David Larocca, Ernst & Young

Financing Future Infrastructure

CCF National Conference 2014

David Larocca

Partner – Head of Infrastructure Advisory

23 October 2014

Agenda

1. State of the infrastructure market

2. Asset Recycling Initiative

3. Outlook for the financing of new projects

4. Concluding remarks

Buoyant global market –$235 billion in 2013, up 25% on 2012

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100

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200

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300

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20

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120

2010 2011 2012 2013 2010 2011 2012 2013 2010 2011 2012 2013 2010 2011 2012 2013

Transport Renewables Social Infrastructure Mining

Deals$USbn

Global Project Finance Market (2010-2013)

Deal Value Debt Value Deal CountSource: IJ Global

But there has been a dramatic change in Europe …

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80

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120

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5

10

15

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25

30

2008 2009 2010 2011 2012 2013

Number of Projects:

Value(Billion Euros)

Year

European PPP Market has shrunk by over 50% over the last 5 years :

Value: (Billion Euros)

Number of Projects:

European investors,

contractors and operators

looking to diversify –

Australia a focus

Source: European PPP Expertise Centre

Unprecedented interest in Australia ….

► Contractors

► Operators

► Banks

► Investors

Active International Contractors

Infrastructure a key focus of governments at Commonwealth and State levels ...

Government Infrastructure Landscape

► Need for new infrastructure – unlocking economic potential

► Need for improved service delivery

► Budget constraints across all State governments

Trends

► Unprecedented appetite for private sector involvement

► Federal/State co-funding arrangements

► Asset sales to fund infrastructure – “capital recycling”

Financing market continues to improve …

► Continual improvement:

► 20-25 active banks

► Banks are prepared to lend more

► ECAs very active – following local suppliers

► $5B+ of capacity for greenfield

► Commercial terms:

► Tenors of 7-10 years

► Margins trending down

► Gearing trending up

► Unprecedented market interest

► Asset appetite:

► Brownfield economic infrastructure

(including patronage risk)

► Greenfield/PPP

► Brownfield PPP

► Main sources:

► Australian superannuation funds

► UK & European PPP investors

► Asian pension funds and trading houses

► North American pension funds

► Middle Eastern SWFs

► Equity pricing on downward trend

Debt Market Equity Market

A resilient financing market – with a significant increase in transaction activity

c$10bn of PPPs forecast to close between

July 2013 and December 2014 – matching pre-GFC levels of activity

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2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 (F)

Value of PPP Transactions ($Billions)

Agenda





Market dynamics that have spurred asset sale activity

► Growing funding gap – public financing capacity and capital needed to build new

infrastructure and modernise existing infrastructure.

► Infrastructure Australia October 2012 report:

► advocated sale of commercially viable, publicly-owned infrastructure assets

► enable government to recycle capital and to fund new projects.

► “conservative estimate” of $100B of infrastructure assets

► Infrastructure Australia December 2013 paper:

► Asset sales could spur broader economic productivity benefits

► Introduction of private sector discipline, improving the ability to finance the

expansion of infrastructure as required, improved governance

► Market appetite for Australian brownfield infrastructure assets

Superannuation sector is engaged, with an appetite to invest more …

The sector wants:

► Greater certainty of pipeline

► Incentives for governments to establish capital recycling processes

► Regulatory certainty over superannuation and taxation policy

► Early project consultation processes

This could further open up a

$1.75 trillion super industry to

Australian and NZ

infrastructure opportunities

The concept of “asset recycling”

Government

owned

asset

Government

Controlled

fund

Greenfield

infrastructure

project

Greenfield

infrastructure

project

Greenfield

infrastructure

project

Greenfield

infrastructure

projects

Sale

proceedsProject

funding

Is the private

sector better

placed to

own/operate?

Robust business

case framework

for investment

decisions

Projects with strong

investment cases and align

with strategic plans

► NSW Government has implemented an asset recycling policy

► Asset sales – Port Botany/Port Kembla, Port of Newcastle, Sydney Desalination

► Greenfield allocations – WestConnex, Newcastle projects

The Commonwealth Government’s Asset Recycling Initiative

► Incentives to States to sell assets and reinvest proceeds into new

productive economic infrastructure.

► 15% of sale proceeds, capped at $5b, closing in 2018-19.

► ARI can only go towards new infrastructure

► Funding (sale and spend) must be agreed by 30 June 2016.

► ARI will be funded by the Commonwealth’s plans to sell non-core

assets

The ARI has further accelerated State Governments’ focus on divestment and investment planning

► Competitive tension among State Governments.

► States have brought forward:

► Sale plans, focusing on their largest assets

► Greenfield plans, focusing on larger transport projects

► ARI has the potential to spur over $90B of infrastructure

financing transactions – brownfield and greenfield

A number of asset sale scoping studies/processes have been announced …

► Commonwealth – Medibank, Australian Hearing, Royal

Mint, Defence Housing, ASIC’s registry service

► NSW – electricity generation, electricity network

► Qld – electricity network, ports, water, electricity

generation

► Victoria – Port of Melbourne

► WA – ports, markets

Election Dates Δ* = expected to be sold sequentially

Potential for over $50B of asset sales in the next 2-3 years

Agenda





PPP PipelineTransport projects dominate the pipeline …

QEII Hospital Car Park

Mundaring Water Treatment Plant

Eastern Goldfields Prison

Perth Stadium

Schools PPP

Perth Light Rail

Airport Rail Link

Perth Freight Link

Darwin Prison

Convention Centre

Northern Beaches Hospital

NorthConnex

WestConnex

Sydney Light Rail

New Royal Adelaide Hospital

South Road Corridor

Bendigo Hospital

Ravenhall Prison

Victorian Comprehensive

Cancer Centre

Victorian Schools 2

East-West Link

Melbourne Rail Link

East West Link Stage 2

Defence Leap 2

Moorebank Intermodal

Capital Metro

ACT Courts Facility

University of Canberra

Public Hospital

Second Sydney Airport

Wiri Prison

Hobsonville Point School

Transmission Gully

Auckland East Prison

Auckland Harbour X

Auckland CRL

Legend

Recent deals closed

PPPs in procurement

Potential PPPs

Sunshine Coast Hospital

Gold Coast Light Rail

Gold Coast Light Rail Stage 2

QLD Schools Project

New Generation Rollingstock

Royal Children's Hospital

Redevelopment

Toowoomba Bypass

BaT Tunnel

Airport Link

Legacy Way

Clem 7

QML Sale

Queensland Correctional Centre

North-West Rail Link

Newcastle Light Rail

2nd Sydney Harbour X

Parramatta Light Rail

Governments are developing mechanisms to address market related issues

Issue Example of Mechanism Examples

Contractor balance

sheet constraints

“Discipline based”

packaging

North-West Rail Link (NWRL)

Debt market capacity Capital contribution Gold Coast Rapid Transit, Sunshine

Coast Hospital, New Generation Trains,

NWRL, East-West Link, Queensland

Schools

Debt syndication guarantee Melbourne Desalination PPP

Optimising the

cost of capital

Debt Paydown (Conditional

on commissioning and

operations)

Darling Harbour Live, North-West Rail

Link, Sydney Light Rail

Market aversion to

greenfield traffic risk

‘Build and Sell’

models

Legacy Way, QML, WestConnex

Availability PPP with

retention of toll revenue

East-West Link

Agenda





Concluding remarks

► International players heavily engaged in the Australian market

► Buoyant Australian infrastructure market

► Brownfield sale processes have the potential to accelerate

greenfield projects

► Pipeline may challenge the financing market

David Larocca, Ernst & Young

Engineering

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