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Global infrastructure

The role of private capital in the delivery
of essential assets and services

At the core of GIIAs agenda is the There are wide ranging views of the
need for an evidence based role of private capital for
account of the contribution private infrastructure assets. We believe
capital can play in assisting that the case studies in this
governments around the world to document demonstrate the positive
deliver high quality essential assets outcomes that can be achieved
and services to the communities where the public sector, regulators
they serve. and investors collaborate to create
fair, transparent and open
There is now a wealth of evidence frameworks that both attract
from bodies such as the World investment and represent the
Economic Forum on the interests of the consumers that
infrastructure gap that exists in ultimately pay for the services
both the developed and developing provided.
world. Likewise, it is widely
recognised that high quality We welcome an open dialogue on
infrastructure serves societies in the future of infrastructure
terms of contributing to economic investment and the positive
growth, local jobs and strong and contribution private capital can
vibrant communities. play in helping societies achieve
their ambitions.
Private investors, working
alongside governments, can play a If you wold like to find out more
profound and positive role in the about GIIA and its advocacy role,
delivery of world class please visit
infrastructure. This report,
produced in partnership with PwC, I am grateful to PwC and GIIA
provides examples of the impact members for their contribution to
that has been made globally. The this report.
funds, which often represent
individuals investing in their
pensions for their retirement, are Andy Rose
looking for long-term stable returns. CEO, GIIA
Professional investors who are the
custodians of these funds take a
long-term view by investing in the
assets they own, often
transcending political and
economic cycles, to improve the
performance of the businesses and
services they own.

Private investors,
working alongside
governments, can
play a profound and
positive role in the
delivery of world
class infrastructure

2 Global Infrastructure Investment

PwC and GIIA 3

Executive summary 5

The need for private investment into global infrastructure and its impacts 8

A snapshot of global infrastructure investment 16

Case studies:
Chilean water privitisation 18
Australian airport privatisation 24
Peel Ports and Global Container Terminals 30
UK water privatisation 36
Azure Power 42

Find out more 45

4 Global Infrastructure Investment

A global transformation in Combined with a strong supply of
infrastructure ownership assets, enhanced by the post-crisis
need for governments and major
The last decade has seen a
corporates to reduce debt and focus
transformation in the ownership of the
expenditure, the impact has been
worlds economic infrastructure with
pronounced, with US$1.7 trillion being
much now resting in the hands of
invested into infrastructure assets
specialist private investors who have
globally since 20102. In the UK alone,
inherited it through acquisitions from
some 56% of water assets, all of the
governments, major corporates and
UKs major airports, most ports and all
take-private transactions.
passenger rail rolling stock now sit
This transformation has been driven by within specialist infrastructure investor
an influx of capital seeking long-term, vehicles3.
stable returns. More than US$200bn
Understandably, questions have been
has been raised by specialist funds
raised around the financial and
since 20061, with at least the same
performance impacts this has had on
again allocated by pension funds and
infrastructure spending and
other direct investors.
performance, on the provenance and
extraction of funds, and on the security
of essential services within private
investors hands.

1 InfraDeals fundraising analysis Jan 2006 to Sep 2016

2 InfraDeals analysis of global transaction activity from Jan 2010 to Sep 2016
3 PwC, The role and impact of specialist investors in UK infrastructure, 2015

PwC and GIIA 5

This report, commissioned by the Global Infrastructure
Investor Association and prepared jointly with PwC, draws
from a global evidence base and presents a series of
illustrative case studies. Whilst not a definitive research
study itself, there are notably consistent themes coming
out of the analysis:

1. A specific 2. A desire to drive 3. Specialist investors 4. Appropriate returns

investment approach significant understand and expectations
geared towards long- performance embrace the key weighted towards the
term essential assets improvements economic and social longer term
roles of their
The infrastructure investor Investors desire to improve As more investors have
infrastructure assets
community brings a long- their assets commonly entered the market,
term mind-set towards asset through improving efficiency The investors we have competition for available
ownership. Of the capital and customer experience interviewed as part of this investments has increased.
raised by infrastructure and exceeding regulator-set report have consistently This, in turn has reduced
funds since 2006, 48% has performance targets. referred to their roles as the level of return targeted
been by vehicles with a Objective analysis has custodians of infrastructure by infrastructure funds
maturity of greater than 10 shown performance assets rather than business globally to reduce from an
years4. Capital investment improvements across owners. average of 14.0% in 2004 to
decisions are typically private-invested 10.6% in 20164.
This is demonstrated in a
weighted towards asset infrastructure with examples
willingness to invest in Access to low-cost, long-
performance and long-term including:
assets throughout the term capital is providing
value creation, rather than
In Australia, private economic cycle and a desire significant benefits to
short-term gain.
owners of the electricity to engage with regulators consumers with owners
Management incentives are
distributors have and municipal bodies to and regulators alike
commonly aligned to these
operated their assets at ensure public needs are demanding substantial
goals (as opposed to the
least 15% and as much being met. performance improvements
shorter term incentives
as 33% more efficiently to mitigate the need for
typically seen in private
than public owned significant increases in
equity and some corporate
assets. customer bills to fund the
structures). Even when
required investment.
investors are considering In the UK, water
selling their assets, this is companies have
typically done via achieved an annual
presentation of a long-term reduction in water
business plan backed by leakage of 13% annually,
management teams. a saving equivalent to
the entire consumption
of Wales.

4 PwC analysis of InfraDeals fundraising information

6 Global Infrastructure Investment

Looking forward
With a major gap between the worlds infrastructure needs and countries abilities to
fund construction, combined with governments globally committed to infrastructure as
a mechanism for driving growth, harnessing the large pools of low-cost capital
presented by specialist infrastructure investors would appear an obvious solution.
Evidence of recent performance suggests that investors are responsible, appreciate
the needs and public status of their assets, and are committed long-term stewards.
However, evidence is still relatively limited, and this industry remains less than 20
years old. It would be complacent to ignore the challenges, and the onus will remain
on the industry to prove its capabilities as custodians of the worlds infrastructure.

Committed asset management Transparent governance

to continue to drive structures should be embraced
improvement and investment We consider it important that global
By their nature as essential public infrastructure investors continue to
services, infrastructure businesses recognise there is valid public interest in
require a lot of effort and ongoing their investments and that, given the
expenditure to keep them operating well, monopolistic nature of many regulated
particularly those meeting the needs of companies, the highest standards of
expanding cities and increasingly governance are required. In order to
demanding consumers. further build confidence in the sector,
investors in essential services should
Whilst new entrants to direct
commit to good governance and robust
infrastructure investment are bringing
ownership principles.
with them lower return requirements and
even longer investment horizons than Continued dialogue to enable
their predecessors, they also often greenfield investment
invest in minority stakes and are still Whilst there is a recognised need to fund
developing their asset management new infrastructure across the world, the
capabilities. risks and challenges of investing in
We consider it important for the industry greenfield construction projects means
that investors continue to support active that such projects typically remain beyond
asset management to ensure the the remit of many institutional investors.
performance improvements achieved To bridge the global infrastructure gap, it
over the last decade continue going will be incumbent on both the industry and
forward governments to devise, sponsor and
champion innovative structures in order to
enable low cost capital to be better used
in meeting the worlds infrastructure

PwC and GIIA 7

The need for
into global
and its impacts
8 Global Infrastructure Investment
Background Such commitments are mirrored around
the world, with Theresa Mays new UK
The desire to invest in infrastructure as an
administration sponsoring high value
asset class has never been stronger. Huge
investment into infrastructure and innovation
amounts of capital have been made available
to boost productivity10, Angela Merkel
by pension, insurance and sovereign wealth
pledging to raise spending on roads,
funds and, as a consequence, many owners
railways and broadband with no new
of infrastructure assets government and
debts11, and the Chinese government
private alike have taken advantage of the
setting aggressive targets to improve many
sharp rise in asset values by putting assets
key infrastructure sectors between now and
up for sale.
Specialist investors have bought into a wide
Hence the need for high-quality, privately
range of the developed (and in certain cases,
funded infrastructure has never been clearer
developing) world's infrastructure ranging
a position articulated back in 2008 by
from Australian airports to UK water
libertarian US think tank Cato Institute that
companies with a wide array of port, energy
most nations face daunting infrastructure
and telecoms infrastructure in between.
problems. To solve them, well-tested methods
At the same time, strong questions have of private provision must be embraced.
been raised about the quality and sufficiency A 2011 OECD study also concluded that
of the worlds existing infrastructure. A increased private sector investment in
McKinsey study in June 2016 estimated that strategic transport infrastructure will
US$3.3 trillion needs to be invested each be essential.
year to 2030 in order to support current
However, given many of the investors remain
growth rates5. Visitors to major capitals just
relatively unknown private organisations, it is
need to spend time on Los Angeles'6
perhaps not surprising that the public can be
congested roads, in long security lines at
sceptical about these organisations actions
New York's airports7 or London's packed
and motivations. Examples include headlines
underground8 to experience this for
around asset-stripping and morally
questionable structures. With limited public
Politicians have responded to pressure by reporting on infrastructure performance,
promising new major improvements with investment and return requirements, it has
the Trump administration pledging US$1 been difficult to date for the industry to respond.
trillion of investment in roads, bridges,
This document brings together available
schools and hospitals9 to be largely funded
commentary and analysis, exploring the
through tax-incentivised private capital.
impact that private investors have had and
are having on the worlds infrastructure,
and the impacts this is bringing to countries,
economies and societies worldwide.

