TIDMINPP
RNS Number : 2884J
International Public Partnerships
09 April 2020
THIS ANNOUNCEMENT AND THE INFORMATION CONTAINED HEREIN IS NOT
FOR PUBLICATION, RELEASE, OR DISTRIBUTION, DIRECTLY OR INDIRECTLY,
IN, OR INTO, THE UNITED STATES, AUSTRALIA, CANADA, JAPAN, SOUTH
AFRICA OR ANY JURISDICTION IN WHICH THE SAME WOULD BE UNLAWFUL OR
TO U.S. PERSONS. THE INFORMATION CONTAINED HEREIN DOES NOT
CONSTITUTE AN OFFER OF SECURITIES FOR SALE IN ANY JURISDICTION.
9 April 2020
INTERNATIONAL PUBLIC PARTNERSHIPS LIMITED
('INPP', the 'Company')
FULL YEAR RESULTS FOR THE TWELVE MONTHSED 31 DECEMBER 2019
OPERATIONAL UPDATE
-- The Company reaffirms that the operational performance of its
investment portfolio continues as expected and there has been no
material change since the Market Update issued on 26 March 2020
-- The Company announces its full-year results for the year-ending 31 December 2019
-- The reliability and predictability of the portfolio's
operational performance in 2019 has supported the Company's aim of
achieving consistent and growing returns via the declaration of a
2.6% increase in full-year dividend distribution to 7.18 pence per
share (i)
-- The Company's liquidity position remains strong with a GBP400
million revolving debt facility (maturing in July 2021) of which
only c.GBP13.4 million is currently utilised. The Company currently
also has c.GBP90 million of cash available with additional cash
reserves held within the underlying investments
-- The Company's Investment Adviser, Amber Infrastructure Group
('Amber') and its asset management team are fully resourced and
continue to actively manage portfolio performance. The team
continues to provide clients with the support they need, whilst
ensuring the health and safety of staff during this time of
uncertainty - the full extent of which and its associated impact on
the Company cannot yet be ascertained
PERFORMANCE FOR THE PERIOD TO 31 DECEMBER 2019
-- During 2019, the Company continued to deliver long-term
benefits for all its stakeholders by responsibly managing its
portfolio of 130 public and social infrastructure projects and
businesses
-- Our portfolio of investments provides essential
infrastructure to over 13 million people, households and businesses
daily across the countries in which we invest
-- The quality and strength of the Company's investments
generated strong operational cash flows supporting a 10.3% increase
in Net Asset Value ('NAV') to GBP2.4 billion and increase in NAV
per share to 150.6 pence
-- GBP281.3 million of new cash investments were made during
2019, reflecting the Investment Adviser's continued origination of
value-enhancing opportunities in line with the Company's investment
strategy
-- The Company successfully raised GBP190.1 million of new
capital during the year to partially repay the cash drawn on its
corporate debt facility
-- As part of a portfolio-wide review of key performance
indicators, the Company has revised its medium-term annualised
internal rate of return target to 7% per annum (ii) to reflect the
growing maturity of the infrastructure asset class in which we
invest, and the effects of a lower-for-longer interest rate
environment. This includes the associated compression in returns on
investments as a result of a current base interest rate below 1%
p.a., compared to 5% p.a. at the time of the Company's IPO
-- The Company's Investment Adviser is a signatory of the UN
Principles of Responsible Investment ('UN PRI'), and the Company
continued to increase its alignment to the UN Sustainable
Development Goals ('UN SDGs') to help manage ESG risk and
specifically drive environmental progress across its assets.
FINANCIAL HIGHLIGHTS (iii)
-- NAV per share growth to 150.6 pence (31 December 2018: 148.1 pence)
-- Full-year dividend increase of 2.6% to 7.18 pence per share
(31 December 2018: 7.00 pence per share)
-- IFRS profit before tax of GBP137.8 million (31 December 2018: GBP138.1 million)
-- Strong inflation-linkage was maintained with a projected
increase in return of 0.82% p.a. for a 1.00% p.a. increase in
inflation (31 December 2018: 0.82% p.a.)(iv)
-- Target 2020 and 2021 full-year dividends of 7.36 and 7.55
pence per share, respectively. Whilst we currently have good
forward-visibility of cash flows generated by the Company's
investments given their predictability, we continue to monitor the
current Covid-19 related uncertainty
-- Low correlation to the FTSE All Share Index of 0.25 and 0.19
over 12 months and 5 years, respectively. (v)
-- 2019 cash dividend cover of 1.3x (vi)
PORTFOLIO UPDATE
Value-focused portfolio management
-- During 2019, the Company continued to diligently manage
greenfield projects where 9.2% of the portfolio is currently under
construction. This includes Tideway, UK, where construction is now
50% complete
-- Taking advantage of its pre-emption rights, the Company
invested a further GBP2 million in two Building Schools for Future
('BSF') projects in Luton and Wolverhampton, UK, respectively. This
followed the refinancing of Ealing and Blackburn (1 and 2) BSF
projects which generated improved shared financial returns for both
the Company and the local authorities
-- Following the GBP12.4 million recapitalisation of the
Midlands batch of the Priority Schools Building Programme, UK, the
construction works were completed by year end with limited
disruption to school pupils
-- The Company completed an innovative refinancing and
restructuring of three of its offshore transmission assets ('OFTO')
by repaying the original bank debt with a combination of new
lower-cost long-term finance and a GBP71.5 million senior debt
investment made by the Company. This has enhanced the earnings
quality of these assets
Further allocation to availability-based renewables assets
-- The Company was appointed preferred bidder on its eighth and
ninth UK OFTO in which we hope to invest c.GBP100 million by the
end of 2020. These two OFTOs have a combined transmission capacity
of 988MW, enough to power 800,000 more homes with renewable power.
The Company will take no exposure to electricity production or
price risk but is paid a pre-agreed, availability-based revenue
stream over 20 years, fully linked to UK inflation
Additional exposure to mature inflation-linked regulated
assets
-- The Company invested a further GBP153.2 million to reach its
long-term target shareholding of 7.25% of Cadent, a UK gas
distribution business connecting 11 million UK homes and
businesses. This provides the Company with a permanent board seat
as part of a highly qualified consortium of international investors
which now owns 100% of the business
-- Cadent delivers long-term cash flows with low anticipated
levels of volatility and a strong degree of inflation-linkage. In
addition, Cadent plays an important role in supporting the UK
Government's net zero target for 2050, undertaking research to
demonstrate how the existing gas network can be used for clean fuel
distribution in the future
Continued global portfolio diversification
-- The Company acquired an additional 51% shareholding in BeNEX,
the German rail business, with an accretive investment of GBP29.4
million (vii) . The acquisition increases the Company's ownership
to 100%, following its initial acquisition in 2007. The Company has
limited exposure to passenger volumes and fair prices
ASSET STEWARDSHIP (viii)
Over the period, the Investment Adviser introduced a series of
sector-specific ESG stewardship objectives, which further evolved
the Company's ESG controls for the five key asset classes in which
the Company invests. This supports enhanced alignment of the
portfolio to the UN SDGs, more about which can be found on pages
34-40 of the Company's Annual Report. Owing to the Investment
Adviser's active asset management approach, the Company noted,
among other things:
-- 94% of investments are captured by an overarching ESG policy to help reduce risk and drive environmental and social progress;
-- In demonstration of the Company's commitment to health and
safety, the Accident Frequency Rate for occupational accidents that
resulted in lost time was 0.36 per 100,000 hours worked;
-- Over 91,000 of additional hours of asset availability were dedicated to community use;
-- Creation of over 12,000 sustained full-time equivalent jobs;
-- Over 1,000 commissioned contract variations which resulted in
GBP47.4 million of additional project work conducted on behalf of
the commissioning body.
Michael Gerrard, Chairman of International Public Partnerships
Limited, said: "Our portfolio of 130 infrastructure assets is
proving resilient through an uncertain environment created by the
Covid-19 pandemic and its global economic consequences. The
strength of our underlying cash flows supports the forthcoming
payment of our full-year dividend, as scheduled. The Investment
Adviser continues to focus on ensuring that our clients and their
end-users are well supported during this exceptionally difficult
time, and I have great confidence in the Company's continued
ability to generate inflation-linked returns for our shareholders,
in line with expectations."
http://www.rns-pdf.londonstockexchange.com/rns/2884J_1-2020-4-8.pdf
S.
A copy of the results presentation can be downloaded from the
Company's website:
www.internationalpublicpartnerships.com
NOTES TO EDITORS
Amber Infrastructure
Erica Sibree / Amy Joslin
+44 (0)20 7939 0558 / 0587
FTI Consulting
Ed Berry / Mitch Barltrop
+44 (0) 20 3727 1046 / 1039
About International Public Partnerships ('INPP'):
INPP is a listed infrastructure investment company that invests
in global public infrastructure projects and businesses, which
meets societal and environmental needs, both now, and into the
future.
INPP is a responsible, long-term investor in 130 infrastructure
projects and businesses. The portfolio consists of utility and
transmission, transport, education, health, justice and digital
infrastructure projects and businesses , in the UK, Europe,
Australia and North America. INPP seeks to provide its shareholders
with both a long-term yield and capital growth.
Amber Infrastructure Group ('Amber') is the Investment Adviser
to INPP and consists of approximately 130 staff who are responsible
for the management of, advice on and origination of infrastructure
investments.
Visit the INPP website at
www.internationalpublicpartnerships.com for more information.
Important Information
This announcement contains information that is inside
information for the purposes of the Market Abuse Regulation (EU)
No. 596/2014.
This announcement is an advertisement. It does not constitute a
prospectus relating to the Company and does not constitute, or form
part of, any offer or invitation to sell or issue, or any
solicitation of any offer to purchase or subscribe for, any shares
in the Company in any jurisdiction nor shall it, or any part of it,
or the fact of its distribution, form the basis of, or be relied on
in connection with or act as any inducement to enter into, any
contract therefor.
Forward-looking statements are subject to risks and
uncertainties and accordingly the Company's actual future financial
results and operational performance may differ materially from the
results and performance expressed in, or implied by, the
statements. These forward-looking statements speak only as at the
date of this announcement. The Company, Amber and Numis Securities
expressly disclaim any obligation or undertaking to update or
revise any forward-looking statements contained herein to reflect
actual results or any change in the assumptions, conditions or
circumstances on which any such statements are based unless
required to do so by the Financial Services and Markets Act 2000,
the Prospectus Rules of the Financial Conduct Authority or other
applicable laws, regulations or rules.
Endnotes
(i) The forecast date for payment of the dividend relating to
the six months to 31 December 2019 is 19 June 2020.
ii Calculated by reference to the November 2006 IPO issue price
of 100p and reflecting NAV appreciation plus dividends paid.
i (ii) For the full year ended 31 December 2019 unless otherwise
stated.
(iv) Projected increase in portfolio return for a 1.00% p.a.
increase in the inflation rate assumed in the current valuation
analysis for each asset in the portfolio.
v Correlation (R) from Bloomberg - 12 months and 5 years to 31
December 2019.
v (i) Cash dividend payments to investors are paid from net
operating cash flow before non-recurring operating costs as
detailed.
v (ii) In addition, there is a deferred commitment of GBP17.8
million which is due to be settled from future returns generated by
BeNEX.
v (iii) Metrics are estimates and exclude digital infrastructure
(UK), US Military Housing, Brescia Hospital (Italy) and
construction projects (except Tideway).
International Public Partnerships Limited
Annual Report and Financial Statements for the year ended 31
December 2019
Registered number: 45241
www.internationalpublicpartnerships.com
Note: Page references in this announcement refer to the full
formatted Annual Financial Report for the period ended 31 December
2019 that can be found on the Company's website. Certain charts
cannot be reproduced for the RNS format and can also be seen in the
PDF version of this document available on the Company's
website.
OUR PURPOSE
Our purpose is to deliver long-term benefits for all
stakeholders by investing responsibly in public and social
infrastructure.
We aim to provide our investors with long-term, inflation-linked
returns, by growing our dividend and creating the potential for
capital appreciation.
We support all our stakeholders through responsible investment
and active asset management, which meet societal and environmental
requirements both now and into the future.
COMPANY FACTS
- London Stock Exchange trading code: INPP.L
- Member of the FTSE 250 and FTSE All-Share indices
- GBP2.7 billion market capitalisation at 31 December 2019
- 1,611 million shares in issue at 31 December 2019
- Eligible for ISA/PEPs and SIPPs
- Guernsey incorporated company
- International Public Partnerships ('the Company', 'INPP', the
'Group' (where including consolidated entities)) shares are
excluded from the Financial Conduct Authority's ('FCA')
restrictions, which apply to non-mainstream investment products,
and can be recommended by independent financial advisers to their
clients
COVER IMAGE:
Challney High School for Girls, Luton, UK
FULL-YEAR FINANCIAL HIGHLIGHTS
DIVIDS
7.18p - 2019 full-year dividend per share(1)
7.36p - 2020 full-year dividend target per share(2)
7.55p - 2021 full-year dividend target per share(2)
2.6% - 2019 divident growth(2)
1.3x - Cash dividend covered(3)
NET ASSET VALUE ('NAV') (4)
GBP2.4bn - NAV at 31 December 2019 (4) (2018: GBP2.2bn)
150.6p - NAV per share at 31 December 2019(4) (2018: 148.1p)
10.3% - Increase in NAV
1.7% - Increase in NAV per share
PORTFOLIO ACTIVITY
GBP281.3m - Cash investments made during 2019
REAL RETURNS
0.82% - Portfolio inflation-linkage at 31 December 2019(5)
(2018: 0.82%)
TOTAL SHAREHOLDER RETURN ('TSR')
209.3% - TSR since Initial Public Offering ('IPO')(6)
9.0%p.a. - Annualised TSR since IPO(6)
PROFIT
GBP137.8m - Profit before tax (2018: GBP138.1m)
1 The forecast date for payment of the dividend relating to the six
months to 31 December 2019 is 19 June 2020.
2 Future profit projection and dividends cannot be guaranteed. Projections
are based on current estimates and may vary in future.
3 Cash dividend payments to investors are paid from net operating
cash flow before capital activity as detailed on pages 24-25.
4 The methodology used to determine the NAV is described in detail
on pages 27-33.
5 Calculated by running a 'plus 1.00%' inflation sensitivity for each
investment and solving each investment's discount rate to return the
original valuation. The inflation-linkage is the increase in the portfolio
weighted average discount rate.
6 Since inception in November 2006. Source: Bloomberg. Share price
appreciation plus dividends assumed to be reinvested.
COMPANY OVERVIEW
CONSISTENT AND GROWING RETURNS
INPP Dividend Payments
[Diagram can be found in PDF version of this document on the Company's
website].
Highly PREDICTABLE portfolio performance
P rojected Investment Receipts
[Diagram can be found in PDF version of this document on the Company's
website].
Note: This chart is not intended to provide any future profit forecast.
Cash flows shown are projections based on the current individual asset
financial models and may vary in the future. Only investments committed
as at 31 December 2019 are included.
LOW RISK AND DIVERSIFIED PORTFOLIO
Sector Breakdown Energy Transmission 22%
--------------------- ----
Transport 20%
--------------------- ----
Education 18%
--------------------- ----
Gas Distribution 17%
--------------------- ----
Waste Water 9%
--------------------- ----
Health 3%
--------------------- ----
Courts 3%
--------------------- ----
Military Housing 3%
--------------------- ----
Other 5%
130 investments in infrastructure projects and businesses across a
variety of sectors(1)
Geographic Split UK 73%
----------- ----
Belgium 9%
----------- ----
Australia 8%
----------- ----
Germany 4%
----------- ----
US 3%
----------- ----
Canada 2%
----------- ----
Ireland 1%
----------- ----
Italy <1%
Invested in selected global regions that meet INPP's specific risk
and return requirements
Investment Type Risk Capital(2) 89%
----------------- ----
Senior Debt 11%
Invested across the capital structure, taking into account appropriate
risks to returns
Asset Ownership
100% 50%
--------- ----
50%-100% 6%
--------- ----
<50% %
Preference to hold majority stakes
Mode of Acquisition/Asset Status
Construction 9%
------------------------- ----
Operational 91%
------------------------- ----
Early Stage Investor(3) 68%
------------------------- ----
Later Stage Investor(4) 32%
Early stage investment gives first mover advantage maximises
capital growth opportunities
Investment Life
<20 years 52%
------------- ----
20-30 years 19%
------------- ----
>30 years 29%
Weighted average portfolio life of 34 years(5)
1. The majority of projects benefit from availability-based
revenues.
2. Risk Capital includes both project level equity and
subordinated shareholder debt.
3. 'Early Stage Investor' - asset developed or originated by the
Investment Adviser or predecessor team in primary or early phase
investments.
4. 'Later stage investor' - asset acquired from a third party
investor in the secondary market.
5. Includes non-concession entities which have potentially a
perpetual life but assumed to have finite lives for this
illustration.
International Public Partnerships invests in high-quality
infrastructure projects and businesses that are resilient over the
long-term
We have a long-standing relationship with Amber Infrastructure
Group, the Company's Investment Adviser
Amber has managed the Company's assets since IPO in 2006
- Amber Infrastructure Group ( 'Amber') is a specialist
international infrastructure investment manager and one of the
largest independent teams in the sector with c.130 employees
working internationally. It is a leading investment originator,
asset and fund manager with a strong track record
- Amber applies an active asset management approach to the
underlying investments to support sustainable performance
- The Company has first right of refusal over qualifying
infrastructure assets developed by Amber and for US investments, by
its main shareholder, US Group, Hunt Companies LLC ('Hunt')
Relationship with the Investment Adviser
[Diagram can be found in PDF version of this document on the
Company's website].
OUR STRENGTHS
- Long-term alignment of interests between the Company, Amber and other key suppliers
- Amber has physical presence in all of the major countries in
which we invest, which provides local insights and
relationships
- A vertically integrated model with direct relationships with public sector authorities
- Experienced team in all aspects of infrastructure development, investment and management
- Active approach to investment stewardship which is the cornerstone of successful investment
- Consideration and integration of material Environmental,
Social and Governance ('ESG') issues and opportunities
- Active engagement with all key stakeholders
- Strong independent Board with a diversity of experience and strong corporate governance
STRATEGIC REPORT
BUSINESS MODEL - DELIVERING long-term benefits
OUR PURPOSE
Our purpose is to deliver long-term benefits for all
stakeholders by investing responsibly in public and social
infrastructure.
We aim to provide our investors with long-term, inflation-linked
returns, by growing our dividend and creating the potential for
capital appreciation.
We support all our stakeholders through responsible investment
and active asset management, which meet societal and environmental
requirements both now and into the future.
what we do
INVEST
We seek new investments through our extensive relationships,
knowledge and insights to:
- Enhance predictable, long-term cash flows
- Provide opportunities to create long-term value and enhance returns
- Ensure ESG is core to the investment process
ASSESS
The Company operates a rigorous framework of governance,
incorporating a streamlined screening, diligence and execution
process. This includes substantive input from the Company's
Investment Adviser and, as appropriate, external advisers, with the
Company's Board providing robust challenge and scrutiny
OPTIMISE
Using the Investment Adviser's highly experienced in-house asset
management team, we seek to actively manage the Company's
investments, balancing risk and return, and using detailed research
and analysis to optimise our investment performance
DELIVER
Together with our Investment Adviser's active asset management
of our investments, we aim to deliver strong ongoing asset
performance for stakeholders and achieve target returns from the
portfolio for investors
VALUE-FOCUSED PORTFOLIO DEVELOPMENT
- We seek investments with no or low exposure to market demand risks and for which financial, macroeconomic, regulatory, ESG and country risks are well understood and manageable
- The Investment Adviser has a strong investment team that
originates unique opportunities in line with the Company's
investment strategy
- We continually monitor opportunities to enhance the Company's existing investments
ACTIVE ASSET MANAGEMENT
- The Investment Adviser has an in-house asset management team
dedicated to managing the Company's investments
- Where possible, through the Investment Adviser, we manage the
day-to-day activities of each of our investments internally
- We carry out extensive monitoring, for example, asset level
board and management meetings occur on a quarterly basis
- The Company works with public sector clients to ensure
investments are being managed both responsibly and efficiently to
deliver the required outputs
- We focus on project stewardship across the portfolio and
recognise the broader value created from our investments
efficient financial management
- Efficient financial management of investment cash flows and working capital
- Maintaining cash covered dividends
- Ensuring cost-effective operations
CONTINUOUS risk management
- Robust risk analysis during investment origination ensures strong portfolio development
- Integrated risk management throughout the investment cycle to support strategic objectives
- Ongoing risk assessment and mitigation ensures successful ongoing asset performance
STRONG INVESTMENT STEWARDSHIP
- Fully integrating ESG considerations across the investment lifecycle
- Setting robust ESG objectives to build resilience and drive
environmental and social progress
- Uphold high standards of business integrity and governance
VALUE CREATION
investor returns
Continue to deliver consistent financial returns for investors
through dividend growth and inflation-linkage from underlying cash
flows and provide opportunities for capital appreciation
PUBLIC SECTOR AND OTHER CLIENTS
Providing responsible investment in infrastructure to support
the delivery of essential public services. Our ability to deliver
services and maintain relationships with our clients and other key
stakeholders is vital for the long-term prosperity of each
investment
communities
Delivering social infrastructure for the benefit of local
communities. The Company's investments provide vital public assets
for their communities, and seek to provide additional benefits
through deploying investment in local economies, job creation and
by using investments to help strengthen communities
SUPPLIERS AND THEIR EMPLOYEES
The performance of our service providers, supply chain and their
employees are crucial for the long-term success of our investments.
The Company promotes a progressive approach to:
- Corporate social responsibility
- Healthy, inclusive workplaces
- Opportunities for professional development
- Staff engagement
STRATEGIC REPORT
OBEJCTIVES AND PERFORMANCE
The value we provide to our investors is monitored using our
Investor Return Key Performance Indicators ('KPIs'). The delivery
of value to both investors and our wider stakeholders is achieved
by carefully monitoring our performance against related strategic
priorities
INVESTOR RETURNS Delivering long-term, - Target an - 2.6% Annual dividend
inflation-linked annual dividend increase achieved
returns to investors increase of 2.5% (2018: 2.6%)
- Target a long-term - 8.0% p.a. IRR achieved
total return since IPO(1)
in excess of (2018: 8.1%)
7.0% per annum
- 0.82% Inflation-linked
- Inflation-linked returns on a portfolio
returns on a basis
portfolio basis (2018: 0.82%)
----------------- --------------------------- --------------------- -------------------------------
Value-focused Originate investments New investments 100% Of the investments
portfolio with stable, long-term meet at least made in 2019 met at least
development cash flows and potential three of six three of the six attributes
growth attributes, attributes: (2018: 100%)
whilst maintaining 1. Stable, long-term
a balanced portfolio returns
of assets 2. Inflation-linked
investor cash
flows
3. Early stage
investor
4. Investment
secured through
preferential
access
5. Other capital
enhancement attributes
6. Positive UN
Sustainable Development
Goals ('UN SDG')
contribution
------------------- ------------------------------- ------------------------- ------------------------------------
ACTIVE ASSET Managing strong ongoing - Strong ongoing - 100% Forecast distributions
MANAGEMENT asset performance asset performance received2
as demonstrated (2018: 100%)
by:
- 0.3% Asset performance
deductions achieved against
a target of <3%
(2018: 1.62%)
- 99.7% Asset availability
achieved against a target
of >98%
(2018: 99.6%)
- Managing in - 9.2% of portfolio investments
construction in construction.
investment delivery (2018: 11.0%). All in-construction
investments are within
budget and on schedule
------------------- ------------------------------- ------------------------- ------------------------------------
efficient Making efficient - Cash covered - 1.3x Dividends fully
financial use of the Company's dividends cash covered
management finances and working - Competitive (2018: 1.2x)
capital ongoing charges - 1.10% Ongoing charges
ratio
(2018: 1.17%)
------------------- ------------------------------- ------------------------- ------------------------------------
Strong Responsible Management of material - Robust integration - 94%of portfolio has
Investment ESG factors of ESG into investment an ESG policy
lifecycle (2018: 94%)
------------------- ------------------------------- ------------------------- ------------------------------------
1 Calculated by reference to the November 2006 IPO issue price
of 100p and reflecting NAV appreciation plus dividends paid.
2 Measured by comparing forecast portfolio distributions against
actual portfolio distributions received.
CHAIRMAN'S LETTER
Dear Shareholders,
As I write this letter, the uncertainty associated with the
Covid-19 pandemic hangs heavily over all aspects of our society.
Our thoughts are firstly with all those afflicted and secondly, and
particularly so given our close relationship with our many public
sector clients, with all those working tirelessly to minimise the
impact of this disease on us all. Through our Investment Adviser,
we have been proactively engaging with our public sector clients
and supply chain to provide support, where possible. This includes
ensuring that investments remain open where necessary, and in some
cases repurposed. We are working with our supply chain to
reallocate workers to support key roles for the vulnerable as well
as ensuring payments are made promptly. We will continue to monitor
the situation as it evolves and continue to contribute, where we
can, to the international effort. Our asset management team is
working hard to ensure that, so far as possible, there are
contingency plans in place for these and other risks.
As a business we are working hard to understand the likely
impacts of Covid-19 on the Company's operations. At the time of
writing this letter, we believe that all our assets are operating
as intended and the Company continues to receive cash from its
investments as expected. While we are in no way complacent about
the future, which is full of uncertainties, we take comfort from
the fact that the overwhelming majority of our assets benefit from
payments either linked to the availability of that asset for use,
or made through a legislatively backed regulated mechanism.
We have always taken risk very seriously within the Company and
I am optimistic that this approach will continue to serve us well.
Whilst we cannot be certain about the future, I am confident that
the Board and the Investment Adviser are well resourced and
vigilant in protecting the Company's interests. With this caveat
therefore, I believe the Company to be in a strong position to
weather this situation. This confidence is buoyed by the current
strength of the Company's balance sheet.
Turning to the year now behind us, I am pleased to report that
2019 was another strong year for the Company in which we continued
to deliver financial performance in line with expectations. This
reflected progress across our entire portfolio of investments in
infrastructure projects and businesses, both in the UK and
overseas.
The environment for infrastructure investment remained buoyant
throughout 2019 and, following the outcome of the UK General
Election in December 2019, concerns receded that certain
infrastructure investments in the UK were at possible future risk
of nationalisation. The reduction in this risk was reflected in the
Company's share price which appreciated c.5% during December 2019.
Since its listing in 2006, the Company had, to the end of 2019,
generated a TSR of 209.3%, or 9.0% on an annualised basis.
The Company once again met its target full-year dividend of 7.18
pence per share (2018: 7.00 pence per share) reflecting an
annualised increase of 2.6%, exceeding the Company's long-term
record for annual dividend growth of c.2.5%. The Board is pleased
to reaffirm its target dividend for 2020 of 7.36 pence per share
and provide new guidance of 7.55 pence per share for 2021. Whilst
we have good forward-visibility of the cash flows generated by the
Company's investments given their predictability and we are
confident of the Company's longer-term prospects, we are of course
mindful of the current Covid-19 related uncertainty. Currently
however, other than the general uncertainty affecting all markets,
there is nothing specific that we are aware of that would cause us
to amend our forward guidance of expected dividends.
The Company reported a 10.3% increase in NAV from GBP2.2 billion
at 31 December 2018 to GBP2.4 billion at 31 December 2019; and a
NAV per share increased of 1.7% from 148.1 pence to 150.6 pence.
The combination of strong performance, growth in capital, strategic
acquisitions and continued investor demand for new shares, resulted
in an increase in the Company's market capitalisation to over
GBP2.7 billion at the end of 2019 (31 December 2018: GBP2.3
billion).
The overall NAV outcome for 2019 reflects a positive underlying
portfolio performance in line with our projections and
expectations. The second half of the year was, however,
characterised by two key macroeconomic developments that had a
negative impact on the portfolio valuation. Firstly, the UK
Conservative Party manifesto promised to repeal the previously
enacted future reduction in the rate of corporation tax.
Legislation had previously been passed to reduce this rate to 17%
by April 2020 and, in line with our policy of applying enacted tax
rates to our future projected income when calculating NAV, this
assumed reduction had been incorporated into previous NAV
valuations. Whilst the legislated reductions in the future rates of
corporation tax have not yet been formally repealed, we have
assumed for the purposes of the 2019 year-end valuation that they
will be.
The second macroeconomic change to affect the portfolio came
following the UK General Election result and the agreement of the
transitional arrangements for Britain leaving the European Union
('EU'), which resulted in sterling showing some appreciation
against other currencies. This led to a reduction in the sterling
valuation of our overseas assets. However, I note in passing, that
at the time of writing this letter these changes have reversed and
sterling has weakened further against the euro and US dollar.
INVESTMENT ACTIVITY
During 2019, the Company successfully completed GBP281.3 million
of additional investments across the transport, offshore
transmission ('OFTO'), digital and education sectors; and raised
over GBP190 million of new capital.
The Company completed a GBP153.2 million acquisition of an
additional interest in Cadent and saw its aggregated holding in
Cadent increase to 7.25%. This investment delivers long-term cash
flows with low anticipated levels of volatility and a strong degree
of inflation-linkage.
The Company also completed the acquisition of a further 51%
shareholding in BeNEX, a rolling stock leasing and operating
business in Germany, for GBP29.4 million1. Having initially
acquired 49% of BeNEX in 2007, the Company was well-positioned to
negotiate the further acquisition on accretive terms. The
additional investment will support BeNEX's ongoing role in
providing high-quality public transport within many areas of
Germany.
In September 2019, the Company successfully completed an
innovative refinancing and restructuring of three projects within
its offshore transmission portfolio - Barrow, Gunfleet Sands and
Robin Rigg. This involved the repayment of the original bank debt
with a combination of new lower-cost long-term finance and a
GBP71.5 million senior debt investment made by the Company itself.
This is a good example of how the Company will continue to find
ways of improving the quality of its earnings from existing assets,
as well as seeking overall accretive returns from new
investments.
The Company was also appointed preferred bidder on the Beatrice
and Rampion OFTOs during the period, our eighth and ninth OFTO
projects, and expects to invest c.GBP100 million when these
transactions reach financial close, which is expected to be later
in 2020. These OFTOs have a combined transmission capacity of 988
MW, enough to power 800,000 homes with renewable energy, thereby
further increasing the Company's contribution to the UK's
low-carbon transition.
Further details of investments made during the year can be found
on pages 14-16.
ASSET STEWARDSHIP AND PORTFOLIO PERFORMANCE
The active asset management approach adopted by the Company's
Investment Adviser is fundamental to the long-term performance of
the Company. It has enabled the Company to develop a reputation for
delivering transparent and responsible stewardship of
infrastructure assets which support essential public services.
Through its Investment Adviser, the Company has access to a
large platform of skilled individuals with experience across the
infrastructure spectrum. The Investment Adviser offers a
full-service approach, which allows the Company to work closely
with the underlying investments' key stakeholders on a day-to-day
basis throughout the lifecycle of the investment. This approach
ensures that the Company is responsive to stakeholder feedback and
that the returns we generate, both financial and non-financial, are
well understood by all our stakeholders. Health and safety issues
are always covered first in the reports that the Company receives
from its Investment Adviser, reflecting the priority that they and
we give to the wellbeing of all those who work for, or come into
contact with, the projects and businesses in which we invest.
Environmental stewardship and attention to wider social
considerations are an important part of the Company's approach to
infrastructure investment and the management of our portfolio and
relationships. This view is shared by the Company's Investment
Adviser, which became a signatory to the UN Principles of
Responsible Investment ('UN PRI') in 2019. Alongside ESG
considerations, the Company also integrates the UN Sustainable
Development Goals ('UN SDGs') across the investment process and
within its approach to asset management. Following engagement with
the Company's shareholders, we have updated our approach to
reporting in response to a growing demand for disclosure. This
includes a clearer distinction between the positive impact of the
investments and management of material risks, such as climate
change.
Both the UK and the EU have announced commitments to achieve net
zero carbon economies by 2050. All businesses have a role to play
in this and the Company is no exception. The Company's updated ESG
objectives are seeking to support initiatives to limit global
warming to 1.5(o) C, and our Investment Adviser will be exploring
how we can encourage and support our investments to take action in
2020 and beyond, whist maintaining our prudent approach to
risk.
In addition, the investment community has a key role in
unlocking carbon neutral solutions. Alongside the Investment
Adviser, the Company will be exploring how investment in critical
areas of infrastructure can meaningfully support carbon neutral
pathways in all countries where we invest.
CORPORATE GOVERNANCE
As previously announced, Mr Whittle will be retiring from the
Board at the 2020 Annual General Meeting ('AGM'), having been a
member since August 2009 and chair of the Audit and Risk Committee
from December 2013 to July 2018; and Mr Stares, who joined in
August 2013, retired from the Board in March 2020, having been
chair of the Nominations and Remuneration Committee from September
2014 to February 2019 and chair of the Risk Sub-Committee from
November 2013 to February 2019. I and my fellow directors thank
them both for their dedicated service to the Company over many
years, and for the always wise counsel they have provided.
Accordingly, during 2019, the Board commenced an
externally-facilitated selection process to recruit new
Non-Executive Directors; and the Company announced the appointment
of two new Board members in January 2020, Ms David and Ms
Lenfestey. They bring complementary experience and insight to the
continuing Board members, and we are confident that their
appointments will demonstrate the continued strength of the
governance provided by the Board. I and my fellow directors are
delighted to welcome them to the Board.
The Board complies with the Association of Investment Companies
Code of Corporate Governance and the UK Corporate Governance Code
as set out on page 58. The Board reviews operational processes on
an ongoing basis. In accordance with the UK Corporate Governance
Code on Stakeholder Engagement, we have made additional disclosures
on the Company's stakeholder engagement activities across the
portfolio, including with the communities that our portfolio
serves, our key suppliers and their employees, the public sector
and other clients. In addition, the Board, with the Company's
Investment Adviser, continues to look at ways to evolve its
practices and manage the portfolio more sustainably. More
information can be found in the corporate governance section on
pages 58-66.
INVESTMENT STRATEGY
During 2019, the Board undertook an exercise to evaluate and
rationalise the Company's KPIs and related strategic priorities.
These are summarised on pages 6-7. Working alongside the Company's
Investment Adviser, the Board reviewed the existing indicators to
ensure these metrics continue to be well suited to measuring the
Company's performance against its purpose and strategic objectives,
over the long-term. As a result of this exercise, improvements have
been made to some metrics and the presentation of others has been
simplified. However, although reduced in number, the KPIs remain
familiar and consistent in substance with those previously
reported. More information can be found throughout this report,
including in the summary of Objectives and Performance on pages
6-7.
During its 13-year life, the Company's long-term target to
deliver an 8% annualised return based on the November 2006 IPO
issue price has remained unchanged. During the KPI reassessment
process, the Board also took the opportunity to review the
continued appropriateness of this target and concluded that, given:
(i) the evolution of the infrastructure sector into what has now
become a mainstream investment class; (ii) the decrease in
long-term interest rates (which were approximately 5% p.a. at the
time of the formulation of the current return target and are now
below 1% p.a.); and (iii) the associated compression in returns on
investments that this interest rate reduction has brought about
across all real asset classes, it was appropriate to modify the
Company's long-term target return to 7%1. The Company's focus on
investing in long-term, inflation-linked revenues to deliver a
growing dividend, with the potential for capital appreciation,
remains at the core of the Company's investment proposition. More
detail on the Company's performance metrics can be found on pages
6-7.
CURRENT ENVIRONMENT AND OUTLOOK
I have referred to the uncertainties and risks relating to
Covid-19 above. The Audit and Risk Committee of the Board has also
been monitoring the risks associated with potential outcomes from
the UK leaving the EU, which remains a source of uncertainty for
the infrastructure sector and for the Company. The possibility of
disruption to some of the supply chains on which the Company
depends (for example, for skilled workers or spare parts) cannot be
discounted. Accordingly, whilst we do not believe that the Company
is unusually exposed to such risks, or that there will necessarily
be significant impact on the Company as a direct result of Brexit,
the Investment Adviser has adopted a position of heightened
readiness and close communication with key contractors and
suppliers, so that as much early warning as possible can be given
to enable appropriate mitigating measures to be implemented, if an
identified risk becomes a material issue for one of the Company's
investments.
Overall, subject to all the caveats referred to above, the
Company remains confident in its ability to source high-quality,
well-performing assets that will be accretive to the Company's
performance. The international pipeline remains strong across the
types of assets in which the Company invests, and we remain
positive about existing and future opportunities within the
jurisdictions where we operate. Across these geographical areas
there continues to be supportive policy and regulatory environments
for private investment in public infrastructure.
