For RARE Infrastructure, the cost reductions achieved at the corporate level were the highlights of the FY10 result. Transurban has reduced its cost base significantly over the last two years. The company reduced corporate costs (including business development activities) by 20% in FY10, bringing total corporate cost reductions in the last two years to A$45m, more than double the original cost reduction target of A$20m set in June 2008.

RARE Infrastructure believes that cost control and reduction is an under-appreciated aspect of managing long term infrastructure assets. Previous management teams at Transurban had pursued an expansion strategy with less focus on cost control. Yet the cost reductions achieved in the last two years, when compounded over the life of the assets, can be worth more to shareholders than acquisition-led growth.

There is further opportunity for Transurban to reduce costs across the business. Management has a flat nominal cost base target in the medium term with more than 100 current initiatives to reduce costs and increase revenues. At the asset level, the largest cost savings are expected from the renegotiation of three operations and maintenance contracts. Meaningful cost reductions at the corporate level may be more difficult as the low-hanging fruit has been picked.

The financial performance of Transurban in the last two years has demonstrated that publicly listed infrastructure companies are just as capable as unlisted infrastructure at creating shareholder value through active management, efficiency improvements and cost control.

The lack of coordination of global financial markets reform is a key concern, according to Global Value Investors’ senior equities analyst Matthew Hegarty.

Global Value Investors is one of the international managers that are part of boutique fund management incubation firm Treasury Group. Speaking at a Treasury Group luncheon in Sydney yesterday, Hegarty said while he felt the global financial crisis was over and saw the recent market activity over the last few months as a healthy correction in asset markets, he was concerned about the run-on effects of global regulatory policies that he saw as anti-market, anti-growth and ill-timed.

Hegarty said market regulatory reform was a key risk to markets.

“There is certainly a lot of loose [reform] and lack of coordination globally, and there’s potential risk of a very unlevel and uneven playing field emerging in the global regulatory landscape,” he said.

He felt that local regulators were going about their own reform agenda without thinking about the far-reaching consequences. He said the US, for example, was adopting broad sweeping financial regulatory reform that would have wide-ranging consequences for the sector.

“Certainly now the status of global funding markets and banks that rely on wholesale funding markets is going to be a key thing going forward, producing a lot of pressure on bank net interest margins,” he said. “The Australian banks are going to be facing significant headwinds going forward as well. A percentage of their debt issuance as a percentage of their total assets places them among some of the highest banks in the world in terms of their reliance for offshore funding, and certainly is a business banking model that’s under the most pressure globally.”

Nick Langley of RARE Infrastructure was another fund manager to speak at the lunch, and he was also concerned about Government action.

“I think we’ve had quite an incredible and far-reaching series of reactions from our Governments globally, and those reactions will have consequences that we don’t know yet, and we will see those flow through over the coming years,” he said.

Langley said RARE recently conducted a bear case on investments in the Iberian Peninsula, which revealed negative gross domestic product (GDP) over the next three years, zero GDP for the five years after that, and a further three to five years before the region got back to growth.

“There are certainly some draconian views that we need to take into account,” he said, adding that they formed part of RARE’s assessments.

Click here to read the article in full.

China outperformed the rest of Asia, up 10%. (Thailand +7.3%, India +1.6%, Indonesia +5.3%, Malaysia +3.6). Latin America was also strong, buoyed by the strong rebound in commodity prices. Brazil (+13.7%) significantly outperformed Mexico (+5.6%) during the month. Among the other markets, Argentina and Colombia posted a 15.9% and 13.2% increase respectively, while Chile increased 12% helped by the strong Chilean peso.

For us the most interesting news in July was policymakers in China converging to a new consensus which could be best summarized as “loose fiscal, tight monetary”. The exact opposite of the tight fiscal, loose monetary policy of developed economies. It is likely China will ramp up government spending on public housing and other public works, but it will stick to its structural reforms and its property tightening measures. In Brazil the BCB surprised the majority of economists by slowing down the pace of tightening to 50bps, with the BCB more concerned with deflation risks emanating from the developed world than before. Over the medium to long term though we expect the strong domestic picture to outweigh global fears.

The scale of infrastructure investment in emerging markets continues to grow. Recent data shows that China’s total fixed asset investment in urban areas tallied Rmb5trn (+26.1% YTD). Investment in railways and highway amounted to 5% of the national total. The scale of investment in these two sectors is unlikely to decline of the next 10 years. Indeed, the country is planning to lay down 42,000 kilometers of new track by 2020, adding new high-speed rail lines between major cities. It needs to invest Rmb3trn on railway construction, and Rmb3trnon rural infrastructure construction, according to the investment institute of the National Development and Planning Commission (NDRC), Further, RMB 682.2 billion is being spent on 23 new development projects in impoverished western regions.

