ERES Conference -Millano, 23-26 /06/ 2010

Measuring Innovation and Performance of Infrastructure Financing Vehicles across the UK

 

*Joseph B. Oyedele, *Alastair Adair and *Stanley McGreal

* University of Ulster, Jordanstown Campus, Shore Road Newtownabbey, Co. Antrim BT37 0QB Northern Ireland, UK.

Corresponding Author -Joseph B. Oyedele(Mobile +44(0)7551390983 Email oyedele-j@email.ulster.ac.uk)

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Introduction

Infrastructure and Economic Growth/Positioning

Drivers of Infrastructure Investment

Global Population and Economic Growth

Urbanization Trends in Emerging Markets

Supply and Demand Imbalance

Global Infrastructure Deficit- Opportunities for the private sectors

Relevance of the capital markets- total size of the global equity market- US$43.8

trillion as at 2007. Global listed infrastructure fund- US$7.6 trillion (economy only)

(RREEF Research 2007).

Knowledge Gap Regarding Innovative Approaches

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The 12 pillars of Economic Competitiveness

Source: The Global Competitiveness Report 2008-2009 © 2008 World Economic Forum

Sources: Booz Allen Hamilton, Global Infrastructure Partners (2009) 4

Global Infrastructure Deficit

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How Financial assets link different corners of the globe

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Unique Investment Characteristics of Listed Infrastructure FundsMaSustainable

growth

Infrastructure assets have a sustainable growth profile which is relatively immune to economic cycles. In addition, many infrastructure assets have delivered growth well above nominal GDP over a numberof decades.

High barriers to entry

In most cases, infrastructure assets are government legislated or natural monopoly providers of certain essential services. For example, electricity and gas distribution networks, toll road concessions with non-compete clauses or city airports with restricted flight paths.

Pricing power

Infrastructure assets tend to have the ability to consistently increase the price of their services over time. This can be due to several factors including tolls linked to inflation, real regulated returns and assets with high barriers to entry making competition difficult and limiting customer choice.

Predictable cash flows

These assets have an ability to generate cash flows which are highlypredictable. This predictability is underpinned by infrastructure’s essential service nature, regulated returns, long-term contracts, limited cyclicality and lack of commodity price exposure.

Source: Colonial First State (2009). 7

What is INNOVATION?

Innovation has two commanding views –a social view and an economic

view.

The social view looks at how innovation is adopted and adapted

while five forms of innovation originate from the economic view-

new products, new processes, new markets, new resources, new

organizations (Holbrook, 2005) and financial-revenue innovations.

Impact of Innovation

Providing a sustainable competitive advantage for investors

Potentials to enhance productivity

Valuable impact on both the public and private sectors

Balanced national growth and corporate performance

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Two forms of innovation measurement:

output innovations and input innovation (Rogers, 1998).

output innovations- company performance (profits, revenue growth, share

performance, market capitalization and productivity)

input innovation-research and development (R&D) Anti-Institutional Ignorance), T-

know-how

Based on financial and non-financial matrices

Financial Matrix-share price and financial ratios analysis-

Non-Financial Matrix-Characteristics of the business leadership- creative managementPortfolio matrixInnovation strategy Geographical location and market size (by country)Economic sector of operation Ownership structure and origin of the firm

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Fin

ancia

l Rat

io C

lassi

ficat

ion

Profitability

Return on Shareholders’ Funds

(ROSF)

Efficiency

Liquidity

Gearing

Investment

Return on Assets (ROA)

Net Profit Margin

Gross Profit Margin

Average Stock Turnover

Avg. Settlement Period of Debtors

Avg. Settlement Period of Creditors

Quick Ratio

Current Ratio

Gearing Ratio

Interest Cover Ratio

Dividend Per Share

Dividend Pay Out

Dividend Yield Ratio

Earning Per Share

Price Earning Ratio

Net profit after taxation and preference dividendOrdinary share capital plus reserves

X 100

Net incomeTotal assets (average)

X 100

Net profit before interest and taxation Sales

X 100

Gross profitSales

X 100

Average stock held Cost of sales

X 365 days

Trade debtors Credit sales

X 365 days

X 365 daysTrade creditors Credit purchases

Current assets Current liabilities (creditors due within one year)