5 Source: McKinsey Global Institute, Bridging Global Infrastructure Gaps, June 2016
6 Research by consultancy INRIX indicates Los Angeles tops the list of the worlds most gridlocked cities, with
drivers spending 104 hours in congestion in 2016 during peak time periods
7 PwC, Future-ready airports, 2017
8 Source:
10 Source:
11 Source:

PwC and GIIA 9

A global desire to invest Figure 1: Global unlisted infrastructure fundraising
into Infrastructure
60,000 42
In the decade since the Global Financial Crisis,
50,000 34
more than US$200bn (see Figure 1) has been
raised by investment funds to deploy long term
USD millions

40,000 26

Number of funds
capital into infrastructure investments. 30,000 18

It is estimated that at least the same amount 20,000 10

again has been allocated to infrastructure by 10,000 2
organisations seeking to invest directly rather than
- (6)
through investment funds. Typically, these 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016F
organisations will be major pension, insurance
Aggregate fund value No. of closed funds
and sovereign wealth funds; all of whom have
needs for long-term investments. Source: InfraDeals

The creation of these specialist vehicles and Figure 2: Global infrastructure transaction activity
teams has, unsurprisingly, led to a sharp rise in
the volume and value of infrastructure 500

transactions over the last decade (see Figure 2), 400

and a significant rise in asset valuations13, as

Number of transactions
acquirers have accepted lower returns on their
US$ billions

investments. 200

The key question, of course, is the impact these 100

investments have had on customer pricing and - -

quality of services. 2010 2011 2012 2013 2014 2015 Q3 2016 LTM

Europe North America Latin America

Asia / Australia Middle East & Africa Global transcation volume

InfraDeals estimates Source: InfraDeals

that over US$110bn of Figure 3: Global infra investment Equity and PPP by type of owner

dry powder is available Sovereign wealth fund


to deploy globally from Pension fund 5%


unlisted equity funds. 5%


Infrastructure fund

13 Source:
Infrastructure-Aug-15.pdf Source: InfraDeals

10 Global Infrastructure Investment

Infrastructure asset performance
Whilst there is limited direct analysis on the impact UK electricity distribution
of investors on infrastructure as a sector, it is Figure 4: Average customer minutes lost (CML)
possible to look at specific sectors where private 100

Average customer minutes lost

investment is most developed. In its paper The role
and impact of specialist investors in UK 80
infrastructure14, PwC reviewed the performance of
the UKs airports, energy distributors, water and
sewerage companies, which had seen a
pronounced shift in ownership over the ten years to
2015. Highlights of this analysis showed: 20
A reduction in annual water leakage by 13%
annually equivalent to the entire consumption -
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
of Wales (see Figure 7)
Average actual CML Ofgem average target CML
Reductions in electricity supply interruptions by Source: Ofgem
29% and length of average outage by 39%
(see Figure 5) Figure 5: Average customer interruptions (CI)
High investment levels: in every year between 100

Average customer interruptions

2004 and 2014, water companies and electricity 90
77 76
distribution network operators invested more 80 73 74
70 67 68 66
per customer than was generated in profits 62 63
60 56 55 55
In their review, PwC UK attributed these 50
improvements to a number of factors created by the 40
change in ownership, including: 30
A long-term perspective on the asset, with 10
focus on performance and value creation
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Focus on the underlying infrastructure, rather Average actual CI Ofgem average target CI
than ancillary commercial businesses
Source: Ofgem
Desire to work with regulators for the long-term
benefit of consumers
An alignment of management incentives with
UK Water and Wastewater
long-term performance Figure 6: Water infrastructure serviceability rating for overall
PwC concluded overall that its analysis showed 100%
a notable improvement in performance across all
major asset classes, which we consider is in no 80%
% of total network

small part due to the focus and investment capital

provided by specialist investors. (See Figures 3 60%

and 4).
Key examples of the above can be seen in the case
studies. Analysis of Thames Waters performance 20%

following Macquaries investment shows a 31%

reduction in leakage since 2006, beating regulator-
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
set targets in each year, something it had been
fiercely criticised for under previous ownership. Improving Stable Marginal Deteriorating
Source: Ofwat
Another water company featured in this report,
Affinity, has seen marked improvements in its Figure 7: Total leakage across England and Wales (MI/day)
customer engagement and cost efficiencies since 3,700
acquisition by Morgan Stanley and Prudentials 3,600
infrastructure arm in 2012. 3,500 3,553 3,553 3,367
3,200 3,346
3,239 3,103
3,113 3,096

14 2,800
infrastructure/insights/the-role-and-impact-of-specialist- 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
investors-in-uk-infrastructure.html Leakage (Ml/day)
Source: Ofwat

PwC and GIIA 11

Profit versus service levels? Figure 8: Average targeted return of funds raised globally
One of the charges commonly levelled against 16.0%
private sector investors is that their focus on 15.0%
improving profits can only be achieved to the 14.0%
detriment of customer service and reduced
maintenance of the assets.

Target IRR
The vast majority of addressable evidence in fact
appears to suggest the opposite that private 8.0%
investment in infrastructure typically drives 7.0%
improvements for consumers with either a) the 6.0%
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
need to compete (for non-monopolistic
Average target 9return Linear (Average target 9return)
infrastructure such as seaports and airports),
which leads to a shift in strategy towards Source: PwC analysis of InfraDeals fundraising information
customers; or b) regulators setting demanding
efficiency targets and price constraints. Typically, Figure 9: Historical development of regulated Weighted Average Cost of
regulators appear to become emboldened when Capital (WACC)
dealing with privately run companies rather than 7.0%
state-owned enterprises.

WACC (vanilla, real)

The regulator of the water sector in England and
Wales (Ofwat), in its latest price review, was able
to reduce bills in real terms by 5%, despite strong
and continued improvements in target service
levels. As Ofwat stated, Companies are set to
spend more than 44bn (or around 2,000 per 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
household)by 2020 customers will benefit from Year of price review
substantial improvements15. Electricity distribution - UK Airports - UK Water - NSW
Rail - UK Water - UK Water - South Australia
The above has only been possible through Water - Northern Ireland Water - Victoria

investors desires to put significant amounts of

Source: PwC analysis of regulatory settlements
capital into the industry, seeking increasingly
modest returns. Analysis by PwC of funds raised
since 2004 shows a clear downward trend in
Figure 10: Total cost per customer compared with customer density
return expectations from 14% in 2004 to 10.6% in
(average 2009-2013)
2016 (see Figure 8). Many regulators have taken
advantage of investors desire to deploy capital in 1,600 ERG
infrastructure, by allowing ever-lower returns in 1,400

each regulatory review over the last decade (see 1,200

Total user cost per customer ($)

Figure 9). 1,000
800 END
In October 2016 a review by PwC Australia into 600 ENX
the impact of privatisation on the Australian 400 PCR
electricity market demonstrated that, on a 200
cost-per-customer basis, private owners of the
0 10 20 30 40 50 60 70 80 90 100 110
electricity distributors in Australia operated their
Customer density (customer/ km line length)
assets at least 15% and as much as 33%
cheaper than publicly owned assets (see Figures Public Private Linear (Public) Linear (Private)

10 and 11)16. Further, this document highlighted a

Figure 11: Multilateral total factor productivity for each distributor
2014 review by the NSW Treasury, which found
Publicly-owned networks are dashed lines
electricity bills in Victoria and South Australia
(where the electricity networks are held in private
ownership) increased at lower rates than in NSW 1.8

and Queensland (where at the time they 1.6

remained in public hands17). 1.4




2006 2007 2008 2009 2010 2011 2012 2013


15 Source: ERG ACT* TND
*ACT power networks are owned through a public/private joint venture.
16 PwC Australia The case for change Privatisation of Source: Australian Energy Regulator, Electricity distribution network service
Western Australias electricity networks October 2016
17 Across 2015 and 2016 NSW has subsequently privatised
both its electricity transmission and distribution networks
12 Global Infrastructure Investment benchmarking%20report%20-%20November%202014_0.pdf
Responding to public needs
Figure 12: BAC employment at the airport
Arguments are also often put forward that
infrastructure operated on a commercial basis, 60,000
weakens the ability to use it as a tool for economic 50,000