CONCLUDING SUMMARY
During this, my first year as your Chairman, I have been very
pleased to meet several of our larger shareholders, to understand
their perspectives and to benefit from their insights. These have
informed the ongoing strategic development of the Company and its
commitment to implementing best practices, as they evolve, in the
key area of ESG. I and my fellow directors thank all our
shareholders for their ongoing support of the Company.
We invest in 130 infrastructure projects and businesses across
eight countries. Our portfolio of investments provides essential
infrastructure to over 13 million people, households and businesses
daily across the countries in which we invest. This is only made
possible by the professionalism and enthusiasm of the many people
within our Investment Adviser, investment partner organisations,
our supply chain and within our many stakeholder groups - who work
day-in and day-out to ensure that these projects and businesses
deliver for the communities they serve.
I and my fellow directors would also like to thank these
individuals, on your behalf, for their essential contributions to
the performance of the Company.
Mike Gerrard
Chairman
8 April 2020
1 In addition, there is a deferred commitment of GBP17.8 million
which is due to be settled from future returns generated by
BeNEX.
2 Calculated by reference to the November 2006 IPO issue price
of 100p and reflecting NAV appreciation plus dividends paid.
TOP 10 INVESTMENTS
The Company's top ten investments by fair value at 31 December
2019 are summarised below. A complete listing of the Company's
investments can be found on the Company's website (
www.internationalpublicpartnerships.com ).(1)
% holding % investment % investment
Status at at fair value fair value
31 December 31 December 31 December 31 December
Location Sector 2019 2019 2019 2019
------------------ ----------- ------------------ ------------------- -------------- ------------- -------------
7% Risk
Cadent UK Gas distribution Operational Capital 17.1% 12.4%
------------------ ----------- ------------------ ------------------- -------------- ------------- -------------
Cadent owns four of the UK's eight regional gas distribution networks
('GDNs') and in aggregate provides gas to approximately 11 million
consumers.
----------------------------------------------------------------------------------------------------------------------
16% Risk
Tideway UK Waste water Under Construction Capital 9.2% 10.6%
------------------ ----------- ------------------ ------------------- -------------- ------------- -------------
Tideway is a GBP4.2 billion investment and relates to the design,
build and operation of a 25km 'super-sewer' under the River Thames.
----------------------------------------------------------------------------------------------------------------------
Diabolo Rail 100% Risk
Link Belgium Transport Operational Capital 8.6% 10.0%
------------------ ----------- ------------------ ------------------- -------------- ------------- -------------
Diabolo Rail Link integrates the Brussels Airport with the national
rail network allowing passengers to access high-speed trains, such
as Amsterdam-Brussels-Paris and NS Hispeed trains.
----------------------------------------------------------------------------------------------------------------------
Lincs Offshore Energy 100% Risk
Transmission UK transmission Operational Capital 7.9% 9.0%
------------------ ----------- ------------------ ------------------- -------------- ------------- -------------
The project connects the 270MW Lincs offshore windfarm, located 8km
off the east coast of England, to the National Grid. The transmission
assets comprise the onshore and offshore substations and under-sea
cables, 100km in length.
----------------------------------------------------------------------------------------------------------------------
100% Risk
Capital
Ormonde Offshore Energy and 100%
Transmission UK transmission Operational senior debt 5.3% 6.2%
------------------ ----------- ------------------ ------------------- -------------- ------------- -------------
The project connects 132kV Ormonde offshore wind farm, located 10km
off the Cumbrian coast, to the National Grid. The transmission assets
comprise the onshore and offshore substations and under-sea cables,
41km in length.
----------------------------------------------------------------------------------------------------------------------
Reliance 33% Risk
Rail Australia Transport Operational Capital 3.7% 4.3%
------------------ ----------- ------------------ ------------------- -------------- ------------- -------------
Reliance Rail is responsible for financing, designing, delivering
and ongoing maintenance of 78 next-generation, electrified, 'Waratah'
train sets serving Sydney in New South Wales, Australia.
----------------------------------------------------------------------------------------------------------------------
100% Risk
BeNEX Germany Transport Operational Capital 3.5% 2.0%
------------------ ----------- ------------------ ------------------- -------------- ------------- -------------
BeNEX is both a rolling stock leasing company as well as an investor
in train operating companies, providing approximately 40 million
train km of annual rail transport.
----------------------------------------------------------------------------------------------------------------------
5% Risk
Angel Trains UK Transport Operational Capital 3.3% 3.5%
------------------ ----------- ------------------ ------------------- -------------- ------------- -------------
Angel Trains is a rolling stock leasing company asset base comprising
over 4,400 vehicles. Angel Trains has invested over GBP5 billion
in new rolling stock and refurbishment since 1994, and is the second
largest investor in the industry after Network Rail.
----------------------------------------------------------------------------------------------------------------------
US Military Military 100% Risk
Housing(2) US housing Operational Capital 2.7% 3.1%
------------------ ----------- ------------------ ------------------- -------------- ------------- -------------
Two tranches of mezzanine debt underpinned by security over seven
operational Public-Private Partnerships ('PPP') military housing
projects, relating to a total of 19 operational military bases in
the US and comprising c.21,800 individual housing units.
----------------------------------------------------------------------------------------------------------------------
100% Risk
Capital
Robin Rigg Energy and 100%
OFTO UK transmission Operational senior debt 2.3% 1.1%
------------------ ----------- ------------------ ------------------- -------------- ------------- -------------
The project connects the 180MW Robin Rigg East and West offshore
windfarms, located 12km off the coast of Cumbria, to the National
Grid. The transmission assets comprise the onshore and offshore substations
and under-sea cables, 25km in length.
----------------------------------------------------------------------------------------------------------------------
1. Risk Capital includes both project level equity and subordinated shareholder debt.
2. Includes two tranches of mezzanine debt into US military housing.
Significant movements in the Group's portfolio for the year to
31 December 2019 can be found on pages 14-16 of the Strategic
Report .
STRATEGIC REPORT
CASE STUDY - BENEX
DIFFERENTIATION OF THE OPERATING MODEL
A key differentiator for the Company is the relationship with
its Investment Adviser. The Investment Adviser supports the Company
(and its investment portfolio entities) with investment, financial
and asset management services to deliver the best value for its
shareholders and wider stakeholders. The Investment Adviser's team
of approximately 130 infrastructure professionals spread across
three continents, are focused on delivering and maintaining
high-quality portfolio performance.
The Investment Adviser has a demonstrable track record, with
high standards of governance, stewardship and relationship
management across the Company's investment portfolio. The Company's
investment in BeNEX demonstrates this approach, as the Investment
Adviser has worked closely with its key stakeholders since the
Company's initial investment in BeNEX in 2007.
THE COMPANY'S ACTIVE ENGAGEMENT APPROACH
BeNEX is a German rail business that both leases rolling stock
and invests in train operating companies ('TOCs') which operate
rail services under concession agreements with German Federal
States. The Company has owned 49% of the business since 2007 with
the remaining 51% having been owned by a German government-owned
entity, Hamburger Hochbahn AG ('HHA').
Owing to the experience and relationships developed by the
Investment Adviser since the Company first invested in BeNEX in
2007, the Company was well-placed to negotiate the acquisition of
HHA's 51% shareholding on accretive terms and invested a further
GBP29.4 million in June 2019(1) .
BeNEX has been a successful investment for the Company and has
almost tripled its annual regional passenger transport services
from c.15 million train kilometres in 2007 to c.40 million train
kilometres in 2019. The Company's further investment supports
BeNEX's ongoing role in providing high-quality public transport to
the areas of Germany that the business serves and its potential to
capitalise on the growth opportunities that will emerge from
Germany's ambition to increase ridership.
Key investment attributes of BeNEX include:
- Concession agreements with 13 of the 16 Federal States across Germany
- Provides the Company with additional government-backed
revenues and geographic diversification
- Ownership of diverse rolling stock fleet with 120 trains leased to six different TOCs
- The TOCs in which BeNEX is invested are consistently
recognised for their high levels of performance
- Promotion of more rail transport is a key part of Germany's approach to climate action
RAIL - AN OPPORTUNITY FOR CLEAN GROWTH
2019 was a significant year for public commitment to action on
climate change. Alongside the UK, Sweden and New Zealand's
commitments to achieve net zero carbon economies by 2050, the EU
has announced plans to make Europe the first carbon-neutral
continent by 2050(2) .
Rail is already a naturally low-carbon mode of transport. Rail
contributes c.1.5% of the EU transport sector's total CO(2)
emissions even though it has c.8.5% of total transport activity,
including aviation, roads and maritime(3) . The environmental
impact of rail transport should reduce even further with the
continuing roll-out of electric, hydrogen and hybrid trains, where
rail has the potential to quickly become a zero carbon form of
transport.
Following the EU's announced intention to become net zero by
2050, the German Government unveiled a record breaking 10-year,
EUR86 billion investment programme for the German rail network. The
commitment establishes rail travel as central to the Government's
ambitious plans to combat climate change. Germany has committed to
cutting its transport sector CO(2) emissions by up to 42% by 2030
and has ambitions to increase the number of customers using
long-distance trains from 148 million in 2018 to 260 million by
2030(4) .
We believe BeNEX will continue to benefit from the German
Government's ambitions to increase rail transportation and present
future investment opportunities.
KEY STATISTICS ON THE COMPANY'S RAIL PROJECTS
B eNEX
- 75% composition of train fleet that is electric(5)
- >90,000,000 number of passengers p.a.
- >40,000,000 train km travelled
All Rail Investments
- 89% composition of train fleet that is electric(6)
- >229,000,000 number of Passengers (total) p.a.
- >364,000,000 train km travelled (total)
UN SDG s Supported
9 - Industry, Innovation and Infrastructure
11 - Sustainable Cities and Communities
1 In addition, there is a deferred commitment of GBP17.8 million
which is due to be settled from future returns generated by
BeNEX.
2 https://ec.europa.eu/info/strategy/priorities-2019-2024/european-green-deal_en.
3 http://www.cer.be/sites/default/files/publication/Facts%20and%20figures%202014.pdf.
4 https://www.ft.com/content/086f62b8-36c8-11ea-a6d3-9a26f8c3cba4.
5 By investment at fair value as at 31 December 2019.
6 Calculated by prorating the valuations of the relevant
investments by value attributable to electric trains.
STRATEGIC REPORT
OPERATING REVIEW
Value -Focused Portfolio Development
New investments that meet the Company's Investment Policy are
made after assessing their risk and return profile relative to the
existing portfolio. In particular, we seek investments to
complement the existing portfolio through enhancing long-term,
predictable cash flows and/or to provide the opportunity for higher
capital growth. The Board also regularly reviews the overall
composition of the portfolio to ensure it continues to remain
aligned with the Company's investment objectives.
The Company's strategic priorities were reviewed during the year
as part of the wider review of its performance indicators, as
referred to in the Chairman's Letter. It was concluded that the key
attributes that the Company uses to assess new opportunities,
continue to be fit for purpose. The Company further refined its
approach, committing to ensuring that at least three of the six
attributes, described below, were present in any investment made by
the Company.
Desirable key attributes for the portfolio include:
1. Long-term, stable returns
2. Inflation-linked investor cash flows
3. Early stage investor (e.g. the Company is an early stage
investor in a new opportunity developed by our Investment
Adviser)
4. Investment secured through preferential access (e.g. sourced
through pre-emptive rights or through the activities of our
Investment Adviser)
5. Other capital enhancement attributes (e.g. potential for
additional capital growth through 'de-risking' or the potential for
residual/terminal value growth)
6. Positive UN SDG contribution
Performance against strategic priority KPIs: 100% of investments
made in 2019 met at least three of the six attributes
During the year to 31 December 2019, the Company invested or
made investment commitments up to GBP281.3 million. These
opportunities were sourced by the Investment Adviser, either from
the start of the project (e.g. early stage developments in response
to an initial government procurement process); through increasing
its interest in existing assets; or as part of a larger consortium,
building on the Company's experience and credibility to participate
in multi-billion-pound regulated infrastructure transactions. These
three origination approaches are the Company's preferred routes to
market, as they limit bidding in the competitive secondary
market.
Details of investment activity during 2019 are provided below.
All investments made by the Company during 2019 meet or exceed the
Company's performance indicator of having at least three of the six
attributes. Please refer to the key performance indicators on page
7. Further details for each of these transactions are provided
overleaf.
INVESTMENTS LOCATION KEY ATTRIBUTES OPERATIONAL INVESTMENT INVESTMENT
MADE DURING STATUS DATE
2019
1 2 3 4 5 6
---------------------------- ------- ------- ------- ------- ------- ------- ------------ ----------- -----------
Luton Building UK ü ü ü ü Operational GBP0.2 17 January
Schools for million 2019
Future ('BSF')
Project
---------------- ---------- ------- ------- ------- ------- ------- ------- ------------ ----------- -----------
Midlands Batch UK ü ü ü ü Operational GBP12.4 30 April
Priority million 2019
Schools
Project (Batch
4)
---------------- ---------- ------- ------- ------- ------- ------- ------- ------------ ----------- -----------
Wolverhampton UK ü ü ü ü Operational GBP1.8 7 June
BSF Projects million 2019
1 & 2
---------------- ---------- ------- ------- ------- ------- ------- ------- ------------ ----------- -----------
Cadent UK ü ü ü ü ü Operational GBP153.2 28 June
million 2019
---------------- ---------- ------- ------- ------- ------- ------- ------- ------------ ----------- -----------
BeNEX Germany ü ü ü ü ü ü Operational GBP29.4 28 June
million(1) 2019
---------------- ---------- ------- ------- ------- ------- ------- ------- ------------ ----------- -----------
National UK ü ü ü ü Operational GBP12.8 Various
Digital million
Infrastructure
Fund ('NDIF')
---------------- ---------- ------- ------- ------- ------- ------- ------- ------------ ----------- -----------
OFTO UK ü ü ü ü Operational GBP71.5 26
Refinancing million September
2019
---------------- ---------- ------- ------- ------- ------- ------- ------- ------------ ----------- -----------
GBP281.3
million
------------------------------------------------------------------------------------------------ ----------- -----------
1 GBP translated value of investment.
INVESTMENTS MADE DURING THE PERIOD
BSF PROJECTS, UK
BSF is a former UK Government programme for the redevelopment of
secondary schools in the UK, which used a combination of design and
build contracts and private finance type arrangements.
In January 2019, the Company acquired additional Risk Capital in
Luton BSF project, investing a further c.GBP0.2 million. As a
result, this has brought the Company's ownership level to 50%
equity and 54% subordinated debt. In June 2019, the Company
invested a further GBP1.8 million for an additional 10% stake in
Wolverhampton BSF Projects 1 and 2. As a result, the Company's
investment was increased from 90% to 100%.
MIDLANDS BATCH PRIORITY SCHOOLS PROJECT (BATCH 4), UK
Following the successful recapitalisation of the project in
2019, required as a consequence of the liquidation of Carillion in
January 2018, the Company announced it will invest up to GBP12.4
million of additional Risk Capital into the Midlands Schools
project (Batch 4) such that it now owns 92.5% of the equity in the
project. The Company successfully appointed a construction firm to
complete the outstanding construction works at five school sites
and the works to a sports hall and main school building have
progressed well with all sites impacted available for use for the
start of the 2019/2020 academic year. The positive relationships
developed between the new contracting parties and the schools
during the course of the works was, and continues to be, a
significant achievement.
In addition to the construction works programme, extensive
defect remediation works have been undertaken at each of the eight
schools, by a variety of specialist sub-contractors, with limited
disruption to the end users. The overwhelming majority of the
identified works were completed and there is a clear plan in place
for the remaining works to be completed by June 2020 within the
original budget.
Cadent gas distRIbUTion network, UK
Cadent is a UK gas distribution business with four geographic
monopolies, supplying gas to approximately 50% of the UK
population, or over 11 million households and businesses. The
Quadgas Consortium (the 'Consortium'), of which the Company is a
member, acquired a 61% interest in Cadent in March 2017, and at the
time of acquisition entered into a put and call option to acquire
an additional 14% stake of Cadent. The Company then entered into a
second put and call option agreement in May 2018, in respect of the
residual 25% shareholding.
These options were exercised in June 2019, increasing the
Consortium's ownership to 100%. As part of this, the Company made a
further investment of GBP153.2 million which took the Company's
ownership to 7.25% and provided it with the permanent right to
appoint a board director. This was and remains the Company's
long-term target level shareholding. Cadent continues to be an
attractive asset for the Company and demonstrates key investment
features including inflation-linked revenues, attractive cash
yield, owned by a highly experienced consortium of investors
including the Company, no exposure to commodity or demand risk and
is substantially insulated from GDP trends.
Cadent is playing a role in supporting the UK Government's net
zero target for 2050 by undertaking important research to
demonstrate how the existing gas network can be used for clean fuel
distribution in the future. This includes the innovative
HyDeploy(1) project, which involves trialling a blend of up to 20%
volume of hydrogen with natural gas to assess whether it can be a
safe and greener alternative to gas currently used.
BeNEx, germany
In June 2019, the Company acquired an additional 51%
shareholding in BeNEX from HHA increasing the Company's ownership
from 49% to 100%. The transaction involved the Company investing
GBP29.4 million(2) , of which part was committed as additional
capital to BeNEX and the remainder used to acquire the additional
51% shareholding. The acquisition also included a deferred
commitment which is due to be settled through future returns
generated by the project.
BeNEX both leases rolling stock and invests in train operating
companies which operate rail services under concession agreements
with German Federal States. Since acquisition in 2007, BeNEX has
been a successful investment for the Company with continued
potential for growth. Please see detailed case study on this
investment on page 13.
DIGITAL INFRASTRUCTURE, U.K.
In July 2017, the Company agreed to invest up to GBP45 million
into UK digital infrastructure alongside the UK Government through
NDIF, a vehicle managed by the Investment Adviser. As part of this
GBP45 million commitment, in March 2019, the Company made an
investment into toob, a new full fibre broadband provider. The
expectation is that this investment will support the delivery of
gigabit broadband speeds to more than 100,000 premises by the end
of 2021. To date, GBP27.8 million of the Company's GBP45 million
commitment has been called by NDIF, supporting NDIF's four
investments.
The Company's commitment to digital infrastructure will help to
transition the UK to full fibre. Research by the Centre for
Economics and Business Research has suggested that full fibre could
boost UK productivity by nearly GBP59 billion by 2025. In doing so,
this will support multiple social benefits such as increased
employment, which is one of INPPs ESG objectives.
OFTOs, UK
In September 2019, the Company successfully completed an
innovative refinancing and restructuring of three projects within
its OFTO portfolio. This involved a repayment of original bank debt
secured against three projects within its portfolio (Barrow,
Gunfleet Sands and Robin Rigg OFTOs) by taking advantage of current
favourable conditions in the debt market. New, lower-cost long-term
bank debt was raised alongside an additional c.GBP71.5 million
senior debt investment made by the Company.
The combination of the low cost of the new bank debt, together
with the ability to release certain reserves and achieve other
efficiencies following the repayment of the existing bank debt,
allows the new senior debt investment made by the Company to be
attractively priced and generate returns accretive to the Company's
portfolio. In addition, this investment increases the portion of
the portfolio that is supporting UN SDGs 7 (Affordable and Clean
Energy) and 13 (Climate Action).
1 https://hydeploy.co.uk/.
2 In addition, there is a deferred commitment of GBP17.8 million
which is due to be settled from future returns generated by
BeNEX.
MARKET ENVIRONMENT IN 2019 AND FUTURE OPPORTUNITIES
UNITED KINGDOM
As referred to in the Chairman's Letter, the demand for private
infrastructure investment remains strong globally and there is a
good pipeline for the types of assets in which the Company invests.
The political landscape in the UK over the course of 2019 continued
to impact the sector, due to the emerging policies of the UK
opposition party to nationalise certain infrastructure. However,
following the General Election held in December, nationalisation
risk dissipated and market sentiment significantly improved.
There continues to be a number of drivers for new and improved
infrastructure across the areas in which the Company invests,
supporting the need for private and public investment into
infrastructure. For example, the Infrastructure and Projects
Authority ('IPA') have forecast that in the UK there is a
requirement for GBP600 billion of infrastructure investment over
the next 10 years(1) , with contributions needed from both the
public and private sectors. The pipeline focuses on the UK's roads,
hospitals and schools, ensuring that modern technologies are
embraced to improve productivity. The UK Budget announcement in
March 2020 provided further support for infrastructure investment
with GBP640 billion of spending earmarked for roads, rail,
broadband, schools and hospitals over the next five-years. The
details of projects and timings are expected to be announced in the
National Infrastructure Strategy at a later date.
Brexit also caused uncertainty through the year and the Board
consistently monitors developments as Brexit preparations progress.
While we see obvious risks of possible market disruption and other
issues arising from anything other than an orderly end to the
Brexit transition period, as previously outlined, we do not
anticipate that the Company is unusually exposed to such risks, or
that there will necessarily be a significant impact on the
Company's existing investments. However, this cannot be guaranteed
and we continue to monitor developments closely as the withdrawal
process continues to evolve.
1. 'National Infrastructure and Construction Pipeline 2018',
Infrastructure and Projects Authority, December 2018.
EUROPE - EXCLUDING UNITED KINGDOM
Overall infrastructure investment into European infrastructure
continues to be strong and is supported by broader EU frameworks.
For example, in order to upgrade its infrastructure, the Connecting
Europe Facility funding programme continues to target
infrastructure investment in transport, energy and digital projects
across all EU Member States, while the Europe 2020 Strategy has a
key role in supporting the European Commission's priorities related
to smart, sustainable and inclusive growth, and the EU's Europe
2020 Strategy objectives in the area of energy and climate policy.
More recently, the European Commission announced its 'Green Deal'
aiming to achieve carbon neutrality in the EU by 2050. This
includes a significant increase of its emissions reduction targets
and the ambition to mobilise at least EUR1 trillion to support
sustainable investment over the next ten years. It also intends to
use a mix of private and public funds to fulfil the plan, including
the use of a quarter of the EU budget although the Company notes
that some of these types of projects currently do not meet its risk
return requirements (for example, they may exhibit demand risk or
GDP correlation).
Notwithstanding this, the Company anticipates there will be
increasing opportunities in infrastructure that will be critical
for facilitating a transition to net zero, particularly in
transport and energy sectors across Europe, exhibiting investment
criteria that the Company will find attractive. In particular, the
Company is focusing on stable and well-structured Northern European
economies including Belgium, the Netherlands, Germany, Austria and
Ireland. These jurisdictions offer a steady flow of new primary
market opportunities across all traditional infrastructure
sectors.
Future success will depend on securing opportunities through bid
processes, while ensuring that every opportunity fits within the
Company's risk and reward parameters.
AUSTRALIA
Australia has a history of private sector organisations
providing and financing public sector infrastructure. It has a
stable and transparent legal and regulatory framework with active
infrastructure financing and investor markets. Most government
counterparties involved with public infrastructure procurement are
rated AA+ or higher.
Infrastructure Australia sets out its medium to long-term
aspirations for the country's infrastructure development in its
'Australian Infrastructure Plan'. Infrastructure investment in
Australia is expected to continue at high levels, with
Infrastructure Australia's Priority Infrastructure List (2019)
identifying a pipeline of critical infrastructure projects over the
next 15 years with a capital value of A$58 billion. By 2034,
Australia's population is projected to grow by c.24% to reach 31.4
million, adding to the changing and growing demand for
infrastructure.
Greenfield PPP activity increased significantly during 2019
compared to the previous year, with A$11.2 billion of projects
closing during the year compared to A$1.5 billion in 2018. The
great majority of this increase in value of investment is
attributable to a small number of large transport projects. We
expect the development of large transport infrastructure projects
to continue in 2020.
Australian States are also developing smaller scale social
infrastructure projects in health, social housing and education
sectors. In keeping with policy recommendations in the
Infrastructure Plan, some States are also adopting infrastructure
procurement models that outsource operator services to the private
sector, as well as seeking private sector capital to develop the
asset.
Refinancing of existing PPP projects continued at a significant
level in 2019 with over A$5 billion of debt being refinanced. This
included refinancing of the Company's Victorian New Schools PPP
Project.
The Company's view is positive about the prospects for further
investments in the region and, whilst mindful of the recent
improvement in the value of sterling since the announcement of
Brexit, will continue to monitor currency volatility in respect of
new transactions. Although the Company remains cautious of the
refinancing risk prevalent within Australia's current primary PPP
market, current liquidity in debt markets is at a level that has
provided the Company with opportunities to manage its exposure to
such risk.
NORTH AMERICA
The US private infrastructure market is mature and large, with
approximately 720 infrastructure investments executed during
2019(1) . The US offers a wealth of infrastructure opportunities
ranging across all sectors, although some US States have progressed
their model for private asset ownership at a faster rate than
others. The opportunity to generate higher returns than generally
seen in the European markets and the ability to source projects
through collaborative procurement processes makes the US an
attractive geography on which to focus resource. However, the
growing amount of domestic capital pursuing projects in the US and
the generally lower commitment given by the public sector to
following through on a privately funded procurement creates
barriers to entry for many European investors.
In its most recent report card on the condition of America's
infrastructure, the American Society of Civil Engineers gave the US
infrastructure a D+ or 'poor' rating. The engineers estimated the
cost of bringing America's infrastructure to a state of good repair
(a grade of B) by 2025 at $4.6 trillion. President Trump's federal
infrastructure programme has yet to be signed into law but promises
a $1 trillion boost to infrastructure spending over the next
decade, primarily focused on transportation.
The real opportunity in the US, however, is not in federally
mandated 'mega' projects, but in areas such as transportation
infrastructure including airports, ports, bridges and logistics
where much of the existing infrastructure ownership is in the hands
of local municipalities and other government-backed entities.
Privatisation of these assets is becoming more commonplace with
even smaller cities and municipalities seeking to monetise assets
including utilities, real estate and civic infrastructure. The
Investment Adviser actively monitors the development of these
projects to assess the suitability for investment by the
Company.
Power and renewables have experienced substantial growth as many
States have committed to ambitious carbon reduction targets. The
regimes that support development and ownership of generation,
transmission and distribution assets are attractive relative to
other markets and considerable short to medium term growth is
expected as States use these regimes to achieve their
objectives.
Canada has a strong track record of infrastructure investment
and the Investing in Canada plan aims to deliver C$180 billion of
infrastructure investment by 2028 to support local, provincial and
territorial projects over 12 years. This includes funding in public
transport, green and social infrastructure and transportation
infrastructure to support trade and rural northern communities and
is split equally between new investment projects and funding
existing initiatives. The Company has an ongoing presence in the
country through two operational projects. The continued focus on
expanding the infrastructure plan over the next decade allows the
Company to capitalise on this opportunity and develop the already
existing relationships.
The ability for the private sector to participate in more North
American infrastructure projects provides the Company with a broad
variety of investment opportunities. The Company is well-positioned
to capitalise on these developments through its Investment
Adviser's relationship with US group, Hunt Companies LLC.
COVID-19
While at this stage no one knows the impact that Covid-19 may
have in the future including in the countries referred to above,
the view of the Investment Adviser is that while it may impact on
some infrastructure investment activity in the short to medium
term, then in the medium to long term there is a likelihood of an
enhanced need for health and other community protection
infrastructure. Moreover, the existing pressures for the delivery
of other new infrastructure will not go away. As a generalisation
the immediate response of central banks to the Covid-19 pandemic
has been to reduce interest rates. Other things being equal, this
might be expected to increase the attractiveness of revenues
streams typically derived from the assets in the Company's
portfolio.
1. Preqin Alternative Assets Financial Database.
CURRENT PIPELINE
The Company's performance does not depend upon additional
investments to deliver current projected returns. Further
investment opportunities will be judged by their anticipated
contribution to overall portfolio returns relative to risk.
Selected opportunities that may be considered for investment in due
course, as identified by the Investment Adviser, are outlined
below.
KNOWN/COMMITTED LOCATION ESTIMATED INVESTMENT(1) EXPECTED INVESTMENT INVESTMENT STATUS
OPPORTUNITIES PERIOD
----------------- --------- -------------------------- -------------------- ----------------------
NDIF UK GBP17.2 million Operational Of the GBP45
businesses million commitment
to NDIF, c.GBP27.8
million has been
invested to 31
December 2019
----------------- --------- -------------------------- -------------------- ----------------------
Offenbach Police Germany GBP8.0 million(2) c.30 years Investment commitment
Headquarters made. Expected
to be funded
mid-2021
----------------- --------- ------------------------ -------------------- ----------------------
Rampion OFTO UK c.GBP35-45 million c.20 years Preferred bidder.
Investment expected
late 2020
----------------- --------- -------------------------- -------------------- ----------------------
Beatrice OFTO UK Up to GBP60 million c.23 years Preferred bidder.
Investment expected
H2 2020
----------------- --------- -------------------------- -------------------- ----------------------
SECTOR OF INVESTMENT LOCATION ESTIMATED CAPITAL EXPECTED INVESTMENT INVESTMENT STATUS
OPPORTUNITY VALUE (3) LENGTH
--------------------- --------------- -------------------- -------------------- ------------------------
OFTO UK c.GBP1.0 billion c.20 years Various opportunities,
including the one
remaining Tender
Round 6, for which
it is shortlisted
--------------------- --------------- -------------------- -------------------- ------------------------
Education UK, Europe, c.GBP0.7 billion Various Various opportunities
Australia
--------------------- --------------- -------------------- -------------------- ------------------------
Health Europe c.GBP1.0 Various o Various opportunities
billion
--------------------- --------------- ------------------ -------------------- ------------------------
Transport Australia, c.GBP0.7 billion Various Various opportunities
Europe
--------------------- --------------- -------------------- -------------------- ------------------------
Regulated UK c.GBP7.0 billion Various Regulated opportunities
--------------------- --------------- -------------------- -------------------- ------------------------
Other UK, US, Europe c.GBP10.0 billion Various Various opportunities
--------------------- --------------- -------------------- -------------------- ------------------------
1 Represents the current estimate of total future investment commitment by the Company.
2 Project has reached financial close. Commitment to invest once
construction has completed, expected to be mid-2021.
3 Includes both third-party debt and equity.
The above includes commitments and a selection of potential
opportunities currently under review by the Investment Adviser
including current bids, preferred bidder opportunities and the
estimated value of opportunities to acquire additional investments
including under pre-emption/first refusal rights and future
opportunities that meet the Company's investment criteria. There is
no certainty that potential opportunities will translate into
actual investments for the Company. In relation to opportunities
where the current estimated gross value of the relevant project is
given (which includes an estimate of both debt and equity), the
estimates provided are not necessarily indicative of the eventual
acquisition price for, or the value of, any interest that may be
acquired.
ACTIVE ASSET MANAGEMENT
The Company's Investment Adviser has a highly experienced,
well-resourced, dedicated team of asset managers, with access to a
wider pool of c.130 infrastructure professionals across eight
countries. The Company's Investment Adviser operates a full-service
approach to infrastructure, and this includes day-to-day asset
management and oversight of the Company's investments. This active
asset management approach has been fundamental to the Company's
performance since IPO in 2006; and has enabled the Company to build
a reputation of delivering transparent, responsible stewardship of
public infrastructure assets that support essential services,
working as a trusted partner.
During the year, the objectives and indicators of active asset
management were reassessed as part of the wider performance
indicator review undertaken by the Company. It was assessed that
availability of assets was critical to performance, as well as
ensuring that performance deductions made by the Company's public
sector clients are below 3%. Certain other factors previously
reported were considered supporting, rather than indicating, the
delivery of active asset management and are accordingly now no
longer reported as key performance indicators themselves. We have
introduced indicators that demonstrate our hands-on approach,
including management of construction investment delivery and
forecast distributions received.
OPERATIONAL PERFORMANCE
The Company's Investment Adviser adopts a hands-on approach with
robust internal processes and monitoring. The Investment Adviser's
involvement will vary depending on each investment type, although
each investment is actively managed to optimise performance. During
2019, 100% of forecast annual investment portfolio receipts were
received (2018: 100%)(1) .
Infrastructure projects inherently involve health and safety
risk from construction through to operation. The health and safety
of the Company's end-users, delivery partners, employees and
members of the public, who come into contact with our assets, are
of the upmost importance to the Company, and we accord the highest
priority to health and safety, including advocating a
zero-tolerance approach to accidents and near-misses across our
portfolio. The Company's Accident Frequency Rate for occupational
accidents that resulted in lost time was 0.36 per 100,000 hours
worked (as at 31 December 2019)(2) .
Performance against strategic priority KPIs:
100% Forecast distributions received(1)
0.3% Asset deductions achieved against target of <3%
99.7% Asset availability achieved against a target of
>98%
PPP PROJECTS
The Company's Investment Adviser has extensive experience in PPP
projects, which account for 41% of the portfolio (by investment at
fair value) with a large majority developed by the Investment
Adviser, demonstrating the expertise and understanding that the
team has of these types of investments. Ensuring that the
facilities are available for their intended use, that areas are
safe and secure, and that the performance standards set out in the
underlying agreements are achieved, are key deliverables for the
Investment Adviser. The Company works closely with its partners to
ensure these standards are met. For those investments whose
performance is measured by availability for the 12 months to 31
December 2019, the availability of those assets was 99.7% and
across all projects there were performance deductions of 0.3%, both
exceeding their KPI targets.
In addition, the Company's public sector clients commissioned
over 1,000 contract variations in 2019, resulting in a combined
value of GBP47.4 million of additional project work conducted on
behalf of the commissioning body. The completed changes in 2019
range from minor building fabric alterations within education
facilities to the delivery of transport facility upgrades. Three
benchmarking exercises were also performed and agreed in its social
accommodation projects, which included reviewing facilities
management services delivered on the projects in order to assess
value for money for the public sector.
The Company completed three refinancings of its BSF projects in
2019. These refinancings generate improved financial returns which
are shared with the public sector counterparty and demonstrate an
important pillar of our active asset management and approach to
financial efficiency.
1 Measured by comparing forecast portfolio distributions against
actual portfolio distributions received.
2 This includes UK social accommodation (where the Investment
Adviser provides oversight of the management services), Cadent,
Tideway and all investments in Germany, Australia and Canada.
REGULATED INVESTMENTS
The Company invests in a number of regulated investments,
including OFTOs, Cadent and Tideway. The Company owns 100% of each
of its OFTO investments and whilst these are regulated by Ofgem,
the Company takes no exposure to electricity production or price
risk but is paid a pre-agreed, availability-based revenue stream
for the duration of the licence. Whilst the Company does not hold
majority positions in Cadent and Tideway, the Company engages
through its board director positions and membership of management
committees. The Company's Investment Adviser actively works with
respective boards to maintain alignment and focus on strategic
goals to drive financial and operational best practice and ensure
effective risk management.
Cadent and Tideway are subject to regulatory regimes which are
designed to, among other things, protect the interests of consumers
whilst ensuring that regulated companies are able to earn a
reasonable return on their capital. Changes in the regulatory
regimes have the potential to impact the returns of these two
investments.
During the year, Ofgem announced its Sector Specific Methodology
Decision which sets out its decisions on the policy areas which
will be used to determine the revenues that UK gas and electricity
network companies are able to earn during the next price control
period. This announcement is relevant to the Company's investment
in Cadent, a gas distribution business which will enter its next
price control period on 1 April 2021. The terms of the announcement
made by Ofgem were consistent with the Company's expectations. In
November 2019, Cadent submitted its business plan in respect of the
next price control period to Ofgem and expects to receive Ofgem's
draft and final determinations later in 2020.
In December 2019, Ofwat published its final determinations in
respect of the business plans it had received from water companies
covering the next price control period. The final determinations do
not have a direct impact on the Company's investment in Tideway
owing to the bespoke nature of the licence held by Tideway which
entitles it to a fixed regulated return with no regulatory reset
until 2030.
OTHER OPERATING BUSINESSES
The Company invests in a number of operational businesses
including BeNEX, Angel Trains and digital infrastructure (via its
commitment to NDIF). With the exception of Angel Trains, the
Investment Adviser holds a board position on its portfolios
operating businesses and uses these positions to influence and
strengthen company policies and procedures, for example enhancing
ESG credentials, health and safety performance as well as
protecting the value and mitigating operational risk.
COUNTERPARTY RISK
Whilst counterparty risk exists to some extent across all
investments, the most significant risk is in relation to PPPs which
have a long-term fixed-price contract with a facilities management
provider.
The Company has a diverse exposure to service providers across
its portfolio and counterparty risk is actively managed and
mitigated. The chart below illustrates the Company's service
providers (by investment fair value), highlighting the
diversification across the portfolio.