In Brazil, the presidential campaign beginning in earnest. According to a mid-month poll, President Lula’s candidate, Ms. Dilma Rousseff, and the main opposition candidate, former São Paulo state governor José Serra, are currently tied.

Although we remain concerned about the global backdrop, EMs are in a very strong fiscal and external position with the vital signs for growth and employment remaining very healthy.

European bank stress tests were better than expected and the Basel III global bank regulatory proposals were more lenient than expected. Some European bank stocks were up 30%. As a consequence of the positive earnings results and macro news investors returned to “nsk assets” having fled such assets in prior months.

Infra Regulation: Aéroports de Paris signed the new Economic Regulation Agreement with the French government for the 2011-2015 period. This included real price increases of 1.4% per annum and a move towards a ‘dual till’ structure. The details were in line with RAREs expectations, and the stock gained ~7% on the announcement.

Infra M&A:

* CPPIB offered A$3.47bn for North American Toll Road Intoll (37% above the last share price), in its second attempt to buy a Australian listed Toll Road in eight months. The directors were yet to recommend shareholders to accept or reject the all cash bid by the end of the month.

* France’s EDF sold its UK electricity network to Hong Kong’s Cheung Kong for GBP5.8bn. The price, which includes debt, was higher than market estimates, with CKI the Abu Dhabi Investment Authority and Australia’s Macquarie. The sale lead to positive read through to portfolio water stocks.

* Abertis’s major shareholders ACS and La Caixa announced they were in talks with CVC Capital partners in a potential €26bn leveraged buyout. While there is still mixed speculation on any deal eventuating, the stock is still trading up ~10% since the announcement.

Infra Funding: Abertis buyout referred to above is dependent on €6bn in bank finance. The market view is that banks are struggling to provide this finance in the current market.

JP Morgan Infrastructure Fund is buying the Spanish Ports business from ACS (a major shareholder in Abertis)for €700-€800 mn, subject is debt financing. Given the size of this funding it should be more achievable than the debt required for the Abertis restructure.

Other Infra News. Russian Prime Minister Valdamir Putin wants greater private investment in airports as he believes “airports are key to developing and allowing it (Russia) to reach its full potential.”

News flow out of the EMs in June continued to be on balance positive – the big exception being their World Cup performance. For us probably the most important was the announcement by China that they would de-peg the Renminbi allowing for appreciation for the first time in 2 years. We see this as positive for several reasons

• Increases global competitiveness and hopefully spurs global growth
• reduces (but not eliminates) the risk that the US will take action against China labelling it protectionist
• indicative of China’s confidence in its own economic recovery
• appreciation of RMB sees chinese earnings that much more attractive for a foreign holder

From a macro-economic perspective the EMs also continue to show their superiority with the tightening process now well under way

• Brazil tightened its reference rate for the second time by 75bps
• Chile commenced tightening with a 50bp increase in its rate
• China de-pegged its currency (discussed above) and reaffirmed commitment to fiscal targets, only concern is that they may tighten for too long
• Argentina finalised its debt swap with a 66% acceptance level. We will now be watching to make sure the policy makers dont overshoot de-railing the economic recovery.

Politics and regime stability remain key for EM investors and in June we were pleased to see

• the political standoff in Thailand resolved without further bloodshed although we remain wary over the medium term
• Brazilian presidential campaigning kicked off with Serra gaining ground in the polls

Although the global outlook remains uncertain we continue to take comfort that the EMs are fundamentally fairing better than their developed peers.

Throughout June there was mixed economic news not giving a clear signal of either renewed growth or potential recession. Risk aversion prevailed for the last 2 weeks of June. On balance consensus on US growth is edging up however Eurozone is being revised down sharply on austerity announcements. Concerns remain over whether China can manage a soft landing for its economy.

Infra Regulation. On the 24 June Spanish government announced a freeze on electricity tariffs until a comprehensive revision of the whole system is complete. This has bipartism support in Spain. It has created uncertainty which will prevail until there is an announcement on outcomes.

Infra M&A
M&A activity in the sector continued during the month;

• Brisa (Portuguese tollroad operator) announced the sale of its 16.35% interest in Brazilian tollroad operator, CCR expected proceeds are $1.2b Euros.
• Copenhagen Airport agreed to dispose of its 7.65% indirect interest in Mexican airport operator AZUR. Map owns 30.8% of Copenhagen airport.
• DUET (Australian utility) announced its intention to sell its 29% interest in US utility Duquesne (DQE). DUET only acquired the shareholding in DQE in July 2008.