On investigation, evidence from the case studies
indicates the long term nature of infrastructure 30,000
investors also contradicts this claim. Analysis of 21,000
Brisbane Airport Corporations (BAC) performance
following privatisation in 1997 (owned by a 10,000
consortium of Australian superannuation funds, led
by infrastructure specialist First State Investments), 1996 / 97 2015 / 16 2033 / 34
shows nearly A$2.5bn in capital investment up to Actual Actual Estimate
2016 (see Figure 22), driving a doubling in Source: BAC annual sustainability report, 2016
passenger numbers over the same period. Indeed
it has also been responsible for the creation of over Figure 13: Job and economic value creation
16,000 jobs, whilst being run as a commercial
30,000 29,000 9.0

GVA (USD Billiions)

25,000 7.5
Brisbanes owners have recently committed to
further development with an A$3.3bn runway 20,000 6.0

expected to deliver incremental economic benefits 15,000 3.8 4.5
to the region of A$5bn per annum and a further 10,000 3.0
29,000 jobs by 2035 as the airports capacity 5,000 1.4 5,500
continues to grow19. The privatisation has clearly 5,000 1.5
been a factor in total economic growth. -
Jobs GVA Jobs GVA Jobs GVA
Similar outcomes are expected from both Peel
Brisbane airport Liverpool 2 Deltaport
Ports expansion of Liverpool 2 in the UK and runway expansion
Global Container Terminal's (GCT) investment into Source: BAC annual sustainability report, 2016; Superport Action Plan,
improving Deltaport in Vancouver. These projects 2011; Deltaport Terminal, Road and Rail Improvement Project Consultation
are expected to facilitate the creation of 5,000 and Discussion Guide, 2011
5,500 jobs and 1.1bn and C$500m of economic
Figure 14: Chile urban coverage of drinking and wastewater
value respectively.
99.6% 99.8% 100.0% 99.8%
Of course, public needs may require more than 93.1% 95.2%

improved airports or shipping and tourism growth. 75% 82.3%

In some cases, they're driving critical investment to
% coverage

improve people's health and wellbeing. Less than

20 years ago, most Chilean cities were still
routinely dumping raw sewage into seas and rivers
with less than 15% of sewage being treated prior 25%
to disposal20.
Chiles answer incorporated the harnessing of Drinking water Wastewater Wastewater
private capital alongside strict regulatory collection treatment*
2000 2007 2015
objectives, in particular the ambitious goal of
*Until 2010, Sewage treatment was calculated over the total urban
providing 90% of the population with treated
population. From 2011 onwards, it has been calculated over population
sewage. Partial privatisation of Chiles water connected to sewage.
companies from 1998 encouraged long-term
Source: Superintendence of Sanitary Services (SISS)
investors such as Ontario Teachers Pension Plan
to invest alongside global water companies. Figure 15: National urban coverage of sewage water treatment
and hospital discharges, 2003-2007
The result of the programme has been seismic,
with huge improvements in water quality and SWTP Coverage (MM Inhab) Hospital Discharge (cases)
supply, and a steep decline in hospital admissions 12 1200
for typhoid and shigellosis illnesses typically 10 1000
contracted from unclean water (see Figure 15)20.
8 800

6 600

4 400

2 200
Sustainability%20Report%20FY2016.pdf 0 0
20 SISS (Superintendence of Sanitary Services), 2011 Official 2003 2004 2005 2006 2007
Environment Status report Source: Superintendence of Sanitary Services (SISS)

PwC and GIIA 13

Whilst the overall picture has
been positive, it would be nave
to assume that all infrastructure
investments have found stable
homes and will continue to
perform excellently for the
foreseeable future.

1. Committed asset management

Much of the initial wave of infrastructure investment,
which is explored in this report, was driven by
infrastructure funds with strong asset management
capabilities, harnessing private capital to acquire long
term infrastructure assets, primarily from corporate and
government vendors. These organisations typically had
both the scale and appetite for heavy asset
management roles, which in our view have contributed
By their nature as essential public services, infrastructure significantly to the improvements in performance
businesses require a lot of effort and ongoing expenditure evidenced throughout this report.
to keep them operating well, particularly those meeting the
The industry has evolved since then, with many new
needs of expanding cities and increasingly demanding
entrants (which had previously invested in infrastructure
funds) choosing now to invest directly instead. Many of
Whether it is city centre water companies needing to these new entrants represent pension funds, insurance
replenish ageing networks to meet the needs of growing companies and sovereign investment funds.
populations, airport owners needing to respond to airline
As a group these organisations have brought much
demands, or telecoms businesses rolling out fibre
lower cost capital into the sector, often with even longer
infrastructure capable of filling the appetites of technology-
term investment horizons than the funds which they
hungry consumers, all will require high quality
replace both of which have the benefits of continuing
management supported by committed shareholders who
to support high levels of investment whilst keeping
are focused on the challenges facing their assets.
end-user costs down. However, they also often invest
Following our review, we have identified three principal in minority stakes, and many havent yet achieved the
challenges facing the industry, which investors will need to scale or appetite for major asset management roles.
respond to if they are to continue building their reputations
We consider it important for the industry that its
as good custodians of the worlds infrastructure assets: (i)
investors continue to evolve and strengthen their asset
committed asset management, (ii) good governance and
management capabilities in order to drive the next
(iii) continued investment into new infrastructure.
wave of improvements and investment across the
worlds infrastructure base.

14 Global Infrastructure Investment

2. Transparent governance 3. Continued investment into new
Understandably, with an expanding universe of investors
acquiring assets regarded by consumers as essential services, The appetite for private investment in
scepticism has been expressed around whether investors infrastructure has never been stronger, but
motivations and structures are in the public interest. there remains a significant gap between
infrastructure needs and investors
This point has been articulated by many stakeholders including
expectations. In particular, whilst there is a
regulators, who understandably believe that the monopolistic,
strong, recognised need to fund new
high profile, nature of many regulated companies requires the
infrastructure across the world, the risks and
highest standards of governance.
challenges of investing in greenfield
Academics in the industry have also highlighted the long term construction projects are typically beyond the
benefits of robust governance. Recent studies have shown that remit of many specialist investors.
long term, sustainable approaches to management are not just
We note some of the highly innovative
in consumers interests, but companies, too: 88% of reviewed
structures which have been created in order to
sources find that companies with robust sustainability practices
harness low cost capital to major infrastructure
demonstrate better operational performance, which ultimately
projects; in particular, the regulated return
translates into cash flows. 21
structures around assets such as Thames
This is a view that is recognised and shared by numerous global Tideway Tunnel and High Speed One in the
investors (and GIIA members), which have clearly stated aims UK, feed-in tariff constructs on renewable
towards good governance. One such member, Hermes energy and the unitary charge mechanisms on
Investment Management, made its position explicit in a 2017 public private partnerships (PPP) contracts.
position statement: It may be that the case for implementing a
However, on major infrastructure projects,
formal, separate governance regime for infrastructure
these remain the exception rather than the rule.
businesses that provide essential public services is considered
Typically, infrastructure investors will continue
by some as impractical and undesirable. However, we are
to look for governments or corporate sponsors
strong advocates of an enhanced code applicable to privately
to take construction risk. Going forward, it will
owned Infrastructure businesses in the interests of both
be incumbent on both the industry and
shareholders and society as a whole.
governments to devise, sponsor and champion
We consider it important that global infrastructure investors structures that will enable private capital to be
continue to recognise there is valid public interest in their better used in meeting the worlds infrastructure
investments. In order to further build confidence in the sector, needs.
investors in essential services should commit to good
governance and robust ownership principles.

