 250B capital

New
The Opportunity is to Connect the Dots
Insomnia, LLC.
February, 2008
7
The Need Quantified

• Projected funding gap for infrastructure in the
  US is 1.6 Trillion over the next five years
• Much of this is just to maintain and repair an
  aging infrastructure that no longer meets the
  needs of how our culture lives
• Asias infrastructure needs are approximately 1
  Trillion over the next five years according to
  the World Bank

Insomnia, LLC.
February, 2008
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Infrastructure and Real Estate

• Real Estate underlies all operating facilities
  and systems
• Real Estate value is linked to facilities and
  systems. Ownership structure may determine value
  to public entity
• Surrounding real estate values are impacted by
  infrastructure

Insomnia, LLC.
February, 2008
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Infrastructure Real Estate
Opportunity Investment
Insomnia, LLC.
February, 2008
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Infrastructure Investors

• Institutional Investors
• Private Equity Funds
• Infrastructure Funds
• Insurance Companies
• Endowment Funds
• Why?
• Portfolio Diversification
• Stable, Long-term Returns
• High Barriers to entry and natural monopolies
  drive stability low sensitivity to economic
  environmental changes

Insomnia, LLC.
February, 2008
11
Infrastructure Investment Vehicles

• Public-Private Partnerships
• Economic Infrastructure Private sector can
• Securitize operating cash flows
• Create demand - demand variability and pricing
  can impact revenue
• Realize significant residual value
• Benefit from depreciation
• Note capital market liquidity is average
• Social Infrastructure Private sector can
• Securitize tax revenues with long-term contract
  creating fixed returns
• Provide recourse to credit allowing high leverage
• Note capital market liquidity is high
• Privatization
• Infrastructure Funds (Listed Unlisted)
• Project-based financing
• Asset-based financing

Direct Equity
Indirect Equity
Direct Debt
Indirect Debt
Insomnia, LLC.
February, 2008
12
Infrastructure Investments
Real Estate Markets
Opportunity - Many players - Open or closed
funds - Development, vacancy risk - High leverage
(80) - Return Goals 18 net - Return Goals 13
gross - Short term 3 yrs
Value Add - Many players - Open or closed funds -
100M - 2B - Poorly managed asset - Med leverage
(50) - Return Goals 12-14 - Income (6-7)
- Capital Gains (6-7)
Core - Few players - Open ended funds - Stable -
Low leverage (lt20) - Long term - Return Goals
7-10 - Income (6-7) - Capital Gains
(1-3)
Infrastructure Markets
Greenfield Development - 18 IRR
Infrastructure - 30-yr return - 10 IRR
Value Add Return
Insomnia, LLC.
February, 2008
13
Infrastructure Investors
100M-500M Equity
500M-1B Equity
1B Equity

• ING
• UBS
• The Carlyle Group
• HSBC
• Challenger
• LandSecurities
• NGP Energy
• QIC
• Local Funds
• NIBC
• AMP Capital Investors
• Prudential

• RREEF
• JP Morgan
• Morgan Stanley
• Merrill Lynch
• Global Infrastructure Partners
• Teachers
• Babcock Brown
• CPP Investment Board

• Macquarie
• Goldman Sachs
• Citi
• Brookfield
• GE

Insomnia, LLC.
February, 2008
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The Opportunity Think Big!

• Traditional thinking is to minimize scope to
  secure funding
• Individual projects or corridors may not be large
  enough to interest private investors, may not
  generate return on their own and have higher risk
• Develop a Regional Plan and finance the entire
  plan

Insomnia, LLC.
February, 2008