Why invest in Social Infrastructure PPPs?
Revenues linked to government or government-related entities
The PIP Fund will principally invest in Social Infrastructure Assets that are provided through PPP arrangements in return for regular payments. Revenues will be derived from central or local government or related entities, such as the Crown, city councils, district health boards and universities (“Public Sector Clients”). The creditworthiness of the Public Sector Clients is underpinned by their relationship with the local or central government which have the ability to levy tax or rates.
Long-term, stable cash flows
Revenues in Social Infrastructure PPPs are typically generated from the assets being made available to Public Sector Clients, rather than from measures based on usage or demand (such as for airports or toll roads), and are typically subject to 15 to 35 year contracts (“Concessions”). The cash flows from assets (once operational) are therefore expected to be stable in nature and predictable over long periods of time.
Revenues linked to inflation
Social Infrastructure PPPs generate revenues that are often linked to an inflation index for the duration of the Concession. Returns to investors are therefore typically linked to inflation over the term of the Concession.
Limited exposure to economic cycles and diversification benefits
Social Infrastructure PPPs generally involve investments in assets associated with the provision of essential social services, which are necessary during periods of economic growth as well as recession. Investors who are seeking to diversify from market specific risk in listed equities, listed property and listed infrastructure may therefore be able to achieve diversification by investing in Social Infrastructure PPPs where revenues are sourced from Public Sector Clients and are generally either not contingent upon, or have limited exposure to, economic cycles.
Value enhancement potential
In addition to offering stable long-term returns, active management of PPP projects can result in enhanced value and return characteristics for investors. This may be achieved in a number of ways, including valuation increases following construction completion (as a project’s risk profile reduces), negotiating lower costs with service providers or insurers as the PIP Fund portfolio grows, and ‘follow-on’ investments, where the PIP Fund may invest further capital to expand an existing project.
Why invest in NZSIF?
Growth potential for the use of PPPs in New Zealand
Spending on infrastructure has been a feature of stimulus packages announced by governments internationally, including the New Zealand Government, in response to the recent global economic downturn. The New Zealand Treasury has predicted a need for significant expenditure on investment in infrastructure in New Zealand over the next 10 years1.
The use of PPPs in New Zealand is an emerging investment sector but is being increasingly examined by the Government as a means of procuring Social Infrastructure, as demonstrated by the Government’s exploration of PPP procurement options for the delivery of a new prison at Wiri2. In March 2010, the National Infrastructure Unit of the New Zealand Treasury released the National Infrastructure Plan which confirms that the Government intends to use PPPs where they represent value for money to tax payers. Recently, Government agencies have taken steps to explore the feasibility of the PPP model in relation to New Zealand school property3, and to remove impediments to the use of PPPs in water4 and transport projects5. Due to the emerging nature of the PPP sector in New Zealand, the PIP Fund may be unable to invest in suitable projects immediately, but will invest as opportunities become available during the Investment Period (which is expected to be for the period to 29 October 2015).
PPPs have a proven track record internationally
The merits of adopting PPPs to procure Social Infrastructure Assets in New Zealand and Australia are supported by the successful use of PPPs in international markets. United Kingdom and Australian studies have demonstrated that PPPs provide cost and delivery efficiencies versus traditional procurement methods, which aligns with governments’ focus on delivering value for money in the public sector7,8.
The PIP Fund draws on the expertise of Morrison & Co as a specialist infrastructure investor
The PIP Fund will be managed by a wholly-owned subsidiary of Morrison & Co. Morrison & Co has a history of successful investment partnerships with local government and community bodies, and is manager of a global infrastructure mandate for the NZ Superannuation Fund. Morrison & Co’s management team has extensive experience in managing and funding major infrastructure assets. Steven Proctor, who Morrison & Co has recently appointed as Executive Director of the PIP Fund, has worked in overseas PPP markets since 1995, including managing investments in PPPs to provide schools, hospitals, wastewater infrastructure, railways, roads and leisure facilities.