21 From the Stockholder to the Shareholder, Clark, Feiner and Viehs, March
PwC and GIIA 15
A snapshot of global infrastructure
investment and our case studies

Investor mix by Investments by
number of investments asset type
North America
Investor mix by Investments by 8%
number of investments asset type 28% 25%

7% 44%
1% 16%
46% 12% 38% 6%

9% 3%

Peel Ports, Liverpool

Affinity Water, Herefordshire
Global Container Terminals,
New York and Vancouver

Investor mix by
number of investments



Latin America 52%

Investor mix by Investments by

number of investments asset type

2% 24% Investments by
11% asset type
Aguas del Valle,
1% La Serenae
76% 8%
6% Nuevosur,Talca
Essbio, 10%

4% 6%

16 Global Infrastructure Investment

Key Case studies

Investor mix by number Investment by

of investments asset type
Corporate Transport
Infrastructure fund / Social
investment firm
Pension fund
Sovereign wealth /
government agency Telecoms
Other Renewable energy

Middle East
Investor mix by Investments by
number of investments asset type

12% 13% 13%

9% 7% 5%

60% 23%
Investor mix by
39% number of investments


Shenyang Zhenxing
Wastewater, 64%
Shenyang City,

Investments by
Azure asset type
33% 33%

2% 2%

Brisbane Airport,
Investor mix by Investments by Brisbane
number of investments asset type

6% 11%
3% 1%
32% 7%


45% 19% Source: InfraDeals investment and

ownership mix as at 30 September
2016 based on number of investments

PwC and GIIA 17

Chilean water:
driving global health
through infrastructure
Less than two decades
ago, the public water
utility industry in Chile
was in urgent need of
investment to improve
the quality of service
to consumers and
public health.

Essbio wastewater treatment facility, Source: OTPP

18 Global Infrastructure Investment

Figure 16: Chile urban coverage of drinking and wastewater
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Drinking water Wastewater collection Wastewater treatment*
Source: SISS (Superintendence of Sanitary Services)

As recently as the early 1990s, cities in Between 1998 and 2004, the
Chile were unloading untreated sewage government sold strategic interests in 13
into the sea or rivers. By 1998, even water companies to the private sector,
following a programme of investment, with five being perpetual concessions
the country had just 24 wastewater and the remainder 30 year
treatment plants, and whilst urban concessions. The government retained
coverage was around 97% for potable minority interests of 30% to 45% in the
water, it was 83% for sewage collection perpetual concessions to maintain
and just 15% for sewage treatment 22. governance and a source of income.
Having set a goal to treat 90+% of the The results were dramatic. Between
sewage in Chile by 2010 and meet 2000 and 2010, coverage levels for
world-class standards, the country faced potable water, sewage collection and
investing an estimated US$4bn to meet sewage treatment approached 100%.
this target. This was an undertaking the Chile is now a worldwide leader in
government-owned water companies in sewage treatment coverage in urban
Chile were neither able to self-finance centres, whilst maintaining some of the
nor had the necessary experience to lowest water tariffs in the world.
The benefit to the populations health of
this investment has been seen through
a steady decline in hospital admissions
for typhoid and shigellosis as sewage
treatment has increased (see Figure
19). All of this has been achieved whilst
also creating more than 5,000
additional jobs between 2004 and 2015
(see Figure 18).

22 SISS (Superintendence of Sanitary Services), 2011 Official Environment Status report

PwC and GIIA 19

OTPPs involvement in Figure 17: International water tariff comparison
Chilean water Berlin, Germany (Berlinwasser AG) 6.25
The initial investors in the Chilean water Copenhagen, Denmark (Copenhagen Water) 5.87
industry were primarily European Oslo, Norway (Oslo Kommune) 5.59
strategic investors, including Agbar Sydney Australia (Sydney Water Corporation) 4.90
(wholly owned by Suez), Anglian Water Washington DC, US (DC Water) 4.73
and Thames Water. Most of these Paris, France (Eau de Paris) 4.18
players exited within five years through London, UK (Thames Water) 4.04
sales to institutional investors, and now Ottawa, Canada (City of Ottawa) 3.06
only Agbar remains. The institutional Stockholm, Sweden (Stockholm Vatten) 2.36
Madrid, Spain (Canal de Isabel II) 2.13
entrants include the Canada based
Montevideo, Uruguay (OSE, Uruguay) 1.90
global investor Ontario Teachers
Rome, Italy (ACEA) 1.88
Pension Plan Board (OTPP), which
Athens, Greece (EYDAP SA Athens) 1.65
entered the Chilean water industry in
Cape Town, Southafrica (Cape Town) 1.62
2007 by acquiring majority stakes in four
Santiago, Chile (Aguas Andinas) 1.26
Chilean water companies: perpetual
Sao Paulo, Brazil (SABESP) 1.13
concessions Essbio and Esval, and 30 Moscow, Russia (Mosvodokanal) 0.93
year concessions Nuevosur and Aguas Seoul, Korea (Arisu) 0.90
del Valle. Lima, Peru (SEDAPAL) 0.64
After a thorough review, it became clear Shanghai, China (Shanghai Chentou Corp) 0.56
to OTPP that Chiles robust regulatory Caracas, Venezuela (Hidrocapital) 0.36
frameworks and strong rule of law made - 1 2 3 4 5 6 7
it an ideal country in which to invest. Source: International Benchmarking Network for Water and Sanitation Utilities
The water industry emerged as a high (IBNET); 2015
potential area, given its strong need for
investment, and an industry regulator
that at that time was actively seeking Figure 18: Chilean water total employment
to attract new investment to improve 16,000
service quality and coverage.
OTPP Portfolio Manager Stacey Purcell
says that on making the investments, 12,000
OTPP could see two key opportunities
for improvement in the companies it had
acquired. The first was governance: We 8,000
wanted to deepen the dialogue on
valuation creation and strategy while at 6,000
the same time letting management run 4,000
the day-to-day business, says Purcell.
The second area that OTPP set about 2,000
improving was long-term planning:
Traditionally, the companies had been 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
quite reactive with limited long term Source: SISS (Superintendence of Sanitary Services)
planning so we pushed them to
change the way they worked. Taking a
long-term view and thinking about Figure 19: Urban water coverage in Chile mapped against hospital
sustainable investment, risk admissions for typhoid and shigellosis, 2003-2007
management and continuous
improvement were big steps forward. SWTP coverage (MM Inhab) Hospital discharge (cases)
12 1200

10 1000

8 800

6 600

4 400

2 200

0 0
2003 2004 2005 2006 2007
Source: SISS (Superintendence of Sanitary Services)

20 Global Infrastructure Investment

The benefits delivered Figure 20: Water losses

With a sophisticated international 50%

investor as majority owner, OTPPs

% loss of potable water

Chilean water companies have enjoyed 45%
a wide range of advantages. These
include access to insight from a
network of world class commercial
operators to help drive innovation and
leading edge thinking on financing. 30%
Alongside these gains, one of the
clearest benefits OTPP brings as a 25%
long term investor without immediate
cash requirements is the ability to 20%
maintain required investment plans, 2007 2008 2009 2010 2011 2012 2013 2014 2015
irrespective of shocks in the macro Esval AdV Essbio Nuevosur Industry
environment. Source: SISS (Superintendence of Sanitary Services)

Backed by OTPPs ownership and

investment, the companies have This simultaneous focus on financial on the ground. AndesCans Rodrigo
achieved strong financial performance, investment and operational improvement Montes says this role includes helping
as well as improvements in operational is fostered by the model company the companies share process innovations
metrics such as the level of water regulatory framework applied by the and best practices, as well as realise
losses despite material external Chilean industry regulator, the economies of scale in areas like
shocks. OTPPs Purcell says this twin Superintendencia de Servicios procurement. Montes comments:
track progress reflects the way OTPP Sanitarios (SISS). This approach means An important part of AndesCans value
balances financial investment with both OTPP and the water companies is to act as a coordinator between the
operational improvement. The long- management are constantly seeking companies to ensure that good ideas,
term plans we have worked with innovation to deliver better services at a whether from Toronto or the companies
management to create are both driving lower cost. Purcell says OTPP seeks to themselves, are understood by all of
continuous improvement and improving align the management incentives with them, helping to promote best practices
the robustness of our systems to this focus on innovation through a across the board.
ensure security of water supply, she balanced scorecard that includes
explains. In recent years weve cut operational performance, strategy and Looking forward
back our distributions to increase the risk measures rather than financial-only While privatisation of the Chilean water
level of investment as the companies metrics. industry has objectively been highly
needed it. Ultimately, we see that what successful, inevitably some challenges
A further factor in the success of
is good for the companies in the long remain. One is the need to handle the
OTPPs investments in the Chilean
term is also good for us growing impact of climate change on the
water industry has been the role played
as investors. security of the water supply, including a
by AndesCan (its Chilean-based asset
recent severe drought that lasted about
management team) in helping to
five years, whilst simultaneously keeping
manage and coordinate the investments
customers bills at affordable levels.
These challenges add to the already
strong need for private investors such as
OTPP to support the companies in
Taking a long-term view and thinking continuing to innovate and invest. Going

about sustainable investment, forward, in the face of the ever-present

threat of environmental changes to the
risk management and continuous security of water supply and the cost of

improvement were big steps forward. delivery, it will be crucial for water
companies and their investors to
maintain an active and open dialogue
Stacey Purcell with the regulator over how to best
Portfolio Manager, address these challenges.