Following the administration of Interserve in March 2019 to a
newly incorporated company (Interserve Group Limited), we continue
to monitor any developments or issues affecting the service
provider. Interserve continues to be the service provider of c.7%
of the portfolio (by investment fair value) and all facilities
remain operational with no disruption to service delivery. The
Investment Adviser continues to closely monitor other service
providers within the portfolio for counterparty risk.
INPP Service Providers
[Chart can be found within the PDF document of the report on the
company website.]
The Investment Adviser takes a holistic approach to monitoring
counterparty risk, which draws upon a number of sources to form a
complete picture of how each counterparty and its wider group are
performing. A key aspect of the Investment Adviser's risk
management activities is a focus on the early identification of
signs that a counterparty is encountering problems through: regular
contract performance monitoring and internal performance
benchmarking of contracts; in depth reviews of counterparty
financial and market data and information available in the trade
press; as well as drawing upon our contacts in the industry for any
other non-public information.
Early identification of increased counterparty risk ensures that
corrective measures are taken at the appropriate time, to help
mitigate potential losses to the Company. Those measures may
include working more closely with the contractor to support them in
their efforts to improve contract performance or, at its most
extreme, the implementation of contingency plans designed to
facilitate the replacement of that contractor.
Ultimately the Company's desire is to see its service providers
succeed and deliver a high-quality service and the Investment
Adviser makes all efforts to ensure this is achieved. However,
where a subcontractor does fail, the Investment Adviser has the
necessary processes and procedures in place to mitigate and manage
the risk to Company.
PROJECTS UNDER CONSTRUCTION
The Investment Adviser's asset management team has extensive
experience and possesses the key skillsets needed to successfully
deliver projects through the construction and into the operational
phase. The Company has a strong track record of delivering
construction projects safely, on time, to budget and to a
high-quality by understanding the project environment and potential
risks that may occur. The team works closely with the contractors
and technical advisers throughout this stage in order to deliver
the expected project performance and create value for investors and
communities. Two projects, representing 9.2% of the Company's
portfolio, were under construction at 31 December 2019.
Tideway continued to make good progress in 2019 with more than
50% of the construction works now complete and at year-end the
Company remained on target to meet the scheduled date for handover
in March 2024. In April 2019, Tideway announced that its overall
cost estimates had been updated; however the updated costs were in
line with the Company's projections. Tideway confirmed that there
would be no change to the original estimated range of annual costs
for Thames Water bill payers and that no further funding from
stakeholders is required to complete the project.
As reported earlier in this report, construction work has
completed on the Midlands Batch Priority Schools project (Batch 4),
and the outstanding remediation works are progressing well and are
expected to complete in the first half of 2020.
Construction works for Offenbach Police Headquarters continue to
proceed over the year as scheduled and to budget. The structural
work for the building is nearly complete and the interior
construction work has begun and is making good progress. The
Company's current expectation is that the project will be delivered
on schedule in 2021.
Performance against strategic priority KPIs:
9.2% Of portfolio under construction. All in-construction
investments within budget and on schedule.
Projects under construction as at 31 December 2019 are set out
in the table below.
ASSET LOCATION CONSTRUCTION DEFECTS COMPLETION STATUS % OF FAIR
COMPLETION DATE VALUE OF
DATE INVESEMENT
------------------ ---------- -------------- ------------------- ------------- ------------
Tideway UK 2024(1) 2027(2) On Schedule 9.2%
------------------ ---------- -------------- ------------------- ------------- ------------
Offenbach Police
Headquarters Germany 2021 2025 On Schedule 0.0%(3)
------------------ ---------- -------------- ------------------- ------------- ------------
1 Scheduled handover date. Source: Tideway Annual Report 2018-2019.
2 Scheduled system acceptance date. Source: Tideway Annual Report 2018-2019.
3 The Investment Fair Value of Offenbach Police Headquarters as
at 31 December 2019 was 0.03%.
EFFECTIVE FINANCIAL MANAGEMENT
The Company aims to manage its finances efficiently, to provide
the financial flexibility to pursue new investment opportunities,
whilst minimising levels of unutilised cash holdings. Efficient
financial management is achieved through active monitoring of cash
held and generated from operations, ensuring cash covered dividends
and managed levels of corporate costs. This is supported by
appropriate hedging strategies and prudent use of the Company's
corporate debt facility ('CDF').
Cash dividends paid in the year of GBP101.8 million (2018:
GBP92.8 million), were 1.3 times (2018: 1.2 times) covered by the
Company's net operating cash flows before capital activity. This
achieved the Company's objective to generate dividends paid to
investors through its operating cash flows. The Company also
remains confident of its ability to continue to grow dividends for
the foreseeable future.
Corporate costs were effectively managed during the year and
represent 1.10% for 2019 (2018: 1.17%). Corporate costs overall
have increased as expected, driven by NAV growth, and include
management fees paid of GBP23.4 million for the year to 31 December
2019 (2018: GBP22.7 million).
During the year, the objectives and indicators of efficient
financial management were reassessed as part of the wider
performance indicator review undertaken by the Company. It was
assessed that cash covered dividends and management of ongoing
charges are the principal objectives and indicators of efficient
financial management. Certain other factors previously reported
were assessed as supporting the delivery of efficient financial
management, rather than being key indicators, and are consequently
now no longer reported as key performance indicators
themselves.
The Company's cash balance at 31 December 2019 was GBP45.6
million, a GBP39.1 million decrease on the corresponding balance at
31 December 2018 of GBP84.7 million. The higher opening cash
balances contained GBP42.2 million of capital raise proceeds from
2018 which were used during the year to fund new investments.
Cash receipts from investments increased by GBP20.8 million in
the year, to GBP159.6 million (2018: GBP138.8 million), reflecting
the further growth and maturity of the portfolio. Other corporate
costs during the period were negligible (2018: GBP0.1 million).
During the year to 31 December 2019, GBP281.3 million of new
investments were made (2018: GBP63.3 million), and these are
further detailed in note 12 of the financial statements, as well as
on page 14 of the Operating Review. Investment transaction costs in
2019 were GBP3.7 million, increasing by GBP2.5 million from 2018
(2018: GBP1.2 million) reflecting the increased in levels of
investments made.
The Company has a GBP400 million CDF (available until July
2021). At 31 December 2019, the facility was GBP27.9 million cash
drawn with GBP0.6 million committed via letters of credit (December
2018: nil cash drawn). Net financing costs paid were GBP4.7
million, an increase of GBP1.5 million compared to December 2018
(2018: GBP3.2 million) reflecting the level of utilisation of the
Company's CDF during the year. The Company successfully raised
GBP190.1 million of new capital (net of issue costs) during the
year (2018: GBP114.9 million). The Company utilised these proceeds
to partially repay the cash drawn on the facility in line with the
Company's policy to use the facility for short-term funding, rather
than for long-term financing. At 8 April 2020, GBP13.4 million was
cash drawn, leaving GBP386.6 million available for use.
Performance against strategic priority KPIs:
1.3x Dividends fully cash covered
1.10% Ongoing charges ratio
SUMMARY OF CASH FLOWS
SUMMARY OF CONSOLIDATED CASH YEAR TO 31 DECEMEBER YEAR TO 31 DECEMEBER
FLOW 2019 2018
GBP MILLION GBP MILLION
------------------------------ --------------------- ---------------------
Opening cash balance 84.7 33.9
Cash from investments 159.6 138.8
Corporate costs (for ongoing
charges ratio) (25.1) (24.5)
Other corporate costs (0.1) (0.1)
Net financing costs (4.7) (3.2)
------------------------------ --------------------- ---------------------
Net operating cash flows
before capital activity(1) 129.7 111.0
------------------------------ --------------------- ---------------------
Cost of new investments (281.3) (63.3)
Investment transaction costs (3.7) (1.2)
Net movement of CDF 27.9 (17.8)
Proceeds of capital raisings
(net of costs) 190.1 114.9
Dividends paid (101.8) (92.8)
Closing cash balance 45.6 84.7
------------------------------ --------------------- ---------------------
Cash dividend cover 1.3x 1.2x
------------------------------ --------------------- ---------------------
1 Net operating cash flows before capital activity as disclosed
above of c.GBP129.7 million (31 December 2018: c.GBP111.0 million)
include net repayments from investments at fair value through
profit and loss of c.GBP40.2 million (31 December 2018: c.GBP34.9
million), and finance costs paid of c.GBP4.7 million (31 December
2018: c.GBP3.2 million) and exclude investment transaction costs of
c.GBP3.7 million (31 December 2018: c.GBP1.2 million) when compared
to net cash inflows from operations of c.GBP90.5 million (31
December 2018: c.GBP78.2 million) as disclosed in the statutory
cash flow statement on page 84 of the financial statements.
CASH FLOWS ASSOCIATED WITH ONGOING CHARGES RATIO
CORPORATE COSTS YEAR TO 31 DECEMBER 2019 YEAR TO 31 DECEMBER
GBP MILLION 2019
GBP MILLION
--------------------- ------------------------- --------------------
Management fees (23.4) (22.7)
Audit fees (0.3) (0.3)
Directors' fees (0.4) (0.4)
Other running costs (1.0) (1.1)
Corporate costs (25.1) (24.5)
--------------------- ------------------------- --------------------
ONGOING CHARGES RATIO YEAR TO 31 DECEMBER 2019 YEAR TO 31 DECEMBER
GBP MILLION 2018
GBP MILLION
------------------------------- ------------------------- --------------------
Annualised Ongoing Charges(1) (25.1) (24.5)
Average NAV(2) 2,285.3 2,097.8
Ongoing Charges (1.10%) (1.17%)
------------------------------- ------------------------- --------------------
1 The Ongoing Charges ratio was prepared in accordance with the
Association of Investment Companies' ('AIC') recommended
methodology, noting this excludes non-recurring costs.
2 Average of published NAVs for the relevant period.
INVESTOR RETURNS
DIVID GROWTH
The Company forecasts to pay the second 3.59 pence per share
dividend in respect of the 12 months to 31 December 2019 in June
2020. Once paid, this would bring the total dividends paid in
respect of 2019 in line with the previously announced target of
7.18 pence per share (2018: 7.00 pence per share).
The Company targets predictable and, where possible, growing
dividends. As illustrated in the chart on page 2, the Company has
delivered a c.2.5% average annual dividend increase since IPO. The
Company forecasts to pay 7.36 pence and 7.55 pence per share in
respect of 2020 and 2021 respectively.
TOTAL SHAREHOLDER RETURN
The Company's annualised TSR(1) since the IPO to 31 December
2019 was 9.0%. This compares to the annualised FTSE All-Share index
TSR over the same period of 5.9%.
During its 13-year life, the Company's long-term investment
target to deliver an annual return in excess of 8.0% based on the
IPO issue price has remained unchanged. During the KPI reassessment
process mentioned on pages 6-7, the Board also took the opportunity
to review the continued appropriateness of this target and
concluded that, given: (i) the evolution of the infrastructure
sector into what has now become a mainstream investment class; (ii)
the decrease in long-term interest rates (which were approximately
5% p.a. at the time of the formulation of the current return target
and are now below 1% p.a.); and (iii) the associated compression in
returns on investments that this interest rate reduction has
brought about across all real asset classes, it was appropriate to
modify the Company's long-term target return to 7% (2) .
As shown in the share price performance graph below, the Company
has historically exhibited relatively low levels of volatility
compared to the market. This is a continuing trend as demonstrated
by the correlation of 0.25 and 0.19 with the FTSE All-Share index
over the 12 months and five years to 31 December 2019 and 31
December 2018 respectively.
Performance against strategic priority KPIs:
8.0% p.a. IRR achieved since IPO(2)
The Company's Share Price Performance
[Diagram can be found in PDF version of this document on the
Company's website].
Inflation-linked cash flows
In an environment where investors are focused on achieving
long-term real rates of return on their investments, inflation
protection is an important consideration for the Company. At 31
December 2019, the majority of assets in the portfolio had some
degree of inflation-linkage and, in aggregate, the weighted average
return of the portfolio (before fund-level costs) would be expected
to increase by 0.82% per annum in response to a 1.00% per annum
increase in all of the assumed inflation rates (3) .
1 Since inception in November 2006. Source: Bloomberg. Share
price appreciation plus dividends assumed to be reinvested.
2 Calculated by reference to the November 2006 IPO issue price
of 100p and reflecting NAV appreciation plus dividends paid.
3 Calculated by running a 'plus 1.00%' inflation sensitivity for
each investment and solving each investment's discount rate to
return the original valuation. The inflation-linkage is the
increase in the portfolio weighted average discount rate.
VALUATIONS
NAV
The NAV represents the fair value of the Company's investments
plus the value of other net assets or liabilities held within the
Group. The fair values of the Company's investments are determined
by the Board, with the benefit of advice from the Investment
Adviser, and are reviewed by the Company's auditor. The Company
reported a 10.3% increase in NAV from GBP2,198.7 million at 31
December 2018 to GBP2,425.2 million at 31 December 2019. Over the
same period, the NAV per share increased by 1.7% from 148.1 pence
to 150.6 pence.
NAV Movements (GBPm)
[Diagram can be found in PDF version of this document on the
Company's website].
The movements seen in the chart above are explained further
below:
- The Company successfully raised GBP190.1 million (post costs) of new capital during the year;
- Government bond yields decreased in all jurisdictions in which
the Company is invested, resulting in a positive impact on the
NAV;
- The positive impact of the reduction in government bond yields
was mostly offset by an increase in the investment risk premia
designed to ensure the valuations continue to reflect recent
market-based evidence of pricing for infrastructure
investments;
- Sterling strengthened against the euro, Australian dollar and
the US dollar, and marginally weakened against the Canadian dollar.
The net impact was negative on the NAV with the most significant
impact seen on the Company's euro-denominated investments;
- Four adjustments were made to the macroeconomic assumptions;
(i) a two--year delay in the step--up to the long--term deposit
rate assumptions used for all of the Company's investments
reflecting the prolonged period of lower interest rates; (ii) an
increase in the long-term deposit rate assumption used for the
Company's investments in Canada from 2.00% to 2.50%; (iii) UK
corporation tax is assumed to remain at 19% rather than reduce to
17% in accordance with the announcements made by the Conservative
Party prior to the UK General Election; and (iv) the corporation
tax rate for the Canadian province of Alberta has been reduced to
reflect the latest enacted rate. These changes had an overall
negative impact on the NAV;
- In line with forward guidance provided previously, two cash
dividends were paid to the Company's shareholders during the year
in relation to the six-month periods ended 31 December 2018 and 30
June 2019 respectively;
- Among other things, the NAV Return of GBP138.5 million captures the impact of the following:
o Unwinding of the discount rate;
o Outperformance of the investment portfolio during the
period;
o Updates to the forecast cash flows (except those due to
macroeconomic assumption changes); and
o Changes in the Company's working capital position.
INVESTMENTS AT FAIR VALUE
The investments at fair value represents the fair value of the
Company's investments without consideration of the value of other
net assets or liabilities held within the Group which are captured
within the NAV. The Company reported a 13.6% increase in the
investments at fair value from GBP2,097.5 million at 31 December
2018 to GBP2,382.6 million at 31 December 2019.
Investments at Fair Value Movements (GBPm)
[Diagram can be found in PDF version of this document on the
Company's website].
The movements seen in the chart above are explained further
below.
- An increase of GBP281.3 million owing to new investments made during the period;
- A decrease of GBP159.6 million due to investment distributions
paid out from the portfolio during the period;
- The Rebased Investments at Fair Value is presented in order to
allow an assessment of the Portfolio Return assuming that the
investments and distributions occurred at the start of the relevant
period;
- The Portfolio Return of GBP168.5 million captures broadly the
same items as the NAV Return (set out in detail on page 27) with
the principal exception being the fund-level operating costs;
- There was a small reduction in the discount rates used by the
Company to value its investments. The component parts of the
GBP37.9 million impact shown above can be seen in the NAV movements
chart on page 27;
- Four adjustments were made to the macroeconomic assumptions;
(i) a two--year delay in the step--up to the long--term deposit
rate assumptions used for all of the Company's investments
reflecting the prolonged period of lower interest rates; (ii) an
increase in the long-term deposit rate assumption used for the
Company's investments in Canada from 2.00% to 2.50%; (iii) UK
corporation tax is assumed to remain at 19% rather than reduce to
17% in accordance with the announcements made by the Conservative
Party prior to the UK General Election; and (iv) the corporation
tax rate for the Canadian province of Alberta has been reduced to
reflect the latest enacted rate. These changes had an overall
negative impact on the investments at fair value;
- Sterling strengthened against the euro, Australian dollar and
the US dollar, and marginally weakened against the Canadian dollar.
The net impact was negative on the investments at fair value with
the most significant impact seen on the Company's euro-denominated
investments.
PROJECTED CASH FLOWS
The Company's investments are generally expected to continue to
exhibit predictable cash flows, owing to the principally contracted
or regulated nature of the underlying cash flows. As the Company
has a large degree of visibility over the forecast cash flows of
its current investments, the chart below sets out the Company's
forecast investment receipts from its current portfolio before
fund-level costs.
The majority of the forecast investment receipts are in the form
of dividends or interest and principal payments from subordinated
and senior debt investments. The Company's portfolio comprises both
investments with finite lives (determined by concession or licence
terms) and perpetual investments that may be held for a much longer
term. Over the term of investments with finite lives, the Company's
receipts from these investments effectively represent a return of
capital as well as income, and the fair value of such investments
is expected to reduce to zero over time.
Projected Investment Receipts (GBPm)
[Diagram can be found in PDF version of this document on the
Company's website].
Macroeconomic Assumptions
The Company reviews the macroeconomic assumptions underlying its
forecasts on a regular basis. Following a thorough market
assessment, it was resolved that certain adjustments should be
made, including to the deposit rates, corporation tax rates and
foreign exchange rates used to value the Company's overseas
assets.
The key macroeconomic assumptions used as the basis for deriving
the Company's investment valuations are summarised below, with
further details provided in note 11 of the financial
statements.
MACROECONOMIC ASSUMPTIONS 31 DECEMBER 2019 31 DECEMBER 2018
--------------------------- ----------- ------------------------- -------------------------
Inflation Rates UK 2.75% RPI/2.00% 2.75% RPI/2.00%
CPIH CPIH
Australia 2.50% 2.50%
Europe 2.00% 2.00%
Canada 2.00% 2.00%
US(1) N/A N/A
--------------------------- ----------- ------------------------- -------------------------
Long-term Deposit Rates(2) UK 2.00% 2.00%
Australia 3.00% 3.00%
Europe 2.00% 2.00%
Canada 2.50% 2.00%
US(1) N/A N/A
--------------------------- ----------- ------------------------- -------------------------
Foreign Exchange Rates(3) GBP/AUD 1.92 1.88
GBP/EUR 1.13 1.05
GBP/CAD 1.80 1.80
GBP/USD 1.37 1.34
--------------------------- ----------- ------------------------- -------------------------
Tax Rates(4) UK 19.00% 17.00%-19.00%
Australia 30.00% 30.00%
Europe Various (12.50%-32.28%) Various (12.50%-32.28%)
Canada Various (23.00%-26.50%) Various (26.50%-27.00%)
US(1) N/A N/A
--------------------------- ----------- ------------------------- -------------------------
1 The Company's US investment is in the form of subordinated
debt and therefore not directly impacted by inflation, deposit and
tax rate assumptions.
2 The portfolio valuation assumes actual current deposit rates
are maintained until 31 December 2021 before adjusting to the
long-term rates noted in the table above. The 31 December 2018
valuation assumed the long-term rates noted in the table above
would apply from 31 December 2019.
3 The Company uses the four-year forward curve and maintains the
four-year forward rate for the longer-term.
4 Tax rates reflect rates those substantively enacted or
formally announced as at the valuation date.
Discount Rates
The discount rate used to value each investment comprises the
appropriate long-term government bond yield plus an
investment-specific risk premium which reflects the risks and
opportunities associated with that particular investment.
The majority of the Company's portfolio (88.8%) comprises Risk
Capital investments, while the remaining portion (11.2%) comprises
senior debt investments. To provide investors with a greater level
of transparency, the Company publishes both a Risk Capital weighted
average discount rate and a portfolio weighted average discount
rate - the latter of which captures the discount rates of all
investments including the senior debt interests.
The weighted average discount rates are presented in the table
overleaf.
31 DECEMBER 31 DECEMBER
2019 2018 MOVEMENT
----------------------------- ------------ ------------ ---------
Weighted Average Government
Bond Yield - Portfolio 0.98% 1.83% (0.85%)
----------------------------- ------------ ------------ ---------
Weighted Average Investment
Premium - Portfolio 6.04% 5.43% 0.61%
----------------------------- ------------ ------------ ---------
Weighted Average Discount
rate - Portfolio 7.02% 7.26% (0.24%)
----------------------------- ------------ ------------ ---------
Weighted Average Discount
rate - Risk Capital 7.52% 7.55% (0.03%)
----------------------------- ------------ ------------ ---------
NAV per share 150.6p 148.1p 2.5p
----------------------------- ------------ ------------ ---------
The Company is aware that there are differences in approach to
the valuation of investments among different listed infrastructure
funds similar to the Company. In the Company's view, comparisons of
discount rates between different listed infrastructure funds are
only meaningful if there is a comparable level of confidence in the
quality of forecast cash flows (i.e. assumptions are homogenous);
the risk and return characteristics of different investment
portfolios are understood; and allowance is made for differences in
the quality of asset management employed to manage risk and deliver
returns. Any focus on average discount rates without an assessment
of these and other factors would be incomplete and could therefore
derive misleading conclusions.
VALUATION SENSITIVITIES
This section indicates the sensitivity of the 31 December 2019
NAV per share of 150.6 pence to changes in key assumptions. Further
details can be found in note 11 of the financial statements. This
analysis is provided as an indication of the potential impact of
these assumptions on the NAV per share on the unlikely basis that
the changes occur uniformly across the portfolio. The movement in
each assumption could be higher or lower than presented. Further,
forecasting the impact of these assumptions on the NAV in isolation
cannot be relied on as an accurate guide to the future performance
of the Company as many other factors and variables will combine to
determine what actual future returns are available. These
sensitivities should therefore be used only for general guidance
and not as an accurate prediction of outcomes.
Estimated impact of changes in key assumptions on the 31
December 2019 NAV 150.6p per Share
[Diagram can be found in PDF version of this document on the
Company's website].
DISCOUNT RATES
The chart above indicates the sensitivity of the NAV per share
to uniform changes to the discount rates applied to the forecast
cash flows from each individual investment.
INFLATION
The impact of inflation on the value of each investment depends
upon the extent to which the revenues and costs of that particular
investment are linked to an inflation index. On a portfolio basis,
there is a positive correlation to inflation with a 1.00% sustained
increase in the assumed inflation rates projected to generate a
0.82% increase in returns. The returns generated by the Company's
UK investments are typically linked to the Retail Price Index
('RPI'), whereas the Company's non-UK investments are typically
linked to the relevant Consumer Price Index ('CPI') for that
jurisdiction. Further to recent announcements by the UK's energy
and water regulators, the revenues earned by Cadent and Tideway
will be linked to the CPIH (CPI including owner occupied housing
costs) from 2021 and 2030 respectively. The regulators have stated
that this is not designed to negatively impact companies but rather
to reflect the perceived shortcomings of the RPI (i.e. the
regulators' intention is for the transition from RPI to CPIH to be
valuation neutral). The inflation sensitivities by geographical
region are provided in note 11.5 of the financial statements.
FOREIGN EXCHANGE
The Company has a geographically diverse portfolio and forecast
cash flows from investments are subject to foreign exchange rate
risk in relation to euros, Australian dollars, Canadian dollars and
US dollars. The Company seeks to mitigate the impact of foreign
exchange rate changes on near-term cash flows by entering into
forward contracts, but the Company does not hedge exposure to
foreign exchange rate risk on long-term cash flows. The impact of a
10% increase or decrease in these rates is provided for
illustration.
DEPOSIT RATES
The long-term weighted average deposit rate assumption across
the portfolio is 1.81% per annum. While operating cash balances
tend to be low given the structured nature of the investments,
project finance structures typically include reserve accounts to
mitigate certain costs and therefore variations to deposit rates
may impact valuations. The impact of a 1.00% increase or decrease
in these rates is provided for illustration.
TAX RATES
Post-tax investment cash inflows are impacted by tax rates
across all relevant jurisdictions. The impact of a 1.00% increase
or decrease in these rates is provided for illustration. Other
potential tax changes are not covered by this scenario.
LIFECYCLE SP
There is a process of renewal required to keep physical assets
fit for use and the proportion of total cost that represents this
'lifecycle spend' will depend on the nature of the asset.
PPPs will typically need to ensure that the assets are kept at
the standard required of them under agreements with relevant public
sector counterparties. To enhance the certainty around cash flows,
the majority of the Company's PPP investments, and all of the
Company's OFTO investments, are currently structured such that
lifecycle cost risk is taken by a sub-contractor for a fixed price
(isolating equity investors from such downside risk). As a result,
the impact of changes to the forecast lifecycle costs for the
Company's PPP investments is relatively small.
The Company's investments in rolling stock leasing or operating
businesses, or businesses providing digital infrastructure, are
also distinct from PPPs which have fixed revenue streams from which
they need to pay lifecycle costs. These businesses will still
expect to incur lifecycle costs but will typically aim to recover
any changes in lifecycle costs through the prices they charge their
end users.
Tideway and Cadent, are treated differently due to the
protections offered by the regulatory regimes under which they
operate. Regulated assets have their revenues determined for a
known regulatory period and each settlement includes revenue
sufficient to allow the owner to undertake the efficient lifecycle
management of its assets due in that regulatory period. It is
common practice to employ reputable subcontractors to undertake
lifecycle work under contracts which include incentive and penalty
regimes aligned with the businesses' regulatory targets. This
approach ensures an alignment of interest and helps to mitigate the
risk of increased lifecycle costs falling on the equity investor.
Accordingly, no lifecycle sensitivity has been run in respect of
the Company's investments in Tideway and Cadent.
The impact of a 10% increase or decrease in the lifecycle costs
incurred by the Company's PPPs, OFTOs and operating businesses is
provided for illustration.
By order of the Board
Mike Gerrard John Le Poidevin
Chairman Director
8 April 2020 8 April 2020
RESPONSIBLE INVESTMENT
STRONG RESPONSIBLE INVESTMENT
OUR APPROACH
Consideration of ESG drivers is an important part of how the
Company assesses the long-term viability of investments that it
makes and its associated asset management strategies. ESG drivers
are non-financial factors that can influence and be influenced by
the Company's business activities and include issues such as
climate change, demographics, resources, technology and social
values.
Consideration of ESG is important to the Company for the
following key reasons:
- ESG drivers present an opportunity for new markets and investments;
- Incorporating ESG into the Company's management processes
supports its high standards of financial rigour and requirements
for long-term financial performance;
- By investing in infrastructure and associated businesses, the
Company can meaningfully support sustainable development.
In 2019, the Company continued to evolve its approach to ESG
integration. This has involved updating investment processes,
developing specific ESG stewardship objectives, and updating all
ESG risks and associated controls. As part of the Company's
commitment to improvement and transparency, all ESG integration
updates and controls have been reviewed by an independent third
party. This assessment was completed in line with the UN PRI, to
which the Company's Investment Adviser became a signatory in 2019.
The updated approach to ESG reflects increased alignment with the
goals of the UN SDGs, using their targets to quantify the Company's
positive environmental and social impact, but also using them to
drive sustainable management of the Company's investments.
As part of the Company's ESG controls, it has increased the
level of information that is gathered at investment opportunity
evaluation through screening and due diligence. In addition, the
Company commissioned an ESG due diligence review of all its current
investments. A comprehensive review of the top ten assets (by
investment fair value) has been completed, with all remaining
investments expected to be reviewed during 2020. The Company will
use the outputs to reduce risk in its investments and drive our
assets' contribution to environmental and social progress. This is
expected to include opportunities for innovations achieved in one
part of the portfolio to be shared more widely. Climate change risk
formed a key part of this review and, in 2020, the Company plans to
further assess how the risks posed by climate change (both
transitional and physical) can be mitigated within its portfolio
management strategy.
ALigned to five asset classes
ESG impact and stewardship objectives have been divided into
five asset classes. This allows the Company to target and manage
material ESG issues, which can vary considerably across a diverse
portfolio of assets. These include all sectors listed in the Sector
Breakdown in the Company Overview section of this report.
- Social Infrastructure
- Waste Water
- Transport
- Energy Transmission
- Gas Distribution
UN SDG GOAL ALIGNMENT
The Investment Adviser, on behalf of the Company, has aligned
with the UN SDGs1. In addition to screening and managing material
ESG risks, both organisations have committed to advancing these
objectives. Infrastructure appears both as an explicit goal and as
an implicit means to support other UN SDGs.
By investing in the 'right type' of infrastructure, the
definition of which is included in this section, the Company
believes its investments can significantly support the targets set
out by the UN SDGs. For each investment sector, the Company has
identified which UN SDGs its investments are positively impacting.
The core benefits to society are described under the 'Impact'
section on the following pages.
Equally, the Company believes any investment must be managed in
a sustainable way. The Company has undertaken an exercise to
identify what ESG topics are sufficiently material for each sector
as to require active management. This is to ensure that any ESG
risks are appropriately managed and opportunities for environmental
and social progress are maximised. Performance against these
objectives is described under 'Sustainable Management'.
[Graphics can be found in PDF version of this document on the
Company's website].
1
https://www.un.org/sustainabledevelopment/sustainable-development-goals/
SOCIAL INFRASTRUCTURE
Incorporates the Company's investments in educational
facilities, hospitals, healthcare facilities, judicial and other
government buildings
impact
Education HEALTHCARE GOVERNMENT
266 Schools 3 Hospitals 5 Police Stations
>195,000 Pupils 37 Healthcare facilities 8 Judicial Buildings
>540,000 patients
annually
Social infrastructure is pivotal to the development of
sustainable communities. While the provision of housing, clean
water and electricity are vital for meeting basic human needs,
other services such as schools and healthcare facilities are
equally important for ensuring the long-term well-being of people.
In combination, these infrastructure types create the framework
within which residents can establish a community with opportunities
for social and economic wellbeing.
As part of this, ensuring equitable access to these services is
critical. Provision of basic services such as health, education,
shelter, water and sanitation are central to the objectives of the
UN SDGs.
By investing directly in social infrastructure, the Company is
supporting three UN SDGs; UN SDG 3 (good health and wellbeing), UN
SDG 4 (quality education), and UN SDG 9 (industry, innovation and
infrastructure).
SUSTAINABLE MANAGEMENT(1)
ENVIRONMENT
92% (Investments with an Environment Management System)
94% (Investments monitoring energy usage)
31% (Investments monitoring waste)
82% (Investments monitoring water)
83% (BREEAM 'Very Good' or higher)
During 2019, 92% of social infrastructure investments were
managed by facilities management companies with an Environmental
Management System.
The Company identified that 94% of social infrastructure
investments monitored their energy usage. In addition, 31% of the
Company's social infrastructure investments implemented
energy-saving initiatives, with 99 investments generating renewable
energy on-site through a mixture of solar, wind, biomass and
combined heat and power. In addition, 83% of assets in the
portfolio built in accordance with BREEAM(2) scored 'very good' or
higher.
31% of the Company's social infrastructure investments monitored
waste at the site level. As part of the Investment Adviser's
approach to asset management, a pilot for repurposing furniture as
part of life cycle maintenance was undertaken. For example, 250
stools have been re-purposed from Derby Schools and donated to
National Police Aid Convoys.
social
100% (Investments with a health and safety policy and management
system)
>3,800 (Sustained full-time employees)
96% (Investments with equality, diversity and inclusion policy)
91,819 (Additional community hours)
The Company undertakes a proactive approach to ensuring that all
parties are aware of their health and safety obligations, which is
monitored through quarterly reporting. In 2019, 100% of the
Company's social infrastructure was managed by facilities
management companies with a health and safety policy.
Through the Company's contracts, over 3,800 sustained FTE jobs
have been created, with 100% of facilities management companies
implementing staff development and training programmes. In
addition, 96% of social infrastructure investments were managed by
facilities management companies with an equality, diversity and
inclusion policy.
Promoting the use of assets for community use continues to be a
priority, reflecting the Company's ambition for investments to
positively contribute to local communities. In 2019, additional
community use hours totalled 91,819.
[Relevant UN SDG graphics can be found in PDF version of this
document on the Company's website].
1 Note: Metrics are estimates and include the Company's
investments in social infrastructure, schools, hospitals,
healthcare facilities, judicial and other government buildings
2 https://www.breeam.com/
WASTE WATER
Encompasses the Company's investment in Tideway
impact
39 million (Tonnes of avoided sewage discharges)
25km (Tunnel length)
3 Acres (New public space)
An average of 39 million tonnes of untreated waste water
containing raw sewage overflows into the River Thames in London
every year(1) .
Tideway will work to reduce the number of discharges from over
50 to four or fewer in a typical year. The Tideway Tunnel will
collect sewage before it enters the river and divert it to
treatment facilities, cleaning up the river for future generations
of Londoners. This will also help to prevent fish kills and allow
the river to sustain a rich, diverse array of wildlife.
Whilst the main benefit of the completed tunnel is to prevent
pollution and improve biodiversity in the tidal River Thames,
during the eight-year construction period, the project is being
delivered in a sustainable way and will result in the creation of
three acres of new public space along the embankment.
By investing directly in social infrastructure, the Company is
supporting three UN SDGs; UNSDG 6 (clean water and sanitation), UN
SDG 9 (industry, innovation and infrastructure) and UN SDG 11
(sustainable cities and communities).
SUSTAINABLE MANAGEMENT
ENVIRONMENT
100% (Investments with an Environment Management System)
238 tCO(2) e (Scope 2 GHG Emissions)
131,329 tCO(2) e (Scope 3 GHG Emissions)
96% (Beneficial re-use of excavated material
Tideway has a robust environmental management system in place to
deliver on planning requirements and on its legacy commitments.
This includes a variety of initiatives to minimise its impact on
the environment.
By considering carbon reduction opportunities, such as moving
the excavated material by barge, Tideway has been able to reduce
its base-case carbon footprint by 19% - a total of 199,000 tonnes.
Tideway is the first infrastructure project to capture
comprehensive emissions data which shows that a 1,000-tonne tug at
75% engine load produces 54% reduction in nitrogen oxide, 86%
reduction in nitrogen dioxide emissions and 90% reduction in carbon
dioxide per tonne km compared with the modern standard HGV.
Tideway has a legal commitment to beneficially use at least 85%
of the excavated material. In 2019, Tideway was at 96% beneficial
reuse, with 83,878 tonnes of main tunnel material sent to Veolia
Rainham Marshes/Land and Water Rainham for habitat creation.
social
100% (Investments with a health and safety policy and management
system)
2,514 (Sustained full-time employees)
56% (Female employees)
Tideway has an award-winning approach to Health and Safety,
including Health, Safety and Wellbeing Initiative of the Year at
the British Construction Industry Awards, the Ground Engineering
Awards 2018. Overall, the programme accident frequency rates have
remained below other large infrastructure projects working at
similar phases of construction(2) . In 2019, there were 167
volunteer mental health first aiders across the project.
During the eight-year construction period, the project is
addressing several social sustainability areas, such as bringing
more women into engineering and construction creating sustained
employment and employing people living in the area affected by the
works; it is also setting targets on employing apprentices and
ex-offenders.
In 2019, Tideway recorded 2,514 sustained FTE jobs, with 56% of
the workforce being female.
1
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/471847/thames-tideway-tunnel-strategic-economic-case.pdf
2 https://www.tideway.london/media/3128/a0601_green-bond-report-2018_vis8.pdf
[Relevant UN SDG graphics can be found in PDF version of this
document on the Company's website].
TRANSPORT
Includes transport related investments, such as rail PPPs and
other rail businesses
impact
>229 million (Passengers per annum)
4,651 (Train units)
>364 million (Train kilometres)
Well-planned and coordinated infrastructure is fundamental to
the economic and social wellbeing of a community. It is also
becoming increasingly important to combat climate change and has
been identified as a key part of net zero carbon strategies
emerging internationally(1) .
The Company's rail investments move over 229 million passengers
annually - over 627,000 people daily. This is roughly the
equivalent to moving the entire population of the city of
Glasgow(2) every day.
Although rail is already an existing low-carbon form of
transport, the Company recognises that there will be a growing
shift towards cleaner units, and the Company will fully support
investments to make this transition.
