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John Laing Infra Fd (JLIF)

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Monday 20 March, 2017

John Laing Infra Fd

Preliminary results for the year ended 31 Dec 2016

RNS Number : 8696Z
John Laing Infrastructure Fund
20 March 2017
 



John Laing Infrastructure Fund Limited

Preliminary results for the year ended 31 December 2016

 

 

Another year of good performance

 

·  Today declaring a dividend of 3.48 pence per share for the six months to 31 December 2016, up 2.0%, which is above the Consumer Prices Index

·  Today announcing the issue of up to approximately 89.8 million new ordinary shares by way of a shareholder tap issue (see separate announcement for further details)

·  Dividends of 6.82 pence per share paid in 2016

·  Net Asset Value ("NAV") of £1,080.6m, representing a NAV per share of 120.2 pence

·  NAV total return of 10.9%

·  Portfolio value of £1,217.6 million, up 40.3% on that as at 31 December 2015

·  Underlying portfolio growth of 8.18%, 1.14% ahead of growth arising from discount rate unwind

·  £93.2m received in cash from investments

·  New investments of approximately £306.0m, including one follow-on interest and interests in seven new projects

·  Divestment of interests in two projects for £43.4m, representing a c.36% uplift on the carrying value, and resulting in an aggregate realised IRR of c.16%

·  Total Shareholder Return of 76.5% since launch (November 2010), 9.8% annualised (simple basis)

·  Intending to seek shareholder approval at AGM in May 2017 to widen the geographic limits of the investment policy to include certain other countries that are fiscally strong and have a track-record of using PPP as a procurement method

 

Commenting on today's results, Paul Lester, Chairman of JLIF, said:

 

"I am pleased to present JLIF's year-end results for the financial year 2016. It was a busy 12 months for JLIF, with investments of £306 million, a record amount in any single year since launch. JLIF also sold its interests in two projects having received offers that the Board considered represented better value for shareholders than could be achieved by retaining the interests. The disposals generated proceeds of £43.4 million that were re- invested almost immediately. During the year JLIF paid dividends of 6.82 pence per share, supported by good Portfolio performance, with underlying growth again ahead of the discount rate unwind. With JLIF's share price benefitting from market volatility in the wake of the EU referendum outcome, JLIF delivered a share price total return of 17.5% over the year. I am confident in the outlook for JLIF's business prospects and look forward to being able to report to you news of another successful year in 2017."

 

 

For further information, please contact: John Laing Capital Management

 

020 7901 3326

Andrew Charlesworth


Finsbury

020 7251 3801

Faeth Birch Philip Walters


 

This Announcement contains Inside Information as defined under the Market Abuse Regulation (EU) No. 596/2014. 

JLIF is one of Europe's largest London-listed equity infrastructure funds, with a Premium Listing on the London Stock Exchange. JLIF partners with public sector counterparties across the world to provide key local and national infrastructure projects that generate government-backed, inflation-linked revenues. JLIF's success is built on a collaborative approach centred on long term relationships with its clients such that their changing 
infrastructure needs are met in a timely and cost-effective manner.

 

 

  

 

John Laing Infrastructure Fund Limited 
Annual Report 2016

 

ACTIVELY GENERATING LONG TERM SUSTAINABLE VALUE CAUTIONARY STATEMENT

Pages 4 to 37 of this Annual Report (including but not limited to the Chairman's Statement, Risk Committee Report and the Investment Adviser Report, together the "Review Section") have been prepared solely to provide additional information to shareholders to assess the Group's strategies and the potential for those strategies to succeed. These should not be relied on by any other party or for any other purpose.

 

The Review Section may include statements that are, or may be deemed to be, "forward-looking statements". These forward-looking statements can be identified by the use of forward-looking terminology, including the terms "believes", "estimates", "anticipates", "forecasts", "projects", "expects", "intends", "may", "will" or "should" or, in each case, their negative or other variations or comparable terminology.

 

These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this Annual Report and include statements regarding the intentions, beliefs or current expectations of the Directors and the Investment Adviser concerning, amongst other things, the investment objectives and investment policy, financing strategies, investment performance, results of operations, financial condition, liquidity, prospects, opportunities and distribution policy of the Company and the markets in which it invests.

 

These forward-looking statements reflect current expectations regarding future events and performance and speak only as at the date of this Annual Report.