PwC and GIIA 21

Water PPPs in China / MIRA
As private investment continues to transform Chiles water sector, a
similar process is under way in China. Rather than full privatisation of
companies and infrastructure, the approach in China is based on a PPP
model. Private investors build water and waste treatment facilities and
receive ongoing revenues for operating them in line with service quality
Macquarie Infrastructure and Real Assets (MIRA) began investing in the
Chinese water sector in 2012. By combining a long-term investment
perspective with global industry experience, its facilities are now treating
more than two million tonnes of tap water, wastewater and recycled
water per day, all to the highest treatment standards in China.
The environmental benefit of MIRA's investment is made clear by its
facility in Shenyang, one of the largest wastewater treatment plants in
northern China. The facility today treats more than 500,000 tonnes of
raw effluent that was previously being deposited everyday, untreated,
into the Hunhe River, the citys major water source.
As a global financial investor MIRA is also committed to ensuring its
work force meets the highest Environmental Health and Safety (EHS)
standards. Neil Johnson, head of MIRAs China infrastructure team,
explains: Good environment, health and safety is synonymous with
operational and financial performance. You cant have the returns
without the right service provision and employee welfare. Once those
building blocks are in place and youre meeting the required treatment
standards, only then can you look for operational efficiencies.

Shenyang Zhenxing Wastewater, Shenyang City, Liaoning Province, China Source: MIRA

22 Global Infrastructure Investment

Good environment, health and safety
is synonymous with operational and
financial performance: you cant have
the returns without the right service
provision and employee welfare. Once
those building blocks are in place and
youre meeting the required treatment
standards, only then can you look for
operational efficiencies.
Neil Johnson
Head of MIRAs China infrastructure team

PwC and GIIA 23

Australian airport
enabling economic
expansion through

Brisbane Airport, Source: Brisbane Airport Corporation

24 Global Infrastructure Investment

For over 10 years, between the
mid-1980s to the mid-1990s,
Australia's 10 largest airports saw
8% compound growth in domestic
and international passengers23.
Over this time it became
increasingly clear that the publicly
owned structure of these airports
was starting to hinder their ability to
keep pace with the evolution of the
global aviation industry.
Faced with developments such as
the rise of low cost carriers,
increasing passenger volumes and
the opening up of Asian markets,
the required investment into airport
capacity, facilities and passenger
experience were becoming a
growing burden on the balance
sheet of the Australian Federal
In light of these issues, the
government decided that investment
from the private sector accompanied
by appropriate regulatory oversight
was the best way forward for the
countrys airports and proceeded to
privatise Australias airports from
1997 into the early 2000s.

23 PwC analysis, Source: Bureau of

Infrastructure Transport and Regional
Economics (BITRE)

PwC and GIIA 25

From day one we Figure 21: BAC pre / post privatisation passenger numbers

recognised that 25

the airport is an
economic engine 20
for the entire State
of Queensland. So
it was important

PAX in millions

that we worked
with management 10

to develop a long
term strategy 5
not just for the
domestic outlook,
but to realise -
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
the potential for Year

BAC pre-privatisation BAC - post-privatisation
Source: Bureau of Infrastructure Transport and Regional Economics (BITRE)
growth related to
Asian and other
FSIs involvement in Brisbane This strategy has seen investment and
Chris McArthur Airport operational improvement across all
Partner, In 1997, Brisbane Airport Corporation aspects of the airport, with close to
First State Investments (BAC) was one of the first wave of A$2.5bn in infrastructure capex since
Australian airports to be privatised. First privatisation (see Figure 22). The
State Investments (FSI), known in investment has included a
Australia as Colonial First State Global redevelopment of the international
Asset Management, is a foundation terminal and new northern access road
investor and the largest shareholder in system, as well as several upgrades and
BAC, with owned and managed developments of the domestic terminal
interests totalling 26.5%. and car parks.

FSI Partner Chris McArthur, who sits on McArthur notes that the ability to invest
the BAC Board, says FSIs consistent the significant levels of capex required
investment strategy since the acquisition has been facilitated by the light touch
reflects the airports characteristics as a regulatory model employed by the
core infrastructure asset that acts as a Australian Competition and Consumer
gateway to the entire state. From day Commission (ACCC) since 2002. The
one we recognised that the airport is an regulatory framework employed by the
economic engine for the entire State of ACCC allows BAC to negotiate directly
Queensland. So it was important that we with the airlines, agree on the
worked with management to develop a investment required and how this is paid
long term strategy not just for the for, he explains. This model has been
domestic outlook, but to realise the key to enabling the airports and airlines
potential for international growth related to agree on how to grow the airports in
to Asian and other international markets. line with demand, and ensure the
facilities in place provide the best overall
customer experience.

26 Global Infrastructure Investment

The benefits delivered At the same time, the airports positive
human, social and environmental
To support the airports performance,
impacts have been recognised through
FSI takes an active asset management
several awards. It has been rated as
approach. This involves working with the
Australias number one airport for quality
Board and management to shape the
of service 12 years in a row in a survey
strategy and drive investment
by the ACCC, and was also only the
performance, while also maintaining a
seventh airport in Asia Pacific to achieve
long-term focus on responsible
Airport Carbon Accreditation Level 3.
investment and sustainable returns.
Nominee directors from FSI participate
on all Board Committees, bringing
aviation sector experience.
Figure 22: BAC capex investment since 1999
Brisbane Airports success in
implementing its strategy is underlined 500
by the growth in employment on the site,
with the number of direct and indirect
employees increasing from 4,700 in
1999 to 21,000 today (see Figure 23). 400 381
This is supported by active development
of the airports large 2,700 hectare land 324 325
bank the largest of any Australian
AUD in millions

capital city airport. Over the same 300

period, overall EBITDA has risen at a
238 232
CAGR of 10.4%, and passenger
numbers at a CAGR of 4.3%24. 189

59 66
41 41 40
10 13

24 Source: BAC annual reports Source: BAC annual reports

Brisbane Airport departure lounge, Source: Brisbane Airport Corporation

PwC and GIIA 27

Brisbane Airport plays a significant role in
Queenslands economy, generating jobs,
investment and tourism and the proposed
infrastructure investments will provide
benefits to the local, state, regional and
national economies.
Warren Truss
Former Deputy Prime Minister of Australia

Looking forward The wider economic impact of BACs significant role in Queenslands
ongoing capex was underlined in 2015, economy, generating jobs, investment
While significant investment has already
when the then Deputy Prime Minister and tourism and the proposed
been made in BAC since privatisation, a
and Minister for Infrastructure and infrastructure investments will provide
further A$3bn is expected to be spent
Regional Development, Warren Truss, benefits to the local, state, regional and
over the next four years in projects
approved its 2014 Master Plan, national economies.
including the New Parallel Runway
commenting25: Brisbane Airport plays a
(NPR), the largest aviation project of its
kind in Australia. On completion in 2020,
the NPR will double the airports existing Figure 23: BAC employment at the airport
capacity. It is also expected to deliver a 60,000
regional economic benefit of around
A$5bn per year by 2035, including 50,000 +
increasing employment at the airport to 50,000
more than 50,000, as well as creating
7,800 jobs across the Brisbane /
Moreton region. 40,000

Significantly, the NPR has been in the

airports master planning document for 30,000

two decades and wasnt derailed by the

global financial crisis of 2008-2009. 21,000
Australian airports have proven to be 20,000
remarkably resilient despite occasional
traffic shocks, with growth quickly
reverting to long term trends. So our 4,700
decision making is focused on
maximising the long-term growth -
potential of the airport, and doing so in a 1996 / 97 2015 / 16 2033 / 34
responsible fashion, comments Actual Actual Estimate
McArthur. Source: BAC annual sustainability report, 2016


28 Global Infrastructure Investment

The wider story Figure 24: Adelaide Airport international passengers
The success of the Brisbane Airport
privatisation has been mirrored at
several other airports across Australia.
For example, since an IFM-led
consortium first acquired the lease for 800,000
Melbourne Airport 26 more than fifteen
years ago, nearly A$3bn has been
invested into the airport. This includes 600,000
extension and expansion of a new fourth

terminal and associated transport hub,

improvement to land-side access to the 400,000
airport such as new roads, car-parking
and public transport points of access,
and improved customer experience
including baggage reclaim facilities,
retail and airline lounge offerings. These
investments have seen passenger
numbers increase by more than 20 -
million to 35.2 million in 2015-201626.