Current assets (excluding stocks) Current liabilities (creditors due within one year)

Long term liabilitiesShare capital + Reserves+ Long-term liabilities

X 100

X 100Profit before interest and taxation

Interest payable

Dividend announced during the periodNumber of shares in issue

Dividend announced for the yearEarning for the year available

X 100

Dividend per share/ (1-t)Market value per share

X 100

Earnings available to ordinary shareholdersNumber of ordinary shares in issue

Market value per shareEarnings per share

Adapted from: Atrill and McLaney (2002)10

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This paper is a part of a research in progress which investigates the capital markets and innovative vehicles for financing infrastructure provision from a global perspective and a focus on the UK, US and Australia.

The present study investigates the performance of ten listed infrastructure funds over the period 2008-2009.

Two forms of variables were adopted for the study, the financial and non-financial/innovative variables.

The financial variables include the share price and the investment financial ratios, earning per share (EPS), dividend per share (DPS), price earnings and the dividend yield.

The non-financial/innovation variables include: Portfolio matrix (transport, utilities and social infrastructures)Infrastructure stage (Greenfield, Brownfield, Secondary)Geographical focus (local, regional or global)Strategy (growth, investment)Research and Development (R&D)

Infrastructure Fund

Year Listed

Stock Exchange

Location Focus Major Infrastructure Assets in UK

3i Infrastructure Fund 13 March 2007

London Germany, Netherlands, UK, Global

PFI projects in the UK, investment through AWG in Anglian Water, the fourth largest water supply and waste water company in England and Wales measured by regulatory capital value.

Brookfield Infrastructure Partners

31 Jan 2008 New York Australia, Brazil, Canada, Chile, UK, US

Interest: 40% Interest in International Energy Group (“IEG”)-owns “last mile” electricity and natural gas connections business in the UK and a portfolio of natural gas distribution businesses located in the Channel Islands (Guernsey and Jersey) and the Isle of Man.

Challenger Infrastructure Fund

19 August, 2005.

Australia Spain, OECD 80.4% interest in Inexus- Provides 'last mile' of gas, electricity, water and fibre connections to new dwellings in UK.

Ecofin Water & Power Opportunities Trust

26 February 2002

London Emerging Markets, OECD

8.2% of Hansen Transmissions, 3.2% Northumbiran Water Group and 2.1% of International Power in portfolio.

Hastings Diversified Utilities Fund

2004 Australia Australia, UK 50.0% Interest in South East Water: second-largest regulated water only company in England and Wales.

HSBC Infrastructure Company

29 March 2006

London UK, Europe, Global Several PFI Projects including 100% ownership of Barnet Hospital, 90% Conwy Schools, UK

Infigen Energy 28 October, 2005

Australia Australia, France, Germany, US,

*Subsidiaries- Global wind partners UK ltd.

International Public Partnership

09 Nov 2006 London Australia, Belgium, Canada, France, Germany, Ireland, Italy, UK, Global

54% investment in UK out of 51 projects in the U.K., Australia, Canada, Germany, France, Belgium, Italy and Ireland.

Macquarie International Infrastructure Fund

27 May 2005 Singapore Canada, China, Taiwan, UK, Global

8.7% interest in Arqiva (S$238.5 million ) % 23.3% of portfolio.- provider of terrestrial and satellite broadcasting transmission, wireless communications and radio services in UK

Prime Infrastructure 24 June 2002 Australia Australia, China, New Zealand, UK, US, OECD

Investment in International Energy Group (IEG)- natural gas distribution businesses a gas and electricity distribution business in UK.