By investing directly in sustainable transport, the Company is
supporting two UN SDGs: UN SDG 9 (industry, innovation and
infrastructure) and UN SDG 11 (sustainable cities and
communities).
SUSTAINABLE MANAGEMENT
ENVIRONMENT
89% (Composition of train fleet that is electric)(3)
60% (Investments with an environment management system)
100% (Investments monitoring energy)
40% (Investments monitoring waste)
In 2019, 89% of the train units under investment were electric.,
with three being 100% electric: Gold Coast Rapid Transport, Diabolo
Rail Link and Reliance Rail.
Investments with diesel units are innovating to explore ways of
cost-effectively transitioning to cleaner fleets. For example,
Angel Trains ground-breaking Hydrive4 project aims to improve air
quality and reduce carbon emissions by retrofitting diesel units
with hybrid technology. In 2019, the Hydrive trial project
completed the procurement phase with bench-testing of the new
equipment.
100% of transport investments are monitoring their energy use,
with many taking innovative approaches to improving
performance.
In 2019, several of BeNEX's train operating companies introduced
a driver advisory system, which supports train drivers to achieve
an energy-efficient driving style.
40% of transport investments are monitoring waste. During train
use, many train components such as bogies, wheelsets, gearboxes and
engines are mostly refurbished and reused and not disposed of.
social
100% (Investments with a health and safety policy)
>2,290 (Sustained full-time employees)
100% (Equality diversity and inclusion policy)
Health and safety is the highest priority for the Company's
investments in rail, with 100% of investments holding a robust
health and safety policy and management system.
In addition to supporting the economic development of
communities through the provision of public transport, the
Company's transport investments also provided over 2,290 sustained
full-time equivalent ('FTE') jobs in 2019.
In 2019, 100% of transport investments held a diversity and
inclusion policy. In most instances these are developed by the
investment themselves. In other cases, the investment adopts
government standards.
1 https://www.theccc.org.uk/publication/net-zero-technical-report/
2
https://www.nrscotland.gov.uk/files/statistics/council-area-data-sheets/glasgow-city-council-profile.html
3 Calculated by prorating the valuations of the relevant
investments by value attributable to electric trains.
4 https://www.ft.com/content/4f7d9fd8-ba98-11e8-8274-55b72926558f
[Relevant UN SDG graphics can be found in PDF version of this
document on the Company's website].
ENERGY TRANSMISSION
Encompasses the Company's OFTO investments
impact
1.5 GW (Transmission capacity)
1.3 Million (Homes powered by renewable
energy)
The UK Government has set an ambitious target for the deployment
of renewable energy. In March 2019, the Government outlined a plan
for offshore wind to power more than 30% of British electricity by
2030. This will be spearheaded by a new GBP250 million Offshore
Wind Growth Partnership and will see Crown Estate & Crown
Estate Scotland release new seabed land from 2019 for new offshore
wind developments(1) .
The Company increased its investment in this sector in 2019,
with an additional c.GBP70 million senior debt investment made by
the Company as part of a refinancing which took advantage of the
favourable prevailing conditions in the debt market.
The overall impact of the investment therefore remains the same,
with a transmission capacity of 1.5GW, sufficient to supply the
electricity needs of 1.3 million homes.
By investing in OFTOs, the Company is directly supporting two UN
SDGs; UN SDG 7 (affordable and clean energy) and UN SDG 13 (climate
action).
SUSTAINABLE MANAGEMENT
ENVIRONMENT
100% (Investments with an Environment Management System)
100% (Investments monitoring energy)
100% (Investments monitoring waste)
All OFTOs now operate under a robust ISO 14001 Environmental
Management System, which was introduced in 2019. As part of this,
each investment monitors energy usage and waste.
Considering the environment OFTOs operate in, it is important
that the Company has a clear view of how resilient they are to
extreme weather events. All OFTOs have been designed to meet <1
in 200-year waves. Onshore substations generally are designed to
meet Planning Policy Guidance 25 and have <1 in 100 flood risk.
In 2019, there has been no flood damage at any onshore substation
and no more weather-related damage beyond what would be regarded as
in the normal course of business.
Across all the sites the OFTOs are mandated by environmental
legislation to record the quantity of Fluorinated gasses (F Gasses)
held within the equipment. This includes Sulphur Hexafluoride
(SF6), which is used across the energy transmission sector. Any
leaks of SF6 are immediately identified by SCADA systems.
social
100% (Investments with a health and safety policy and management
system)
12 (Sustained full-time employees)
33% (Female employees)
100% of OFTO investments are covered by a robust ISO18001 health
and safety system. Transmission Capital Services(2) implement
several training initiatives, with all staff receiving ongoing
training which is relevant to their role. Transmission Capital
Services' asset management policy is designed to ensure:
- The prevention of injury and illness to employees, contractors, and the public;
- Maximisation of the long-term average availability of the assets under management; and
- Minimisation of the whole life costs of maintaining, operating
and repairing assets under management.
The Company's OFTO investments support a relatively small, but
highly skilled workforce. Although small, the skills developed have
the potential to play an important role in the Government's plans
to export UK skills and services to areas like Europe, Japan, South
Korea, Taiwan and the US as part of plans to boost global exports
for offshore wind fivefold to GBP2.6 billion per year by 2030(1)
.
1
https://www.gov.uk/government/news/offshore-wind-energy-revolution-to-provide-a-third-of-all-uk-electricity-by-2030.
2 Transmission Capital Services are responsible for management of the OFTO.
[Relevant UN SDG graphics can be found in PDF version of this
document on the Company's website].
Gas distribution
Comprises the Company's investment in Cadent
impact
5.7 million GJ/day (Maximum energy throughput)
>11 million (Homes and businesses connected
to gas)
As the largest gas distribution company in the UK, Cadent
provides a service that keeps the energy flowing to over 11 million
homes, offices and businesses.
The gas network is at the centre of the energy system in the UK,
delivering critical energy to homes, businesses and industry;
reliably, efficiently and securely.
Following the UK's commitment to achieving net zero carbon by
2050, the Company recognises that the UK cannot continue using
fossil fuels in the way it does today and still meet its carbon
emissions reduction targets. The Company believes Cadent has an
important role to play in transitioning the UK to a net zero carbon
economy and is committed to supporting Cadent to pilot and invest
in infrastructure to increase the distribution of low carbon fuels
including biomethane and clean hydrogen.
By investing in Cadent, the Company is directly supporting two
UN SDGs; UN SDG 7 (affordable and clean energy) and UN SDG 9
(industry, innovation and infrastructure).
SUSTAINABLE MANAGEMENT(1)
ENVIRONMENT
32 (Biomethane connections)
24,167 tCO(2) e (Scope 1 and Scope 2 business GHG Emissions)
86% (Waste diverted from landfill)
68% (Reduction in emissions compared to 1990 baseline)
As a business, the most significant impacts Cadent has on the
environment are leakage from the networks they operate, excavation
waste, vehicle emissions and waste from direct activities. Cadent
has made progress against each of these, with 86% waste diverted
from landfill in 2018/19 (34% in 2017/18). In 2019, Cadent achieved
a 68% reduction in operational Greenhouse Gas ('GHG') emissions,
meaning they are on track to achieve their longer-term target ahead
of schedule to reduce GHG emissions by 80% (from 1990 levels) by
2050(2) .
Cadent is undertaking important research and demonstration
projects to support the transition to a sustainable energy system,
in the home, for industry, and for transport. These innovative
projects mean Cadent is positioning itself to play a key role
within the changing energy landscape. For example, The HyDeploy
project is providing evidence that substantial percentages of
hydrogen can be blended with gas, reducing its carbon intensity,
without having to change any customer equipment.
social
100% (Investments with a health and safety policy and management
system)
>4000 (Sustained full-time employees)
20% (Female employees))
Cadent has a robust approach to health and safety and is
committed to driving improvements. Over the last decade, Cadent has
improved its employee Lost Time Injury Frequency Rate from 3.5 per
million hours worked to close to 1.3 in 2019.
Cadent has a workforce of over 4,000 employed in sustained
roles. Recruitment is supported by a robust diversity and inclusion
policy. However, female representation at Board and senior
leadership levels are 18% and 15% respectively. This imbalance is
partially symptomatic of the industry, where 83% of the energy and
utility sector's workforce are male.
In 2019, Cadent continued to identify how it can support the
communities in which it operates. For example, in 2019, this has
included capacity building to help active targeting of subsidised
connections to the gas grid for eligible households to help tackle
fuel poverty.
1 Data obtained directly from Cadent and refers to their 2018/2019 financial year.
2
https://cadentgas.com/nggdwsdev/media/Downloads/reports/safety-sustainability/Cadent-Safety-Sustainability-report-2018-19.pdf
STAKEHOLDER ENGAGEMENT
VALUE CREATION - HOW WE ENGAGE
The Company takes a proactive approach to identifying and
engaging with key stakeholders. It achieves this through a
combination of Board engagement and oversight and leveraging the
Investment Adviser's expertise and networks. The Company believes
robust stakeholder engagement is a critically important component
on delivering its purpose. It is for this reason that stakeholder
engagement is considered at a strategic level by the Board.
1. Investor RETURNS
Consistent and growing returns
We aim to provide our investors with long-term, inflation-linked
returns, by growing our dividend and creating the potential for
capital appreciation. Through engagement with our investors, we aim
to inform our strategic objectives and to ensure that their views
on topical issues are understood by the Company. This approach is
intended to maximise investor buy-in to current objectives and
performance whilst also helping shape future plans for the
portfolio.
The key mechanisms for the Company's engagement with investors
include:
- Regular and timely updates on performance including through
the annual and half-yearly reporting cycle
- The Company's AGM
- Investor days
- One-to-one meetings with the Chairman and other directors
- One-to-one meetings with representatives from the Company's Investment Adviser
- Other group engagement with representatives from the Company's Investment Adviser.
- The Company's website
For example, the Company hosted a successful investor day in
2019 with one of its investments, Tideway. Investors were presented
with a series of updates on the portfolio, including an overview of
Tideway. Through its Investment Adviser, the Company also engaged
in a round of meetings to help inform its approach to ESG, which
was updated in 2019.
2. PUBLIC SECTOR & OTHER CLIENTS
A TRUSTED PARTNER
Through our investments we aim to provide the public sector and
other customers with a highly reliable, robust service. Our ability
to deliver contracted services and maintain strong relationships
with our clients through our Investment Adviser is vital for the
long-term success of the business. Through close engagement with
our clients, we aim to meet high levels of satisfaction and quickly
respond to any potential issues and emerging challenges.
The key mechanisms for engagement with our clients include:
- Regular meetings between the Investment Adviser and public
sector clients including local authorities and regulators
- Active asset management, which provides monitoring of the
facilities management arrangements on compliance with maintenance
obligations
- Asset managers directly engaging with the client on a day-to day-basis
For example, the Company developed a comprehensive set of
environmental and social objectives, which align with strategic
priorities of the Company's public sector clients, including key
topics such as emissions reductions.
Please see pages 21-23 for details on active asset management
and pages 34-40 for details on responsible investment.
3. COMMUNITIES
STRENGTHENING COMMUNITIES
We strive to make our investments an integral part of the
communities they serve. Engaged communities can play an important
role in successful delivery of new assets and their long-term
operations. As part of our approach to active asset management, the
Investment Adviser ensures critical services are delivered with a
focus on the end user, ensuring that the community is at the heart
of all that we do. This approach is intended to help our
communities thrive and create robust environments for our
investments to flourish.
The key mechanisms for community engagement include
- Active asset management providing facilities for community use
- Local Education Partnership agreements
- Supporting community initiatives
For example, through the Investment Adviser's engagement with
the local authority, Chapel-en-le-Frith school was made available
to the emergency services for their use during the evacuation of
the town as a result of the Todbrook Dam emergency in 2019.
Please see pages 21-23 for details on active asset management
and pages 34-40 for details on responsible investment.
4. KEY SUPPLIERS
AN ENGAGED SUPPLY CHAIN
Our ambition is to work with a high-quality, sustainable supply
chain with a focus on long-term value for our stakeholders. The
performance of our service providers, their employees, and
investment supply chain is crucial for the long-term success of our
business. The Company takes a progressive approach to engaging with
key suppliers. A key component of this is ensuring our Investment
Adviser is proactively maintaining an engaged supply chain for our
investments.
The examples of mechanisms for engagement with key suppliers
include:
- Annual management engagement committee review
- Ad hoc engagement
- Quarterly board meetings and reporting
- Investment Adviser managing investment supply chain
In 2019, the Management Engagement Committee reviewed the
performance of the Investment Adviser and the Company's other
advisers and major service suppliers to ensure that performance is
satisfactory and in accordance with the terms and conditions of the
respective appointments.
Please see page 63 for more information on the Management
Engagement Committee and its activities.
RISK MANAGEMENT
CONTINUOUS RISK MANAGEMENT
The Board is ultimately responsible for risk management.
Delegation of oversight of the risk framework and management
process is provided to the Audit and Risk Committee. The risk
framework has been designed to manage, rather than eliminate, the
risk of failure to meet business objectives. No system of control
can provide absolute assurance against the incidence of risk,
misstatement or loss. Regard is given to the materiality of
relevant risks in designing systems of risk management and internal
control.
[Diagram can be found in PDF version of this document on the
Company's website].
Risk Framework and Management Process
The Company has in place a risk management framework. The Board
recognises the importance of identifying and actively monitoring
the risks facing the business. The framework involves an ongoing
process for identifying, evaluating and managing significant risks
faced by the Company. While responsibility for risk management
ultimately rests with the Board, the aim is for the risk management
framework to be embedded as part of the everyday operations and
culture of the Company and its key advisers.
The risk framework is applied holistically across the Company
and, to the extent possible, to the underlying investment portfolio
as illustrated in the Business Model on pages 4-5.
Direct communication between the Company, its Investment
Adviser, and the portfolio investment level asset manager, is a key
element in the effective management of risk through the investment
portfolio.
The Board has considered the need for an internal audit function
but because of the internal controls systems in place at the key
service providers, and the external controls process reviews
performed annually, it has decided instead to place reliance on
those control and assurance processes.
The risk framework is implemented through the following risk
control processes:
[Diagram can be found in PDF version of this document on the
Company's website].
Risk Identification
The Board, Audit and Risk Committee and the Risk Sub-Committee
identify risks with additional input from the Company's Investment
Adviser and the Administrator. The Board receives detailed
quarterly asset management reports highlighting performance and
potential risk issues on an investment-by-investment basis. The
Audit and Risk Committee also has an open dialogue with its
advisers to assist with assessment of significant risks, if any,
that might arise between reporting periods. A risk register is
reviewed and updated by the Board and Audit and Risk Committee on a
quarterly basis. An annual workshop with the Investment Adviser
considers emerging and changing risks.
Risk Assessment
Each identified risk is assessed in terms of probability of
occurrence, potential impact on financial performance and any
movements in the relative significance of each risk between
periods. A robust assessment of principal and emerging risks facing
the Company is performed. The assessments build on the wealth of
knowledge acquired by the Company and Investment Adviser through
both bidding and asset management phases, with risk assessments
carried out to quantify and assess risks. Where risks might impact
viability, these are assessed further and the Viability Statement
on page 53 contains more information of this review.
MITIGATION PLAN
For newly identified risks or existing risks with increased
likelihood or impact, the Audit and Risk Committee assists the
Company in developing an action plan to mitigate the risk, with
enhanced monitoring and reporting put in place.
RISK MONITORING, REPORTING AND REASSESSMENT
Risks are monitored and risk mitigation plans are reassessed by
the Audit and Risk Committee, where applicable with input from any
relevant key service providers, and reported to the Board on a
quarterly basis. Annual external controls and process reviews help
ensure the robustness of control processes.
The principal risks affecting the Company and its investment
portfolio did not, in the view of the Board, materially change
during the year, in part due to the typically long-term contractual
and regulated nature of portfolio investments. Changes in
macroeconomic or external industry environments or in global
regulatory or tax environments can also impact portfolio returns
and these areas continue to be a key feature of the risk review
process. Further details of the activities performed by the Audit
Risk Committee during the year can be found on pages 68-71 of the
Audit and Risk Committee report.
developments in the year
UK REGULATORY REGIME ANNOUNCEMENTS (RISK 5)
Two of the Company's investments are subject to regulatory
regimes which are designed by the regulators to, among other
things, protect the interests of consumers whilst ensuring that
regulated companies are able to earn a reasonable return on their
capital. Changes in the regulatory regimes have the potential to
impact the returns of these regulated assets.
During the year, Ofgem announced its Sector Specific Methodology
Decision which sets out its decisions on the policy areas which
will be used to determine the revenues that UK gas and electricity
network companies are able to earn during the next price control
period. This announcement is relevant to the Company's investment
in Cadent, a gas distribution business which will enter its next
price control period on 1 April 2021. The terms of the announcement
made by Ofgem were consistent with the Company's expectations. In
November 2019, Cadent submitted its business plan in respect of the
next price control period to Ofgem and expects to receive Ofgem's
draft and final determinations later in 2020.
In December 2019, Ofwat published its final determinations in
respect of the business plans it had received from water companies
covering the next price control period. The final determinations do
not have a direct impact on the Company's investment in Tideway
owing to the bespoke nature of the licence held by Tideway which
entitles it to a fixed regulated return with no regulatory reset
until 2030.
The Company believes its regulated asset valuations continue to
remain appropriate. In addition, investments in regulated assets
are considered very long-term, beyond any individual regulatory
cycle. Therefore, our long-term view of such assets takes into
account the robustness of yield as well as potential for increases
in the regulated asset base over time.
Counterparties and service providers (Risk 8)
Counterparty risk continued to be closely monitored following
recent issues affecting certain service providers to the Group.
During the year, the Group successfully completed the
recapitalisation and investment of rescue capital into the Midlands
Batch Priority Schools Project ('Batch 4'), following the project
being impacted by the collapse of Carillion plc in 2018. The
successful recapitalisation of this project as well as the smooth
transition to new service providers for the other Carillion
impacted assets in the portfolio demonstrated the effectiveness of
the contingency plans developed by the Investment Adviser in
managing counterparty risk. Further information can be found in the
Active Asset Management section on pages 21-23. In addition, during
2019 Interserve plc (a service provider to c.4% of the Company's
portfolio by fair value) entered administration. The Investment
Adviser, building on the experience of Carillion, had been
monitoring the issues affecting Interserve plc for some time and
had developed contingency plans for this scenario. All facilities
remain operational, with no disruption to service delivery. The
Investment Adviser continues to closely monitor other service
providers within the portfolio for counterparty risk.
Nationalisation (Risk 5)
The result of the UK General Election in December 2019 has meant
the risk of asset nationalisation as proposed by the UK Labour
Party has receded in the immediate term. Nevertheless, it would be
naive to conclude the risk has disappeared completely over the
longer term. It is uncertain if the party will change this policy
with its next leader or if policy may remain in the Labour Party
manifesto at the next General Election. The Board will monitor this
risk for any future developments; however, it believes that the
Company's contractual arrangements mean it will remain defensively
positioned with regard to this risk.
In addition, notable developments in other risk areas including
emerging risks were considered during the year and to the date of
this report, including:
CLIMATE CHANGE
Climate change is an emerging risk which could lead to more
frequent or severe weather events like flooding, fires, droughts
and storms. Investments may be subject to extreme weather and
changes in precipitation and temperature, all of which may result
in physical damage or a decrease in demand for infrastructure
assets located in the areas affected by these conditions. Should
the impact of climate change be material in nature or occur for
lengthy periods of time, the financial condition or results of
operations of the investments could be adversely affected.
In addition, changes in national, federal and state legislation
and regulation on climate change could result in increased capital
expenditures to improve the energy efficiency or reduce the carbon
footprint of the Company's investments in order to comply with such
regulations. This transition could also lead to certain fuels and
business models becoming obsolete if unable to adapt to emerging
regulation and customer preference.
The Company takes climate change very seriously and continues to
devote attention to managing this emerging risk. During the year
the Company updated its investment processes, strengthening climate
considerations within investment screening and diligence, ensuring
these are considered from the earliest point in the investment
cycle. A review of the Company's top 10 assets was also performed
to assess the investments against material ESG issues, which
included a high-level assessment of physical and transitional
climate change risks for those assets. Climate change would most
likely manifest itself through impact on physical assets (risk 9)
and changes in climate related regulation (risk 6). In 2020, the
Company is exploring how best to communicate these risks to
investors in line with emerging best practice. Further information
related to the Company's approach to responsible investing can be
found in the responsible investment section on pages 34-41.
BREXIT
There remains uncertainty over the eventual relationship between
the UK and the EU. This uncertainty makes it hard to foresee what
impact Brexit will have on the wider macroeconomic environment and
any associated impact on the valuation of the Company's assets.
Throughout the Brexit process, the Audit and Risk Committee has
sought to manage Brexit risk as it might manifest at both the
Company and asset levels. In keeping with the approach taken by the
Audit and Risk Committee, the Investment Adviser established a
focused Brexit risk committee to identify, assess and, where
relevant, develop mitigating strategies for potential Brexit risk
arising across the Group. Focus during the year continued to be
given to areas which may have the potential to impact the Company,
including any developments in the approach to cross-border AIFMD
regulation and taxation of cross-border financing. Regarding the
portfolio, attention has also been given to managing potential
risks that may affect projects or businesses, and which may
consequently impact the valuation of the assets. Particular areas
of consideration at this level include, for example, availability
of staff, availability of financing and supply chain considerations
for key parts. As a result of these assessments, we do not
currently believe there will be a significant impact on the Company
as a direct result of Brexit; however, this cannot be guaranteed
and we continue to closely monitor developments as the withdrawal
process continues.
COVID-19 CORONAVIRUS
The Covid-19 pandemic will continue to affect all businesses
across the world in a variety of ways. Whilst the Company is no
different and the current situation does not yet allow all
consequences to be fully analysed, the Company is reassured by the
operational performance of its assets to date and its historic
focus on risk mitigation.
The Company notes that there are a range of contingent risks
stemming from Covid-19. These include, but may not be limited to,
staff shortages and supply chain breakdowns and their consequences.
The Company will continue to monitor and where possible take action
to avoid or mitigate any such impacts on its portfolio. The Company
notes that the overwhelming majority of its revenues come from
availability-based payments or regulated cashflows that generally
provide a range of protections against adverse scenarios.
Nevertheless, shareholders should take note that Covid-19 and
its consequences are new and untested circumstances. Moreover, the
response of public bodies around the world has involved novel and
unconventional interventions. At this time, it is not possible to
assess with confidence what the short, medium or long term impacts
of Covid-19 may be on the Company, or if these will be negative or
positive. Whilst the full consequences of the pandemic and its
effects cannot yet be known, the Company believes that its business
model continues to offer a significant degree of protection to
shareholders. Please see more information on pages 50 - 51.
FURTHER INFORMATION
A description of broader risk factors relevant to investors is
disclosed in the latest Company prospectus available on the website
www.internationalpublicpartnerships.com .
PRINCIPAL RISKS ASSESSMENT
This section provides a summary of the Board's assessment of the
Company's principal risks. This is not intended to highlight all
the potential risks to the business. There may be other risks that
are currently unknown or regarded as less material, which could
turn out to materially impact the performance of the Company, its
assets, capital resources and reputation. Where the Company has
applied mitigation processes, it is unlikely that the techniques
applied will fully mitigate the risk.
Risk Heat Map
[Diagram can be found in PDF version of this document on the
Company's website].
The following key is used in the table below to highlight the
Board's view on movement of risk exposures during the period:
RISK TYPE
INCREASE Risk exposure has increased in the period
DECREASE Risk exposure has reduced in the period
NO SIGNIFICANT No significant change in risk exposure since last
CHANGE reporting period
1 Inflation
2 Foreign Exchange Movements
3 Interest Rates
4 Tax and Accounting
5 Political Policy
6 Law and Regulation
7 Asset Performance
8 Counterparty Risk
9 Physical Asset Risk
10 Contract Risk
11 Financial Forecasts
RISK DESCRIPTION MITIGATION/APPROACH
----------------------------- ---------------------------------------- -------------------------------------
MACROECONOMIC RISKS
--------------------------------------------------------------------------------------------------------------
Inflation Inflation may be higher The Company monitors the
or lower than expected. effect of inflation on
Investment cash flows are its portfolio through
positively correlated to its biannual valuation
inflation therefore increases/decreases process. It also provides
to inflation compared to sensitivities to investors
current projections would indicating the projected
impact positively or negatively impact on the Company's
on the Company's future NAV of a number of alternative
projected cash inflows. inflation scenarios, offering
Negative inflation (deflation) investors an ability to
will reduce the Company's anticipate the likely
future cash flows in absolute effects alternative inflation
terms. scenarios may have on
The Company's portfolio their investment.
has been developed in anticipation The Company uses a long-term
of continued inflation view of inflation within
at, or above, the levels its forecasts, benchmarked
used in the Company's valuation where possible to independent
assumptions. Where inflation analysis.
is at levels below the
assumed levels, investment
performance may be impaired.
The level of inflation-linkage
across the investments
held by the Company varies
and is not consistent.
Some investments have no
inflation-linkage, and
some have a geared exposure
to inflation. The consequences
of higher or lower levels
of inflation than that
assumed by the Company
will not be uniform across
its portfolio. The Company
is also exposed to the
risk of changes to the
manner in which inflation
is calculated by the relevant
authorities.
---------------------------------------- -------------------------------------
1
---------------------------------------- -------------------------------------
NO SIGNIFICANT
CHANGE
Foreign Exchange The Company indirectly The Company uses forward
Movements holds part of its investments foreign exchange contracts
in entities in jurisdictions to mitigate the risk of
with currencies other than short-term volatility
sterling, but borrows corporate in foreign exchange rates
level debt, reports its on investment returns
NAV and pays dividends from overseas investments.
in sterling. Changes in These may not be fully
the rates of foreign currency effective and rely on
exchange are outside the the strength of the counterparties
Company's control and may to those contracts to
impact positively or negatively be enforceable.
on cash flows and valuation. The Company monitors the
effect of foreign exchange
on its portfolio through
its biannual valuation
process and reports this
to investors. The Company
also provides sensitivities
to investors indicating
the projected impact on
the NAV of a limited number
of alternative foreign
exchange scenarios, offering
investors an ability to
anticipate the likely
effects of some foreign
exchange scenarios on
their investment. We continue
to be mindful of the potential
for exchange rate volatility
in light of international
economic and political
change, including during
the UK's withdrawal from
the EU We note a devaluation
of sterling against the
main currencies (in which
non-UK investments are
made) would typically
have a positive impact
on NAV. The opposite would
also be true for an increase
in the value of sterling.
---------------------------------------- -------------------------------------
2
---------------------------------------- -------------------------------------
NO SIGNIFICANT
CHANGE
Interest Rates Changes in market rates
of interest can affect
the Company in a variety
of different ways:
Valuation Discount Rate
The Company, in valuing
its investments, uses a
discounted cash flow methodology.
Changes in market rates
of interest (particularly
government bond yields)
may directly impact the
discount rate used to value
the Company's future projected
cash flows and thus its
valuation. Higher rates
will have a negative impact
on valuation while lower
rates will have a positive
impact.
----------------------------------------
3
----------------------------------------
NO SIGNIFICANT
CHANGE
In determining the discount
rates used to value its
investments, the Company
generally uses nominal
government bond yields
to which specific investment
risk premia are added
to determine discount
rates. The investment
risk premia may provide
a buffer against rising
bond yields assuming market
demand for investment
is sustained. Where the
Company's cash investment
inflows are linked to
inflation, higher interest
rates can often be precipitated
by higher inflation expectations,
and therefore any inflation-linkage
may partly mitigate the
effect of interest rate
changes.
---------------------------------------- -------------------------------------
Corporate Debt Facility
The Company has a corporate In the event that the
debt facility that may interest rate increases,
be drawn from time-to-time. the Company has the option
Interest is charged on of repaying its corporate
a floating rate basis, debt facility at any time
so higher than anticipated with minimal notice, providing
interest rates will increase sufficient funds are available.
the cost of this facility The maximum facility is
adversely impacting on GBP400 million compared
cash flow and the Company's to a current investment
valuation. portfolio valuation of
c.GBP2.4 billion.
----------------------------- ---------------------------------------- -------------------------------------
Underlying portfolio considerations
Changes in interest rates As presented in the sensitivity
have potential impacts analysis, variations in
on the portfolio at underlying cash deposit rates have
investee entity level. little impact on the Company's
Portfolio entities typically NAV. Due to the spread
choose or can be required of cash holdings within
to hold various cash balances, ring-fenced SPV structures
including contingency reserves and relatively smaller
for future costs (such balances in the SPVs,
as major lifecycle maintenance it is not economically
or debt service reserves). feasible to hedge against
adverse deposit rate movements.
These are generally held The Company monitors the
on interest bearing accounts effect of historical and
and under the contractual projected interest rates
terms applicable to certain on its portfolio through
investments which in many its biannual valuation
cases are projected to process and reports this
be held for the long-term. to investors. It also
The Company assumes that provides sensitivities
it will earn interest on to investors indicating
such deposits over the the projected impact on
long-term. Changes in interest the Company's NAV of a
rates may mean that the limited number of alternative
actual interest receivable scenarios, offering investors
by the Company is different an ability to anticipate
to that projected. If the the likely effects of
Company receives less interest some deposit interest
than it projects this will rate scenarios on their
impact cash flows and NAV investment.
adversely. Certain assets The risk of adverse movements
within the portfolio contain in debt interest rates
refinancing assumptions. for unhedged debt within
Increases in lending rates regulated entities is
available to these projects limited through protections
would have the potential provided by the regulatory
to increase their cost regime.
of financing and therefore
impact the overall returns
from these assets.
---------------------------- ---------------------------------------- -------------------------------------
Tax and Accounting Change in Tax Rates
Rates of tax, both in the
UK and overseas jurisdictions
in which the Company operates,
may increase in the future
if government policy were
to change.
---------------------------------------- -------------------------------------
The Company typically
incorporates changes in
tax rates within its forecast
cash flows and NAV once
substantively enacted.
We have conservatively
departed from this approach
on this occasion with
regard to the UK tax rates
following the UK Government's
recent corporation tax
rate announcements.
--- ---------------------------------------- -------------------------------------
4 Change in tax legislation
NO SIGNIFICANT Changes in tax legislation The diversified jurisdictional
CHANGE across the multiple jurisdictions mix of the Company's investments
in which the Company has may provide some mitigation
investments can reduce to tax changes in any
returns impacting on the one jurisdiction.
Company's future cash flow The Company believes it
returns and hence valuation takes a cautious approach
(calculated on a discounted to tax planning. The Board
cash flow basis). monitors changes in tax
The OECD's Action Plan legislation and takes
on Base Erosion and Profit advice as appropriate
Shifting ('BEPS'), published from external, independent,
in 2013, seeks to address qualified advisers. While
perceived flaws in international the Board and the Company's
tax rules. It sets out Investment Adviser seek
15 actions to counter BEPS to minimise the impact
in a comprehensive and of adverse changes in
coordinated way. Countries tax requirements, its
in which the Company invests ability to do so is naturally
have been assessing their limited.
compliance or otherwise The Company's Investment
with this guidance. Adviser continues to monitor
developments relating
to tax reform across the
jurisdictions in which
the Company has operations.
Future legislation in
response to the OECD proposals,
or changes in approach
to existing legislation
as a consequence of market
practice or updated guidance,
continue to have the potential
to negatively impact the
Company.
---------------------------- ---------------------------------------- -------------------------------------
Accounting
The Company and its portfolio A portion of the Company's
of investments and holding income is received in
entities form an international the form of shareholder
group structure. The Group debt interest income i.e.
uses long-term cash flow from pre-tax cash flows
forecasts from its portfolio and not constrained by
as part of its valuation distributable profits
process. These cash flow tests. However, changes
forecasts are dependent in accounting standards
upon distribution profiles/cash or challenges to accounting
tax profiles and therefore judgements can potentially
can fluctuate because of have an impact on distributable
future changes in accounting profits or post-tax cash
standards, or challenges flows.
to accounting judgements.
Therefore, future changes
to accounting standards,
or changes in interpretation
and application of existing
standards, have the potential
to impact the distributable
profits of entities in
the portfolio and so the
cash flows available to
the Group and overall portfolio
valuation.
--- ------------------- ---------------------------------------- -------------------------------------
POLITICAL AND REGULATORY RISKS
-------------------------------------------------------------------------------------------------------------
The nature of the businesses Most of the Company's
in which the Company invests existing investments benefit
exposes it to potential from long-term service
changes in policy and legal and asset availability-based
requirements. All investments pricing contracts or regulatory
have a public sector infrastructure frameworks and the countries
service aspect and are in which the Company operates
exposed to political scrutiny do not tend to have a
and the potential for adverse tradition of penal retrospective
public sector or political legislation. They tend
criticism. to be long-term supporters
of infrastructure and
similar investment and
recognise the risk of
deterring future investment
in the event that penal
or disproportionate steps
are taken in respect of
existing contractual engagements.
---------------------------- ---------------------------------------- -------------------------------------
Political Policy
---------------------------- ---------------------------------------- -------------------------------------
5
------ -------------------
NO SIGNIFICANT Current global policy
CHANGE practice continues to
support the use of private
Change in political policy sector capital to finance
Political policy and financing public infrastructure,
decisions may adversely impact despite challenge from
either on existing investments, some political parties,
or on the Company's ability particularly in the UK,
to source new investments, around the role of the
at attractive prices or at private sector in the
all. This may impact the Company's provision of such services.
reputation.
A certain degree of reputational The Company seeks to
risk exists in this area as maintain strong and positive
policy decisions adversely relationships with its
impacting t he Company have public sector clients
the potential to be made as where possible. It also
a direct or indirect result has an active relationship
of reputational developments with other external stakeholders
seen across the wider sector. including investors.
---------------------------- ---------------------------------------- ---------------------------------------
Termination of Contracts
Often contracts between public The Company engages with
sector bodies and the Company's its public sector clients
investment entities contain in developing cost-saving
rights for the public sector initiatives and seeks
to voluntarily terminate contracts to act as a 'good partner'
in certain situations. While including by focusing
the contracts typically provide on the ESG aspects of
for some compensation in such its investments. None
cases, this may be less than of the Company's investments
required to sustain the Company's have been identified,
valuation, causing loss of by any government audit
value. There have been instances or public sector report,
of contracts being voluntarily as poor value for money
terminated in the UK (although or not in the public interest.
not affecting the Company). The Investment Adviser
is a signatory to the
Code of Conduct for Operational
PFI/PPP contracts in the
UK. The voluntary code
of conduct sets out the
basis on which public
and private sector partners
agree to work together
to make savings in operational
PPP contracts.
Compensation on termination
clauses within such contracts
serve to partially mitigate
the risk of voluntary
termination. Furthermore,
in the current financial
climate where voluntary
termination leads to a
requirement to pay compensation,
such compensation is likely,
in many cases to represent
an unattractive immediate
call on the public finances
for the public sector.
---------------------------- ---------------------------------------- ---------------------------------------
Nationalisation
The UK Labour Party's policy The Company believes
is to nationalise privately significant compensation
owned infrastructure. Despite would be required in order
the recent UK general election to enact this policy legitimately
results, this risk remains within existing contractual
over the medium term. arrangements. Therefore,
we maintain the view that
the Company is defensively
positioned in this regard.
---------------------------- ---------------------------------------- ---------------------------------------
Law and regulation Change in law or regulation
6 Changes in law or regulation Some investments maintain
NO SIGNIFICANT may increase costs of operating a reserve or contingency
CHANGE and maintaining facilities designed to meet change
or impose other costs or obligations in law costs and/or have
that indirectly adversely affect a mechanism to allow some
the Company's cash flow from change in law costs (typically
its investments and/or valuation building maintenance related)
of them. to be passed back to the
public sector. There remains
the possibility for there
to be changes in law or
regulation (including
for example in relation
to climate change , as
a result of Brexit) which
have the potential to
impact costs or obligations
of the Company or portfolio
projects, which may not
be fully capable of mitigation.
---------------------------- ---------------------------------------- ---------------------------------------
OPERATIONAL AND VALUATION RISKS
-------------------------------------------------------------------------------------------------------------
Asset Performance Construction
For the Company's assets under
construction, there is an element
of construction risk that takes
the form of cost overruns or
delays that could impact on
investment returns. Of particular
note at this time are the implications
of Covid-19 on the construction
industry and potential consequential
impacts on the Company. At
this time, it is not possible
to fully assess with confidence
what the short, medium or long-term
impacts of Covid-19 may be
on the Company or if these
will be negative or positive.