Source: Adelaide Airport annual reports, BITRE

Adelaide Airport 27 privatised in 1998 This strategy has resulted in a four-fold

is another example. The consortium of increase in the number of international
Australian superannuation funds that passengers going through Adelaide
acquired the concession oversaw the since 1999 the highest rate of
construction of a new, integrated compound growth of Australias capital
international and domestic terminal, city airports28.
replacing what was previously two
What is clear is that in less than two
separate and dated facilities. Core to the
decades since privatisation, private
approach adopted in Adelaide has been
investment has transformed Australias
an effort to open up South Australia to the
airports and the benefits are continuing
global economy through increasing
to grow.
international connections.

26 Annual report 2016

27 Company website
28 PwC analysis, BITRE Airport traffic data
PwC and GIIA 29
Peel Ports:
driving the

The Liverpool 2 development, Source: Deutsche AM

30 Global Infrastructure Investment

Peel Ports is the UKs second largest
group of ports. Its broad geographical
footprint includes: the Ports of Liverpool,
Medway in South East England, Heysham
in Lancashire, Clydeport in West Scotland
and Great Yarmouth on the east coast,
along with the Manchester Ship Canal, a
container terminal in Dublin and marine
support facilities in Tyne, Tees, Liverpool
and Falmouth.

Deutsche Asset Management's

involvement in Peel Ports
In 2006, Deutsche Asset Management
(Deutsche AM) acquired 49% of Peel Ports
from Peel Group. Peel Group decided to
partner with Deutsche AM to bring on
board long term asset management and
financial management expertise to
catalyse further growth opportunities. In
the decade since, Deutsche AM has
supported Peel Ports in development
programmes involving around 680m of
capex. It has seen volumes through the
port increase at a CAGR of 4%, and
around an additional 600 FTEs employed
since 2008 (see Figure 26).
Deutsche AMs approach involves taking a
long-term view of opportunities for the
group, supporting management decision
making, and helping to drive growth.
Sundeep Vyas, Managing Director, Deputy
Chief Investment Officer, Deutsche AM's
infrastructure business, comments: We
see ourselves as active owners who take
responsibility for creating value and
helping the business grow, rather than
being passive and simply taking out

PwC and GIIA 31

The benefits delivered This in turn has also had an
environmental benefit. Incremental
We acknowledge
Peel Ports Chief Executive Mark
Whitworth confirms the benefits brought
volume growth since 2011 has removed our role in being
by an active private investor working
around 25 million miles from the UK
road network, generating a net saving of
a key part of the
hand in hand with the management.
Our whole culture at Peel Ports is about
around 30,000 tonnes of transport- supply chain for
understanding the market and
related CO2. This is supplemented by
Peel Ports container service along the
the wider North
customers in our hinterland, and being
able to react with agility to meet their
Manchester Ship Canal. Started in 2009 West region, so
needs, he says. We acknowledge our
and operated by their in-house shipping
operation BG Freight. The service
role in being a key part of the supply
chain for the wider North West region,
currently moves more than 20,000 how we can work
so understanding how we can work
containers a year between Liverpool
and Manchester by Canal, saving a
together with
together with our customers to drive
growth in the region is core to how we
further 700,000 miles per year 29. our customers to
operate and very much encouraged by A further characteristic shared by Peel drive growth in the
our shareholders. Ports investors and management is
looking beyond short term cycles to
region is core to
This mentality is reflected by Peels
Ports Cargo200 campaign, where it has
focus on the long term, an approach how we operate.
demonstrated during the last recession.
engaged with businesses who have
For us as long term investors, Mark Whitworth
operations in the North West to
recession per se is not a driver of any Chief Executive,
transform their global supply chains. By
particular action, Vyas explains. The Peel Ports
bringing new port related services to the
recession focused the minds of
likes of Matalan, Typhoo and B&M,
shareholders and management on the
major volume flows have been rerouted
need to collectively improve what we
to Liverpool on new feeder services.
already had. So the actions we took are
Whereas only two major shipping lines
things we would have done anyway, but
offered connections to Liverpool via
with an added incentive.
feeder services at the start of 2011,
around ten do so now. The resulting
volume growth of 60,000 units to
157,000 units represents a CAGR of
10.2%, favourably compared with Peel
Ports' estimate of the market CAGR of

Figure 26: Peel Ports net capex and FTEs

150 3,000
2,745 2,649

120 2,400

90 1,674 1,800
in millions


1,177 1,216
60 1,200

30 600

41 39 23 29 19 37 91 141 140
- -
2008 2009 2010 2011 2012 2013 2014 2015 2016F
Capex FTEs

Source: Peel Ports statutory accounts, company information. Net capex shown is after disposals receipts and grants received

29 Company estimates

32 Global Infrastructure Investment

Figure 27: Peel Ports Liverpool TEU* capacity

2.5 2.4

TEUs (millions)


1.0 0.9


Pre expansion Post phase 1 (2016) Post phase 2 (c.2020)
Source: Peel Ports March 2015 statutory accounts
Note: Twenty Foot Equivalent Units (TEU)

Those actions included committing to

the investment in Liverpool2. This new
Economic analysis by AMION Consulting
in 2011 forecast that Liverpool2 would
Its not about what
400m deep water container terminal at contribute 1.1bn of GVA by 2020. When business we can
the Port of Liverpool is providing an
opportunity and catalyst for further
combined with a number of other
investments across the Liverpool City
be doing tomorrow.
automation in the groups port Region in transport infrastructure, skills Its about what
operations, while also generating an
estimated 500 jobs directly and up to
development and logistics assets, it has
the potential to create 30,000 new jobs
business we should
5,000 indirectly across the north-west and an additional 18.3bn of GVA by be doing that will
region30. 2030. be productive for
Acknowledging that improving access to
the Port is important to maximising the
Liverpool2 is not the only substantial
investment committed to in recent years
customers for the
benefits of the expansion, the UK by Peel, with a new 100m Biomass next five to ten
government has also committed to both
adding a second line on the rail link to
terminal for Drax commissioned as well
as a 150m to develop tri-modal logistics
the port, as well as either upgrading the along the Manchester Ship Canal.
connected highways or building a new The question is which opportunities to Sundeep Vyas
road to improve the efficiency of road focus on for the medium and long term, Managing Director,
connectivity31. Vyas says. Its not about what business Deputy Chief Investment Officer,
we can be doing tomorrow. Its about Deutsche AM's infrastructure business
what business we should be doing that
will be productive for customers for the
next five to ten years.


PwC and GIIA 33

Global Container Figure 28: GCT group capex investment since acquisition

Terminals 250

In North America, a similar story of how 191

200 186
private capital has supported significant

USD in millions
capex investment and is helping drive 150
economic activity can be seen with 150 130
OTPPs acquisition of Global Container 115
Terminals (GCT) in 2006. GCT is one of 100
the largest container terminal operators 70 67
in North America, operating two 50 47
terminals Deltaport and Vanterm
under long-term leases with the
Vancouver Fraser Port Authority, as -
well as Bayonne and the NY Container FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 YTD
Terminal in the Port of New York /
Source: Global Container Terminals information
New Jersey.
Over the decade since the acquisition, The expansion doubled capacity at As with Bayonne, to ensure the benefits
a particular hallmark of OTPPs Bayonne, allowing for semi automation of this investment for Deltaport and the
stewardship of GCT has been both its of the facility and included the wider economy are fully realised, GCTs
willingness to take a long term view in installation of state of the art rail investment has not been undertaken
decision making, as well as its mounted gantry cranes to enable alone. The federal government and port
coordinated approach to working in improved operational performance, and authority have spent close to C$50
partnership with the public sector for enhance safety and service to truckers. million building an overpass to enable
mutual benefit. better traffic flow and make using the
The decision to undertake this
port for shipping onwards through
With a terminal business, you have to investment in the face of difficult global
Canada and to the US Midwest more
recognise that its part of a greater financial conditions was a significant
supply chain, says Darrin Pickett, who vote of confidence in the ports long
heads OTPPs team managing its term prospects. Daniel Rossetti, Senior
investment into GCT. So any Principal at OTPP underlines the point:
investment needs to consider the In 2009 we like everybody else
quality of the rail, road and related faced a number of challenges caused
infrastructure, even extending so far as by the global economic environment.
distribution centres. But we believed in the Bayonne
terminals long term prospects so chose
He cites two particular examples. In
to invest US$325m at a time when
2009 OTPP successfully concluded
many investors were pulling back from
negotiations with the Port Authority of
the industry.
New York and New Jersey to expand
GCT Bayonne onto the adjacent 70 Another good example of public private
acre property. This involved the sale of collaboration has been GCTs
Bayonnes existing 100 acre facility to investment programme to improve the
PANYNJ (the only freehold land in the rail and road links to Deltaport in
port that PANYNJ did not own). In Vancouver. GCT committed C$300m to
return PANYNJ leased it back to GCT improving intermodal rail tracks and the
under a long term concession and replacement of rail container handling
provided US$150m of funding for the equipment. Once completed in mid-
expansion as well as a further US$50m 2017, this project will add 50% to
for subsequent development of an Deltaports rail capacity within the
intermodal rail yard. existing terminal footprint and is
estimated to create up to 5,500 new
jobs and add C$500m to the Canadian

