Banking for 7 billion and 7 million

GLOBAL INVESTOR 3.06 Basics — 37
Across Europe, we can readily find a number of transactions, which
have already been implemented by numerous governments, as well
as plans and intentions for more in future. The French state, for
instance, quite recently disposed of its stakes in companies that
operate a network of toll roads. Even though the sale of these assets
has nothing to do with a PPP project, it doubtlessly shows that
governments are forced to reduce public expenditure. The Spanish
Ministry of Public Works and Development’s 10-year strategic plan
foresees the financing of around 40% of total investments of
around EUR 250 billion through public-private partnerships. In
Germany, the government is currently evaluating formal, functional
and material aspects of a privatization of the national highway
network. The estimated value of the national highway system is
approximately EUR 172 billion (source: Alfen Consult GmbH, Studie
zur Privatisierung des deutschen Autobahnnetzes, formell, funktional
oder materiell). The sale of the road network itself is not a
PPP, but the requirements for maintenance and extension would be
structured accordingly, clearly pointing towards the potential of this
market. In addition, more and more EU member state governments
are establishing PPP units centrally or within individual ministries
(e.g. ministry of finance). This points clearly to the fact that institutional
support for PPPs is growing among European governments
and that they are considered to be a pivotal initiative in the future.
PPPs make additional projects affordable. By attracting private
sector finance for schemes suited to the PPP model, limited public
sector funds can be directed to deliver other non-PPP projects.
Julie O’Neill, Secretary General of the Irish Department of Transport
at the 2005 PPP Transport Summit
such as pension funds, which seek to match their long-term pension
liabilities with long-dated and stable income flows offered
by this kind of assets, represent one driver that will guarantee
continued development in this area. Only a small fraction of these
long-term liabilities can be matched with inflation-linked bonds
(see figure 5). PPP investments offer pension funds the possibility
to match their contingent liabilities with longer duration assets.
All of the aforementioned factors and the environment in the
financial markets have contributed to a sustained appetite in the
primary markets. Market participants are keen to fund new projects,
especially in an environment with increasing volatility in equity markets.
Demand for some asset classes clearly exceeds the current
supply. The growing popularity of this asset class now presents the
opportunity for a more vibrant secondary market, as the asset class
matures and grants easier access to private investors. The number
of European and global infrastructure funds has more than doubled
in the last 18 months according to Standard & Poor’s. Additionally,
Macquarie Bank Ltd., ABN AMRO Bank N.V. and Allianz AG have
recently established funds. For investors who wish to buy infrastructure
securities directly, companies like e.g. Albertis Infrastructure
SA (S&P: A, Moody’s: n.r., Fitch: A), Red Electrica (AA-, A2,
n.r.), E.ON (AA-, Aa3, AA) offer the possibility to buy both equity
and bonds, while Cintra and Grupo Ferrovial SA are both purely
financed with bank loans and are therefore pure equity plays.
Bonds of these infrastructure project providers are mostly of good
investment grade quality and offer an alternative credit spread over
government bonds, and give investors such as pension funds the
possibility to match their liabilities for periods up to 20 – 25 years.
Thereafter, they have to match with equity as shown in figure 6.
Countries need to radically improve and modernize their transport
networks, but often lack budgetary resources and administrative
structures to traditionally design and then procure the infrastructure
they need. Even when EU funds are available, it makes sense to
get the maximum leverage on those funds through project finance
to postpone the budgetary impact of capital expenditure.
David Azema, CEO Vinci Concessions, at the 2005 PPP Transport Summit
PPP: Investors focus on this new asset class
The rationale for the development of infrastructure as an asset
class is embedded in the classical supply/demand relationship. As
the portfolio of PPP projects expands, the financial markets become
increasingly comfortable and educated regarding the characteristics
of such transactions, a fact which has brought PPP
projects more widespread recognition as a separate asset class
with stable return characteristics and an attractive risk/reward profile.
In comparison with alternative investments in a similar risk category,
the projects are providing longer duration and relatively
higher yields, and are a suitable investment for investors targeting
these asset characteristics. Externally, the new asset class has
been supported by significant market liquidity, coupled with the fall
in long-term government bonds that helped to drive up the value
of these investments. Very few corporate bonds have a maturity
beyond 10 years and offer little reward for taking long-term credit
risk (see figure 4), whereas infrastructure projects typically have a
long lifespan (toll roads, bridges, tunnels, utilities), coupled with
secure cash flows. The quite recent inflow of new money for existing
and new projects from equity funds targeting stakes in such
projects will remain sustainable, in our view. Institutional investors