Operational Performance
Assets in the portfolio contain
revenues which are based on
the availability of the asset,
as well as revenues not solely
dependent on availability but
also have linkage to other
factors including being subject
to regulatory frameworks.
The entitlement of the Company's
PPP and OFTO investments to
receive revenues is generally
dependent on underlying physical
assets remaining available
for use and continuing to meet
certain performance standards.
Failure to maintain assets
available for use or operating
in accordance with pre-determined
performance standards may dis-entitle
(wholly or partially) the continued
receipt of income that the
Company has projected to receive.
Two of the Company's investments
are subject to regulatory regimes
which are designed by the regulators
to, among other things, protect
the interests of consumers
whilst ensuring that regulated
companies are able to earn
a reasonable return on their
capital. Changes in the regulatory
regimes have the potential
to impact the returns of the
Company's two regulated assets.
---------------------------------------- -------------------------------------
7
----------------------------------------
NO SIGNIFICANT
CHANGE
Contractual mechanisms
allow for significant
pass-down of construction
cost overrun and delay
risk to sub-contractors
and/or consumers, subject
to credit risk (see below).
The Company's investment
in Tideway benefits from
a government support mechanism
which ultimately backstops
investors' downside risk
in the event of a major
construction cost overrun.
The Board reviews underlying
investment performance
of each investment, quarterly,
allowing asset performance
to be monitored.
Historically, the Company
has seen very high levels
of asset performance,
which suggests a positive
trend for the future.
For regulated assets,
the regulatory regimes
under which the assets
operate provide a level
of protection of cash
flows for these assets.
Contractual mechanisms
and underlying regulatory
frameworks also allow
for significant pass-down
of unavailability and
performance risk to sub-contractors
in many cases, subject
to credit risk (see below).
In addition, investments
in regulated assets are
considered very long-term,
beyond any individual
regulatory cycle. This
long-term view of such
assets takes into account
the robustness of yield
as well as potential for
increases in the regulated
asset base over time.
---------------------------- ---------------------------------------- -------------------------------------
OPERATIONAL AND VALUATION RISKS CONTINUED
At this time, it is not possible In order to manage the
to fully assess with confidence implications of Covid-19,
what the short, medium or long the Company through its
impacts of Covid-19 may be Investment Adviser has
on the Company or if these sight of detailed business
will be negative or positive. continuity plans of its
Covid-19 may affect services counterparties designed
provision as well as impact to manage services in
the facilities management industry. adverse circumstances.
Certain assets within the portfolio In addition, the Company
have demand risk based on the has the ability to pass
usage of the underlying infrastructure down certain costs to
the service providers
and can potentially rely
on business interruption
cover where available.
Certain demand-based assets
have contractual arrangements
to adjust pricing in the
event of a substantial
decrease in usage.
---------------------------------------- ---------------------------------
Termination In the event of significant
In serious cases where the and continuing unavailability
terms of the underlying contract across the Company's portfolio,
with the public sector are it is able to terminate
breached due to default or the Investment Advisory
force majeure then that contract Agreement. This serves
can usually be terminated without to reinforce alignment
compensation. Failure to receive of interest between the
the amount of revenue projected Company and the Investment
or termination of a contract Adviser.
will have a consequential impact The risk of termination
on the Company's cash flow of contracts as a result
and value. of political policy is
addressed above.
---------------------------------------- ---------------------------------
OPERATIONAL AND VALUATION RISKS CONTINUED
Counterparty The Company's investments are The Company has a broad
Risk dependent on the performance range of suppliers and
of a series of counterparties believes that supplier
to contracts including public counterparty risk is diversified
sector bodies, consortium partners, across its investments.
construction contractors, facilities All contracts include
management and maintenance the provision of a security
contractors, asset and investment package from counterparties
managers (including the Investment to mitigate the impact
Adviser), banks and lending of supplier failure. In
institutions and others. Failure addition, generally payments
by one or more of these counterparties are made in arrears to
to perform their obligations service providers giving
fully or as anticipated could the Company some protection
adversely affect the performance against failures in performance.
of affected investments. There CovidOVID-19 can potentially
may be disruption or delay lead to a greater pressure
to the services provided to on the facilities management
investments, or replacement sector, however the recent
counterparties (where they government announcements
can be obtained) may only be to support businesses
obtained at a greater cost. are encouraging and should
These risks would negatively help mitigate the risk
impact the Company's cash flows of counter party defaults.
and valuation. The credit quality of
Over recent years there has supplier counterparties
been particular pressure on is reviewed as part of
construction and facilities the Company's due diligence
management firms operating at the time of making
across the sector, particularly its investments and for
within the UK. key supplies on a regular
basis.
Most of the services provided
to the Company's investments
are reasonably established
with competing providers.
Therefore, there are expectations
that there will be a pool
of potential replacement
supplier counterparties
in the event that a service
counterparty fails, albeit
not necessarily at the
same cost.
The Company closely monitors
the risk of adverse developments
occurring in relation
to its significant counterparties,
Where borrowings exist in and develops contingency
respect of the Company's investments, plans as appropriate to
interest rates are generally ensure risk of counterparty
fixed through the use of interest failure is minimised.
rate swaps. The Company is Information regarding
therefore exposed if the counterparties relevant counterparty
of these swaps were to default risk developments during
or the swaps otherwise become the year can be found
ineffective. on pages 21-23.
The credit risk of such
swap counterparties is
considered at the time
of entering into these
arrangements and is regularly
reviewed. However, there
is a risk of credit deterioration
which could impact affected
investments. The Company
continues to aim to use
reputed financial institutions
with good credit ratings.
----------------------------------------- ------------------------------------
8
----------------------------------------- ------------------------------------
NO SIGNIFICANT
CHANGE
------------------ ----------------------------------------- ------------------------------------
OPERATIONAL AND VALUATION RISKS CONTINUED
Physical Asset The Company indirectly The Company's investments
Risk invests in physical benefit from regular risk
assets used by the reviews and external insurance
public and thus is advice which is intended to
exposed to possible ensure that those assets continue
risks, both reputational to benefit from insurance
and legal, in the event cover that is standard for
of damage or destruction such assets.
to such assets and
their users, including
loss of life, personal
injury and property
damage. While the assets
the Company invests
in benefit from insurance The Company continues to strengthen
policies, these may its climate change considerations
not be effective in and processes throughout the
all cases. investment cycle.
Climate change
Investments may be
subject to extreme
weather and changes
in precipitation and
temperature, all of
which may result in
physical damage to
assets.
-------------------------------- -------------------------------------
9
-------------------------------- -------------------------------------
NO SIGNIFICANT
CHANGE
Contract Risk The performance of Such contracts have been entered
the Company's investments into, usually, only after
is dependent on the lengthy negotiations and with
complex set of contractual the benefit of external legal
arrangements specific advice. A legal review of
to each investment contract documentation is
continuing to operate undertaken as part of the
as intended. The Company Company's due diligence at
is exposed to the risk the time of making new investments.
that such contracts See Political Policy on page
do not operate as intended, 49 for further commentary
are incomplete, contain on contractual risk of voluntary
unanticipated liabilities, termination.
are subject to interpretation
contrary to its expectations
or otherwise fail to
provide the protection
or recourse anticipated.
-------------------------------- -------------------------------------
10
-------------------------------- -------------------------------------
NO SIGNIFICANT
CHANGE
Financial Forecasts The Company's projections Financial forecasts are generally
depend on the use of subject to model audit by
financial models to external accountancy firms,
calculate its future which is a process designed
projected investment to identify errors. The comparison
returns. These are of past actual performance
in turn dependent on of investments against past
the outputs from other projected performance also
financial model forecasts gives confidence in financial
at the underlying investment models where actual performance
entity level. There has closely matched projected
may be errors in any performance. However, there
of these financial can be no assurance that forecast
models, including calculation results will be realised,
errors, incorrect assumptions, particularly in relation to
programming, logic operational infrastructure
or formulaic errors businesses where more variables
and output errors. can impact forecast results.
Once corrected, such Investments in regulated business
errors may lead to are considered very long-term,
a revision in projected beyond the much shorter regulatory
cash flows and thus cycles. Valuations of such
impact valuation. business should take into
Recent investments account robustness of yield
in operating infrastructure and potential for increases
businesses that can in regulated asset base over
result in more variability time.
in performance than
contracted concessions
special purpose companies,
are inherently more
difficult to forecast
accurately given the
wider range of variables
that apply.
-------------------------------- -------------------------------------
11
-------------------------------- -------------------------------------
NO SIGNIFANT CHANGE
OPERATIONAL AND VALUATION RISKS CONTINUED
----------------------------------------------------------------------
Sensitivities
The Company publishes Sensitivities are produced
information relating for the information of investors
to its portfolio including and are accompanied by disclaimers
projections of how and guidance explaining that
portfolio performance limited reliance can be placed
and valuation might upon them.
be impacted by changes
in various factors
e.g. interest rates,
inflation, deposit
rates, etc. The sensitivity
analysis and projections
are not forecasts and
actual performance
is likely to differ
(possibly significantly)
from that projection
as in practice the
impact of changes to
such factors will be
unlikely to apply evenly
across the portfolio
or in isolation from
other factors.
----------------------------- -------------------------------------
VIABILITY STATEMENT
In accordance with provision 31 of the 2018 revision of the UK
Code of Corporate Governance, we have considered the Company's
viability as summarised below. Due to the long-term and/or
contractual nature of our investments, we have a significant level
of confidence over the endurance and longevity of our business;
however, it is difficult to assess the regulatory, tax and
political environment on a long-term basis. Whilst we consider the
valuation of investment cash flows for the purposes of NAV over a
considerably longer period than five years, we view five years as
an appropriate timeframe for assessing the Company's viability
given these inherent uncertainties.
The viability assessment process is embedded within the
Company's annual risk review cycle and involves the following:
1 period. This exercise has considered the potential to
liquidate investments and/or refinance investments if
necessary.
2 An Audit and Risk Committee review and assessment of the risks
facing the Company. A summary of the review process is detailed on
pages 68-70;
3 Identification of those principal risks that are deemed more
likely to occur and have a potential impact on the Company's
viability over the viability period. This exercise has included
consideration of a persistent low inflation rate environment
(noting that a high rate environment would typically be positive
for the Company's investment cash flows giving linkage of revenues
to inflation across many investments), large currency fluctuations
impacting on receipts from overseas investments, and the impact
from the loss of income from investments (whether due to key
sub-contractor default or other assets underperformance). We note
that a number of risks identified during the risk review process in
step one above may have implications for the Company's valuation
but may be considered insignificant from a five-year viability
perspective;
4 Quantification analysis of the potential impact of those
principal risks occurring in isolation and under plausible combined
sensitivity scenarios over the viability period;
5 Assessment of potential mitigation strategies to mitigate the
potential impact of principal risks over the viability period. This
exercise has considered the potential to liquidate investments
and/or refinance investments if necessary.
The viability assessment is approved by the Board. Following the
assessment, the Board has a reasonable expectation that the Company
will be able to continue in operation and meet all of its
liabilities as they fall due up to March 2025. This assessment is
based on the following assumptions which are not within the
Company's control:
- No changes to government policy, laws and regulations
affecting the Company or its investments other than the impacts
already factored into future cash flows as part of the 31 December
2019 NAV valuation
- Continued availability of sufficient capital and market
liquidity, in particular that the disruption arising from Covid-19
is not so severe and long lasting such that it impacts on the
refinancing/repayment of any short-term recourse debt facility
obligations as they become due.
By order of the Board
Mike Gerrard John Le Poidevin
Chairman Director
8 April 2020 8 April 2020
CORPORATE GOVERANCE
SUMMARY OF INVESTMENT POLICY
OVERVIEW
The Company invests in public or social infrastructure assets
and related businesses located in the UK, Australia, Europe, North
America and other parts of the world where the risk profile meets
the Company's risk and return requirements.
The Company has a long-term view and invests in operational and
construction phase assets for the life of the asset or concession,
or under a licence issued by a regulator unless there is a
strategic rationale for earlier realisation. The Company seeks to
enhance the capital value and the income derived from its
investments to optimise returns for its investors. The Investment
Policy is summarised below and available in full at
www.internationalpublicpartnerships.com .
INVESTMENT parameters
Maintaining the performance of the existing portfolio is the
Company's key focus. However, it will also seek attractive
opportunities to expand its portfolio, including:
- Investments with characteristics similar to the existing portfolio;
- Investments in other assets or concessions or regulated
businesses having a public or social infrastructure character with
either availability, property rental or user paid payment
mechanisms or appropriate regulatory frameworks;
- Investments in infrastructure assets or concessions
characterised by high barriers to entry and expected to generate an
attractive total rate of return over the life of the
investment;
- Divestments where an investment is no longer aligned with the
Company's investment objectives or where circumstances offer an
opportunity to enhance the value of the portfolio.
PORTFOLIO COMPOSITION
The Company will, over the long-term, maintain a spread of
investments both geographically and across industry sectors in
order to achieve a broad balance of risk in the Company's
portfolio. It does not expect to invest in non-OECD countries,
unless it can get comfortable with the risk-return profile.
Asset allocation will depend on the maturity of the local
infrastructure investment market, wider market conditions and the
judgement of the Investment Adviser and the Board on the
suitability of the investment from a risk and return perspective.
The Company Overview on pages 2-3 has details of the current
composition of the investment portfolio.
INVESTMENT RESTRICTIONS
The Company's Investment Policy restricts it from making any
investment of more than 20% of the total assets in any one
investment in order to limit the risk of any one investment to the
overall portfolio.
As a London Stock Exchange listed company, the Company is also
subject to certain restrictions pursuant to the UKLA Listing
Rules.
MANAGING CONFLICTS OF INTEREST
Further investments will continue to be sourced by the
Investment Adviser, Amber Fund Management Limited. Some of these
investments will have been originated and developed by, and in
certain cases may be acquired from, members of the Amber
Infrastructure group.
The Company has established detailed procedures to deal with
conflicts of interest that may arise and manage conduct in respect
of any such acquisition. The Corporate Governance Report sets out
more details on the conflicts management process.
Financial management
The Company may also make prudent use of leverage to enhance
returns to investors, to finance the acquisition of investments in
the short-term and to satisfy working capital requirements.
Under the Company's Articles, outstanding borrowings at the
Company level, including any financial guarantees to support
subscription obligations in relation to investments, are limited to
50% of the Gross Asset Value ('GAV') of the Company's investments
and cash balances. The Company has the ability to borrow in
aggregate up to 66% of such GAV on a short-term basis (i.e. less
than 365 days) if considered appropriate. Details of the Company's
corporate debt facility can be found on page 25.
Changes to investment policy
Material changes to the Investment Policy summarised in this
section may only be made by ordinary resolution of the shareholders
in accordance with the UK Listing Rules.
CORPORATE GOVERANCE
BOARD OF DIRECTORS
The table below details all directors of the Company at the date
of this report.
Mike Gerrard Julia Sally-Ann Meriel John John Stares(1) Claire John Giles
Board Chair, Bond (1) David Lenfestey Le Chair, Whittet(1) Whittle(1) Frost
Chair, Investment Chair, Poidevin(1) Risk Chair, Senior
Committee Risk Chair, Sub-Committee Management Independent
Sub-Committee; Audit (until Engagement Director
(with and Risk 1 February Committee ([until
effect Committee 2019), ([Senior 27 May
from 1 Chair, Independent 2020])
February Nomination Director,
2019), and with effect
Chair, Remuneration from 28
Nomination Committee May 2020)]
and Remuneration (until
Committee 1 February
(with 2019)
effect
from 1
February
2019)
----------------------- ----------------- ----------------- ------------- -------------- ---------------- --------------- ------------------ -----------------
Aged 62 Aged 60 Aged Aged Aged 49 Aged 68 Aged 64 Aged 64, Aged 57
and a resident and a 56 and 50 and and a and a resident and a resident John is and a
in the UK, resident a resident a resident resident of Guernsey of Guernsey, a resident resident
Mike has in the of Guernsey, of Guernsey, of Guernsey, since 2001, Claire has of Guernsey. in the
over 30 UK, Julia Sally-Ann Meriel John has John has 40 years' John is UK, Giles
years of has 27 has over has over over 25 over 40 experience a Fellow is a founder
financial years' 34 years 25 years years years' in the banking of the of Amber
and management experience of experience of of business experience. industry Institute Infrastructure
experience of capital in multi-sector experience. Before with Bank of Chartered and has
in global markets infrastructure business John is moving of Scotland, Accountants worked
infrastructure in the projects experience. a Fellow to Guernsey, Bank of in England in the
investment. financial in the With of the John worked Bermuda and Wales infrastructure
He has held sector energy a background Institute for 23 and Rothschild and holds investments
a number and held sector, in human of Chartered years as and Co Bank the Institute sector
of senior senior including centered Accountants a management International, of Directors for over
positions, positions international design in England consultant where she Diploma 20 years.
including within offshore for and Wales with Accenture, was latterly in Company Giles
as an assistant Credit transmission technology, and a where he managing Direction. qualified
director Suisse, systems she brings former held a director John holds as a solicitor
of Morgan including and the a strategic partner wide variety and co-Head non-executive and partner
Grenfell Head of challenges end user of BDO of leadership until May positions in the
plc, a director One Bank of the focus LLP, where roles. 2016 when on a number law firm
of HM Treasury Delivery energy and a he held He currently she became of other Wilde
Taskforce, and Global transition. broad a number holds a boards. Sapte
deputy CEO Head of Having set of of non-executive non-executive John was (now Dentons).
and later Sovereign held experiences leaderships positions director. previously Giles
CEO of Partnerships Wealth senior encompassing roles, on the She is also finance is Chairman
UK plc and, funds positions many including boards a director and a
most recently, activity. within sectors Head of of several non-executive of Close director
a managing the power and scales Consumer other director Fund Services, of Amber
director utility of Markets, companies. of a number a large Infrastructure
of Thames arena, organisation where John is of other independent Group
Water Utilities Sally-Ann ranging he developed a Fellow investment administrator. Holdings
Limited. is currently from an extensive of the companies Prior Ltd, the
Mike has the Chief her own breadth Institute and is not to moving ultimate
a breadth Operating start-ups of experience of Chartered involved to Guernsey, holding
of experience Officer through and knowledge Accountants in any trading John was company
across a of Guernsey global across in England companies. at Price of the
range of Electricity corporations the real and Wales, Claire is Waterhouse Investment
economic Ltd. and estate, a member a member Coopers Adviser
and social She is governmental leisure of the of the in London to the
infrastructure a Chartered programmes. and retail Worshipful Chartered before Company
sectors Engineer sectors Company Institute embarking and various
and has and Chartered in the of Management of Bankers on a career of its
been involved Director. UK and Consultants, in Scotland, in business subsidiaries.
in some overseas. and a Freeman the Chartered services,
of the largest John is of the Insurance predominantly
infrastructure a City of Institute, telecoms.
projects non-executive London. is a Chartered
in the UK. director Banker,
He is a on several a member
Fellow of plc boards of the
the Institution and chairs Institute
of Civil a number of Directors
Engineers. of audit and holds
committees. the Institute
of Directors
Diploma
in Company
Direction.
DATE OF APPOINTMENT
---- ------------------- ----------------------------------------------------------------- ----------------------------------- -----------------------------------
4 September 1 September 10 January 10 January 1 January 28 August 10 September 6 August 2 August
2018 2017 2020 2020 2016 2013 2012 2009 2006
----------------------- ----------------- ----------------- ------------- -------------- ---------------- --------------- ------------------ -----------------
LISTED COMPANY AND OTHER RELEVANT DIRECTORSHIPS
----------------------------------------------------------------------------------------------------------------------------- ---------------- -----------------
Mike Gerrard Julia Sally-Ann Meriel John John Claire John Giles
Mike holds Bond (1) David Lenfestey Le Stares(1) Whittet(1) Whittle(1) Frost
no other European Guernsey Bluefield Poidevin(1) Governor BH Macro Aberdeen Giles
listed Assets Electricity Solar Episode of More Ltd Frontier is also
company Trust Ltd Income Inc. House Eurocastle Markets a director
positions ('EAT') Channel Fund Limited BH Macro School Investment Investment of a number
but holds Julia Islands Meriel Ltd New Ltd Company of the
several is currently Electricity sits on Philanthropy Riverstone Ltd Company's
non-executive a non-executive Grid a number Capital Energy Globalworth subsidiary
positions director Sally-Ann of other (Trustee) Ltd Real and investment
within British is also commercial TwentyFour Estate holding
boards Foreign a director boards Select Investments entities
and committees and Commonwealth for several including Monthly Ltd and of
that oversee and Vice charities Gemserv, Income GLI Finance other
the development Chair Jersey Fund Ltd entities
and delivery of the Telecom, Ltd India in which
of infrastructure Royal Aurigny Third Capital the Company
investments Academy Air Services Point Growth has an
in the of Dance. and is Offshore Fund investment.
UK and a committee Investors Ltd He does
Europe. member Ltd Starwood not receive
for the European directors'
Guernsey Real fees from
Institute Estate such roles
of Directors Finance for the
Ltd Company.
Chenavari
Toro
Income
Fund
Ltd
--------------------- ------------------- --------------- --------------- -------------- -------------- ----------------- ---------------- -----------------
1 All of the independent directors are members of all Committees
with the exception of Mr Gerrard, who is not a member of the Audit
and Risk Committee. Mr Frost is a non-independent director. Mr
Stares retired from the Company's Board on 31 March 2020.
CORPORATE GOVERNANCE
CORPORATE GOVERNANCE REPORT
Introduction
The Board of Directors is committed to high standards of
corporate governance and has put in place a framework for corporate
governance which it believes is appropriate for an investment
company that is a constituent of the FTSE 250 Share Index.
The Board is responsible to shareholders for the overall
direction and oversight of the Company, for agreeing its strategy,
monitoring its financial performance, and setting and monitoring
its risk appetite.
This section describes how the Company is governed. It explains
how the Board is organised and operates, including the roles and
composition of each of its Committees, and provides details on our
Board members and how they are remunerated. As an investment
company, the Company has no employees and relies on the advice and
expertise of its key suppliers, notably its Investment Adviser,
Amber Fund Management Limited ('Amber'). This section therefore
also explains the nature of the Company's relationship with the
Investment Adviser, and how this is managed, including the
remuneration of the Investment Adviser.
Compliance with Corporate Governance Codes AND REGULATIONS
All companies with a Premium Listing on the London Stock
Exchange are required to confirm their compliance with (or explain
departures from) the UK Corporate Governance Code (the 'UK Code').
This requirement applies regardless of where the company is
incorporated. A revised UK Code was issued in July 2018, which
applies to accounting periods beginning on or after 1 January 2019
and therefore applies to the Company for this financial year.
The Company is a member of the Association of Investment
Companies (the 'AIC'). The Financial Reporting Council acknowledges
that the AIC Corporate Governance Code issued in February 2019 (the
'AIC Code') can assist externally managed companies in meeting
their obligations under the UK Code in areas that are of specific
relevance to investment companies. This also applies to accounting
periods beginning on or after 1 January 2019. However, the Board
took a forward-looking position during 2018 and had already adopted
some of the recommendations in the AIC Code in advance of the
proposed application date.
The Guernsey Financial Services Commission has also confirmed
that companies that report against the UK Code or AIC Code are
deemed to meet the Guernsey Code of Corporate Governance.
The AIC Code is available from the Association of Investment
Companies website (www.theaic.co.uk). The UK Code is available from
the Financial Reporting Council website ( www.frc.co.uk ).
The Company has complied throughout the year with all the
provisions of the AIC Code and as such also meets the requirements
of the UK Code. However, as an investment company, most of the
Company's day-to-day responsibilities are delegated to third
parties. The Company does not have any executive directors. The UK
Code's two separate principles of setting out the responsibilities
of the chief executive and disclosing the remuneration of executive
directors (Principles G and Q of the UK Code) are therefore not
applicable.
The Company is subject to a European Union Regulation (2017/653)
('the Regulation') which deems it to be a packaged retail and
insurance-based investment product ('PRIIPs'). In accordance with
the requirements of the Regulation, the Company published and
updated its standardised three-page Key Information Document
('KID') on 6 September 2019. The KID is available on the Company's
website www.internationalpublicpartnerships.com/investors and will
be updated at least every 12 months.
Board and Committees
The Board sets the strategy for the Company and makes decisions
on changes to the portfolio (including approvals of acquisitions,
disposals and valuations). Through Committees, and the use of
external independent advisers, it manages risk and governance of
the Company. The Board has a majority of independent directors -
currently eight of the nine directors are independent.
Board of Directors
The Board of Directors consists of nine non-executive directors,
whose biographies, on pages 56-57, demonstrate a breadth of
investment and business experience. Following the retirement of Mr
Stares and Mr Whittle, as previously announced, the Board will
return to seven non-executive directors.
The Board consists solely of non-executive directors and, for
the period of this report, was chaired by Mr Gerrard, who was
responsible for leadership of the Board and ensuring its
effectiveness in all aspects of its role. The Board considered that
Mr Gerrard was independent, upon appointment, and remained
independent throughout his term of service for the purposes of the
AIC Code. For the period of this report, Mr Whittle held the role
of Senior Independent Director. He is an alternative point of
contact for shareholders and leads in matters where it is
inappropriate for the Board Chair to do so. It is intended that Ms
Whittet will be appointed as the Senior Independent Director upon
Mr Whittle's retirement.
For the purposes of the AIC Code, Mr Frost is not treated as
being an independent director, due to his relationship with the
Company's Investment Adviser. In accordance with the AIC Code, all
other non-executive directors are independent of the Company's
Investment Adviser.
Board Tenure and Re-election
Directors do not have service contracts. Directors are appointed
under letters of appointment, copies of which are available at the
registered office of the Company. All directors offer themselves
for re-election on an annual basis. The Board considers its
composition and succession planning on an ongoing basis.
In accordance with the AIC Code, when and if any director has
been in office (or on re-election would at the end of that term of
office have been in office) for more than nine years, the Company
will consider further whether there is a risk that such a director
might reasonably be deemed to have lost independence through such
long service.
Mr Whittle has been a Board member since August 2009 and will be
retiring from the Board at the 2020 AGM. In addition, Mr Stares has
been a Board member since August 2013 and retired from the Board as
at 31 March 2020. During the year the Board commenced an externally
facilitated selection process using an independent search firm.
Accordingly, on 10 January 2020, the Board appointed Ms David and
Ms Lenfestey as part of its ongoing succession programme.
Directors' Duties and Responsibilities
The Directors have adopted a set of Reserved Powers, which
establish the key purpose of the Board and detail its major duties.
These duties cover the following areas of responsibility:
- Statutory obligations and public disclosure;
- Approval of the Company's mandate, objectives and strategy;
- Strategic matters and financial reporting;
- Board composition and accountability to shareholders;
- Overall risk assessment and management, including reporting,
compliance, monitoring, governance and control;
- Other matters having material effects on the Company.
These reserved powers of the Board have been adopted by the
Directors to demonstrate clearly the importance with which the
Board takes its fiduciary responsibilities and as an ongoing means
of measuring and monitoring the effectiveness of its actions.
The Board monitors the Company's share price and NAV and
regularly considers ways in which shareholder value may be
enhanced. These may include implementing marketing and investor
relations activities, appropriate management of share price
premium/discount and the relative positioning and performance of
the Company to its competitors. The Board is also responsible for
safeguarding the assets of the Company and for taking reasonable
steps for the prevention and detection of fraud and other
irregularities.
Individual directors may, at the expense of the Company, seek
independent professional advice on any matter that concerns them in
the furtherance of their duties. The Company maintains appropriate
Directors' and Officers' liability insurance in respect of legal
action against its directors on an ongoing basis and the Company
has maintained appropriate cover throughout the period.
All new directors receive introductory support and education
about the infrastructure sector, and the Company, from the
Investment Adviser upon joining the Board and, in consultation with
the Board Chair, all directors are entitled to receive other
relevant ongoing training as necessary.
Board Diversity
The Board is committed to maintaining the appropriate balance of
skills, gender, knowledge and experience among its members to
ensure strong leadership of the Company. When appointing Board
members, its priority will always be based on merit, but will be
influenced by the strong desire to maintain Board diversity. The
Board has four female directors. Following the retirement of the
Company's non-executive directors, Mr Stares and Mr Whittle, the
gender balance will be 57% female and 43% male.
Board Remuneration
The Nomination and Remuneration Committee considers matters
relating to the directors' remuneration, taking into account
benchmark information (including fees paid to directors of
comparable companies, although such a review does not necessarily
result in any changes to the fees paid) and based upon the amount
of work performed by the Board members. During the latter half of
2019, the Nomination and Remuneration Committee recommended that,
in line with changing market practise and the recommendations made
by Trust Associates in their evaluation of Board remuneration
undertaken in 2018 that Board remuneration be increased annually in
line with inflation. The Board accepted this recommendation. Board
remuneration will still be reviewed regularly to ensure that it
remains appropriate to the business of the Company and remains in
line with the market.
As a result, the Board resolved to increase Board remuneration
with effect from 1 January 2019 as outlined in the table below.
2020 FEE P.A. 2019 FEE P.A.
POSITION GBP GBP
Board Chair 86,800 85,000
Audit and Risk Committee Chair 59,200 58,000
Director (Independent and Non-Independent) 45,900 45,000
Senior Independent Director(1) GBP2,000 GBP2,000
Risk Sub-Committee Chair(1) GBP2,000 GBP2,000
Management Engagement Committee GBP2,000 GBP2,000
Chair(1)
Nomination & Remuneration Committee GBP2,000 GBP2,000
Chair(1)
------------------------------------------- ------------- -------------
1 These are additional fees payable to directors chairing a
committee.
All fees payable to the Directors should reflect the time spent
by the Directors on the Company's affairs and the responsibilities
borne by the Directors and be sufficient to attract, retain and
motivate directors of a quality required to run the Company
successfully. The Chair of the Board is paid a higher fee in
recognition of additional responsibilities, as are the Chairs of
the Audit and Risk Committee, the Risk Sub-Committee, the
Management Engagement Committee, the Nomination and Remuneration
Committee, as well as the Senior Independent Director.
There are no long-term incentive schemes provided by the Company
and no performance fees, or bonuses paid to directors. Any changes
to directors' aggregate remuneration are considered at the AGM of
the Company.
2019 FEES PAID 2018 FEES PAID
DIRECTOR GBP GBP
----------------- -------------- --------------
Mike Gerrard 85,000 21,683
Julia Bond(1) 48,666 43,000
John Le Poidevin 58,000 46,000
John Stares(2) 45,333 43,000
Claire Whittet 47,000 43,000
John Whittle 47,000 49,000
Giles Frost(3) 45,000 43,000
----------------- -------------- --------------
1 Ms Bond was appointed as Chair of the Risk Sub-Committee and
the Nomination & Remuneration Committee, effective from 1
February 2019.
2 Mr Stares retired as Chair of the Risk Sub-Committee and the
Nomination & Remuneration Committee, effective from 1 February
2019.
3 The emoluments for Mr Frost are paid to his employer Amber
Infrastructure Limited, a related company of the Company's
Investment Adviser.
Mr Frost is also a director of a number of other companies in
which the Company directly or indirectly has an investment,
although he does not control or receive remuneration in relation to
these entities.
In addition to the director fees above, Mr Whittle is appointed
as director to four Luxembourg subsidiary entities of International
Public Partnerships and is entitled to fees of GBP3,000 per entity
for the year ended 2019.
Directors' Interests
Directors, who held office at 31 December 2019, had the
following interests in the shares of the Company:
31 DECEMBER 2019 31 DECEMBER 2018
DIRECTOR NUMBER OF ORDINARY SHARES(1) NUMBER OF ORDINARY SHARES(1)
------------------ ----------------------------- -----------------------------
Mike Gerrard 136,851 55,739
Julia Bond 43,014 14,020
John Le Poidevin 130,350 97,883
John Stares 75,000 75,000
Claire Whittet(2) 71,134 69,602
John Whittle(3) 58,864 58,864
Giles Frost(4) 917,833 893,797
------------------ ----------------------------- -----------------------------
1 All shares are beneficially held.
2 Holds shares through a Retirement Annuity Trust Scheme jointly with Ms Whittet's spouse.
3 Holds shares through a Retirement Annuity Trust Scheme.
4 Holds some shares through a personal investment company.
There have been no changes to the holdings of existing directors
between 31 December 2019 and the date of this report.
Committees of the Board
[Diagram can be found in PDF version of this document on the
Company's website].
The Board has established four Committees consisting of the
independent non-Executive Directors. The responsibilities of these
Committees are described below. Terms of reference for each
committee have been approved by the Board and are available on the
Company's website (www.internationalpublicpartnerships.com).
Audit and Risk Committee
The Audit and Risk Committee is comprised of the full Board,
with the exception of Mr Gerrard as Board Chair and Mr Frost as the
Non-Independent Director. However, Mr Gerrard and Mr Frost
routinely attend meetings of the Audit and Risk Committee as
observers.
Mr Le Poidevin is the current Chair of the Audit and Risk
Committee. Mr Stares had lead responsibility for risk within the
Risk Sub-Committee until 1 February 2019, when he was succeeded in
the role by Ms Bond.
The duties of the Audit and Risk Committee in discharging its
responsibilities are outlined in the Audit and Risk Committee
Report.
In respect of its risk management function, the Audit and Risk
Committee, through the separately convened Risk Sub-Committee, is
also responsible for reviewing the Company's risk management
function and framework, in relation to the Investment Policy of the
Company including the acquisition and disposal of assets, the
valuation of assets and ensuring that the risk management function
of the Investment Adviser, Administrator and other third-party
service providers are adequate and to seek assurance of the
same.
The Audit and Risk Committee formally reviews the Company's
overall approach to risk management on an annual basis and its risk
register on at least a quarterly basis. Topics considered during
the year can be found in the Audit and Risk Committee Report on
pages 68-71. The Committee is satisfied that the key risks that
could impact the Company and its investments were effectively
mitigated and reported upon and were broadly in line with those of
the Company's relevant industry peers.
Investment Committee
The Investment Committee is comprised of the full Board, with
the exception of Mr Frost as the Non-Independent Director, and is
chaired by Mr Gerrard, as Chair of the Company.
The Committee considers proposals relating to the acquisition
and disposal of investments and, if thought fit, approves those
proposals. Details of the transactions completed during the period
are outlined on pages 14-16 of this Annual Report.
Management Engagement Committee
The Management Engagement Committee is comprised of the full
Board, with the exception of Mr Frost as the Non-Independent
Director, and is chaired by Ms Whittet. The duties of the
Management Engagement Committee in discharging its responsibilities
are outlined in the diagram on page 62.
The Management Engagement Committee carries out its review of
the Company's advisers through consideration of a number of
objective and subjective criteria and through a review of the terms
and conditions of the advisers' appointments; with the aim of
evaluating performance, identifying any weaknesses and ensuring
value for money for the Company's shareholders.
During the year, the Management Engagement Committee formally
reviewed the performance of the Investment Adviser and other key
service providers to the Company and no material weaknesses were
identified. Overall, the Committee confirmed its satisfaction with
the services and advice received.
Nomination and Remuneration Committee
The Nomination and Remuneration Committee is comprised of the
full Board, with the exception of Mr Frost as the Non-Independent
Director, and was chaired by Mr Stares until 1 February 2019, with
Ms Bond succeeding him as Committee Chair with effect from that
date.
The Committee is formally charged by the Board to consider the
structure, size, remuneration and composition of the Board. It also
oversees the appointment and re-appointment of directors, taking
into account the expertise of the candidates and their independence
(see page 62 for more detail on the Committee).
In accordance with the Corporate Governance Code required for
listed companies of the premium segment of London Stock Exchange,
the Company undertakes an externally facilitated evaluation every
three years. Utilising the services of independent corporate
governance consultant, Trust Associates, the Nomination and
Remuneration Committee undertook a review of the performance of the
Board and its Committees during 2017. No significant issues were
reported as a result of this review. An external review of the
performance of the Board and its Committees is planned to take
place during 2020.
Board and Committee Meeting Attendance
The full Board meets at least four times per year and in
addition there is regular contact between the Board, the Investment
Adviser, the Administrator and the Company Secretary. The agenda
and supporting papers are distributed in advance of quarterly Board
and Committee meetings to allow time for appropriate review and to
facilitate full discussion at the meetings.
The table below lists Directors' attendance at Board and
Committee meetings during the year. In addition, during the year,
two ad hoc Board meetings and eight Board Committee meetings1 took
place to finalise matters that had been approved in principle at
full meetings of the Board.