Deltaport, Source: OTPP

32 Port Metro Vancouver consultation discussion guide


34 Global Infrastructure Investment

The proportion of incoming
goods shipped on into the
US by rail has risen from
virtually zero in 2006 to
between a quarter and a
third of all volume today.
The potential for further
growth that the Deltaport
project creates is obviously
very good for jobs in
the area and helps drive
wider economic growth in
Darrin Pickett
Infrastructure & Natural Resources

PwC and GIIA 35

UK water
driving performance
through asset

Thames Water's Lee Tunnel development, Source: MIRA

36 Global Infrastructure Investment

The privatisation by Margaret Thatchers
government of the Regional Water
Authorities in 1989 created 10 listed
monopoly water and sewerage
operators. At the same time, it set up the
industry regulatory agency Ofwat, using
the model of infrastructure regulation
already proven in sectors such as
energy and telecoms.
Whilst much criticism was initially
levelled against the regulatory bodies for
failing to adequately police the privatised
utilities, today it is widely recognised
that the UKs utility regulators set the
gold standard for incentive-based
regulation. Other regulators across the
world actively track the evolution of
Ofwat and other UK regulatory regimes.
Over the decades since water
privatisation, there has been industry-
wide improvements in metrics such as
drinking water quality, network pressure
and supply interruptions. Two examples
of where specialist infrastructure
investors have seen the opportunity to
drive improvement in the operations of
these assets are Thames Water and
Affinity Water.

MIRAs involvement in
Thames Water
A consortium led by Macquarie
Infrastructure and Real Assets (MIRA)
acquired the UK water utility Thames
Water from global conglomerate RWE in
2006. In making the investment, the
acquirers had a clear view of the
opportunities for the business and its 15
million customers. Richard Greenleaf,
MIRA Asset Director on Thames Water
explains: MIRA was already an
experienced investor in the UK water
sector via its investment in South East
Water. When RWE started the sale
process for Thames Water, we saw the
opportunity to commit more capital to
the sector together with great potential
to drive improvements in the
performance of the business.

PwC and GIIA 37

The benefits delivered Figure 29: Thames Water actual vs target leakage
In the years since the takeover, MIRA 1,000
has continued to pursue its goal, with 950
Thames Waters operating performance
notably improved since acquisition. The
companys drinking water quality
compliance score of 99.99% is now the 800

MI / day
equal highest in England34, the security 750
of water supply has consistently been 700
rated as the maximum attainable35 and
leakage rates across its 20,000 mile
network of water mains have beaten the 600
regulatory target for ten successive 550
years and are now 25% lower than at 500
the time of acquisition (see Figure 29). 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

The foundations for these improvements Actual leakage Target leakage

were laid down at the time of the 2006 Source: Ofwat, company information
takeover. On completing the purchase,
an immediate priority for MIRA was to This long term view saw MIRA and As well as replacing old water mains,
divest a multitude of non-core, management work to provide the company has also invested in many
unregulated activities that had distracted transparency around the companys other initiatives delivering wider benefits
managements attention away from the investment plans with stakeholders. to the community. Examples include
core water infrastructure business. When we acquired Thames, aspects of completing the construction of the Lee
its operational performance and the Tunnel to help remove waste from the
Combined with the appointment of a
underlying resilience of some of its river Thames, completing major
highly experienced CEO and the
assets was unacceptable. We saw that improvements at each of the five large
introduction of new management
a significant step change in the level of sewerage works serving London to
incentives, the divestment programme
investment was required to address support the growing population,
helped to focus and energise Thames
these problems. It was important that we investing in new technologies to handle
Waters management towards improving
demonstrated to stakeholders that we water and waste and becoming one of
the quality of service to customers. This
are a positive custodian of the business, the leading UK water companies in
was all via a simultaneous ramp-up in
while evidencing that the incremental generating electricity from waste.
investment, and an improvement in
investment is necessary and how it will
operational performance, undertaken Furthermore, MIRA worked closely with
benefit customers.
with a long-term perspective. Thames Water management to develop
Under MIRA-led ownership, annual an investment model for delivery of the
These assets are regulated over
capital investment has exceeded 1bn Thames Tideway Tunnel. With the support
five-year cycles, explains Greenleaf.
for 11 years in a row. This has enabled of Ofwat and the UK government, this
So we set our management teams
record spending on treatment works, model has become a reality and may
agenda and incentives around delivering
pipes and sewers, while maintaining a now become a blue-print for future large
to that cycle, while also ensuring that
focus on operating costs has helped infrastructure projects.
the business is as well-positioned as
keep the average household bill the third
possible for the next five-year cycle and
lowest in England and Wales.
the long term. This is aligned with our
long term approach to investing in
Figure 30: Thames Water average yearly capital investments 1984-201536 in constant
2012 / 2013 prices

State ownership (up to 1989) 323m

Listed company (1989-2001) 580m

Utility ownership (2001-2006) 660m

MIRA-led ownership (2006-2015) 1,030m

and-figures Source: Thames Water annual report
/our-business/previous-performance-reports 36 Thames Water published accounts. Expressed in 2012 / 2013 prices

38 Global Infrastructure Investment

Looking forward
Eleven years on from its acquisition by specialist private
investors, significant improvements have been made, but
management and investors acknowledge the job is not
yet done.
Whilst year on year improvements have been made to the
service incentive mechanism (SIM), Ofwats measure of
customer service, Thames remains in the lower quartile of
the league table. The 1bn per year spent on maintaining,
upgrading and expanding the network is also set to continue
for the foreseeable future to try to ensure both leakage and
disruptive bursts (such as those impacting parts of London in
December 2016) are prevented wherever possible.
The plan and approach weve developed has come directly
from listening to what our customers want. Ultimately, we
drive our business plans in response to the customers'
needs while at the same time recognising that, as a
financial investor, we seek to earn an appropriate return,
explains Greenleaf. Its a fine balance and, to date, MIRA
and Thames Water seem to have struck it successfully.

Ultimately, we drive
our business plans
in response to the
customers' needs
while at the same time
recognising that, as
a financial investor,
we seek to earn an
appropriate return.
Richard Greenleaf
MIRA Asset Director,
Thames Water Victorian era Finsbury Park reservoirs, Source: MIRA

PwC and GIIA 39

Affinity Water
Another UK water company to
demonstrate a similar path of
performance improvement post
separation from a wider corporate
structure is Affinity Water.
In 2012, a consortium comprising
Infracapital and Morgan Stanley
Infrastructure Partners acquired
90% of Veolia Environments UK
regulated water business for
1.24bn. The business
subsequently rebranded as Affinity
Water supplies water to 3.5
million customers in suburban
areas to the North and West of
London, as well as in North Surrey,
parts of East Kent and Essex.
Following the acquisition, the three
regulated water companies that
previously made up the business
were combined into a single
licensed water company.

If we engage The benefits delivered Both investors and management

highlight the role that private investors
effectively, Having completed the acquisition and
restructuring, the new investors
play in the companys continued
customers can refocused the businesss strategy
progress. CEO Simon Cocks comments:
The biggest difference for me
be clear on what around two main themes: putting the
customer first and targeting long-term
personally, from being part of a listed
they want. And if value creation. Key changes included:
company, is that I have my investors in
the room, and were all directly aligned
we demonstrate Introducing management incentives around a plan and outcomes and
how we are going more closely aligned with the
customer and operational measures
incentivised in the same way. That helps
give much shorter lines of
to deliver this monitored by Ofwat. Creating a long communication and makes decision
efficiently and term incentive plan structured
around growth in longer term
making happen clearly and in a more
agile way.
economically, it regulatory value.
From the investor side, Stephen Nelson,
leaves a lot less Modifying governance and reporting Asset Management Director at
open to debate. to give more weight to health and
safety, customer service and
Infracapital, adds: Theres a
relationship advantage as well. If you
operational issues, balanced with have a chemistry and relationship that
Simon Cocks financial performance outcomes. allow you to make quick decisions, and
CEO, have easier access to management,
Putting greater focus on delivering
Affinity Water youre going to be more effective and
value for customers (for which
thats what happens here. Part of that is
Affinity was considered to be in the
a mutual respect for the different but
bottom quartile37 at the beginning of
complementary skills that each party
the regulatory period) including
brings to the table.
immediate steps to boost efficiency
such as closing the companys
shared service centre.