As manager of the listed infrastructure fund, Infratil Limited, Morrison & Co has a strong track record of shareholder value creation. Infratil has delivered a total shareholder return for investors in excess of 15% per annum since 1 April 19949.
Morrison & Co has confirmed that its shareholders and employees will collectively commit to invest not less than $2 million alongside NZSIF in the PIP Fund, reinforcing Morrison & Co’s alignment with investors and its focus on delivering returns.
Attractive target return for investors in NZSIF over a long investment horizon
NZSIF is targeting an Internal Rate of Return over the term of the PIP Fund of 11%10 per annum before tax, but aft er all costs, investment management and administration fees and expenses. There is the possibility of additional incremental return arising from active management of PIP Fund Investments and economies of scale.
Investors in NZSIF should note that an 11% Internal Rate of Return is a target only and dependent on the performance of investments made by the PIP Fund and there can be no guarantee that such return will be delivered to investors. In particular, due to the potentially staggered timing of investments by the PIP Fund and the nature of cash flows under the PPP model, the actual distribution to investors in NZSIF in a particular year may be lower or higher than NZSIF’s target rate of return. Distributions are likely to be lower when the PIP Fund is in the process of evaluating and making investments in Social Infrastructure PPPs (but is not yet receiving any distributions from those investments).
Investors in NZSIF will begin to receive distributions over the term of the PIP Fund (expected to be 18 years) once the PIP Fund commences receiving distributions from operational Social Infrastructure PPPs and itself makes distributions to NZSIF (and/or NZSIF receives returns onany co-investments). These distributions may be in the form of dividend income, periodic returns of investment capital, and potentially capital gains on the sale of Investments (if made).
In-specie distribution rights
NZSIF will be entitled to participate in any in-specie distribution of assets to PIP Fund investors. To the extent permitted by the relevant securities and tax laws applying at the relevant time, shares distributed by PIP Fund may in turn be able to be distributed directly to investors in NZSIF.
1 The Treasury paper “Infrastructure: Facts and Issues” September 2009, available at http://www.treasury.govt.nz/releases/2009-09-07i/, outlines the Treasury’s current forecast expenditure for certain infrastructure areas in New Zealand
2 See Bill English’s speech to the New Zealand Council of Infrastructure Development, reported 12 August 2009, available at http://www.billenglish.co.nz/index.php?/archives/ Speech-to-New-Zealand-Council for infrastructure Development, accessed on 21 October 2009. It should be noted that NZSIF/PIP Fund will focus on the delivery of Social Infrastructure Assets rather than on the provision of social services, so would not provide private custodial services within prisons
3 See http://beehive.govt.nz/release/ppps+being+considered+new+school+property
4 NZPA, “Hide Announces Proposed Changes to Local Government Act”, 28 October 2009, available at http://www.stuff .co.nz/national/politics/3007715/Hide-announces-proposedchanges- to-local-government-act
5 Steven Joyce, “Land Transport Management Act to be reviewed”, 28 October 2009, available at http://beehive.govt.nz/release/land+transport+management+act+be+reviewed
7 Allen Consulting Group, “Performance of PPPs and Traditional Procurement in Australia – Report to Infrastructure Partnerships Australia”, 30 November 2007
8 KPMG, “PFI in School Building – Does it Infl uence Educational Outcomes?”, 2009 and KPMG, “Investment in School Facilities and PFI – Do they Play a Role in Educational Outcomes?”, 2008
9 Data sourced from Bloomberg Historical Studies. Total shareholder returns have been calculated for the period 1 April 1994 to 31 December 2009, assuming the reinvestment of net dividends
10 Returns to NZSIF are based on the return to the PIP Fund from its investments. NZSIF’s Internal Rate of Return target of 11% is expected to be less than the return received by direct investors in the PIP Fund due to the additional costs of creating and maintaining NZSIF as a separate company, including administration and governance costs. It does not include the Application Fee investors pay to the Lead Manager.