MANAGEMENT NOMINATION
QUARTERLY AUDIT AND INVESTMENT ENGAGEMENT AND REMUNERATION
DIRECTORS BOARD RISK COMMITTEE COMMITTEE COMMITTEE COMMITTEE
------------------ ---------- ---------------- ----------- ------------ ------------------
Maximum number 4 5 2 1 3
------------------ ---------- ---------------- ----------- ------------ ------------------
Mike Gerrard(2) 4 N/A 1 1 3
Julia Bond 4 4 - 1 2
John Le Poidevin 4 5 2 1 3
John Stares 4 5 1 1 3
Claire Whittet 4 4 2 1 3
John Whittle 4 4 2 1 3
Giles Frost(3) 4 N/A N/A N/A N/A
------------------ ---------- ---------------- ----------- ------------ ------------------
1. Board Committee meetings are formed of any two or more
members of the Board and do not require full attendance. All
members of the Board are appraised of the matters to be discussed
at the Committee meeting and have the opportunity to raise
questions to the Board Chair, Investment Adviser or other advisers,
as required.
2. Mr Frost is not a member of the Audit and Risk Committee,
Management Engagement Committee, Nomination & Remuneration
Committee or the Investment Committee. While Mr Frost attended the
majority of ad-hoc Board and Committee meetings, as these meetings
considered recommendations from the Investment Adviser his presence
does not count towards the quorum so has been excluded from this
tally.
The Board has reviewed the composition, structure and diversity
of the Board, succession planning, the independence of the
Directors and whether each of the Directors has sufficient time
available to discharge their duties effectively. The Board confirms
that it believes it has an appropriate mix of skills and
backgrounds, that a majority of directors should be considered as
independent in accordance with the provisions of the AIC Code and
that all directors have the time available to discharge their
duties effectively.
Notwithstanding that a number of the independent directors sit
on the boards of a number of other listed companies, the Board,
noted that these individuals are exclusively non-executive
directors and that listed investment companies generally requires
less day-to-day responsibility and time commitment than trading
companies. Furthermore, the Board noted that attendance of all
Board and Committee meetings during the year is high by all
Directors and that each Director has always shown the time
commitment necessary to fully and effectively discharge their
duties as a director.
Accordingly, the Board recommends that shareholders vote in
favour of the re-election of all directors at the forthcoming
AGM.
Relationship with Administrator and Company Secretary
Ocorian Administration (Guernsey) Limited (formerly Estera
International Fund Managers (Guernsey) Limited) acts as
Administrator and Company Secretary, and is responsible to the
Board under the terms of the Administration Agreement. Noting that
final responsibility lies with the Board, the Administrator ensures
compliance with Guernsey Company Law, London Stock Exchange listing
requirements, the regulatory requirements of the Guernsey Financial
Services Commission, anti-money laundering regulations and
observation of the Reserved Powers of the Board and in this respect
the Board receives detailed quarterly reports. In July 2019 it was
announced that Estera International Fund Managers (Guernsey)
Limited would join Ocorian. This merger completed on 7 February
2020 and a formal name change took place on 6 April 2020.
The Directors have access to the advice and services of the
Company Secretary, who is responsible to the Board for ensuring
that Board procedures are followed and that it adheres to
applicable legislation, rules and regulations as referred to
above.
Relationship with the Investment Adviser
The Directors are responsible for the overall management and
direction of the affairs of the Company. Under the Investment
Advisory Agreement ('IAA'), Amber Fund Management Limited (a member
of the Amber Infrastructure Group Holdings Limited group of
companies) acts as Investment Adviser to the Company to review and
monitor current investments and to advise the Company in relation
to strategic management of the investment portfolio.
Contractual arrangements and fees
The IAA allows for the provision of investment advisory and
certain other financial services to the Board. In return, the
Investment Adviser receives fees based on the Gross Asset Value
('GAV') and composition of the investment portfolio as well as a
contribution to expenses. The annual base fees are detailed in note
17 to the financial statements and calculated at the following
rates:
- 1.2% for that part of the portfolio that bears construction
risk (i.e. the asset has not fully completed all construction
stages including any relevant defects period and achieved
certification by the relevant counterparty and senior lender)
- For fully operational assets:
> 1.2% for the first GBP750 million of GAV of the portfolio
> 1.0% for that part of the portfolio that exceeds GBP750
million in GAV but is less than GBP1.5 billion
> 0.9% for that part of the portfolio that exceeds GBP1.5 billion in GAV
In addition, GAV excludes uncommitted cash from capital
raisings.
The Company has a long-standing relationship with the Investment
Adviser and the Board believes that the continuation of this
relationship, on a long-term basis, is in the Company's best
interest. The current IAA was renegotiated in 2013 and has a
10-year fixed term with a five-year notice period. The Board
considers that, given the long-term nature of the Company's
investments, its responsibility for the detailed day-to-day
delivery of management services and relationships with public
sector clients, it is important that it benefits from the
continuity of service provided by a long-term advisory partner. To
ensure that shareholder interests are protected, termination
provisions have been put in place to ensure that, in the event of
poor investment performance, the Company has the flexibility to
remove the Investment Adviser.
The Investment Adviser is also entitled to receive an asset
origination fee of 1.5% of the value of new investments acquired by
the Company. It should be noted that, generally, the Investment
Adviser bears the risk of abortive transaction origination costs
and that this fee has been waived or reduced by agreement in the
past where it has been deemed appropriate to do so for the
transaction in question.
Cash receipts from capital raisings and tap issuances are not
included in the GAV for the purposes of the calculation of base
fees until such receipts are invested for the first time.
investment approval process
As outlined above, the Investment Committee, comprised of
independent directors of the Company, make decisions with respect
to new investments or divestments after reviewing recommendations
made by the Company's Investment Adviser. The Investment Adviser
has a detailed set of procedures and approval processes in relation
to the recommendation it makes to the Board.
It is expected that further investments will be sourced by the
Investment Adviser. It is likely that some of these investments
will have been originated and developed by, and in certain cases
may be acquired from, other members of the Investment Adviser's
group. Where that is the case, the conflicts management process
summarised overleaf is followed.
Managing Conflicts of Interest
The Company has established detailed procedures to deal with
conflicts of interest that may arise on investments acquired from
the Investment Adviser's group, and manage conduct in respect of
any such acquisitions. As previously mentioned, the Company's Board
has a majority of independent members and a Chairman who is
independent of the Investment Adviser. Each Director is required to
inform the Board of any potential or actual conflicts of interest
prior to Board discussions.
The potential conflicts of interest that may arise include when
an Amber entity is an existing investor in the target entity while
an associated company, AFML, acts on the 'buyside' as Investment
Adviser to the Company. The Investment Advisory Agreement contains
procedures with the intention of ensuring that the terms on which
the vendors of such assets dispose of their assets are fair and
reasonable to the vendors; and on the 'buyside' the Company as
Investment Adviser must be satisfied as to the appropriateness of
the terms for and the price of the acquisition.
Key features of these procedures include:
- The creation of separate committees representing the interests
of the vendors on the one hand (the 'Sellside Committee') and the
Company on the other (the 'Buyside Committee'), to ensure arm's
length recommendation and approval processes. The membership of
each Committee is restricted in such a way as to ensure its
independence and to minimise conflicts of interest arising;
- A requirement for the Buyside Committee to conduct and report
to the Company on an independent due diligence process on the
assets proposed to be acquired prior to making an offer;
- A requirement for any offer made for the assets to be
supported by advice on the fair market value for the transaction
from an independent expert;
- The establishment of 'information barriers' between the
Buyside and Sellside Committees to ensure information is kept
confidential to one or the other side;
- The provision of a 'release letter' to each employee of the
relevant associate of the Investment Adviser, who is a member of
the Buyside and Sellside Committees. The release letter confirms
that the employee shall be treated as not being bound by his/her
duties as an employee to the extent that such duties conflict with
any actions or decisions which are in the employee's reasonable
opinion necessary for him/her to carry out as a member of the
Buyside Committee or Sellside Committee;
- Individuals with material direct or indirect economic
interests in the relevant assets will not participate in Buyside
Committee and Sellside Committee discussions regarding the relevant
assets;
- A requirement that the financial statements, policies and
records of any such asset offered to the Company be compliant with
the Company's accounting policies and procedures.
The acquisition of all assets, including those from any
associate of the Investment Adviser is considered and approved in
advance by the Investment Committee. In considering any such
acquisition, the Investment Committee will, as it deems necessary,
review and ask questions of the Buyside Committee of the Investment
Adviser and the Group's other advisers and the acquisition will be
approved by the Committee on the basis of this advice. The purpose
of these procedures is to ensure that the terms upon which any
investment is acquired from a member of the Amber group is on an
arm's length basis.
Risk Management and Internal Controls
The Board is responsible for overall risk management with
delegation provided to the Audit and Risk Committee. The system of
risk management and internal control has been designed to manage,
rather than eliminate, the risk of failure to meet the business
objectives. Regard is given to the materiality of relevant risks
and therefore the system of internal control cannot provide
absolute assurance against material misstatement or loss.
This process is outlined in further detail in the Risk Report
found on pages 46-52.
Relations with Shareholders
The Board welcomes shareholders' views and places great
importance on communication with shareholders. It has
responsibility for communication with the investor base and is
directly involved in major communications and announcements.
The Board receives regular reports on the views of shareholders
and the Chairman and other Directors, including the Senior
Independent Director are available to meet shareholders as
required.
In addition to more formal investor events, such as Results
Presentations, the Investment Adviser conducts the day-to-day
investor relations activities for the Company. It meets with major
shareholders on a regular basis and reports to the Board on these
meetings. During 2019, the Investment Adviser and members of the
Board held formal meetings with over 100 shareholders in addition
to day-to-day interaction, including calls and other forms of
correspondence. The Company also has an active programme of
sell-side engagement and the Board is also informed on a regular
basis of all relevant market commentary on the Company by the
Investment Adviser, Administrator and the Company's Broker. In
October 2019, the Company held a successful investor briefing,
including a portfolio update, and an asset tour of Tideway.
The AGM of the Company provides a forum for shareholders to meet
and discuss issues with the Directors and with the Investment
Adviser of the Company. It is the Board's policy to publish the
results of the voting at the AGM via Regulatory News Service
('RNS') at the completion of the meeting.
To promote a clear understanding of the Company, its objectives
and financial results, the Board aims to ensure that information
relating to the Company is disclosed in a timely manner. The
Company's website (www.internationalpublicpartnerships.com) enables
investors to easily find publicly disclosed documents including
Annual Reports and RNS announcements, together with additional
background information on its assets and corporate practice.
Investors can register to receive notifications (via email) of RNS
announcements that the Company issues. The Board encourages
investors to utilise this useful online resource.
Any shareholder issues of concern, including on corporate
governance or strategy, can be addressed in writing to the Company
at its registered office address (see back cover).
AUDIT AND RISK COMMITTEE REPORT
The Audit and Risk Committee (the 'Committee' for the purposes
of this report) is an essential part of the Company's governance
framework. The Board has delegated oversight of the Company's
financial reporting, internal controls, compliance and external
audit to the Committee. The terms of reference for the Committee,
together with details of the standard business considered by the
Committee, have been approved by the Board and are available on the
Company's website ( www.internationalpublicpartnerships.com ).
The Committee is chaired by Mr Le Poidevin. From 1 February
2019, Ms Bond assumed lead responsibility for risk within the Risk
Sub-Committee, succeeding Mr Stares who previously held the role.
An overview of the Committee's work during the year and details of
how the Committee has discharged its duties is set out below.
Committee Meetings
The Committee meetings during the year were attended by the
Investment Adviser and Administrator by invitation. A
representative of the Company's external auditor, Ernst & Young
LLP ('EY'), also attended those meetings where the annual audit
cycle, the Annual Report and financial statements and the
half-yearly financial report were considered.
All Committee members are considered to be appropriately
experienced to fulfil their role, having significant, recent and
relevant financial experience in line with the Corporate Governance
Code. Biographies of the Committee members can be found on pages
56-57.
Committee Agenda
The Committee's agenda during the year included:
- Review of the Company's risk profile, specific risks and
mitigation practices, with a special focus on emerging risks
including climate change;
- Review of the effectiveness of the Company's internal control systems;
- Review of the regulatory environment the Company operates within;
- Review of the Annual Report and financial statements and
half-yearly financial report and matters raised by management and
the external auditors (including significant financial reporting
judgements and estimates therein);
- Review of the appropriateness of the Company's accounting policies;
- Consideration and challenging of the draft valuation of the
Company's investments prepared by the Investment Adviser and
recommendations made to the Board on the appropriateness of the
valuation;
- Review of the effectiveness, objectivity and independence of
the external auditors, and the terms of engagement, cost
effectiveness and the scope of the audit;
- Approving the external auditor's plan for the current year end;
- Review of the policy on the provision of non-audit services by the external auditor.
Key activities considered during the year
The Committee undertook the following activities in discharging
our responsibilities during the year:
Financial Reporting
The Committee reviewed the Company's Annual Report and financial
statements, the half-yearly financial report and interim management
reports prior to approval by the Board and advised the Board with
respect to meeting the Company's financial reporting obligations.
The Committee reviewed the Company's accounting policies and
practices, including approval of critical accounting policies;
consideration of the appropriateness of significant judgements and
estimates; and advising the Board as to its views on whether the
Annual Report and financial statements, taken as a whole, was fair,
balanced and understandable.
The Committee considered the most significant accounting
judgement exercised in preparing the financial statements to be the
basis for determining the fair value of the Company's investments,
as detailed overleaf.
Fair Value of Investments
The Company's investments are typically in unlisted securities,
including shares and debt, hence market prices for such investments
are not typically readily available. Instead, the Company uses a
discounted cash flow methodology and benchmarks to market
comparables to derive the Directors' valuation of investments.
Valuations are prepared by the Investment Adviser and the
methodology requires a series of judgements to be made as explained
in note 11 to the financial statements. The valuation process and
methodology were discussed with the Investment Adviser regularly
during the year and with the auditor as part of the year end audit
planning and interim review processes. The Committee challenged the
Investment Adviser on the year end fair value of investments as
part of its consideration of the audited statements.
During the period, the Committee reviewed the Investment
Adviser's quarterly valuation reports, reports on the performance
of the underlying assets and the Investment Adviser's assessment of
macroeconomic assumptions. The Investment Adviser confirmed that
the valuation methodology has been applied consistently with prior
years. The Committee also reviewed and challenged the valuation
assumptions (discount rates, interest rates, foreign exchange
rates, inflation rates and tax rates).
The external auditor explained the results of its review of the
valuations, including its assessment of management's underlying
cash flow projections and assumptions; macroeconomic assumptions;
and discount rate methodology and output. The auditor confirmed no
material adjustments were proposed.
The Committee concluded that a consistent valuation methodology
has been applied throughout the year and any forecast assumptions
applied were appropriate.
R evenue Recognition
The Committee has considered the risk of inappropriate
accounting recognition of revenue to be a relatively low risk given
the nature of the Company's activities.
Internal controls over financial reporting
The Committee satisfied itself that the system of internal
control and compliance over financial reporting was effective,
through consideration of regular reports from the Investment
Adviser, Administrator and external third-party advisers.
The Committee also considered the adequacy of resources,
qualifications and experience of staff in the finance function and
had direct access to and independent discussions with the external
auditor during the course of the year.
Fair, Balanced and Understandable
The Committee seeks to establish arrangements to ensure fair,
balanced and understandable reporting. The Committee engaged in
extensive dialogue with management throughout the year, and
considered the Interim and Annual financial statements as well as
quarterly updates and reports prepared by management. Following
review of the Company's 2019 Annual Report and financial
statements, the Committee advised the Board that, in its opinion,
the Annual Report and financial statements, taken as a whole, is
fair, balanced and understandable and provides the information
necessary to assess the Company's performance, operating model and
strategy.
EXTERNAL AUDITOR
The Committee recommended to the Board the scope and terms of
engagement of the external auditor. The Committee considered
auditor objectivity and independence, audit tenure, audit tendering
and auditor effectiveness as detailed below.
Objectivity and independence
In assessing the objectivity of the auditor, the Committee
considered the terms under which the external auditor may be
appointed to perform non-audit services. The Committee was also
mindful of the new ethical standards for auditors and changes in
auditor independence which became effective in December 2019. Work
expected to be completed by an external auditor included formal
reporting for shareholders, regulatory assurance reports and
assurance work in connection with new investments.
Under the Company's policy for non-audit services, there is a
specific list of services for which the external auditor cannot be
engaged, as the Committee consider that the provision of such
services would impact its independence. Potential services to be
provided by the external auditor with an expected value of up to
GBP50,000, and which are not prohibited by the policy, must be
pre-approved by the Chairman of the Committee; any services above
this value require pre-approval by the full Audit and Risk
Committee. Non-audit fees represented 7.6% of total audit fees
during the period under review. EY undertook its standard
independence and objectivity procedures in relation to non-audit
engagements and confirmed compliance with these to the Committee.
Further details on the amounts of non-audit fees paid to EY are set
out in note 7 to the financial statements. These were reported to
us and were not considered to be a significant risk impacting the
objectivity and independence of EY as external auditor.
Review of auditor effectiveness
As part of our annual review of the objectivity and
effectiveness of the audit, the Committee conducted an in-depth
review in 2019 of the auditor's performance and the Committee were
satisfied in this regard. This was facilitated through the
completion of a questionnaire by relevant stakeholders (including
members of the Committee and senior members of the Investment
Adviser's finance team), review and challenge of the audit plan for
consistency with the Company's financial statement risks, and
review of the audit findings report. In accordance with the
relevant Corporate Governance Code principles, the Committee will
continue to review the effectiveness of the external auditor in
line with best practice.
Review of auditor's remuneration
The Committee carried out a review of the proposed audit fees
for 2019. The audit fee for the Group (including unconsolidated
subsidiaries) remained broadly consistent with the prior year. The
Committee consider that the audit fees for the current year present
good value for money for the Company's shareholders.
Audit tendering and tenure
The Committee annually considers the reappointment of the
external auditor, including rotation of the audit partner. The
external auditor is required to rotate the audit partner
responsible for the Group audit every five years and the year to 31
December 2019 was the fourth year for the current lead audit
partner. The Committee continue to challenge EY on its process for
transitioning other key current audit team members reaching the end
of their rotation terms and continue to be actively engaged in the
developments in this area and in ensuring an appropriate level of
continuity of the team.
The Company last put its audit out to formal tender in October
2010. One year in advance of the auditor rotation requirements for
listed companies and to ensure continued audit quality, the Board
initiated the next formal tender process in late 2019. A longlist
of suitable audit firms were approached, and following an initial
dialogue and screening process, a shortlist of firms were formally
invited to tender for the audit of the Company. Formal tender
proposals from participating firms and meetings with the Board of
Directors are scheduled for the period from April to June 2020,
with the results of the tender expected to be concluded and
disclosed ahead of the Company's 2020 interim report.
RISK MANAGEMENT
During the year, the Committee continued to ensure that the
Company's risk management framework and processes remained
effective in managing the Company's risks. Areas of note for the
year are discussed below. A review of significant developments
relating to the Company's risks arising in the year can be found in
the risk management section of this report, starting on page
42.
Viability assessment
The Committee carried out a robust assessment of the principal
risks facing the Company with a view to identify risks which may
impact the Company's viability. Detailed stress tests, including an
impact assessment on the Company's forecasted cash flows, showed
significant resilience in the Company's ability to remain viable.
The results of the risk assessment process are detailed in the
Viability Statement on page 53.
ESG external controls review
During the year the Committee progressed the independent
external review of the Company's ESG policies and procedures and
this is expected to be concluded over the coming months. Further
details of the Company's ESG approach for responsible investment
can be found on pages 34-41.
Climate Change
The Committee continued to strengthen the Company's approach to
managing climate change. During the year, climate change was
further embedded in the risk management process and details of
these actions can be found in the review of principal and emerging
risks, starting on page 43.
UK withdrawal from the EU
Potential risks which may arise on the Company as a result of
the UK's withdrawal from the EU continued to be monitored.
Following particular attention given to potential impacts arising
from a no deal scenario during 2019, attention will refocus to any
potential longer-term risks resulting from changes in the
relationship between the UK and the EU going forward.
Regulatory and Tax Environment
The Committee received regular reports from the Administrator
and Investment Adviser on regulation and regulatory developments.
The Company continues to maintain compliance with the requirements
of the Common Reporting Standard, the Retail distribution of
unregulated collective investment schemes (regulation which the
Company remains excluded from), the UK Criminal Finance Act 2017,
the Alternative Investment Fund Managers Directive ('AIFMD'), The
Foreign Account Tax Compliance Act ('FATCA'), and the Packaged
Retail and Insurance-based Investment Products ('PRIIPs').
Focus for 2020
Alongside an obvious focus on the impacts to the Company of the
Covid-19 pandemic and additional to its continued attention to
regular and routine matters, this year the Committee will
additionally finalise the independent review of the Company's ESG
policies and procedures, as well as continuing to monitor any
political, tax and regulatory developments in its applicable
geographies.
John Le Poidevin
Chairman, Audit and Risk Committee
8 April 2020
DIRECTORS' REPORT
Introduction
The Directors present their Annual Report on the performance of
the Company and Group for the year ended 31 December 2019.
Principal Activity
The Company is a limited liability, Guernsey-incorporated and
domiciled, authorised closed-ended investment company under
Companies (Guernsey) Law, 2008. The Company's shares have a premium
listing on the Official List of the UK Listing Authority and are
traded on the main market of the London Stock Exchange.
The Chairman's Letter and Strategic Report contain a review of
the business during the year. A Corporate Governance Report is
provided on pages 58-67.
Directors' Indemnities
The Company has made qualifying third-party indemnity provisions
for the benefit of its Directors, which were made during the period
and remain in force at the date of this report.
Substantial Shareholdings
As at 31 December 2019, the Company had been notified, in
accordance with Chapter 5 of the Disclosure and Transparency Rules,
of the following interests in 5% or more of the Company's Ordinary
Shares to which voting rights are attached:
NO. OF ORDINARY
NAME OF HOLDER % ISSUED CAPITAL SHARES DATE NOTIFIED
------------------------------ ----------------- ---------------- --------------
Investec Wealth & Investment 5 September
Ltd 12.00% 168,673,159 2018
There have been no additional notices between 31 December 2019
and the date of this report.
Directors' Authority to Buy Back Shares and Treasury Shares
The Company did not purchase any shares for treasury or
cancellation during the year.
The current authority of the Company to make market purchases of
up to 14.99% of the issued Ordinary Share Capital expires on [26
May 2020]. The Company will seek to renew such authority at the AGM
to take place on [27 May 2020]. Any buy back of Ordinary Shares
will be made subject to Guernsey law and within any guidelines
established from time-to-time by the Board and the making and
timing of any buy backs will be at the absolute discretion of the
Board.
Purchases of Ordinary Shares will only be made through the
market at prices below the prevailing NAV of the Ordinary Shares
(as last calculated) where the Directors believe such purchases
will enhance shareholder value. Such purchases will also only be
made in accordance with the Listing Rules of the UK Listing
Authority, which provide that the price to be paid must not be more
than 5% above the average of the middle market quotations for the
Ordinary Shares for the five business days before the shares are
purchased (unless previously advised to shareholders). No such
shares were bought back by the Company during the prior year. Up to
10% of the Company's shares may be held as treasury shares.
Going Concern
The Company's business activities, together with the factors
likely to affect its future development, performance and position,
are set out in the Strategic Report on pages 12-53. The financial
position of the Company (and consolidated subsidiaries), its cash
flows, liquidity position and borrowing are described in the
financial statements from page 75.
The Directors have considered significant areas of possible
financial risk and comprehensive financial forecasts have been
prepared and submitted to the Board for review. The Directors have,
based on the information contained in these forecasts and the
assessment of the committed banking facilities in place, formed a
judgement, at the time of approving the financial statements, that
the Company (and consolidated subsidiaries) have adequate resources
to continue in operational existence for the foreseeable
future.
After consideration, the Directors are satisfied that it is
appropriate to adopt the going concern basis in preparing the
financial statements.
Director Declaration
Each person who is a Director at the date of approval of this
Annual Report confirms that:
So far as the Director is aware, there is no relevant audit
information of which the Company's external auditor is unaware.
Each Director has taken all the steps that he/she ought to have
taken as a Director in order to make himself/herself aware of any
relevant audit information and to establish that the Company's
auditor is aware of that information. This confirmation is given
and should be interpreted in accordance with the provisions of
Section 249 of the Companies (Guernsey) Law, 2008.
By order of the Board
Mike Gerrard John Le Poidevin
Chairman Director
8 April 2020 8 April 2020
DIRECTORS' RESPONSIBILITIES STATEMENT
The Directors are responsible for preparing financial statements
for each year which give a true and fair view, in accordance with
applicable Guernsey law and International Financial Reporting
Standards ('IFRS') as adopted by the EU, of the state of affairs of
the Company and its consolidated subsidiaries (the 'Group') and of
the profit or loss of the Group for that year. In preparing those
financial statements, the Directors are required to:
- Select suitable accounting policies and then apply them consistently;
- Make judgements and estimates that are reasonable;
- State whether applicable accounting standards have been
followed, subject to any material departures disclosed and
explained in the financial statements;
- Prepare the financial statements on a going concern basis
unless it is inappropriate to presume that the Group will continue
in business.
The Directors confirm that they have complied with the above
requirements in preparing the financial statements.
The Directors are responsible for keeping proper accounting
records, which disclose with reasonable accuracy at any time, the
financial position of the Group and to enable them to ensure that
the financial statements comply with the Companies (Guernsey) Law,
2008. They are also responsible for safeguarding the assets of the
Group and hence for taking reasonable steps for the prevention and
detection of fraud, error and non-compliance with law and
regulations.
The maintenance and integrity of the Company's website is the
responsibility of the Directors; the work carried out by the
auditor does not involve considerations of these matters and,
accordingly, the auditor accepts no responsibility for any change
that may have occurred to the financial statements since they were
initially presented on the website. Legislation in Guernsey
governing the preparation and dissemination of the financial
statements may differ from legislation in other jurisdictions.
Responsibility Statement of the Directors' in respect of the
Consolidated Annual Report and Financial Statements
The Directors each confirm to the best of their knowledge
that:
- The consolidated financial statements, prepared in accordance
with IFRS as adopted by the EU, give a true and fair view of the
assets, liabilities, financial position and net return of Group
- The Annual Report and financial statements includes a fair
review of the development and performance of the business and the
position of the Group, together with a description of the principal
risks and uncertainties faced
Directors' Statement under the UK Corporate Governance Code
The Board, as advised by the Audit and Risk Committee, has
considered the Annual Report and financial statements and, taken as
a whole, consider it to be fair, balanced and understandable and
that it provides the information necessary for shareholders to
assess the Company's performance, business model and strategy.
By order of the Board
Mike Gerrard John Le Poidevin
Chairman Director
8 April 2020 8 April 2020
INDEPENT AUDITOR'S REPORT TO THE MEMBERS OF INTERNATIONAL PUBLIC
PARTNERSHIPS LIMITED
Opinion
In our opinion:
- International Public Partnerships Limited's group financial
statements give a true and fair view of the state of the Group's
affairs as at 31 December 2019 and of its profit for the year then
ended;
- the group financial statements have been properly prepared in
accordance with International Financial Reporting Standards
('IFRSs') as adopted by the European Union; and
- the financial statements have been prepared in accordance with
the requirements of the Companies (Guernsey) Law, 2008.
We have audited the financial statements of International Public
Partnerships Limited which comprise:
- Consolidated statement of comprehensive income for the year ended 31 December 2019;
- Consolidated balance sheet as at 31 December 2019;
- Consolidated statement of changes in equity for the year ended 31 December 2019;
- Consolidated cash flow statement for the year ended 31 December 2019; and
- Related notes 1 to 21 to the consolidated financial
statements, including a summary of significant accounting
policies.
The financial reporting framework that has been applied in their
preparation is applicable law and International Financial Reporting
Standards ('IFRSs') as adopted by the European Union.
BASIS FOR OPINION
We conducted our audit in accordance with International
Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our
responsibilities under those standards are further described in the
Auditor's responsibilities for the audit of the financial
statements section of our report below. We are independent of the
Group in accordance with the ethical requirements that are relevant
to our audit of the financial statements, including the UK FRC's
Ethical Standard as applied to listed entities, and we have
fulfilled our other ethical responsibilities in accordance with
these requirements.
We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our opinion.
CONCLUSIONS RELATING TO PRINCIPAL RISKS, GOING CONCERN AND
VIABILITY STATEMENT
We have nothing to report in respect of the following
information in the annual report, in relation to which the ISAs
(UK) require us to report to you whether we have anything material
to add or draw attention to:
- the disclosures in the annual report set out on page 46 that
describe the principal risks and explain how they are being managed
or mitigated;
- the directors' confirmation set out on page 43 in the annual
report that they have carried out a robust assessment of the
principal risks facing the entity, including those that would
threaten its business model, future performance, solvency or
liquidity;
- the directors' statement set out on page 74 in the financial
statements about whether they considered it appropriate to adopt
the going concern basis of accounting in preparing them, and their
identification of any material uncertainties to the entity's
ability to continue to do so over a period of at least 12 months
from the date of approval of the financial statements;
- whether the directors' statement in relation to going concern
required under the Listing Rules is materially inconsistent with
our knowledge obtained in the audit; or
- the directors' explanation set out on page 53 in the annual
report as to how they have assessed the prospects of the entity,
over what period they have done so and why they consider that
period to be appropriate, and their statement as to whether they
have a reasonable expectation that the entity will be able to
continue in operation and meet its liabilities as they fall due
over the period of their assessment, including any related
disclosures drawing attention to any necessary qualifications or
assumptions.
Overview of our audit approach
Key audit matters - Misstatement or manipulation of investment fair
value
- Income recognition
- Going concern (including potential impact of
Covid-19)
------------------ ---------------------------------------------------------
Audit scope - We performed an audit of International Public
Partnerships Limited and the consolidated service
entities ('the Group'), for the year ended 31 December
2019
- The Group has determined that it is an investment
entity under the requirements of IFRS10 amendments
for Investment Entities (IFRS 10 amendments) and
therefore only consolidates service entities as
explained in note 1 of the financial statements.
- All audit work performed for the purposes of
the audit was undertaken by the Group audit team.
------------------ ---------------------------------------------------------
Materiality - Overall Group materiality of GBP24.3 million
(2018: GBP22.0 million) which represents 1% (2018:
1%) of Equity.
------------------ ---------------------------------------------------------
KEY AUDIT MATTERS
Key audit matters are those matters that, in our professional
judgment, were of most significance in our audit of the financial
statements of the current period and include the most significant
assessed risks of material misstatement (whether or not due to
fraud) that we identified. These matters included those which had
the greatest effect on: the overall audit strategy, the allocation
of resources in the audit; and directing the efforts of the
engagement team. These matters were addressed in the context of our
audit of the financial statements as a whole, and in our opinion
thereon, and we do not provide a separate opinion on these
matters.
Risk Misstatement or manipulation of investment fair
value GBP2,383 million (2018: 2,097 million)
" Investments comprise a portfolio of assets
measured at fair value through profit or loss.
The fair values of these investments are determined
using the income approach which discounts the
expected cash flows at a rate appropriate to
the risk profile of each investment. In determining
the discount rate, the relevant long-term government
bond yields, specific investment risks and the
evidence of recent transactions are considered.
Details of the valuation process and key sensitivities
are provided in note 11 of the financial statements
and are discussed in the strategic report - "operating
review" and "continuous risk management" sections.
The valuation risk includes the risk of an inappropriate
valuation model being applied, the risk of manipulation
or error in both the assumptions applied and
the amount and timing of expected cash flows.
--------------------- ----------------------------------------------------------------
Our response to the Test of Controls: We have tested the effectiveness
risk of controls in operation over investment acquisitions,
valuation, forecasting cashflows and distributions
and placed reliance on control over these processes.
Verification of existence and ownership of Investments:
We have tested, on a sample basis, the existence
and ownership of investments to ensure the Group
is entitled to distributions from the investments.
Valuation assumptions: We have been supported
in our testing of macro economic inputs and discount
rates by specialists from our EY Valuation &
Business Modelling ('EYVBM') team.
We selected a sample of investments that cover
specific risks identified. The following procedures
were performed:
Macroeconomic Inputs: We tested that the macroeconomic
inputs (inflation rates, foreign exchange rates,
deposit rates and tax rates) reviewed by our
EY VBM team were applied consistently and accurately
in the selected models.
Discount Rates: We engaged our EYVBM specialists
to test the discount rates used in the selected
models.
Model integrity: We reviewed management controls
including management's use of third party audits
of the initial model and analysis of yields.
We engaged our EYVBM specialists to test the
changes to the logical operation on the selected
models. We have compared the model used to determine
the year end valuation to the most recent model
that was audited or was reviewed as a part of
previous audit work.
Model inputs: We agreed a sample of contractual
cashflows to contractual agreements and actual
cashflows. We engaged EYVBM specialists to assess
the assumptions used to determine the underlying
variable cash flows which require significant
judgement. Their assessment was based on a combination
of market data and experience of valuing other
similar investments. For an extended sample,
we tested that the macroeconomic inputs (inflation
rates, foreign exchange rates, deposit rates
and tax rates) reviewed by our EYVBM team were
applied consistently and accurately to the models.
We performed the following procedures across
the whole portfolio:
- We reviewed the changes in discount rate of
the assets in INPP's portfolio by analysing the
components of the discount rate build up approach
adopted by management. Any material movements
in the components were discussed/challenged with
management and explanations obtained were corroborated
with appropriate evidence.
- We have performed a detailed analytical review
based on year on year movement on each investment
and validating significant variances from expectation.
- We tested the historical accuracy of forecasting
by comparing the historical forecast distributions
from the projects to the actual distributions.
Acquisitions: We tested all acquisitions during
the year, reviewing the key transaction documents,
including share purchase agreements and agreeing
the consideration paid to bank statements. There
were no disposals during the year.
Market Review: We engaged EYVBM specialists
to provide benchmarking information on the variable
components e.g. inflation rates, risk free rates,
deposit rates etc.
--------------------- --------------------------------------------------------------
Key Observations We confirmed that there were no material matters
communicated to the arising from our audit work that we needed to
Audit Committee bring to the attention of the Audit Committee.
We confirmed that the valuation of the investments
is fairly stated and was in line with IFRSs as
adopted by the European Union.
--------------------- --------------------------------------------------------------
Risk Income recognition
Income primarily comprises of the dividend and
interest income stream (i.e. distributions) generated
by the investments held in underlying consolidated
subsidiaries.
Management may seek to overstate income as a
result of seeking to report the desired level
of return to investors.
--------------------- --------------------------------------------------------------
Our response to the We updated our understanding of the Group's processes
risk and policies for income recognition including
our understanding of the systems and controls
implemented.
We reviewed minutes of board meetings during
the year to ensure dividends declared have been
recognised and checked bank statements to ensure
any dividends paid have also been recognised.
We compared the actual distributions received
in 2019 to the forecast made at the end of 2018
to test the completeness of distributions.
We agreed a representative sample of dividend
and interest receipts to documentation from underlying
project entities and we checked the calculation
of interest amounts and the allocation thereof
to the appropriate period.
We have performed cut off and completeness testing
to conclude on accuracy.
--------------------- --------------------------------------------------------------
Key Observations We confirmed that there were no matters to bring
communicated to the to the attention of the Audit Committee.
Audit Committee
--------------------- --------------------------------------------------------------
Risk Going Concern (including potential impact of
Covid-19)
Since the balance sheet date there has been a
global Covid-19 pandemic which continues to affect
all businesses across the world in different
ways. The governments of the countries affected
have designed measures to mitigate the resulting
adverse economic impact of this pandemic.
There is a risk that this Covid-19 pandemic may
impact some infrastructure investment activity
in the short to medium term, and lead to issues
with asset performance (e.g staff shortages,
supply chain breakdowns) which impacts Going
Concern.
There is also a risk that management has not
appropriately disclosed the impact of Covid-19
in the financial statements.
--------------------- --------------------------------------------------------------
Our response to the We obtained an understanding of the process followed
risk by management to make its going concern assessment
and assessment of the impact of Covid-19. We
reviewed the underlying project cashflows to
ensure there are no unidentified or undisclosed
events that could have an impact on the forecasts.
We challenged management on the appropriateness
of the key assumptions and considered their reasonableness
in the context of other supporting evidence gained
from our audit work.
We reviewed corporate level cash flows including
management's ability to access future financing.