 

By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. Forward-looking statements are not guarantees of future performance or results and will not necessarily be accurate indications of whether or not the times at or by which such performance or results will be achieved. The Company's actual investment performance, results of operations, financial condition, liquidity, prospects, opportunities, distribution policy and the development of its financing strategies may differ materially from the impression created by the forward-looking statements contained in this Annual Report.

 

Subject to their legal and regulatory obligations, the Directors and the Investment Adviser expressly disclaim any obligations to update or revise any forward-looking statement contained herein to reflect any change in expectations with regard thereto or any change in events, conditions or circumstances on which any statement is based.

 

In addition, the Review Section may include target figures for future financial periods. Any such figures are targets only and are not forecasts.

 

This Annual Report has been prepared for the JLIF Group as a whole and therefore gives greater emphasis to those matters which are significant to John Laing Infrastructure Fund Limited and its subsidiary undertakings when viewed as a whole.

 

ABOUT US

 

JLIF is one of Europe's largest listed infrastructure funds, with a Premium Listing on the London Stock Exchange. JLIF launched in November 2010 via an IPO with a seed portfolio of 19 projects, and a mandate to invest in the equity and sub-ordinated debt issued predominantly with respect to operational Public-Private Partnership ("PPP") projects. With no finite life to the Fund, JLIF aims to own infrastructure assets over the long term. As at 31 December 2016, JLIF's Portfolio comprised investments in 62 infrastructure PPP projects, diversified by both geography and sector. Since launch in November 2010, JLIF has delivered a total shareholder return of 76.5%. In 2016, JLIF paid a total of 6.82 pence per share in dividends, while its Portfolio delivered underlying growth in the period of 8.18%.

 

OVERVIEW

 

Our purpose

JLIF believes that physical infrastructure plays a crucial role in stimulating economic growth, increasing the efficiency and productivity of both industry and individuals, and in providing employment, both during construction and operations. JLIF also believes that private sector participation is key in the development and renewal of infrastructure assets, bringing efficiencies, expertise and improved affordability. JLIF believes that the need for such investment is increasing with pressures from demographic trends such as population growth, urbanisation and an expanding middle class. JLIF's purpose is to support governments, cities and communities in meeting their infrastructure needs, from delivery and financing through to operations and management, as a responsible owner of infrastructure projects.

 

Our objective

JLIF's objective is to be the private sector partner of choice for public-sector clients in the markets within which it operates, making available for use high-quality infrastructure assets that meet or exceed contractual requirements and specifications. In doing so, JLIF's aim is to provide its shareholders with a source of stable, predictable income and to deliver a shareholder IRR of 7-8% over the long term, by actively managing our portfolio of projects and selectively investing in new value accretive investments.

 

Key facts

 


2016

2015

Market Capitalisation

£1,166.0m

£950.8m

Ordinary shares in issues

899,003,264

814,751,471

Share price

129.7p

116.7p

Number of projects

62

57

Fair value of investments through profit and loss

£1,078.2m

£883.1m

Portfolio Value1

£1,217.6m

£867.8m

Net Assets

£1,080.6m

£883.1m

NAV per share

120.2p

108.4p

Dividend per share paid

6.82p

6.75p

Company Cash

£5.5m

£2.5m

Group1 Cash

£32.7m

£33.8m

Profit before tax

£160.4m

£47.0m

Management Fees

1.1% on APV* up to £500m; 1.0% from £500m to £1 billion; 0.9% above £1 billion

Board

Six independent

Directors

Six independent

Directors

 

1 See Glossary for definition

* Adjusted Portfolio Value


FINANCIAL AND OPERATIONAL HIGHLIGHT

(including events after the balance sheet date)

 

January

·  In January 2016, acquired a 40% interest in Barcelona Metro Stations L9T2 from Iridium

 

February

·  In February 2016, completed the acquisition of a 100% interest in the British Transport Police project from a member of John Laing Group plc and

The John Laing Pension Trust Limited

 

March

·  In March 2016, raised gross proceeds of £92.9 million via a shareholder tap issue, used to repay debt drawn to finance acquisitions earlier in

the year

 

May

·  In May 2016, acquired a 95% interest in the Oldham Social Housing project from a member of John Laing Group plc