37 Assessment of Three Valley's relative efficiency at PR09:

40 Global Infrastructure Investment
From a customer perspective, the Jim Wilmott, Managing Director at The progress made is reflected in Ofwat
investors recognised that the business Morgan Stanley comments: There is an awarding Affinity enhanced status at
needed to improve its interaction with intense focus around raising our game PR14, highlighting Affinitys plans to
customers as problems in this area were in all aspects of the business, to deliver provide community-level reporting and
resulting in higher customer contact today's plan, enhance our reputation recognising the quality of the companys
costs and bad debt levels, worsening further and unlock more potential for the business plan and commitment to
performance against customer service future. As an example, at the Board industry leading performance
metrics, and reputational risks. level we have taken positive action to improvement that stood out from the
support the management team by other companies. This represented a
Improvement in customer service staff
targeting non-executive director refresh, significant achievement in the relatively
training was prioritised and enhancements
to bring in customer service and short period since the acquisition.
made in a number of other areas,
technology/IT skills to the boardroom,
including online functionality and call
complementing the existing skills of the
centres. A community engagement
board. As a team we feel this will really
programme was also initiated to enable
help us positively address future
charities and community organisations
challenges and opportunities.
in the Affinity region to benefit from the
companys water resources and expertise.
The approach is paying dividends with
customer complaints reduced by 18%
over 2016 and SIM results improving
quarter on quarter in 201738. Work has
now started on developing a technology Figure 31: Affinity Water AMP5 opex efficiencies
strategy that allows a higher degree of 155
autonomy and self-serve functionality
for customers. 150
Affinity Water CEO Simon Cocks notes 147
that in the build up to Ofwat's 2014 price 145
review (PR14) the company spoke to
140 139
more than 12,500 customers and spent 139
the time with each of their communities 136
to understand what they expected and
wanted Affinity to do with the money 132
they were paying for water.
Unless youve got that understanding of 125
what your customers want you to do and 150 152 147 148 137 132
also not do, you end up deploying 120
2009-10 2010-11 2011-12 2012-13 2013-14 2014-15
capital inefficiently. For us engagement
with our customers is not just a nice Actual opex Allowed opex
thing to do. If we engage effectively, Source: Ofwat
customers can be clear on what they
want. And if we demonstrate how we
are going to deliver this efficiently and Figure 32: Affinity Water Service Incentive Mechanism score
economically, it leaves a lot less open 90
to debate.
85 83
Management and shareholders 80
acknowledge that Affinity is still on the 80 78 79
journey to realise the desired level of 75
customer satisfaction. 75





2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 YTD 16-17

Source: Ofwat, Affinity Water

38 Source: Affinity Water Wave 1 to Wave 3 results in 2016/17

PwC and GIIA 41

Azure Power:
investing in a
greener India

42 Global Infrastructure Investment

Context IFC and GIFs investment
Whilst evidence has been presented of into Azure
the capacity for private capital to be Following on from an initial seed
good custodians of infrastructure for investment by the International
'big ticket' infrastructure assets and Financial Corporation (IFC) in 2010, the
support high value investment, how do IFCs Global Infrastructure Fund (GIF)
these attributes translate to smaller, invested US$50m into Azure Power in
new build infrastructure? The following June 2015, providing it with the capital
is an example of where private it needed to scale up and meet the
investors have brought their expertise growing potential for solar photovolatic
to work with existing management on energy in India.
an asset still in development to make a
So, why did IFC and GIF choose
positive economic, social and
Azure? Whilst they noted challenges in
environment impact on communities
the Indian solar market, notably
across India.
downward pressure on prices, low
Azure Power, New Dehli, margins, and a power auction system
India that enables big international players to
buy market share by bidding low, Onur
Azure Power is an independent power
Goker, a Principal with GIF, says the
producer (IPP) that builds, owns and
quality of Azures management enabled
operates small and medium scale solar
GIF to overcome their concern and
power plants across India. Founded in
form an appropriate investment case.
2009 and led by Chief Executive
Inderpreet Wadhwa, whod spent much Mr Wadhwa set up Azure on Western
of his previous career working in Silicon lines, with high standards of project and
Valley, Azure was set up to deliver low data management, explains Goker.
cost, green energy to the approximately Also, a challenge for solar companies
300 million people in rural India who in India is having the land to develop
have no access to power39. the assets and Mr Wadhwa
understands land procurement in India
Azures first project, Punjab 1, was the
incredibly well. GIF also took comfort
first private utility scale solar project
in Azures ability to drive efficiency at
built in India. A further five private solar
the asset level. As well as keeping
projects soon followed, bringing the
abreast of developments in solar
operating capacity of Azures portfolio
technology in North America and
to 110MWs by March 2015. During this
Europe, Azure was constantly taking
time, Azure demonstrated its capability
new equipment and testing it out in the
to deliver cost-effective energy for its
field to find the best solutions for the
customers by consistently seeking to
environmental conditions, says Goker.
identify efficiencies and improve
operational performance. While the fundamentals for a good
business were there, GIF saw that
Azure needed to improve monitoring of
financial and operational data and
strengthen its governance in order to
realise its full potential.
GIF boosted the strength of the board,
and put Azure in contact with solar
businesses in other countries around
the world so that the company could
share experiences and insight into
global best practices. The finance team
was also bolstered to improve
monitoring of financial information and
enable the CEO to focus on operations
rather than spending time on the road
trying to raise funding.

39 Source: World bank estimates 2012:

PwC and GIIA 43

The benefits delivered Figure 33: Portfolio capacity (MW)
The positive impact Azure and its
management team have been able to
deliver with the support of IFC and GIF are
at the same time economic, social and 1000
environmental. Since the time of GIFs 815
investment, Azure has increased its 800 559
generation capacity four fold, whilst also
being able to bring down the cost of energy 600 479
by almost 38%. At Dec-16 Azures total 484
generation was 512 MWh, enabling around 400
180,000 people to be connected to
374 512
electricity and avoiding 250,000 tonnes of
C02-equivalent emissions per year. A 336
further 559 MW is under construction 110
which once operational will correspond to 0
FY2015 FY2016 Dec-16
approximately 1.3 million of residential
persons reached and 1.8 million tonnes of Operational capacity Under construction / committed
C02 equivalent emissions avoided per
annum40. Source: Azure Power

In addition to the economic and social

benefits of connecting huge numbers of Figure 34: Evolution of PPA prices (US$/kWh)
people to electricity for the first time, Azure
is also looking to benefit local communities
in terms of the environment and
employment. As Goker explains, Azures
approach to land procurement includes 0.10
agreeing to clean up polluted brownfield
dumpsters for use as solar sites. It employs 0.08
local people to carry out this clean-up
work. Those who perform especially well 0.06
are offered permanent operational jobs,
which includes Azure building each of 0.04 0.08
them a house near the site.
The company literally changes lives, says
Goker. And aggregated across multiple 0.00
projects, its having a profound impact on FY2015 FY2016 Latest bids
Indian communities and society. Over the
Average PPA prices (US$/kWh)
past six or seven years, Azure has
employed directly and indirectly close
Source: Azure Power
to 4,000 people, mostly in areas where
theres little other economic activity40.
Figure 35: Evolution of project cost (US$/Watt)
Looking forward
For the future, GIF see its key role going 0.90
forward as working with management to 0.85
continue to support further investment 0.80
while also ensuring the companys 0.40 0.35
operations are sustainable. Goker sums 0.59
up: Emerging markets can be vicious and
survival is key. It is not uncommon to see 0.22
companies grow extremely quickly, but 0.40
because their structures and governance
are not in place, just as quickly they 0.50 0.50
disappear. As investors, we are continuing 0.20 0.37
to work with management to help the
business grow. But how Azure grows and
adapts to what is a rapidly changing power FY2015 FY2016 FY2017E
market and assuring this growth is both
sustainable and profitable is much more Module cost Balance of plant cost
important to us than the growth itself.
Source: Azure Power

40 Azure Power analysis

44 Global Infrastructure Investment

Find out more:

The role and impact of The case for change: Future-ready airports:
specialist investors in UK Privatisation of Western Airports are back in the
infrastructure Australia's electricity spotlight as catalysts for networks future growth
the-role-and-impact-of-specialist- power-case-for-change-oct16.html projects-infrastructure/publications/
investors-in-uk-infrastructure.html future-ready-airports.html


Andrew Rose Colin Smith

Chief Executive, GIIA Partner, PwC UK

T: +44 (0) 20 3440 3922 T: +44 (0) 20 7804 9991

E: E:

Jon Phillips David Pedler

Director, Corporate Affairs, GIIA Senior Manager, PwC UK

T: +44 (0) 20 3440 3923 T: +44 (0) 20 7212 5420

E: E:

PwC and GIIA 45

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