ALWAYSTHINKINGINVESTMENT

THE USE OF INVESTMENT FUNDS FOR

INFRASTRUCTURE DEVELOPMENT

African Stock Exchange Conference20 September 2006

2

What is Infrastructure?

3

a. the basic structural foundations of society or enterprises

b. roads, bridges, sewers etc regarded as a country’s economic foundation

Source : Concise Oxford Dictionary

What is Infrastructure?

4

Assets with:

- Essential assets

- Long term, predictable cash flows

- Low sensitivity to economic cycles

- Not subject to competitive markets

- Low risk/volatility

Infrastructure characteristics

5

RegulatedRevenue level or

tariffs regulated

Natural monopolyBasic/essential

servicee.g. prison,

electricity & gas distribution

Patronage/Throughput

Patronage dependent

Monopolistic elements

Demographic factors

e.g. roads, airports, railways, car parks and ports

SocialEssential service,

but not monopoly

Basic social service provision

e.g. hospital, school, government buildingsCompetitive

Compete in market for sale of product

Volatile returnse.g. certain power

pool generators

Risk

Retu

rnInfrastructure asset classes

6

Investment Needs :- High risk adjusted returns

- Diversification

- Absolute returns

- Low correlation alternatives

- Lower risk/volatility alternatives

- Returns that match liability profiles

- Balance capital growth with the security of cash yield

- Downside protection

Other Needs :- Seen to be contributing to upliftment

- Social responsibility

Investment Needs

7

Special Purpose Vehicles

Essential Services

High Barriers to Entry

High Capital Costs/Low Operating Costs/High Financial Leverage

High Gearing to Declining Risk

Regulated

Different to listed equity, bonds & property

8

Typical structure

9

PPP Structures

Shareholder 1 Shareholder 2

Contractor Operator

Lender AuthoritySpecial Purpose Vehicle

(SPV)

Shareholders Agreement

LoanAgreement

ConcessionAgreement

Design and Construct Contract

Facilities Management Contract

Interact with Lenders to extract maximum benefit for shareholders

Due diligence on project,

assumptions and forecasts

Ongoing assessment of performance

Actively monitor our investments and

engage with management on

regular basis. Board representation

Interact with Authority on behalf of SPV

Primary focus as a Non sponsor equity investor

Asset Manager actively monitors its investments at various levels to extract maximum benefit for shareholders

10

Risks appropriately allocated to the party that

controls it

e.g.:

Construction risk entirely back to back to D&C

contractor

Operational risk back to back to O&M contractor

Revenue risk with concession company

Finance risk with concession company

Optimal risk allocation

11

Investment Process

12

Ongoing Management

Disposal

RevaluationRefinancing

Restructuring

Investment

Life Cycle

Initial Screening

Financial ModelDue Diligence

Completion

Investor Returns

Deal Flow

Infrastructure Management Process

Investment CommitteeInvestment Committee

Investment Committee

Investment Committee

13

Management

- Asset management intensive

- Big stakes, few investments

- Often Concessions held by SPV i.e. influence brings obligations

Understanding the asset class

- Few qualified asset managers

- Constant search of economic value add

- Valuation management and continuity

- Cross pollination of best practice (non-competitive)

- Government agency interaction Deal Flow

- Securing pipeline

Active management

14

Listed Infrastructure

15

Constitution of index:

- All companies in Euro Top 300 Index with greater than 50% exposure to pure infrastructure were selected

- Separate infrastructure index was created using these companies

- Comparisons run to ther indexes

Infrastructure index

16

Listed Infrastructure Companies in EuroTop 300 Index

Source: Based on broker ‘sum of parts valuations’ and Macquarie infrastructure definition

Companies included in Infrastructure Index Companies not included in Index

0%

20%

40%

60%

80%

100%

Infr

ast

ruct

ure

Exp

osu

re

BG G

roup

Bouy

gues

Union

Fen

osa

FCC

Elec

tricid

ade

de P

ortu

gal

Ende

saSu

ez

PPC

Enel

Iber

drol

aE.