·  In May 2016, paid a dividend of 3.41 pence per share relating to the six-month period ended 31 December 2015

 

June

·  In June 2016, completed the acquisition of a 100% interest in the Connecticut Service Stations project

·  In June 2016, completed the disposal of JLIF's entire interests in the Newham Hospital and Barnsley Building Schools for the Future projects to Equitix for a combined consideration of

£43.4 million

·  In June 2016, signed and agreed the terms of a £150 million three-year accordion facility, increasing the total amount of debt finance available to JLIF to £330 million

 

July

·  In July 2016, completed the acquisition of an additional 13.5% interest in Barcelona Metro Stations L9T2 and a new 13.5% interest in Barcelona Metro Stations L9T4

 

October

·  In October 2016, paid a dividend of 3.41 pence per share relating to the six-month period ended 30 June 2016

 

December

·  In December 2016, completed the acquisition of a 100% interest in the A55 Holyhead to Llandegai DBFO project and a 6% indirect interest in the Intercity Express Programme Phase 1 project, both from members of John Laing Group plc

 


CHAIRMAN'S STATEMENT

 

Introduction

I am pleased to report another set of good results for the Company. 2016 was a significant year for JLIF in many ways, not least in the area of new investments and markets with the Fund making its first investments in Spain and the US. Continued active management of the existing Portfolio resulted in delivery of a number of value enhancements and underlying Portfolio growth was once again ahead of the discount rate unwind. Overall, distributions from our Portfolio continued to support the ongoing operation of the Company and dividends paid to investors that, together with growth in the share price, resulted in a total shareholder return for the year of 17.5%.

 

For the UK as a whole, 2016 also saw the UK public voting in favour of leaving the European Union, an event that caused disruption to financial markets both in the run up, but particularly in the aftermath. While perhaps not as extreme as some had feared, these times of increased volatility will require the Company to be increasingly adaptable. As at other times of market uncertainty, listed infrastructure stocks are often seen as 'safe havens' and this once again proved true with JLIF's share price peaking for the year in August. With Sterling depreciating, JLIF's balance sheet also benefitted with the valuation of its non-Sterling projects increasing. However, commensurately investing in new overseas projects has become more expensive.

 

Dividends and Share Issuance

In 2016, JLIF paid dividends to shareholders of 6.82 pence per share, representing a dividend yield on the closing share price as at 31 December 2016 of 5.3%, the highest dividend yield amongst the London-listed infrastructure equity funds. Today we are announcing a dividend relating to the

six months ended 31 December 2016 of 3.48 pence per share, representing further progression of 2.0% on the most recently paid dividend in October 2016.

 

In March 2016, the Company issued a further 81.2 million shares via a shareholder tap issue that was accretive to the Company's Net Asset Value ("NAV"). This resulted in gross proceeds of £92.9 million that were used to repay debt drawn in relation to the initial investment made in the Barcelona Metro Stations L9T2 project earlier in the year. As at the end of 2016, JLIF had in issue

899.0 million shares.

 

Performance

Over the year, JLIF's share price increased from an opening value of 116.7 pence to a closing value of 129.7 pence. This, together with dividends paid in the year of 6.82 pence per share resulted in a total shareholder return ("TSR") for the 12 months of 17.5% (with dividends re- invested). Since launch through to the end of December 2016, JLIF delivered a TSR of 76.5%, equating to a simple-basis annualised TSR of 9.8%. JLIF's NAV increased from £883.1 million to

£1,080.6 million over the year, a 10.9% increase on a NAV per share basis. In addition, as at 31 December 2016 £171.4 million was drawn on the revolving credit facility compared to £17.0 million the previous year.

 

The value of JLIF's Portfolio grew significantly in 2016, driven largely by new investments, positive exchange rate movements (unrealised), a reduction in discount rates, discount rate unwind and value enhancement activities.

 

As at every balance sheet date, the discount rates used to value the Portfolio are reviewed to ensure they continue to reflect our market experience. While this resulted in a reduction in the discount rates applied to the projects comprising the Portfolio at the start of the year, this was offset by the acquisition of certain projects during the year at higher discount rates. The weighted average discount rate ("WADR") therefore increased marginally from 7.82% as at 31 December 2015 to 7.87% as at 31 December 2016.