Infra Funding
Companies in the sector continued to access debt finance at attractive rates as they have throughout the economic downturn:

• Sydney Airports issued AUD175m fixed rate MTN due 2015 at 265bps above swap
• 407ETR (Canadian Tollroad) sold CAD800m notes in 2 parts; CAD300m 5yr notes and CAD300m 10 year notes at 114bps and 158bps, over government benchmark respectively.

Other Infra News: Moody’s said the outlook for Europe Infrastructure industry is stable, reflecting some growth in transport volumes in Europe. DP World has postponed plans for a dual listing in London, citing technical difficulties in merging its home exchanges

RARE Infrastructure director Richard Elmslie comments on the Intoll takeover bid in this Lateline news item:

Lateline interview: video & transcript >>

The Canada Pension Plan Investment Board (CPPIB) moves to buy Sydney-based infrastructure group Intoll.

CPPIB bid provides three options for Intoll shareholders including a cash offer equivalent of $1.53 per Intoll stapled security.

The offer represents a significant premium to Intoll’s recent trading price, according to CPPIB.

While CPPIB is doing due diligence on the firm, there’s no guarantee the pension fund will outline a formal binding proposal to buy Intoll’s stapled securities, according to a company statement.

“The directors of Intoll have not formed a view as to the adequacy of the proposal and accordingly recommend that Intoll security holders take no action at this time,” said Paul McClintock, chair at Intoll.

Intoll’s portfolio includes a 30 per cent stake in the 407 ETR in Toronto, Canada and a 25 per cent interest in the Westlink M7 in Sydney, Australia.

The firm’s share price rose more than 30 per cent to $1.45 per share after the announcement. Intoll hired UBS as its financial adviser and Mallesons Stephen Jaques as its legal adviser for the process.

Richard Elmslie, investor director and senior portfolio manager at infrastructure fund manager RARE Infrastructure, an Intoll shareholder, said the bid is reasonable.

“We bought in at around $1.06 [six months ago] so at $1.50 per share, it looks reasonably valued … we’ll just have to wait on the due diligence from CPPIB,” he said.

Intoll’s share price was $1.44 per share following today’s morning trading period.

In November, CPPIB and another pension fund bid for Transurban, which was rejected by the company.

Click here to read the article in full.

RARE Infrastructure has attracted $1.4 billion in investment mandates in nine months including one from the $67 billion Future Fund.

The global listed infrastructure fund manager has gained a number of institutional clients from Australia, Hong Kong, Canada, US and UK including several new clients in the past nine months.

Colonial First State awarded RARE a $200 million global listed infrastructure mandate in January this year.

It is not known when the Future Fund gave the fund manager an undisclosed investment mandate this year.

AvSuper, Canada’s Corporate Pension Plan, Russell OpenWorld and van Eyk Blueprint all awarded RARE Infrastructure mandates last year.

RARE Infrastructure was founded in 2006 and has more than $2.5 billion under management.

Nick Langley, investment director and senior portfolio manager at RARE, said the portfolio’s liquidity allowed the fund manager to reallocate to growth assets quickly early last year.

“[This] gave us the flexibility to transform the portfolio from a very defensive position, with significant utility exposure, in early 2009 to a more GDP leveraged position, with greater exposure to toll roads and rail,” he said.

Click here to read the article in full.

Volatility was heightened due to:

• the Greek debt crisis spreading to Iberia’s debt funding/refinancing needs and associated anxiety over the effectiveness of austerity measures introduced to help reduce debt

• mixed economic news as to the sustainability of global growth ; and

• to a lesser extent the temporary concerns created from volcanic ash spreading over Europe

There are many views on the economic outlook but in essence we need to see the European sovereign credit outlook stabilize, further evidence of cyclical improvement in the US and less volatility for confidence to return to the markets.

Infra Regulation. The NZ Commerce Commission released a draft decision on airport regulation which was viewed by the market as being favourable, establishing an appropriate regulated asset base for future price resets.

Infra M&A.
• Transurban (tollroads) rejected two further bids from major shareholders and proceeded with a $530m equity raising at $4.60 to fund the Lane Cove Tunnel acquisition. One of the shareholders subsequently sold their 12% stake at $4.44 after the raising.

• MAp (Airports) issued notices to certain foreign shareholders to dispose of their shareholdings because the 40% government imposed foreign shareholding threshold had been breached.

Infra Funding. Canadian government committed US$550m in loans for a Detroit River toll bridge. AdP (airports, Europe) announced a €500m bond issue at 80bps over swap (this is an attractive rate). Abertis has financed the R3-R5 tollroad in Spain with €370m from commercial lenders and €300m from the European Investment bank.

Other Infra News. The new UK coalition government announced its plans for the energy sector, in particular its support for nuclear generation and renewable energy.