ONRW

E

Vive

ndi E

nvvi

ronm

ent

Scot

tish

& Sou

ther

n En

ergy

Scot

tish

Power

Gas N

atur

al S

DGVi

nci S

A

Seve

rn T

rent

Unite

d Util

ities

Aces

a

Natio

nal G

rid T

rans

co

BAA

Plc

Auto

stra

de

Snam

Ret

e Gas

17

Source: Dow Jones STOXX website; indexes are based on total return data

Correlation of Infrastructure Index compared to other Indices

-0.0

0.2

0.4

0.6

0.8

1.0

Auto

Tele

com

Med

ia

Const

ruct

ion

Tech

no

Health

care

Non C

yclic

al

Chem

ical

Banks

Infra

stru

ctur

e In

dex

Food

& Bev

Ener

gy

Utiliti

es

Basic re

sour

ces

Retail

Auto

Tele

com

Const

ruct

ion

Cyclic

al

Fina

nce

Indu

stria

l goo

ds& S

erv

Insu

ranc

e

18

Source: Dow Jones STOXX website; indexes are based on total return data

Standard Deviation of Infrastructure Index compared to other Indices

0%

10%

20%

30%

40%

50%

0%

10%

20%

30%

40%

50%

Infra

stru

ctur

e In

dex

Utiliti

es

Non C

yclic

al-

Health

care

Retail

Const

ruct

ion

Fina

nce

Banks

Basic re

sour

ces

Indu

stria

l goo

ds&cy

clical

Serv

Auto

Insu

ranc

e

Med

ia

Teleco

m

Tech

no-

Food

& B

ev

Retail

Chem

ical

Ener

gy

Med

ia

Teleco

m

19

Valuation

20

Source : African Infrastructure Investment Managers

Risk and Capital Growth

MatureRisks: Major

population shift

Risk Premium4% – 5.5%

GrowthRisks: Impacts on

Traffic

Risk Premium5.5% – 6.5%

Ramp UpRisks: Ramp Up Rate, Natural Traffic Level

Risk Premium 6.5% - 8%

Construction Risks: Construction

Risk Premium 8% – 10%

Greenfield Risks: Legal,

Environmental & Regulatory

Risk Premium 9% - 12%

Ass

et V

alue

Project Life

Ris

k Le

vel

Note: risk premium over risk free rate ( eg R153)

Project Life

21

Refreshing Concessions

Concession

Pro

ject

Valu

e

Cash distributionexceeds revaluation

Revaluation exceedscash available

End of

SAIF

22

Other benefits

23

Basis for a globally competitive economy

Stimulates stronger economic growth

- 1% increase in infrastructure stock = 1% increase in GDP

Redistribution of State Spending

Generates new jobs

Increases economic productivity

Alleviates Poverty

Other benefits

24

Government objectives:

- Reduce public sector borrowing & cost

- Operational efficiencies of private sector

- Focus on user benefits & service delivery

- Speed up infrastructure development

- Optimal risk allocation between public and private sector

Why Infrastructure

25

Conclusion

26

Institutional appetite has broadened and deepened

Initially through private equity funds or direct private investments

Critical mass build-up

Public listing – international precedent for both listed funds and direct investments

Asset class diversification

Liquidity

Investor appetite

27

Government vital to future of asset class

Will and competence

Stability of policy

Public entities with track record

Private sector efficiencies

Government role

28

Old Mutual Asset Managers (South Africa) (Pty) Ltd Physical Address:MutualparkJan Smuts DrivePinelands 7405 Telephone number: +27 21 5095082 (Mike van Heerden)Internet website: www.omam.com Old Mutual Asset Managers (South Africa) (Pty) Ltd (“OMAM (SA)”) is a licensed discretionary financial services provider approved by the Registrar of Financial Services Providers (www.fsb.co.za) to provide intermediary services and advice in terms of the Financial Advisors and Intermediary Services Act 37 of 2002. OMAM (SA) is a wholly owned subsidiary of Old Mutual South Africa Limited. Market fluctuations and changes in rates of exchange or taxation may have an effect on the value, price or income of investments. Since the performance of financial markets fluctuate, an investor may not get back the full amount invested. Past performance is not necessarily a guide to future investment performance.  All returns are rand returns, unless otherwise stated. Investment deals done on behalf of clients with a company in the Old Mutual Group are all done on an arms length basis.

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