 

Underlying portfolio growth was ahead of discount rate unwind for the sixth consecutive year, the result of active management and value enhancement efforts across the Portfolio. Examples of


such areas of value enhancement included cost efficiencies (including insurance and SPV management) at both project and Portfolio level, prudent management of lifecycle costs, and reduced margins resulting from the refinancing of senior debt. Additionally, during 2016 JLIF completed the sale of its interests in two projects (Newham Hospital and Barnsley Building Schools for the Future), further details of which are provided below.

 

JLIF's Portfolio at 31 December 2016 was valued at £1,217.6 million, an increase of £349.8 million (including underlying growth of £92.0 million) on the valuation as at 31 December 20154. Of the

£92.0 million of underlying growth, £12.8 million of this represented outperformance; i.e. growth beyond that expected from the simple unwind of the discount rate (adjusted for the timing of acquisitions, disposals and distributions received in the year). The table below shows the underlying growth of the Portfolio for the past four years, and shows that JLIF's Portfolio has consistently outperformed.

 


2013

2014

2015

2016

Underlying portfolio growth

7.24%

9.22%

8.34%

8.18%

Adjusted unwind of the discount rate

6.38%

7.81%

8.12%

7.04%

Outperformance

0.86%

1.41%

0.22%

1.14%

 

4   See the Investment Adviser Report for further detail on the drivers of this growth.

 

Investments and Disposals

JLIF made a record £306.0 million of investments in 2016. This included two metro stations projects in Spain, a motorway service stations project in the US, and a rail rolling stock project, road project, social housing project and justice project in the UK. All of the investments were made on a bilateral basis, outside of competitive auction processes.

 

In June 2016, JLIF sold its entire interests in the Barnsley BSF and Newham Hospital projects. This was having received offers that valued JLIF's interests in both projects at a level significantly above that which the Board considered could be achieved by retaining the interests. It was decided that it was in the best interests of the Company to accept the offers and to redeploy the sale proceeds at better value elsewhere. The disposal proceeds were redeployed almost immediately in July 2016, being used to part-fund the investment in the Connecticut Service Stations project.

 

The sale value represented an uplift on JLIF's valuation of the investments as at 31 March 2016 of approximately 36% and saw JLIF realise an aggregate IRR of approximately 16%. The Board and Investment Adviser will continue to consider and evaluate potential disposals, taking account of the best interests of the Company.

 

Gearing

At the Company's AGM in May 2016, shareholders approved an increase in the gearing limit in the articles of association and investment policy from 25% to 35% of JLIF's Total Assets.

 

Subsequent to this, JLIF signed the terms of an accordion facility in June 2016, providing it with access to an additional £150 million of debt, with the same financial institutions as those who provide the Company's £180 million revolving credit facility. The margin on the accordion facility of 175bps is the same as on the main facility.

 

JLIF drew on its revolving credit facility several times throughout the year to finance new investments. In July, JLIF drew on its facility in Euros

(€63.0 million) to finance the acquisition of a follow-on interest in the Barcelona Metro Stations L9T2 project and a new interest in the Barcelona Metro Stations L9T4 project. As noted at the time, given the relative weakness of Sterling against the Euro subsequent to last June's referendum on

EU membership by the UK, JLIF intends to use income from its portfolio of Euro-denominated projects to repay this debt so as to provide a

natural hedge.


As at 31 December 2016, JLIF's revolving credit facility was drawn by £171.4 million. We are today announcing a proposed share issuance by way of a shareholder tap issue for up to approximately

89.8 million new ordinary shares, the maximum that can be issued via a shareholder tap issue. The proceeds of the issue will be used to repay most of the outstanding Sterling-borrowings, with the Euro-borrowings remaining drawn as JLIF does not wish to use a historically weak Sterling to repay Euro debt. As at 31 December 2016, the Euro-borrowings totalled €59.0 million (€57.0 million as

at the start of March 2017). With the intention being not to raise against the Euro-borrowings, it was deemed by the Board more cost effective to undertake a shareholder tap issue as opposed to a full open offer and placing which is a more expensive process (and therefore only appropriate when seeking to raise larger amounts).