We performed testing to evaluate whether the
covenant requirements of the corporate debt facility
would be met under all base and stress scenarios.
We performed back testing on the historical accuracy
of management's cash flow forecasts.
We evaluated the appropriateness of management's
stress test scenarios and their impact on the
cashflow/liquidity position.
We performed our own scenario analysis using
a number of alternative assumptions to assess
the reasonableness of management's assessment.
We obtained supporting evidence to assess the
appropriateness of mitigation plans in relation
to management's Covid-19 risk assessment.
We reviewed minutes of board meetings with a
view to identifying any matters which may impact
the going concern assessment.
We ensured the disclosures in the financial statements
in relation to Covid-19 adequately disclose the
risk, impact on the group and mitigation actions
adopted.
--------------------- --------------------------------------------------------------
Key observations We confirm that the matter has been appropriately
communicate to the evaluated and reflected in the financial statements.
Audit Committee
--------------------- --------------------------------------------------------------
AN OVERVIEW OF THE SCOPE OF OUR AUDIT
Our assessment of audit risk, our evaluation of materiality and
our allocation of performance materiality determine our audit scope
for the Group. This enables us to form an opinion on the financial
statements. We take into account size, risk profile, the
organisation of the Group and effectiveness of controls, including
controls and changes in the business environment when assessing the
level of work to be performed.
The Group consists of the Company and the consolidated service
entities as explained in note 1 of the financial statements. All
audit work performed for the purposes of the audit was undertaken
by the Group audit team.
Our application of materiality
We apply the concept of materiality in planning and performing
the audit, in evaluating the effect of identified misstatements on
the audit and in forming our audit opinion.
Materiality
Materiality is the magnitude of an omission or misstatement
that, individually or in the aggregate, could reasonably be
expected to influence the economic decisions of the users of the
financial statements. Materiality provides a basis for determining
the nature and extent of our audit procedures.
We determined materiality for the Group to be GBP24.3 million
(2018: GBP22.0 million), which is 1% (2018: 1%) of equity. We
believe that total equity provides us with an appropriate basis for
audit materiality as net asset value is a key published performance
measure and is a key metric used by management in assessing and
reporting on the overall performance of the Group.
During the course of our audit, we reassessed initial
materiality and noted that total equity had increased from GBP2,232
million at 30 June 2019 to GBP2,425 million as at 31 December 2019
mainly due to capital raise in October and December 2019. This
resulted in a higher materiality of GBP24.3 million compared to
GBP22.3 million that was originally determined at the audit
planning stage.
Performance materiality
'Performance materiality' is the application of materiality at
the individual account or balance level. It is set at an amount to
reduce to an appropriately low level the probability that the
aggregate of uncorrected and undetected misstatements exceeds
materiality. On the basis of our risk assessments, together with
our assessment of the Group's overall control environment, our
judgement was that overall performance materiality (i.e. our
tolerance for misstatement in an individual account or balance) for
the Group should be 75% of materiality, namely GBP18.2 million
(2018: GBP16.5 million). We have set performance materiality based
on our understanding of the entity and the past history of no
misstatements (corrected and uncorrected).
Given the importance of Interest income, dividend income and
related party fees to the users of the financial statements we also
apply a lower performance materiality of GBP4.7 million (2018:
GBP3.7 million) to audit these balances.
Reporting threshold
Reporting threshold is an amount below which identified
misstatements are considered as being clearly trivial.
We agreed with the Audit Committee that we would report to them
all uncorrected audit differences in excess of GBP1.2million (2018:
GBP1.1million), which is set at 5% of planning materiality, as well
as differences below that threshold that, in our view, warranted
reporting on qualitative grounds.
We evaluate any uncorrected misstatements against both the
quantitative measures of materiality discussed above and in light
of other relevant qualitative considerations in forming our
opinion.
OTHER INFORMATION
The other information comprises the information included in the
annual report set out on pages 1 to 79, other than the financial
statements and our auditor's report thereon. The directors are
responsible for the other information.
Our opinion on the financial statements does not cover the other
information and, except to the extent otherwise explicitly stated
in this report, we do not express any form of assurance conclusion
thereon.
In connection with our audit of the financial statements, our
responsibility is to read the other information and, in doing so,
consider whether the other information is materially inconsistent
with the financial statements or our knowledge obtained in the
audit or otherwise appears to be materially misstated. If we
identify such material inconsistencies or apparent material
misstatements, we are required to determine whether there is a
material misstatement in the financial statements or a material
misstatement of the other information. If, based on the work we
have performed, we conclude that there is a material misstatement
of the other information, we are required to report that fact.
We have nothing to report in this regard.
In this context, we also have nothing to report in regard to our
responsibility to specifically address the following items in the
other information and to report as uncorrected material
misstatements of the other information where we conclude that those
items meet the following conditions:
- Fair, balanced and understandable statement set out on page 69
by the directors that they consider the annual report and financial
statements taken as a whole is fair, balanced and understandable
and provides the information necessary for shareholders to assess
the Group's performance, business model and strategy, is materially
inconsistent with our knowledge obtained in the audit; or
- Audit committee reporting set out on page 68; or
- Directors' statement of compliance with the UK Corporate
Governance Code set out on page 74 - the parts of the directors'
statement required under the Listing Rules relating to the
company's compliance with the UK Corporate Governance Code
containing provisions specified for review by the auditor in
accordance with Listing Rule 9.8.10R (2) do not properly disclose a
departure from a relevant provision of the UK Corporate Governance
Code.
MATTERS ON WHICH WE ARE REQUIRED TO REPORT BY EXCEPTION
We have nothing to report in respect of the following matters in
relation to which the Companies (Guernsey) Law, 2008 requires us to
report to you if, in our opinion:
- proper accounting records have not been kept by the Company,
or proper returns adequate for our audit have not been received
from branches not visited by us; or
- the financial statements are not in agreement with the
Company's accounting records and returns; or
- we have not received all the information and explanations we require for our audit.
responsibilities of directors
As explained more fully in the directors' responsibilities
statement set out on page 74, the directors are responsible for the
preparation of the financial statements and for being satisfied
that they give a true and fair view, and for such internal control
as the directors determine is necessary to enable the preparation
of financial statements that are free from material misstatement,
whether due to fraud or error.
In preparing the financial statements, the directors are
responsible for assessing the Group's ability to continue as a
going concern, disclosing, as applicable, matters related to going
concern and using the going concern basis of accounting unless the
directors either intend to liquidate the Group or to cease
operations, or have no realistic alternative but to do so.
Auditor's responsibilities for the audit of the financial
statements
Our objectives are to obtain reasonable assurance about whether
the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an
auditor's report that includes our opinion. Reasonable assurance is
a high level of assurance, but is not a guarantee that an audit
conducted in accordance with ISAs (UK) will always detect a
material misstatement when it exists. Misstatements can arise from
fraud or error and are considered material if, individually or in
the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these financial
statements.
A further description of our responsibilities for the audit of
the financial statements is located on the Financial Reporting
Council's website at
https://www.frc.org.uk/auditorsresponsibilities . This description
forms part of our auditor's report.
USE OF OUR REPORT
This report is made solely to the company's members, as a body,
in accordance with Section 262 of the Companies (Guernsey) Law,
2008. Our audit work has been undertaken so that we might state to
the Company's members those matters we are required to state to
them in an auditor's report and for no other purpose. To the
fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the Company and the Company's
members as a body, for our audit work, for this report, or for the
opinions we have formed.
Richard Le Tissier
for and on behalf of Ernst & Young LLP,
Guernsey
Channel Islands
8 April 2020
Notes:
1. The maintenance and integrity of the International Public Partnerships Limited website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.
2. Legislation in the Guernsey governing the preparation and
dissemination of financial statements may differ from legislation
in other jurisdictions.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
YEARED 31 DECEMBER 2019
Year ended Year ended
31 December 31 December
2019 2018
Notes GBP'000s GBP'000s
---------------------------------------- ----- --------------- ------------
Interest income 4 76,405 71,201
Dividend income 4 48,181 32,018
Net change in investments at fair value
through profit or loss 4 44,132 63,826
----------------------------------------- ----- --------------- ------------
Total investment income 168,718 167,045
Other operating income 5 4,797 622
========================================= ===== =============== ============
Total income 173,515 167,667
Management costs 17 (24,537) (22,798)
Administrative costs (1,568) (1,520)
Transaction costs 6, 17 (4,221) (957)
Directors' fees (386) (359)
----------------------------------------- ----- --------------- ------------
Total expenses (30,712) (25,634)
----------------------------------------- ----- --------------- ------------
Profit before finance costs and tax 142,803 142,033
Finance costs 8 (5,053) (3,944)
----------------------------------------- ----- --------------- ------------
Profit before tax 137,750 138,089
Tax credit 9 418 280
----------------------------------------- ----- --------------- ------------
Profit for the year 138,168 138,369
----------------------------------------- ----- --------------- ------------
Earnings per share
From continuing operations
Basic and diluted (pence) 10 9.17 9.75
----------------------------------------- ----- --------------- ------------
All results are from continuing operations in the year.
All income is attributable to the equity holders of the parent.
There are no non-controlling interests within the Consolidated
Group.
There are no other Comprehensive Income items in the current
year (2018: nil). The profit for the year represents the Total
Comprehensive Income for the year.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
YEARED 31 DECEMBER 2019
SHARE CAPITAL
and share OTHER DISTRIBUTABLE RETAINED
NOTES premium RESERVE EARNINGS TOTAL
GBP'000s GBP'000s GBP'000s GBP'000s
---------------------------- ------ -------------- -------------------- ---------- ----------
Balance at 31 December
2018 1,560,243 182,481 456,023 2,198,747
---------------------------- ------ -------------- -------------------- ---------- ----------
Total comprehensive income - - 138,168 138,168
Issue of Ordinary shares 15 195,553 - - 195,553
Issue costs applied to
new shares 15 (1,956) - - (1,956)
Dividends in the year 15 - - (105,273) (105,273)
---------------------------- ------ -------------- -------------------- ---------- ----------
Balance at 31 December
2019 1,753,840 182,481 488,918 2,425,239
---------------------------- ------ -------------- -------------------- ---------- ----------
YEARED 31 DECEMBER 2018
SHARE CAPITAL
and share OTHER DISTRIBUTABLE RETAINED
NOTES premium RESERVE EARNINGS TOTAL
GBP'000s GBP'000s GBP'000s GBP'000s
---------------------------- ------ -------------- -------------------- ---------- ----------
Balance at 31 December
2017 1,441,048 182,481 414,769 2,038,298
---------------------------- ------ -------------- -------------------- ---------- ----------
Total comprehensive income - - 138,369 138,369
Issue of Ordinary shares 15 120,270 - - 120,270
Issue costs applied to
new shares 15 (1,075) - - (1,075)
Dividends in the year 15 - - (97,115) (97,115)
---------------------------- ------ -------------- -------------------- ---------- ----------
Balance at 31 December
2018 1,560,243 182,481 456,023 2,198,747
---------------------------- ------ -------------- -------------------- ---------- ----------
CONSOLIDATED BALANCE SHEET
AS AT 31 DECEMBER 2019
31 DECEMBER 31 DECEMBER
2019 2018
NOTES GBP'000S GBP'000S
---------------------------------- ------ ----------- -----------
Non-current assets
Investments at fair value through
profit or loss 11 2,382,645 2,097,468
---------------------------------- ------ ----------- -----------
Total non-current assets 2,382,645 2,097,468
================================== ====== =========== ===========
Current assets
Other financial costs 11, 13 31,150 25,234
Cash and cash equivalents 11 45,610 84,718
Derivative financial instruments 11 4,161 -
Total current assets 80,921 109,952
================================== ====== =========== ===========
Total assets 2,463,566 2,207,420
---------------------------------- ------ ----------- -----------
Current liabilities
Trade and other payables 11, 14 10,471 8,366
Derivative financial instruments 11 - 307
---------------------------------- ------ ----------- -----------
Total current liabilities 10,471 8,673
---------------------------------- ------ ----------- -----------
Non-current liabilities
---------------------------------- ------ ----------- -----------
Bank loans 8, 11 27,856 -
---------------------------------- ------ ----------- -----------
Total non-current liabilities 27,856 -
---------------------------------- ------ ----------- -----------
Total liabilities 38,327 8,673
Net assets 2,425,239 2,198,747
---------------------------------- ------ ----------- -----------
Equity
Share capital and share premium 15 1,753,840 1,560,243
Other distributable reserve 15 182,481 182,481
Retained earnings 15 488,918 456,023
---------------------------------- ------ ----------- -----------
Equity attributable to equity
holders of the parent 2,425,239 2,198,747
---------------------------------- ------ ----------- -----------
Net assets per share (pence per
share) 16 150.6 148.1
---------------------------------- ------ ----------- -----------
The financial statements were approved by the Board of Directors
on 25 March 2020.
They were signed on its
behalf by:
Mike Gerrard John Le Poidevin
Chairman Director
8 April 2020 8 April 2020
CONSOLIDATED CASH FLOW STATEMENT
Year ended 31 December 2019
Year ended Year ended
31 December 31 December
2019 2018
Notes GBP'000s GBP'000s
--------------------------------------------- ------ ------------- -------------
Profit before tax in the Consolidated
Statement of Comprehensive Income (1) 137,750 138,089
Adjusted for:
Gain on investments at fair value through
profit or loss 4 (44,132) (63,826)
Finance costs(2) 8 5,053 3,944
Fair value movement on derivative financial 5,
instruments 11 (4,468) (1,397)
Working capital adjustments
(increase) / decrease in receivables (6,929) 1,645
Increase in payables 2,105 62
--------------------------------------------- ------ ------------- -------------
89,379 78,517
Income tax received / (paid) (3) 1,071 (296)
--------------------------------------------- ------ ------------- -------------
Net cash inflow from operations (4) 90,450 78,221
--------------------------------------------- ------ ------------- -------------
Investing Activities
Acquisition of investments at fair value
through profit or loss 12 (281,286) (63,293)
Net repayments from investments at fair
value through profit or loss 40,241 34,943
--------------------------------------------- ------ ------------- -------------
Net cash outflow from investing activities (241,045) (28,350)
--------------------------------------------- ------ ------------- -------------
Financing Activities
Proceeds from issue of shares net of issue
costs 190,115 114,925
Dividends paid 15 (101,791) (92,845)
Finance costs paid(2) (4,699) (3,234)
Loan drawdowns(2) 218,300 54,991
--------------------------------------------- ------ ------------- -------------
Loan repayments(2) (190,444) (72,791)
--------------------------------------------- ------ ------------- -------------
Net cash provided by financing activities 111,481 1,046
--------------------------------------------- ------ ------------- -------------
Net (decrease) / increase in cash and cash
equivalents (39,114) 50,917
Cash and cash equivalents at beginning
of year 84,718 33,850
Foreign exchange gain / (loss) on cash
and cash equivalents 6 (49)
============================================= ====== ============= =============
Cash and cash equivalents at end of year
(5) 45,610 84,718
--------------------------------------------- ------ ------------- -------------
1 Includes interest received of GBP69.8 million (December 2018:
GBP68.5 million) and dividends received of GBP48.2 million
(December 2018: GBP32.0 million).
2 These are cash flows and non-cash flows for financing
liabilities in accordance with IAS 7, 44A-E.
3 Cash flows received from unconsolidated subsidiary entities in
respect of surrender of tax losses.
4 Net cash flows from operations above are reconciled to net
operating cash flows before capital activity as shown in the
Strategic Report on pages 24-25.
5 Includes restricted cash of GBPnil (December 2018: GBP42.2
million) which under the terms of the Corporate Debt Facility
Agreement can only be utilised for new investments.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARED 31 DECEMBER 2019
1. Basis of Preparation
International Public Partnerships Limited is a closed-ended
authorised investment company incorporated in Guernsey under the
Companies (Guernsey) Law, 2008. The address of the registered
office is given on the inside back cover. The nature of the Group's
('Parent and consolidated subsidiary entities') operations and its
principal activities are set out on pages 4-5.
These financial statements are presented in pounds sterling as
this is the currency of the primary economic environment in which
the Group operates and represents the functional currency of the
Parent and all values are rounded to the nearest (GBP'000), except
where otherwise indicated.
Basis of Preparation
These financial statements have been prepared in accordance with
International Financial Reporting Standards ('IFRS'), adopted by
the EU, interpretations issued by the International Financial
Reporting Interpretations Committee, applicable legal and
regulatory requirements of Guernsey, and the Listing Rules of the
UK Listing Authority. These financial statements follow the
historical cost basis, except for financial assets held at fair
value through profit or loss and derivatives that have been
measured at fair value. The principal accounting policies adopted
are set out in relevant notes to the financial statements.
The Directors have determined that International Public
Partnerships Limited is an investment entity as defined by IFRS 10
on the basis that the Company:
a) obtains funds from one or more investor(s) for the purpose of
providing those investor(s) with investment management
services;
b) commits to its investors that its business purpose is to
invest funds solely for returns from capital appreciation,
investment income, or both; and
c) measures and evaluates the performance of substantially all
of its investments on a fair value basis.
Accordingly, these financial statements consolidate only those
subsidiaries that provide services relevant to its investment
activities, such as management services, strategic advice and
financial support to its investees, and that are not themselves
investment entities. Subsidiaries that do not provide
investment-related services are required to be measured at fair
value through profit or loss in accordance with IFRS 9 Financial
Instruments.
Going Concern
As set out in the Directors' Report, the Directors have reviewed
cash flow forecasts prepared by management which include the
reassessment of the operational forecasts as a result of Covid-19
as described in note 19. Based on those forecasts and an assessment
of the Group's committed banking facilities, it has been considered
appropriate to prepare the financial statements of the Group on a
going concern basis.
In arriving at their conclusion that the Group has adequate
financial resources, the Directors were mindful that the Group had
unrestricted cash of GBP45.6 million as at 31 December 2019. The
Company continues to fully cover operating costs and distributions
from underlying cash flows from investments. The Company has access
to a corporate debt facility of GBP400 million, of which GBP371.5
million was uncommitted as at 31 December 2019, and is available
for investment in new and existing projects until July 2021. In
addition, a GBP20 million portion of the facility can be utilised
for working capital purposes. The facility is forecast to continue
in full compliance with the associated banking covenants.
Accounting Policies
The same accounting policies, presentation and methods of
computation are followed in this set of financial statements as
applied in the previous financial year. The new and revised IFRS
and interpretations becoming effective in the period have had no
material impact on the accounting policies of the Group. Note 20
sets out a comprehensive listing of all new standards applicable
from 1 January 2019.
2. Significant Judgements and Estimates
Fair Valuation of Investments at Fair Value through Profit or
Loss
Fair values are determined using the income approach which
discounts the expected cash flows at a rate appropriate to the risk
profile of each investment. In determining the discount rate,
relevant long-term government bond yields, specific investment
risks and evidence of recent transactions are considered. Details
of the valuation process and key sensitivities are provided in note
11.
3. SEGMENTAL REPORTING
Based on a review of information provided to the chief operating
decision makers of the Group, the Group has identified four
reportable segments based on the geographical risk associated with
the jurisdictions in which it operates. The factors used to
identify the Group's reportable segments are centered on the
risk-free rates and the maturity of the infrastructure sector
within each region. Further, foreign exchange and political risk is
identified, as these also determine where resources are allocated.
Management has concluded that the Group is currently organised into
four operating segments being UK, Europe (excl. UK), North America
and Australia.
Year ended 31 December 2019
---------- -----------------------------------------------------------------
UK Europe (EXCL. North America Australia Total
GBP'000s UK) GBP'000s GBP'000s GBP'000s
GBP'000s
------------------------ ---------- ----------------------- -------------- ---------- ----------
Segmental results
Dividend and interest
income 94,707 7,674 8,795 13,410 124,586
Fair value gain on
investments 26,442 11,324 2,102 4,264 44,132
------------------------ ---------- ----------------------- -------------- ---------- ----------
Total investment income 121,149 18,998 10,897 17,674 168,718
------------------------ ---------- ----------------------- -------------- ---------- ----------
Reporting segment
profit (1) 85,803 22,242 11,429 18,694 138,168
------------------------ ---------- ----------------------- -------------- ---------- ----------
Segmental financial
position
Investments at fair
value 1,755,755 321,337 105,001 200,552 2,382,645
Current assets 80,921 - - - 80,921
------------------------ ---------- ----------------------- -------------- ---------- ----------
Total assets 1,836,676 321,337 105,001 200,552 2,463,566
Total liabilities (38,327) - - - (38,327)
------------------------ ---------- ----------------------- -------------- ---------- ----------
Net assets 1,798,349 321,337 105,001 200,552 2,425,239
------------------------ ---------- ----------------------- -------------- ---------- ----------
Year ended 31 December 2018
---------- -----------------------------------------------------------------
Europe (EXCL.
UK UK) North America Australia Total
GBP'000s GBP'000s GBP'000s GBP'000s GBP'000s
------------------------- ---------- ----------------------- -------------- ---------- ------------
Segmental results
Dividend and interest
income 76,463 6,907 8,521 11,328 103,219
Fair value gain on
investments 30,184 23,485 6,298 3,859 63,826
------------------------- ---------- ----------------------- -------------- ---------- ------------
Total investment income 106,647 30,392 14,819 15,187 167,045
------------------------- ---------- ----------------------- -------------- ---------- ------------
Reporting segment
profit (1) 77,348 30,887 14,570 15,564 138,369
------------------------- ---------- ----------------------- -------------- ---------- ------------
Segmental financial
position
Investments at fair
value 1,496,423 290,406 103,767 206,872 2,097,468
Current assets 109,952 - - - 109,952
------------------------- ---------- ----------------------- -------------- ---------- ------------
Total assets 1,606,375 290,406 103,767 206,872 2,207,420
Total liabilities (8,673) - - - (8,673)
------------------------- ---------- ----------------------- -------------- ---------- ------------
Net assets 1,597,702 290,406 103,767 206,872 2,198,747
------------------------- ---------- ----------------------- -------------- ---------- ------------
1 Reporting segment results are stated net of operational costs including management fees.
Revenue from investments which individually represent more than
10% of the Group's interest and dividend income approximates
GBP20.7 million (2018: GBP23.0 million).
4. Investment Income
Accounting Policy
Interest income
Interest income is recognised when it is probable that the
economic benefits will flow to the Group and the amount of income
can be measured reliably. Interest income is accrued on a
time-apportioned basis and is recognised gross of withholding tax,
if any.
Dividend income
Dividend income is recognised gross of withholding tax on the
date the right to receive payment is established. This is the date
when the Directors of the underlying project entity approve the
payment of a dividend.
Net change in investments at fair value through profit or
loss
Net change in investments at fair value through profit or loss
includes all realised and unrealised fair value changes (including
foreign exchange movements) other than interest and dividend income
recognised separately
Year ended Year ended
31 December 31 December
2019 2018
GBP'000s GBP'000s
------------------------------------------------ ------------ ------------
Interest income
Interest on investments 76,405 71,201
Total interest income 76,405 71,201
------------------------------------------------ ------------ ------------
Dividend income 48,181 32,018
Net change in investments at fair value through
profit or loss 44,132 63,826
------------------------------------------------ ------------ ------------
Total investment income 168,718 167,045
------------------------------------------------ ------------ ------------
Dividend and interest income includes that from transactions
with unconsolidated subsidiary entities. Changes in investments at
fair value through profit or loss are also recognised in relation
to the Group's investments in unconsolidated subsidiaries.
5. Other Operating Income
Year ended Year ended
31 December 31 December
2019 2018
GBP'000s GBP'000s
---------------------------------------------- ------------ ------------
Fair value gain on foreign exchange contracts 4,468 1,397
Other gains / (losses) on foreign exchange
movements 329 (775)
----------------------------------------------- ------------ --------------
Total other operating income 4,797 622
----------------------------------------------- ------------ --------------
6. Transaction Costs
Year ended Year ended
31 December 31 December
2019 2018
GBP'000s GBP'000s
----------------------------- ------------ ------------
Investment advisory costs 4,221 935
Legal and professional costs - 22
----------------------------- ------------ ------------
Total transaction costs 4,221 957
----------------------------- ------------ ------------
Details of total transaction costs paid to the Investment
Adviser are provided in note 17.
7. Auditor's Remuneration
Year ended Year ended
31 December 31 December
2019 2018
GBP'000s GBP'000s
--------------------------------------------------------------- ------------ ------------
Fees payable to the Group 's auditor for the
audit of the Group 's financial statements 304 304
Fees payable to the Group 's auditor and their
associates for other services to the Group
* The audit of the Group 's consolidated subsidiaries 46 46
* The audit of the Group 's unconsolidated subsidiaries 111 111
--------------------------------------------------------------- ------------ ------------
Total audit fees 461 461
--------------------------------------------------------------- ------------ ------------
Other fees
* Audit related assurance services 11 11
* Other services 24 42
--------------------------------------------------------------- ------------ ------------
Total non-audit fees 35 53
--------------------------------------------------------------- ------------ ------------
8. Finance Costs
Accounting Policy
Interest bearing loans and overdrafts are initially recorded as
the proceeds received net of any directly attributable issue costs.
Subsequent measurement is at amortised cost, with borrowing costs
recognised in the Consolidated Statement of Comprehensive Income in
the period in which they are incurred, using the effective interest
rate method. Arrangement fees are amortised over the term of the
corporate debt facility.
Finance costs for the year were GBP5.1 million (2018: GBP3.9
million). The Group has a corporate debt facility of GBP400 million
provided by Royal Bank of Scotland, National Australia Bank,
Barclays Bank and Sumitomo Mitsui Banking Corporation. The
drawdowns in the period were in the form of cash drawdowns and
issuance of letters of credit. Cash drawdowns were used to
partially fund investments and the letter of credit drawdowns were
used to back the Group's commitment to specific future cash
investments. As at December 2019 the facility was GBP27.9 million
cash drawn (December 2018: GBPnil cash drawn). The uncommitted
balance of the facility which was not cash drawn or notionally
drawn via letters of credit, was GBP371.5 million (December 2018:
GBP399.5 million).
The facility was renewed in July 2018 on improved terms. The
interest rate margin on the corporate debt facility is 165 basis
points over Libor. The loan facility matures in July 2021 and is
secured over the assets of the Group.
9. Tax
Accounting Policy
Current tax is based on taxable profit for the period. Taxable
profit differs from net profit as reported in the Consolidated
Statement of Comprehensive Income as it excludes items of income or
expense that are taxable or deductible in past or future years and
it further excludes items that are never taxable or deductible. The
Group's asset/liability for current tax is calculated using tax
rates that have been enacted or substantively enacted at the
balance sheet date. The current tax charge/credit in the
Consolidated Statement of Comprehensive Income is recognised net of
receivables recognised for losses surrendered to unconsolidated
subsidiary entities.
Under the current system of taxation in Guernsey, the Company
itself is exempt from paying taxes on income, profits or capital
gains. Dividend income and interest income received by the Group
may be subject to withholding tax imposed in the country of origin
of such income.
Year ended Year ended
31 December 2019 31 December
GBP'000s 2018
GBP'000s
----------------------------------------- ----------------- ------------
Current tax:
UK corporation tax credit - current year (521) (412)
UK corporation tax - prior year 23 -
Other overseas tax - current year 106 82
Other overseas tax - prior year (26) 50
----------------------------------------- ----------------- ------------
Tax credit for the year (418) (280)
----------------------------------------- ----------------- ------------
Reconciliation of effective tax rate
Year ended
Year ended 31 December
31 December 2019 2018
GBP'000s GBP'000s
------------------------------------------------ ------------------ -------------
Profit before tax 137,750 138,089
------------------------------------------------ ------------------ -------------
Exempt tax status in Guernsey - -
Application of overseas tax rates 106 82
Group tax losses surrendered to unconsolidated
investee entities (521) (412)
Adjustments to previous year's assessment (3) 50
------------------------------------------------ ------------------ -------------
Tax credit for the year (418) (280)
------------------------------------------------ ------------------ -------------
The income tax credit above does not represent the full tax
position of the entire Group as the investment returns received by
the Company are net of tax payable at the underlying investee
entity level. As a consequence of the adoption of IFRS 10
investment entity consolidation exception, underlying investee
entity tax is not consolidated within these financial statements.
To provide an indication of the tax paid across the wider
portfolio, total forecasted corporation tax payable by the Group's
underlying investments is in excess of GBP1 billion (December 2018:
GBP1 billion) over their full concession lives.
10. Earnings Per Share
The calculation of basic and diluted earnings per share is based
on the following data:
Year ended Year ended
31 December 31 December
2019 2018
GBP'000s GBP'000s
-------------------------------------------------- ------------- -------------
Earnings for the purposes of basic and diluted
earnings per share being net profit attributable
to equity holders of the parent 138,168 138,369
-------------------------------------------------- ------------- -------------
Number Number
-------------------------------------------------- ------------- -------------
Weighted average number of Ordinary shares for
the purposes of basic and diluted earnings per
share 1,506,701,793 1,418,962,119
-------------------------------------------------- ------------- -------------
Basic and diluted (pence) 9.17 9.75
-------------------------------------------------- ------------- -------------
The denominator for the purposes of calculating both basic and
diluted earnings per share is the same as the Group has not issued
any share options or other instruments that would cause
dilution.
11. Financial Instruments
Financial assets and financial liabilities are recognised when
the Group becomes a party to the contractual provisions of the
instrument. Financial assets are derecognised when the contractual
rights to the cash flows from the instrument expire or the asset is
transferred, and the transfer qualifies for derecognition in
accordance with IFRS 9 Financial Instruments. Financial liabilities
are derecognised when the obligation is discharged, cancelled or
expired. Specific financial asset and liability accounting policies
are provided below.
11.1 Financial assets
31 December 31 December
2019 2018
GBP'000s GBP'000s
-------------------------------------------------- ----------- -----------
Investments at fair value through profit and loss 2,382,645 2,097,468
Financial assets
Other financial assets 31,150 25,234
Cash and cash equivalents 45,610 84,718
Derivative financial instruments
Foreign exchange contracts 4,161 -
Total financial assets 2,463,566 2,207,420
-------------------------------------------------- ----------- -----------
Accounting Policy
The Group classifies its financial assets as at fair value
through profit or loss or as financial assets at amortised cost.
The classification depends on the purpose for which the financial
assets were acquired, with investments in unconsolidated
subsidiaries (other than those providing investment-related
services) being at fair value through profit or loss as required by
IFRS 10.
Investments at fair value through profit or loss
Investments in underlying unconsolidated subsidiaries and other
non-controlled investments are held in a portfolio, the business
model of which is to manage them on a fair value basis. The Group's
policy is to fair value both the equity and debt investments in
underlying assets together. All transaction costs relating to the
acquisition of new investments are recognised directly in profit or
loss. Subsequent to initial recognition, equity and debt
investments are measured at fair value with changes in fair value
recognised within total investment income in the Consolidated
Statement of Comprehensive Income.
Other financial assets
Trade and other receivables that meet the contracted cash flow
test as solely payments of principal and interest and which are
held in a business model to receive these contractual cash flows
are classified as other financial assets. Financial assets with
maturities less than 12 months are included in current assets,
financial assets with maturities greater than 12 months after the
balance sheet date are classified as non-current assets.
Cash and Cash Equivalents
Cash and cash equivalents comprise cash on hand and demand
deposits and other short-term highly liquid investments with an
original maturity of three months or less that are readily
convertible to a known amount of cash and are subject to an
insignificant risk of changes in value.
Derivative Financial Instruments
Derivatives are classified as financial assets and liabilities
at fair value through profit or loss, held for trading. Derivatives
are recognised initially, and are subsequently remeasured, at fair
value. Derivatives are shown as assets when their fair value is
positive or as liabilities when their fair value is negative. Fair
value movements on derivative financial instruments held for
trading are recognised in the Consolidated Statement of
Comprehensive Income.
Impairment of Financial Assets
Financial assets, other than those classified at fair value
through profit or loss are assessed for indicators of impairment at
each balance sheet date using a simplified approach to calculate
any expected credit losses. There is no material impairment at the
balance sheet date.
11.2 Financial liabilities
31 December 31 December
2019 2018
GBP'000s GBP'000s
---------------------------------------- ----------- -----------
Financial liabilities at amortised cost
Trade and other payables 10,471 8,366
Bank loans 27,856 -
Derivative financial instruments
Foreign exchange contracts - 307
---------------------------------------- ----------- -----------
Total financial liabilities 38,327 8,673
---------------------------------------- ----------- -----------
Accounting Policy
Trade and other payables
Financial liabilities, other than those specifically accounted
for under a separate policy, are stated based on the amounts which
are considered to be payable in respect of goods or services
received up to the financial reporting date. The carrying value of
other liabilities is considered to approximate their fair
value.
11.3 Financial risk management
The Group's objective in managing risk is the protection of
stakeholder value. Risk is inherent in the Group's activities and
is managed through a process of ongoing identification, measurement
and monitoring, subject to risk limits and other controls. The
Group is exposed to market risk (which includes currency risk,
interest rate risk and inflation risk), credit risk and liquidity
risk arising from the financial instruments it holds. The Board of
Directors is ultimately responsible for the overall risk management
of the Group, with delegation of oversight and activities
(including identifying and controlling risks) provided to the Audit
and Risk Committee and the Group's Investment Adviser. The Group's
risk management framework and approach is set out within the
Strategic Report (pages 42-53). The Board takes into account
market, credit and liquidity risks in forming the Group's risk
management strategy.
Market risk
Market risk is the risk that the fair value or future cash flows
of financial instruments will fluctuate due to changes in market
variables such as changes in inflation, foreign exchange rates and
interest rates.
Inflation risk
The majority of the Group's cash flows from underlying
investments are linked to inflation indices. Changes in inflation
rates can have a positive or negative impact on the Group's cash
flows from investments. The long-term inflation assumptions applied
in the Group's valuation of investments at fair value through
profit or loss are disclosed in the fair value hierarchy section
11.4.
The Group's portfolio of investments has been developed in
anticipation of continued inflation at or above the levels used in
the Group's valuation assumptions. Where inflation is at levels
below the assumed levels for a sustained period of time, investment
performance may be impaired. The level of inflation linkage across
the investments held by the Group varies and is not consistent.
Interest rate risk
Interest rate risk arises from the possibility that changes in
interest rates will affect future cash flows from underlying
investments therefore impacting the value of investments at fair
value through profit or loss. The Group has limited exposure to
interest rate risk as the underlying borrowings within the
unconsolidated investee entities are either hedged through interest
rate swap arrangements, are fixed rate loans or the risk of adverse
movement in interest rates is limited through protections provided
by the regulatory regime. For example, it is generally a
requirement under a PFI/PPP concession that any borrowings are
matched to the life of the concession. Hedging activities are
aligned with the period of the loan, which also mirrors the
concession period and are highly effective. However, particularly
in Australia, refinancing risk exists in a number of such
investments. The Group's corporate debt facility is unhedged on the
basis it is utilised as an investment bridging facility and
therefore drawn for a relatively short period of time. Therefore,
the Group is not significantly exposed to cash flow risk due to
changes in interest rates over its variable rate borrowings.
Interest income on bank deposits held within underlying investments
is included within the fair value of investments.
Foreign currency risk
The Group undertakes certain transactions denominated in foreign
currencies and therefore is exposed to exchange rate fluctuations.
Currency risk arises in financial instruments that are denominated
in a foreign currency other than the functional currency in which
they are measured. The Group uses forward foreign exchange
contracts to mitigate the risk of short-term volatility in foreign
exchange on significant investment returns from overseas
investments. The Group doesn't hedge its exposure to foreign
exchange in relation to foreign currency denominated investment
balances. The carrying amounts of the Group's foreign currency
denominated monetary financial instruments at the reporting date
are set out in the table below:
31 December 31 December
2019 2018
GBP'000s GBP'000s
------------------------------------------------- ----------- -----------
Cash
Euro 2,951 2,555
Canadian dollar 654 1,184
Australian dollar 1,623 97
US Dollar 664 1,227
------------------------------------------------- ----------- -----------
5,892 5,063
Current receivables
Euro receivables 124 1,454
US dollar receivables 539 183
------------------------------------------------- ----------- -----------
663 1,637
Investments at fair value through profit or loss
Euro 321,337 290,406
Canadian dollar 39,911 38,163
Australian dollar 200,552 206,872
US dollar 65,090 65,604
------------------------------------------------- ----------- -----------
626,890 601,045
------------------------------------------------- ----------- -----------
Total 633,445 607,745
------------------------------------------------- ----------- -----------
Sensitivity analysis showing the impact of variations of the
above risks on the fair value of investments is shown in section
11.5.