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Infrastructure Fund Performance

Listed Infrastructure Funds Average Annual

Return

Volatility Sharp

Index

Rankinga

Challenger infrastructure fund -18.26% 41.68% -0.45 -

Hastings diversified utilities fund -22.14% 71.83% -0.32 -

Infigen Energy -2.91% 61.49% -0.06 -

Brookfield infrastructure .ptns.lp. -5.45% 40.42% -0.15 -

HSBC infrastructure co. 5.16% 22.90% 0.19 2

Macquarie international infr.fund -22.77% 45.34% -0.52 -

3i infrastructure fund 3.32% 26.83% 0.09 3

Ecofin water & power opps.ord. -8.18% 22.97% -0.39 -

International public partnership 6.98% 24.03% 0.26 1

Prime Infrastructure -85.03% 148% -0.58

World infrastructure & utilities -1.57% 20.35% -0.11 -

Europe infrastructure & utilities -6.1% 26.43% -0.23 -

UK infrastructure & utilities -4.27% 17.2% -0.29 - 14

Multiple Regression

Table 6 Model Summaryb

Change Statistics

Model R R Square

Adjusted R

Square

Std. Error of

the Estimate R Square

Change F Change df1 df2

Sig. F

Change

1 .966a .933 .879 16.54719 .933 17.276 4 5 .004

a. Predictors: (Constant), Dividend Yield, Price earnings ratio, Earnings per share, Dividend per share

b. Dependent Variable: Annual share price

Coefficients

Unstandardized Coefficients Standardized Coefficients

Model

B Std. Error Beta t Sig.

(Constant) 53.072 26.264 2.021 .099 Earnings per share

3.228 5.547 .202 .582 .586

Dividend per share

9.361 6.738 .540 1.389 .223

Price earnings ratio

.064 .278 .034 .228 .829

Dividend Yield

1.840 1.191 .300 1.545 .183

The model equation given from the coefficient (Table 7) is specified as:

Estimated annual share price = a + b1EPS + b2DPS + b3PE + b4DY

a = constant

b1 is coefficient of Earnings per share b2 is coefficient dividend per share b3 is coefficient price earnings ratio b4 is coefficient dividend Yield Hence, Share price = 53.072 + .202(EPS) + .540(DPS) + .034(PE) + .300(DY)

2008 2009

Listed Funds aEPS DPS PE DY EPS DPS PE DY

Challenger Infr.Fund 0 0.32 - 11.67 0 0.31 - 17.8

Hastings divr.utils.fund 0.08 0.23 31.6 9.6 0 0.21 - 24.74

Infigen energy 0.02 0.13 98.4 8.57 0 0.12 - 9.71

Brookfield infr.ptns.lp. - 0.09 - 0.44 0.28 1.06 48.1 7.77

Hsbc infrastructure co. 4.7 6.25 25.5 5.21 7.8 6.4 15.1 5.45

Macquarie intl.infr.fund 0.29 0.08 3 9.49 0 0.07 - 20.71

3i infrastructure - 2 - 1.71 5.4 5.3 18.3 5.35

Ecofin wtpwr.opps.Trust. 8.13 6 21.9 3.37 5.33 5 26.8 3.5

International pbpart. 5.2 5.25 21.2 4.76 2.85 5.55 37 5.26

Prime Infrastructure 5.97 17.66 21.2 13.92 0 2.99 - 34.72

aZero(0) EPS indicate losses and affects PE calculation

Source: Authors’ compilation from Thomson Reuters (2010) 17

Mix of utilities infrastructure in best performing portfolio

Investing across a range of regions such as Australia and the OECD regions

Targeting areas with a relatively more economic and political stability and

regulatory environments-

The level of research and development (R&D) of the listed funds-70% of the

funds investing in R&D related activities, 30% investing in actual R&D.

3i Knowledge and Research Centre

Infrastructure Investment Committee (IIC)- Challenger Infrastructure fund

Ecofin Research Foundation

Strategy- dominant innovative variables

Investment strategy:

Growth strategy

Management strategy 18

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Best performing funds have a mix of regulated utilities infrastructure such as power generation, power transmission, electricity and gas distribution, water and communications networks-Across all three stages(Greenfield, Brownfield, Secondary)

Comparison of infrastructure investment against other asset classes such as property, stocks and bond is necessary so as to fully appreciate how infrastructure compares with other investments particularly during the global financial crisis.

Private infrastructure financing is a complex task;

Intense competition for assets,

Rising prices and danger of a bubble.

Implementation of more innovative strategies across the infrastructure sectors and regions especially to withstand turbulent financial climates.

Why are some funds already been de-listed? Raising the question of Sustainability !!!

 

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