 

Governance & Regulation

The Company applies the UK Corporate Governance Code and is required to comply with the EU- wide Alternative Investment Fund Managers Directive ("AIFMD") and the Company remains a self- managed non-EU Alternative Investment Fund ("AIF"). We continue to comply with all of the reporting requirements with respect to AIFMD including quarterly reporting in the jurisdictions in which the Company is marketed, and disclosures contained within the annual and interim reports.

 

The Board has considered the principles and recommendations of the AIC Code of Corporate Governance, as revised in 2010, ("AIC Code") by reference to the AIC Corporate Governance Guide for Investment Companies ("AIC Guide"). The AIC Code, as explained by the AIC Guide, addresses all the principles set out in Section 1 of the Combined Code, as well as setting out additional principles and recommendations on issues that are of specific relevance to the Company. More information is on page 38 of this report. The Company intends to continue complying with the

AIC Code in this financial year.

 

Risks & Uncertainties

While the Investment Adviser manages the risks facing the Company on a day-to-day basis, the Board retains ultimate responsibility. JLIF's Risk Committee continues to review on a regular basis the principal risks facing the Company and the controls that we have in place to manage

those risks. An overview of JLIF's risk management strategies, a description of what the Board considers the principal risks, as well as the ways by which these are mitigated, are contained in the Risk Committee report on pages 10 to 15.

 

One of the risks identified in recent reports to shareholders has been in relation to the OECD's Base Erosion and Profit Shifting ("BEPS") initiative. Based on the most recently published draft legislation (in December 2016) we believe that this no longer represents such a significant risk to JLIF, with our analysis meaning that we do not expect introduction of the legislation to have a material impact on the valuation of the Portfolio. While recognising that draft legislation is not enacted legislation, this risk has been downgraded in the Company's risk register.

 

Board & AGM

I would once again like to thank my fellow Directors for their regular and meaningful contribution to the Board. We have met a number of times outside of the regular scheduled meetings during the year to support the execution of the Company's business plan and I offer my thanks to the Board for their continued commitment.

 

The Company's Annual General Meeting will be held at 10.30am BST on 19 May 2017 at The Douglas and Dalrymple Rooms, Old Government House Hotel, St Ann's Place, St Peter Port, Guernsey, Channel Islands.

 

Market & Business Outlook

The markets in which JLIF invests continue to provide opportunities for growth, although increasingly these opportunities are outside of the UK. Consequently, attached to investing in


these markets is exposure to exchange rate risk. While there are diversification benefits that come with holding a portfolio of investments spread across a number of geographies, and there are ways to manage exchange rate risk, investing increasingly overseas creates a greater exposure to non- Sterling income.

 

This trend is both a function of a lack of UK greenfield PPP pipeline in recent years and consolidation of the majority of UK operational PPP projects into the ownership of long term investors. While there is discussion around the announcement of a pipeline of PF2 projects, it is likely that most opportunities that do arise will be brought to market via competitive auction processes. These tend to attract very high pricing because of asset scarcity and an attractive investment environment (i.e. strong credit rating of public-sector counterparties, strong legal and regulatory frameworks to support the contractual structures of projects etc.)

 

More active PPP markets can be found in parts of Continental Europe, North America and further afield in Australia and Latin America. The US in particular, as a less developed PPP market, is likely to present further good investment opportunities over the next few years, especially with the new Administration's stated policy to use private finance to support infrastructure development.

The scale of the infrastructure investment need in the US is significant. JLIF was pleased to complete its first investment in the US market in mid-2016, thereby establishing a presence and foothold for further acquisitions.

 

In 2016, each of the seven investments made by JLIF were completed on a bilateral basis. Four of these (31% by value) were acquired from members of John Laing Group plc under the First Offer Agreements, and three (69% by value) from other vendors. JLIF and its Investment Adviser invest significant time and effort into developing and maintaining relationships with primary developers and vendors, as well as sale advisers who often advise vendors on potential investors to approach. The JLIF Board remains confident about the prospects of the business and is optimistic for the future growth of the Company.

 

Paul Lester CBE

Chairman

16 March 2017

 

 

STRATEGIC REPORT

 

OBJECTIVE

JLIF's objective is to be the preferred private sector partner of choice for public-sector clients of operational infrastructure PPP projects within the markets in which it operates, making available for use high-quality infrastructure assets that meet or exceed contractual requirements and specifications. To this end, JLIF aims to develop strong working relationships with its public-sector clients, based on collaboration.