Credit risk
Credit risk refers to the risk that a counterparty will default
on its contractual obligations resulting in a financial loss to the
Group. The Group has adopted a policy of dealing with creditworthy
counterparties and reviewing this on a regular basis at the
underlying entity level. The majority of underlying investments are
in public-private partnerships and similar concessions (which are
entered into with government, quasi government, other public,
equivalent low risk bodies), or in regulated businesses that
inherently exhibit low levels of credit risk. The maximum exposure
of credit risk over financial assets as a result of counterparty
default is the carrying value of those financial assets in the
balance sheet. In addition, the underlying investee entities
contract with third-party construction and facilities managements
contractors. The Group seeks to mitigate this risk through using a
diverse range of sub-contractors and through at least quarterly
review of the credit position of major contractors.
Liquidity risk
Liquidity risk is defined as the risk that the Group would
encounter difficulty in meeting obligations associated with
financial liabilities that are settled by delivering cash or
another financial asset. The Group invests in relatively illiquid
investments (mainly non-listed equity and loans). As a closed-ended
investment vehicle there are no automatic capital redemption
rights. The Group manages liquidity risk by maintaining adequate
cash reserves, banking facilities and reserve borrowing facilities
and by continuously monitoring forecast and actual cash flows. Cash
flow forecasts assume full availability of underlying
infrastructure to the relevant public sector body or end-user.
Failure to maintain assets available for use or operating in
accordance with pre-determined performance standards or licence
conditions may lead to a reduction (wholly or partially) in the
investment income that the Group has projected to receive. The
Directors review the underlying performance of each investment on a
quarterly basis, allowing asset performance to be monitored. The
terms of public-private partnership contractual mechanisms also
allow for significant pass-down of unavailability and performance
risk to sub-contractors. Regulated asset regimes allow for the pass
through of efficiently incurred costs to the purchaser.
11.4 Fair value hierarchy
All financial instruments for which fair value is recognised or
disclosed are categorised within the fair value hierarchy,
described as follows, based on the lowest level input that is
significant to the fair value measurement as a whole:
Level 1 - Quoted market prices in an active market (that are
unadjusted) for identical assets or liabilities
Level 2 - Valuation techniques (for which the lowest level input
that is significant to the fair value measurement is directly or
indirectly observable)
Level 3 - Valuation techniques (for which the lowest level input
that is significant to the fair value measurement is
unobservable)
During the period there were no transfers between Level 2 and
Level 3 categories.
Level 1:
The Group has no financial instruments classified as Level
1.
Level 2:
This category includes derivative financial instruments such as
interest rate swaps, RPI Swaps and currency forward contracts. As
at 31 December 2019, the Group's only derivative financial
instruments were currency forward contracts amounting to an asset
of GBP4.2 million (December 2018: liability of GBP0.3 million).
Financial instruments classified as Level 2 have been valued
using models whose inputs are observable in an active market (spot
exchange rates, yield curves, interest rate curves). Valuations
based on observable inputs include financial instruments such as
swaps and forward contracts which are valued using market standard
pricing techniques where all the inputs to the market standard
pricing models are observable.
Level 3:
This category consists of investments in equity and loan
instruments in underlying unconsolidated subsidiary entities and
other non-controlled investments which are classified at fair value
through profit or loss. At 31 December 2019, the fair value of
financial instruments classified within Level 3 totalled GBP2,382.6
million (December 2018: GBP2,097.5 million).
Financial instruments are classified within Level 3 if their
valuation incorporates significant inputs that are not based on
observable market data (unobservable inputs). A valuation input is
considered observable if it can be directly observed from
transactions in an active market, or if there is compelling
external evidence demonstrating an executable exit price.
Valuation process
Valuations are the responsibility of the Board of Directors. The
valuation of unlisted equity and debt investments is performed on a
quarterly(1) basis by the Investment Adviser. The valuation is
reviewed by the senior members of the Investment Adviser, and
reviewed and approved by the Board.
Valuation methodology
The valuation methodologies used are primarily based on
discounting the underlying investee entities' future projected net
cash flows at appropriate discount rates. Valuations are also
reviewed against recent market transactions for similar assets in
comparable markets observed by the Group or Investment Adviser and
adjusted where appropriate.
Cash flow forecasts for the full-term of each underlying
investment are generated by detailed investment specific financial
models. These models forecast the dividend, shareholder loan
interest payments, capital repayments and senior debt repayments
(where applicable) expected from the underlying investments. The
cash flows included in the forecasts used to determine fair value
are typically fixed under contracts, however there are certain
variable cash flows which are based on management's estimations
(see also pages 24-25 of the strategic report). The significant
unobservable inputs and assumptions used in projecting the Group's
net future cash flows are shown overleaf.
1 Indicative valuations are calculated in respect of each at 31
March and 30 September.
Europe
31 december 2019 UK (Excl. UK) North America Australia
----------------------------- -------------- -------------- ------------------ ----------
Inflation 2.75% RPI, 2.00% 2.00% 2.50%
2.00% CPIH
Long-term tax 19.00% 12.50%-32.28% 23.00% -26.50%(1) 30.00%
Foreign exchange rates N/A 1.13 1.37-1.80 1.92
Long-term deposit rates 2.00% 2.00% 2.50% 3.00%
----------------------------- -------------- -------------- ------------------ ----------
Europe
31 december 2018 UK (Excl. UK) North America Australia
----------------------------- -------------- -------------- ------------------ ----------
Inflation 2.75% RPI, 2.00% 2.00% 2.50%
2.00% CPIH
Long-term tax 19.00%-17.00% 12.50%-29.58% 26.50% -27.00%(1) 30.00%
Foreign exchange rates N/A 1.05 1.34-1.80 1.88
Long-term deposit rates 2.00% 2.00% 2.00% 3.00%
----------------------------- -------------- -------------- ------------------ ----------
1 Related to investments in Canada.
Discount rate
The discount rate used in the valuation of each investment is
the aggregate of the following:
- Yield on a government bond with a remaining term equivalent to
(or as close as possible to) the investment being valued, issued by
the national government for the location of the relevant investment
('government bond yield');
- A premium to reflect the inherent greater risk in investing in
infrastructure assets over government bonds;
- A further premium to reflect the state of maturity of the
asset with a larger premium applied to immature assets and/or
assets in construction and/or to reflect any current asset specific
or operational issues. Typically, this risk premium will reduce
over the life of any asset as an asset matures, its operating
performance becomes more established, and the risks associated with
its future cash flows decrease. However, the rate may increase in
relation to investments with unknown residual values at the end of
the relevant concession life as that date nears;
- A further adjustment reflective of market-based transaction
valuation evidence for similar assets.
Over the period, the weighted average government bond yield
decreased by 0.85%. The weighted average investment risk premium
increased by 0.61% , reflecting observable market-based evidence.
Further details are provided within the Strategic Report on pages
30-31.
31 December 2019 31 December
Valuation ASSUMPTIONS 2018 Movement
----------------------------- ----------------- ------------ ---------
Weighted Average Government
Bond Yield 0.98% 1.83% (0.85%)
Weighted Average Investment
Risk Premium 6.04% 5.43% 0.61%
----------------------------- ----------------- ------------ ---------
Weighted Average Discount
Rate 7.02% 7.26% (0.24%)
----------------------------- ----------------- ------------ ---------
Weighted Average Discount
Rate on Risk Capital(1) 7.52% 7.55% (0.03%)
----------------------------- ----------------- ------------ ---------
1 Weighted average discount rate on Risk Capital only (equity and subordinated debt).
Reconciliation of Level 3 fair value 31 DECEMBER 31 DECEMBER
measurements of financial assets: 2019 2018
----------------------------------------- ------------- -------------
Balance at 1 January 2,097,468 2,005,292
Additional investments during the year 281,286 63,293
Net repayments during the year (40,241) (34,943)
Net change in investments at fair value
through profit or loss 44,132 63,826
----------------------------------------- ------------- -------------
Balance at 31 December 2,382,645 2,097,468
----------------------------------------- ------------- -------------
11.5 Sensitivity analysis
The valuation requires management to make certain assumptions in
relation to unobservable inputs to the model. There are no straight
forward inter-relationships between the unobservable inputs. A
sensitivity analysis for reasonably possible alternative
assumptions is provided below:
Weighted average Change in Change in
rate in base fair value fair value
Significant assumptions case valuations Sensitivity of investment Sensitivity of investment
31 December 2019 factor GBP'000s factor GBP'000s
------------------------ ------------------- ----------- -------------- ----------- --------------
Discount rate 7.02% +1.00% (221,830) -1.00% 266,321
------------------------ ------------------- ----------- -------------- ----------- --------------
Inflation rate
(overall) 2.26% +1.00% 247,568 -1.00% (204,613)
UK 2.47% +1.00% 198,445 -1.00% (160,506)
Europe 2.00% +1.00% 39,398 -1.00% (33,825)
North America 2.00% +1.00% 1,037 -1.00% (899)
Australia 2.50% +1.00% 8,700 -1.00% (9,384)
------------------------ ------------------- ----------- -------------- ----------- --------------
FX rate N/A +10.00% 63,017 -10.00% (63,017)
------------------------ ------------------- ----------- -------------- ----------- --------------
Tax rate 18.31% +1.00% (20,668) -1.00% 19,729
------------------------ ------------------- ----------- -------------- ----------- --------------
Deposit rate 1.81% +1.00% 23,642 -1.00% (20,778)
------------------------ ------------------- ----------- -------------- ----------- --------------
Weighted average Change in Change in
rate in base fair value fair value
Significant assumptions case valuations Sensitivity of investment Sensitivity of investment
31 DECEMBER 2018 factor GBP'000's factor GBP'000's
------------------------ ------------------- ----------- -------------- ----------- --------------
Discount rate 7.26% +1.00% (215,216) -1.00% 259,450
------------------------ ------------------- ----------- -------------- ----------- --------------
Inflation rate
(overall) 2.38% +1.00% 260,898 -1.00% (220,864)
UK 2.50% +1.00% 204,773 -1.00% (173,197)
Europe 2.00% +1.00% 46,126 -1.00% (39,019)
North America 2.00% +1.00% 1,079 -1.00% (917)
Australia 2.50% +1.00% 8,920 -1.00% (7,709)
------------------------ ------------------- ----------- -------------- ----------- --------------
FX rate N/A +10.00% 60,833 -10.00% (60,820)
------------------------ ------------------- ----------- -------------- ----------- --------------
Tax rate 17.65% +1.00% (19,044) -1.00% 18,970
------------------------ ------------------- ----------- -------------- ----------- --------------
Deposit rate 1.87% +1.00% 23,842 -1.00% (22,310)
------------------------ ------------------- ----------- -------------- ----------- --------------
12. Investments
2019
Consideration % Ownership
Date of investment Description GBP'000's post investment
-------------------- --------------------------------------------- -------------- -----------------
The Group made a follow on investment
into the Luton Building Schools
January 2019 for the Future project, UK 211 50.00%
The Group made further investments
as part of its commitment to the
March - December National Digital Infrastructure
2019 Fund, UK 12,805 45.00%
The Group made investments into
April - October the Midlands Batch Priority Schools
2019 Building Project (Batch 4), UK 12,291 100.00%
The Group made a follow on investment
into the Wolverhampton Building
Schools for the Future projects
June 2019 1 & 2, UK 1,800 100.00%
The Group, as part of a consortium,
made further investments into the
Cadent gas distribution network,
June 2019 UK 153,240 7.25%
The Group acquired an additional
June 2019 interest in BeNEX, Germany 29,397 100%
The Group invested additional amounts
as part of its refinancing and restructure
September 2019 of its OFTOs portfolio 71,542 100%
-------------------- --------------------------------------------- -------------- -------------------
Total capital spend on investments during the
year 281,286
------------------------------------------------------------------- -------------- -----------------
2018
Consideration % Ownership
Date of investment Description GBP'000's post investment
-------------------- ---------------------------------------------- -------------- -----------------
The Group funded a final tranche
of investment in the Gold Coast Rapid
2 January 2018 Transport project, Australia 575 30%
The Group made an investment to acquire
an additional interest in the Hertfordshire
Phase 1 Building Schools for the
28 March 2018 Future project, U.K. 1,745 100%
The Group made investments as part
April - December of its commitment to the National
2018 Digital Infrastructure Fund, U.K. 14,807 45%
The Group made an investment in the
7 November Dudgeon offshore transmission project,
2018 U.K. 46,166 100%
Total capital spend on investments during the
year 63,293
-------------------------------------------------------------------- -------------- -----------------
13. other FINANCIAL ASSETS
31 December 31 December
2019 2018
GBP '000's GBP'000's
------------------------------ ------------ -------------
Accrued interest receivable 27,273 20,704
Other debtors 3,877 4,530
------------------------------ ------------ -------------
Total other financial assets 31,150 25,234
------------------------------ ------------ -------------
Other debtors included GBP3.7 million (December 2018: GBP4.3
million) of receivables from unconsolidated subsidiary entities for
surrender of Group tax losses.
14. Trade and Other Payables
31 December 31 December
2019 2018
GBP '000 s GBP'000
s
-------------------------------- ------------ -------------
Accrued management fee 8,285 7,131
Other creditors and accruals 2,186 1,235
-------------------------------- ------------ -------------
Total trade and other payables 10,471 8,366
-------------------------------- ------------ -------------
15. Share Capital and Reserves
31 December 31 December
2019 2018
shares shares
Share capital GBP'000 s GBP'000 s
---------------------------------------- ----------- -----------
In issue at 1 January 1,484,329 1,405,420
Issued for cash 124,248 76,066
Issued as a scrip dividend alternative 2,218 2,843
----------------------------------------- ----------- -----------
In issue at 31 December - fully paid 1,610,795 1,484,329
----------------------------------------- ----------- -----------
31 December
31 December 2018
2019 GBP'000
GBP'000 s s
----------------------------------------- ----------- -----------
Balance at 1 January 1,560,243 1,441,048
------------------------------------------ ----------- -----------
Issued for cash (excluding issue costs) 192,071 116,000
Issued as a scrip dividend alternative 3,482 4,270
------------------------------------------ ----------- -----------
Total share capital issued in the year 195,553 120,270
------------------------------------------ ----------- -----------
Costs on issue of Ordinary Shares (1,956) (1,075)
------------------------------------------ ----------- -----------
Balance at 31 December 1,753,840 1,560,243
------------------------------------------ ----------- -----------
At present, the Company has one class of Ordinary Shares with a
par value of 0.01 pence which carry no right to fixed income.
On 10 June 2019, 943,993 new Ordinary fully paid shares were
issued as a scrip dividend alternative in lieu of cash for the
interim dividend in respect of the six months ended 31 December
2018.
On 1 October 2019, the Group raised an additional GBP116.5
million of equity through a tap issue of 75,649,350 Ordinary Shares
at an issue price per share of 154 pence.
On 7 November 2019, 1,274,471 new Ordinary fully paid shares
were issued as a scrip dividend alternative in lieu of cash for the
interim dividend in respect of the six months ended 30 June
2019.
On 10 December 2019, the Group raised an additional GBP75.6
million of equity through a tap issue of 48,598,631 Ordinary Shares
at an issue price per share of 155.5 pence.
31 December
31 December 2018
2019 GBP'000
Other distributable EXPENSE GBP'000 s s
---------------------------- ----------- -----------
Balance at 1 January 182,481 182,481
Movement in the year - -
---------------------------- ----------- -----------
Balance at 31 December 182,481 182,481
---------------------------- ----------- -----------
On 19 January 2007, the Company applied to the Royal Court of
Guernsey, following the initial placing of shares, to reduce its
share premium account. This was in order to provide a distributable
reserve to enable the Company to repurchase its shares if and when
the Board of Directors consider it beneficial to do so. Following
court approval, the distributable reserve account was created.
31 December 31 December
2019 2018
Retained earnings GBP'000 s GBP'000 s
------------------------ ----------- -----------
Balance at 1 January 456,023 414,769
Net profit for the year 138,168 138,369
Dividends paid(1) (105,273) (97,115)
------------------------ ----------- -----------
Balance at 31 December 488,918 456,023
------------------------ ----------- -----------
1 Includes scrip element of GBP3.5 million in 2019 (2018: GBP4.3 million).
Dividends
The Board is satisfied that, in every respect, the solvency test
as required by the Companies (Guernsey) Law, 2008, was satisfied
for the proposed dividend and the dividend paid in respect of the
year ended 31 December 2019.
The Board has approved interim distributions as follows:
Year ended Year ended
31 December 31 December
2019 2018
GBP'000 s GBP'000 s
------------------------------------------------------ ------------ ------------
Amounts recognised as distributions to equity
holders for the year ended 31 December 2019 105,273(1) 97,115
Declared
Interim dividend for the period 1 January to 30
June 2019 was 3.59 pence per share (2018: 3.5
pence per share) 53,321 49,189
Interim dividend for the period 1 July to 31 December
2019 was 3.59 pence per share(2) (2018: 3.5 pence
per share) 57,828 51,952
------------------------------------------------------ ------------ ------------
1 Includes the 2018 interim distribution for the period 1 July to 31 December 2018.
2 The distribution for the period 1 July to 31 December 2019 was
approved by the Board on 25 March 2020 and therefore has not been
included as a liability in the balance sheet for the year ended 31
December 2019.
Capital Risk Management
The Group seeks to efficiently manage its financial resources to
ensure that it is able to continue as a going concern while
providing improved returns to shareholders through the management
of the debt and equity balances. The capital structure consists of
the Group's corporate debt facility and equity attributable to
equity holders of the parent, comprising issued capital, reserves
and retained earnings. The Group aims to deliver its objective by
investing available cash and using leverage whilst maintaining
sufficient liquidity to meet ongoing expenses and dividend
payments. The Group's investment policy is set out in the Corporate
Governance Report on page 54.
The Group's Investment Adviser reviews the capital structure on
a semi-annual basis. As part of this review, the Investment Adviser
considers the cost of capital and the associated risks.
16. Net Assets per Share
31 December
31 December 2018
2019 GBP'000
GBP'000 s s
---------------------------------------------- ------------- -------------
Net assets attributable to equity holders of
the parent 2,425,239 2,198,747
----------------------------------------------- ------------- -------------
Number Number
---------------------------------------------- ------------- -------------
Number of shares
Ordinary shares outstanding at the end of the
year 1,610,795,476 1,484,329,031
----------------------------------------------- ------------- -------------
Net assets per share (pence per share) 150.6 148.1
----------------------------------------------- ------------- -------------
17. Related Party Transactions
During the period, Group companies entered into certain
transactions with related parties that are not members of the Group
but are related parties by reason of being in the same group as
Amber Infrastructure Group Holdings Limited, which is the ultimate
holding company of the Investment Adviser, Amber Fund Management
Limited ('AFML').
Under the Investment Advisory Agreement ('IAA'), AFML was
appointed to provide investment advisory services to the Group
including advising the Group as to the strategic management of its
portfolio of investments.
AFML and International Public Partnerships GP Limited are
subsidiary companies of Amber Infrastructure Group Holdings Limited
('Amber Group'), in which Mr G Frost is a Director and also a
substantial shareholder.
Mr G Frost is also a Director of International Public
Partnerships Limited (the 'Company'); International Public
Partnerships Lux 1 Sarl; (a wholly owned subsidiary of the Group);
and the majority of other companies in which the Group indirectly
has an investment. The transactions with the Amber Group are
considered related party transactions under IAS 24 'Related Party
Disclosures'.
The Director's fees of GBP45,000 (2018: GBP43,000) for Mr G
Frost's directorship of the Company are paid to his employer, Amber
Infrastructure Limited (a member of the Amber Group).
The amounts of the transactions in the year that were related
party transactions are set out in the table below:
Amounts owing to
Related party expense related parties in
in the Income Statement the Balance Sheet
---------------------------- ----------------------------
For the For the
year ended year ended At At
31 December 31 December 31 December 31 December
2019 2018 2019 2018
GBP'000s GBP'000s GBP'000s GBP'000s
----------------------------------- ------------- ------------- ------------- -------------
International Public Partnerships
GP Limited 24,537 22,798 8,285 7,131
Amber Fund Management Limited(1) 4,221 957 533 2
----------------------------------- ------------- ------------- ------------- -------------
Total 28,758 23,755 8,818 7,133
----------------------------------- ------------- -------------
1 Represents amounts paid to related parties to acquire or make
investments or advisory fees associated with investments which are
subsequently recorded in the balance sheet.
Investment Advisory Arrangements
Investment advisory fees payable during the period are
calculated as follows:
For existing construction assets:
- 1.2% per annum of gross asset value of investments bearing construction risk
For existing fully operational assets:
- 1.2% per annum of the gross asset value ('GAV') excluding
uncommitted cash from capital raisings up to GBP750 million;
- 1.0% per annum where GAV (excluding uncommitted cash from
capital raisings) is between GBP750 million and GBP1.5 billion;
- 0.9% per annum where GAV (excluding uncommitted cash from
capital raisings) value exceeds GBP1.5 billion.
Asset origination fees in connection with new acquisitions are
charged at a rate of 1.5% of the value of new acquisitions.
The IAA can be terminated where less than 95% of the Group's
assets are available for use for certain periods and the Investment
Adviser fails to implement a remediation plan agreed with the
Group. The IAA may also be terminated by either party giving to the
other five years notice of termination, expiring at any time after
10 years from the date of the IAA.
As at 31 December 2019, Amber Infrastructure held 8,002,379
(December 2018: 8,002,379) shares in the Company. The shares held
by the Investment Adviser in the Company helps further strengthen
the alignment of interests between the two parties.
Transactions with Directors
Shares acquired by Directors in the year are disclosed
below:
Number of New Ordinary Shares
YEARED 31 YEARED 31
Director DECEMBER 2019 DECEMBER 2018
Mike Gerrard 81,112 55,739
Julia Bond 28,994 14,020
John Le Poidevin 32,467 32,550
Claire Whittet 1,532 1,585
John Whittle - -
Giles Frost 24,036 13,484
Total purchased 168,141 117,378
Remuneration paid to the Non-Executive Directors is disclosed on
page 60.
18. Contingent Liabilities and commitments
As at 31 December 2019 the Group has committed funding of up to
c.GBP43.5 million (December 2018: GBP195.0 million), which includes
committed investment amounts as noted in the Strategic Report on
page 20, a deferred commitment of GBP17.8 million for Benex which
is due to be settled from future returns generated by BeNEX, and
GBP0.6m of letter of credit which were notionally drawn against the
Group's corporate debt facility.
There were no contingent liabilities at the date of this
report.
19. Events after THE Balance Sheet Date
There are a range of contingent risks stemming from Covid-19.
These include, but may not be limited to, staff shortages and
supply chain breakdowns and their consequences. The Company will
continue to monitor and where possible take action to avoid or
mitigate any such impacts on its portfolio. The Company is closely
monitoring distributions from all investments and through its
Investment Adviser is actively engaging with counterparts at the
portfolio level - the majority of which are public sector
counterparties. The overwhelming majority of revenues come from
availability-based payments or regulated cashflows that generally
provide a range of protections against adverse scenarios.
In light of the Covid-19 pandemic, the Company has reassessed
the operational performance of its material investments as well as
the cash flow position for the Company itself, including stress
testing for adverse plausible impacts. In addition, the Directors
also note that the Company has free cash reserves at the date of
this report of c.GBP91 million and ability to draw GBP20 million on
its corporate debt facility for working capital purposes.
The Company reaffirms that the operational performance of its
investment portfolio continues as expected and the Covid-19
pandemic has, to date, had no material impact on the Company's
cashflows from its investment portfolio. As the Covid-19
developments remain ongoing, it is premature to assess the
implications of recent events on market pricing of underlying
assets. Whilst the full consequences of the pandemic and its
effects on the portfolio cannot yet be known, the Company believes
that its liquidity position, its business model, diversified
portfolio and its focus on risk mitigation combined with
operational cash and funding reserves, offer a significant degree
of protection.
20. Other Mandatory Disclosures
New Standards that the Group has applied from 1 January 201
9
Standards and amendments to standards applicable to the Group
that became effective during the period are listed below. These
have no material impact on the reported performance or financial
statements of the Group.
- IFRS 16 Leases (1 January 2019)
- Amendments to IFRS 9 Prepayment Features with Negative Compensation (1 January 2019)
- Amendments to IAS 28 Long-term Interests in Associates and Joint Ventures (1 January 2019)
- IFRIC Interpretation 23 Uncertainty over Income Tax Treatments (1 January 2019)
Standards Issued but not yet Effective
Standards issued but not yet effective up to the date of
issuance of the Group's financial statements are listed below. This
listing is of standards and interpretations issued, which the Group
reasonably expects to be applicable at a future date. The Group
intends to adopt these standards when they become effective,
however does not currently anticipate the standards to have a
significant impact on the Group's financial statements. Current
assumptions regarding the impact of future standards will remain
under consideration in light of interpretation notes as and when
they are issued.
- Interest Rate Benchmark Reform - Amendments to IFRS 9, IAS 39 and IFRS 7 (1 January 2020)
- IFRS 17 Insurance Contracts (1 January 2021)
U nconsolidated s ubsidiaries
A list of the significant investments in unconsolidated
subsidiaries, including the name, country of incorporation as at 31
December 2019 and proportion of ownership is shown below:
Place of incorporation Proportion
(or registration) of ownership
Name and operation interest %
Abingdon Limited Partnership UK 100
Aggregator PLC UK 100
Access Justice Durham Limited Canada 100
AKS Betriebs GmbH & Co. KG Germany 98
BBPP Alberta Schools Limited Canada 100
Blackburn with Darwen Phase 1 Limited UK 90
Blackburn with Darwen Phase 2 Limited UK 90
BPSL No. 2 Limited Partnership UK 100
Building Schools for the Future Investments
LLP UK 100
Calderdale Schools Partnership UK 100
CHP Unit Trust Australia 100
Derby City BSF Limited UK 90
Derbyshire Courts Limited Partnership UK 100
Derbyshire Schools UK 100
Derbyshire Schools Phase Two Partnership UK 100
Future Ealing Phase 1 Limited UK 80
4 Futures Phase 1 Limited UK 90
4 Futures Phase 2 Limited UK 90
Hertfordshire Schools Building Partnership
Phase 1 Limited UK 100
H&W Courts Limited Partnership UK 100
INPP Infrastructure Germany GmbH & Co.
KG Germany 100
Inspire Partnership Limited Partnership UK 100
IPP CCC Limited Partnership Ireland 100
Inspiredspaces Durham (Project Co 1) Limited UK 91
Kent PFI (Project Co 1) Limited UK 58
Inspiredspaces Nottingham (Project Co
1) Limited UK 82
Inspiredspaces Nottingham (Project Co
2) Limited UK 82
Inspiredspaces STaG (Project Co 1) Limited UK 90.1
Inspiredspaces STaG (Project Co 2) Limited UK 90.1
Inspiredspaces Wolverhampton (Project
Co 1) Limited UK 100
Inspiredspaces Wolverhampton (Project
Co 2) Limited UK 100
Transform Islington (Phase 1) Limited UK 90
Transform Islington (Phase 2) Limited UK 90
IPP (Moray Schools) Holdings Limited UK 100
LCV Project Trust Australia 100
Maesteg School Partnership UK 100
Norfolk Limited Partnership UK 100
Northampton Schools Limited Partnership UK 100
Northern Diabolo N.V. Belgium 100
Oldham BSF Limited UK 99
PSBP Midlands Limited UK 92.5
Pinnacle Healthcare (OAHS) Trust Australia 100
Plot B Partnership UK 100
St Thomas More School Partnership UK 100
PPP Solutions (Long Bay) Partnership Australia 100
PPP Solutions (Showgrounds) Trust Australia 100
Strathclyde Limited Partnership UK 100
TH Schools Limited Partnership UK 100
TC Robin Rigg OFTO Limited UK 100
TC Barrow OFTO Limited UK 100
TC Gunfleet Sands OFTO Limited UK 100
TC Ormonde OFTO Limited UK 100
TC Lincs OFTO Limited UK 100
TC Westermost Rough OFTO Limited UK 100
TC Dudgeon OFTO PLC UK 100
The entities listed above in aggregate represent 58.4% (December
2018: 63.0%) of investments at fair value through profit or loss.
The remaining fair value is driven from joint ventures, associate
interests and minority stakes held by the Group.
C onsolidated s ubsidiaries
The principal subsidiary undertakings of the Company, all of
which have been included in these consolidated financial statements
are as follows:
Place of incorporation Proportion of
(or registration) ownership
Name and operation interest %
International Public Partnerships Limited
Partnership UK 100
International Public Partnerships Lux
1 Sarl Luxembourg 100
International Public Partnerships Lux
2 Sarl Luxembourg 100
IPP Bond Limited UK 100
IPP Investments Limited Partnership UK 100
21. Investments
The Group holds 130 investments across energy transmission,
education, transport, health, courts, waste water, police, military
housing and other sectors. The table overleaf sets out the Group's
investments that are recorded at fair value through profit or
loss.
Per cent.
Status at Risk Capital
31 December Owned by the INvestment
Investment Name Country 2019 Group(1) end
UK
UK PPP Assets
Calderdale Schools UK Operational 100.0 April 2030
Derbyshire Schools Phase
Two UK Operational 100.0 February 2032
December
Northamptonshire Schools UK Operational 100.0 2037
Derbyshire Courts UK Operational 100.0 August 2028
Derbyshire Schools Phase
One UK Operational 100.0 April 2029
North Wales Police HQ UK Operational 100.0 December 2028
St Thomas More Schools UK Operational 100.0 April 2028
Tower Hamlets Schools UK Operational 100.0 August 2027
Norfolk Police HQ UK Operational 100.0 December 2036
Strathclyde Police Training September
Centre UK Operational 100.0(2) 2026
Hereford & Worcester Courts UK Operational 100.0(2) September
2025
Abingdon Police Station UK Operational 100.0 April 2030
Bootle Government Offices UK Operational 100.0 June 2025
Maesteg Schools UK Operational 100.0 July 2033
Moray Schools UK Operational 100.0 February
2042
Liverpool Library UK Operational 100.0 November
2037
Priority Schools Building Aggregator
Programme
Batch 1 - Schools in North UK Operational 0.0(2) August 2040
East England
Batch 2 - Schools in Hertfordshire,
Luton and Reading UK Operational 0.0(2) November 2040
Batch 3 - Schools in North UK Operational 0.0(2) August 2041
West of England
Batch 4 - Schools in the UK Operational 92.5(2) December
Midlands Region 2041
Batch 5 - Schools in Yorkshire UK Operational 0.0(2) September
2041
OFTOs
Robin Rigg OFTO UK Operational 100.0(2) March 2031
Gunfleet Sands OFTO UK Operational 100.0(2) July 2031
Barrow OFTO UK Operational 100.0(2) March 2030
Ormonde OFTO UK Operational 100.0(2) July 2032
Lincs OFTO UK Operational 100.0 November
2034
Westermost Rough OFTO UK Operational 100.0 February 2036
Dudgeon OFTO UK Operational 100.0 November 2038
Building Schools for the
Future Portfolio
Minority Shareholdings
in 26
Building Schools for the
Future Projects UK Operational Various Various
Blackburn with Darwen Phase UK Operational 90.0 September
One 2036
Blackburn with Darwen Phase UK Operational 90.0 September
Two 2039
Derby City UK Operational 90.0 August 2037
Durham Schools UK Operational 91.0 January 2036
Ealing Schools Phase One UK Operational 80.0 March 2038
Halton Place UK Operational 45.0 March 2038
Hertfordshire Schools Phase UK Operational 100.0 August 2037
One
Islington Phase One UK Operational 90.0 August 2034
Islington Phase Two UK Operational 90.0 March 2039
Oldham Schools UK Operational 99.0 August 2037
Tameside Schools One UK Operational 46.0 August 2036
Tameside Schools Two UK Operational 46.0 August 2037
Nottingham Schools One UK Operational 82.0 August 2034
Nottingham Schools Two UK Operational 82.0 August 2038
South Tyneside and Gateshead UK Operational 90.1 October 2034
Schools One
South Tyneside and Gateshead UK Operational 90.1 September
Schools Two 2036
Southwark Phase One UK Operational 90.0 January 2036
Southwark Phase Two UK Operational 90.0 December
2036
Wolverhampton Schools Phase UK Operational 100.0 September
One 2037
Wolverhampton Schools Phase UK Operational 100.0 August 2040
Two
Kent Schools UK Operational 58.0 August 2035
NHS LIFT Portfolio
Beckenham Hospital UK Operational 49.8 December
2033
Garland Road Health Centre UK Operational 49.8 December
2031
Alexandra Avenue Primary
Care Centre, Monks Park
Health Centre (two projects) UK Operational 49.8 June 2031
Gem Centre Bentley Bridge,
Phoenix Centre December
(two projects) UK Operational 49.8 2030
Sudbury Health Centre UK Operational 49.8 November
2032
Mt Vernon UK Operational 49.8 December
2033
Lakeside UK Operational 49.8 November
2032
Fishponds Primary Care
Centre, Hampton House Health
Centre (two projects) UK Operational 33.4 January 2031
Shirehampton Primary Care
Centre, Whitchurch Primary
Care Centre (two projects) UK Operational 33.4 May 2032
Blackbird Leys Health Centre,
East Oxford Care Centre
(two projects) UK Operational 33.4 May 2031
Brierley Hill UK Operational 34.3 April 2035
Ridge Hill Learning Disabilities
Centre, Stourbridge Health
& Social Care Centre
(two projects) UK Operational 34.3 October 2031
Harrow NRC (three projects) UK Operational 49.8 June 2034
Goscote Palliative Care UK Operational 49.8 November
Centre 2035
South Bristol Community UK Operational 33.4 February
Hospital 2042
East London LIFT Project UK Operational 30.0 October 2030
One (four projects)
East London LIFT Project UK Operational 30.0 April 2033
Two (three projects)
East London LIFT Project
Three
(Newby Place) UK Operational 30.0 May 2037
East London LIFT Project UK Operational 30.0 August 2036
Four (two projects)
Other UK
Angel Trains UK Operational 4.8 December
2038
Tideway UK Construction 15.99 March 2150
Cadent UK Operational 7.25 June 2069
National Digital Infrastructure UK Operational 45.0 July 2027
Fund
Australia
Royal Melbourne Showgrounds Australia Operational 100.0 August 2031
Long Bay Forensic & Prisons Australia Operational 100.0 July 2034
Hospital Project
Reliance Rail Australia Operational 33.0 February
2044
Royal Children's Hospital Australia Operational 100.0 December
2036
Orange Hospital Australia Operational 100.0 December
2035
NSW Schools Australia Operational 25.0 December
2035
Gold Coast Rapid Transport Australia Operational 30.0 May 2029
Victoria Schools Two Australia Operational 100.0 December
2042
North America
Alberta Schools Canada Operational 100.0 June 2040
Durham Courts Canada Operational 100.0 November
2039
U.S. Military Housing U.S. Operational 0.0(2) October 2052
Europe (ex UK)
Diabolo Rail Link Belgium Operational 100.0 June 2047
Dublin Courts Ireland Operational 100.0 February
2035
BeNEX Germany Operational 100.0 December
2037
Federal German Ministry
of Education and Research
Headquarters Germany Operational 98.0 July 2041
Pforzheim Schools Germany Operational 98.0 September
2039
Offenbach Police Centre Germany Construction 45.0 June 2050
Brescia Hospital Italy Operational 37.0 November
2021
1 Risk Capital includes project level equity and/or subordinated shareholder debt
2 Investment contains senior or mezzanine debt in addition to
any Risk Capital ownership shown
KEY CONTACTS
Investment Adviser Auditor Corporate Brokers
Amber Fund Management Ernst & Young LLP Numis Securities Limited
Limited Royal Chambers The London Stock Exchange
3 More London Riverside St Julian's Avenue Building
London St Peter Port 10 Paternoster Square
SE1 2AQ Guernsey London
Channel Island EC4M 7LT
GY1 4AF
Registered Office Legal Adviser Public Relations
PO Box 286 Carey Olsen FTI Consulting
Floor 2, Trafalgar Court PO Box 98, Carey House 200 Aldersgate
Les Banques Les Banques Aldersgate Street
Guernsey Guernsey London
Channel Islands Channel Islands EC1A 4HD
GY1 4LY GY1 4BZ
Administrator and Company
Secretary Corporate Banker
Ocorian Administration Royal Bank of Scotland
(Guernsey) Limited International
PO Box 286 1 Glategny Esplanade
Floor 2, Trafalgar Court St Peter Port
Les Banques Guernsey
Guernsey Channel Islands
Channel Islands GY1 4BQ
GY1 4LY
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
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