 

In doing so, JLIF's aim is to provide shareholders with a source of stable, predictable income and to deliver a shareholder IRR of 7-8% over the long term, by actively managing its portfolio of projects and selectively investing in new value accretive investments. JLIF aims to reduce shareholder risk by offering the opportunity to invest in a well-diversified portfolio, with regard to the number of investments, and the mix of public- sector counterparties (both by jurisdiction and sector) and currency exposure, and to provide a degree of inflation protection via inflation-linked returns.

 

To ensure the Portfolio remains well diversified, JLIF's shareholders have approved an investment policy that includes the following limits with regard to the composition of the Portfolio:

 

•  up to 30% of the Portfolio in assets still in their construction phase;

 

•  up to 10% of the Portfolio in projects that are not classified as PPP projects, but exhibit a substantially similar risk profile and characteristics;

 

•  up to 15% of the Portfolio in projects that are classified as having a demand-based payment mechanism; and

 

•  up to 50% of the Portfolio in overseas jurisdictions, maintaining at least 50% invested in UK assets at all times.

 

Further details of the Investment Policy are found on pages 20 to 21 of this Annual Report.

 

JLIF also aims to manage its investments such that they deliver at least the returns expected at the time of acquisition, and to be at the forefront of disclosure and transparency amongst its peer group such that its shareholders remain updated and can understand the performance of the business, the risks facing it and its prospects going forward.

 

 

MARKET OUTLOOK

JLIF's investment policy is to invest predominantly in operational, PPP projects. The PPP model is used by various governments around the world as a way by which to procure infrastructure assets. In certain countries, it has been used for a long time and is an established method with a proven history and political support. Such mature markets include the UK, Canada, much of Western Continental Europe, Australia and Chile. Other markets, including the US, have only more recently started using the PPP model, although have the potential to grow significantly over the coming years.

 

Globally there is a significant need for infrastructure investment, both in more economically developed economies where existing infrastructure assets require upgrading or replacing, and in less developed economies, where the need is driven by the processes of rapid population growth, urbanisation and increasing levels of economic wealth (e.g. car ownership). For a variety of reasons, many governments see the benefits that derive from private sector involvement and consider private sector participation as key to meeting their infrastructure needs over the coming decades.

 

With competition for assets in more established, traditional PPP markets, remaining high, it is becoming necessary to broaden where JLIF seeks out investment opportunities in order to find new investments that represent good value. Increasingly this may include slightly more nascent PPP markets, although these will only be considered where the degree of risk is considered reasonable and the Company's interests remain adequately protected.

 

In the short term, developed markets are expected to continue to present the majority of opportunities. However, over the longer term (as pipelines and regulatory and legal frameworks become more established) the best value opportunities may arise in sectors and jurisdictions outside of those that have historically formed the core of JLIF's Portfolio. JLIF is confident that its investment policy provides sufficient flexibility to be able to target and benefit from such opportunities.

 

These new opportunities are likely to compliment further investments in JLIF's core markets, providing additional diversification across the Portfolio. To succeed in its core markets, JLIF will need to focus increasingly on originating bilateral deals through developing long-term relationships with greenfield developers/sponsors. The Company believes that the Board and the Investment Adviser have the right resources in play to achieve this.


BUSINESS MODEL

JLIF's business model is to predominantly invest in equity and sub-ordinated debt issued with respect to operational infrastructure PPP projects. While the Company's Investment Policy allows up to 30% of its Total Assets to be invested at any one time in projects still in their construction phase, JLIF predominantly targets operational projects, as it is ordinarily upon operations commencement that revenues start to be received. This supports the Company's objective, as described above, to deliver income (or yield, as opposed to capital growth) to shareholders.

 

Revenue

The majority of projects in which JLIF invests (92.5% by value as at 31 December 2016) have an availability-based payment mechanism. This means that the project company receives a pre- agreed payment (usually on a monthly basis) from the public-sector counterparty, known as a unitary payment. This is received in return for making the infrastructure asset (e.g. school, hospital, police station etc.) available for use and in accordance with the contractual specifications. These specifications may include, for example, the requirement for certain areas of a building (e.g. a hospital) to be maintained within a specific temperature range. Where such specifications are not met, certain parts of, or in extreme cases, whole projects, may be deemed by the public-sector client to be unavailable for use. In this event, deductions may be made against the unitary payment received by the project company, thereby incentivising the project company to ensure that this does not happen. Most of this type of operational risk on a project is passed-down to a specialist facilities management company on a back-to-back basis (although liability caps may apply beyond which the risk is retained by the project company).

 

Other projects include a demand-based payment mechanism, where the amount of revenue received by the project company is based not on the asset being made available for use, but rather on the level of use of the asset. As at 31 December 2016, JLIF held an investment in one asset (the Connecticut Service Stations P3 project) deemed to have demand-based revenue risk. By value, this asset comprised 7.5% of the Portfolio.

 

Profit

Availability-based projects

On availability-based projects the unitary payment is agreed prior to signing of the project agreement at the start of a project, and sized to cover the project company's costs of construction, operation and financing. Given JLIF predominantly invests only in operational projects (i.e. after the construction phase is complete), the main costs incurred by the projects at this time are those relating to maintenance and operation of the asset, and costs associated with how the initial construction was financed. As noted, the unitary payment is fixed (other than in the event of contractually agreed variations to the project or inflationary changes). Therefore, if the project company can manage its operating and financing costs more efficiently (i.e. to a level below that originally anticipated at the time of signing of the project agreement), while continuing to deliver the required level of service under the project agreement, then it will make an increased profit/return.

However, attached to certain cost savings generated by the project company are sharing arrangements. These stipulate that, should cost savings be made, a proportion of these efficiencies be shared with the public-sector client. For other costs - usually those that are uncontrollable by the project company (e.g. change in law) - should these increase above what was originally anticipated when sizing the unitary payment, the 'pain' of such increases are also shared with the public-sector client.

 

Where the risk associated with a particular cost has been passed-down to a sub-contractor, the sub-contractor benefits/suffers from cost savings or increases, as opposed to the project company. Typically, although not always, such costs can include lifecycle and routine maintenance costs.

Those costs whose risk of variability is typically retained by the project company include insurance costs, project company management costs and senior debt finance costs.

 

Demand-based projects


The cost side of a demand-based project is very similar to that of an availability-based project. The main difference therefore lies on the revenue side. As noted above, in a demand-based project, revenues are based on the level of use of a project, and therefore are inherently less certain (i.e. riskier). The profitability of a demand-based project is therefore as much concerned with managing costs as it is about maximising revenues. Profitability is driven by the project company's ability to encourage higher use of the asset, as well as wider macroeconomic/demographic factors (of which assumptions are made at the time of investment).

 

Fund Level

Profits made by the underlying project companies in which JLIF invests are ultimately returned to JLIF by way of dividends and sub-ordinated debt interest and principal repayments (collectively known as distributions). Distributions from the projects comprising the Portfolio are aggregated at the Fund level and distributed to JLIF's shareholders by way of dividends, after accounting for costs incurred in managing the Fund. The principal costs incurred in managing the Fund are those related to the Investment Adviser, the Board, the Auditor, the Administrator, fees related to JLIF's corporate credit facility, adviser fees related to capital raising activities and regulatory fees, amongst others. A review of the Ongoing Charges

(i.e. costs in managing the Fund) for 2016 can be found in section 2.2 of the Investment Adviser Report.

 

The above description is a representative simplification of JLIF's business model and of the project companies in which it invests. In reality the contracts relating to the projects may be more detailed and complex.

 

 

OUTCOMES AND KEY PERFORMANCE INDICATORS ("KPIS")

There are two categories of KPIs JLIF is measured against:

•   the performance of the investment in JLIF; and

•   the compliance of the investments JLIF makes against its policy.

 

 

Performance based KPIs

 

KPI

2015

2015

2014

Yield

Objective: To provide shareholders with a dividend yield of at least 6% on the IPO Issue Price of 100p.

 

Measurement: This is expressed as a ratio of the total annual dividend yield against both the IPO Issue Price and the year-end share price.

 

Total dividend paid within the financial year: 6.82pps

 

Status: 6.82% on the IPO issue price5, being 5.3% yield on share price as at 31 December 2016.

 

Share price at 31/12/16: 129.7p

 

Total dividend paid within the calendar year: 6.75pps

 

Status: 6.75% on the IPO issue price5, being 5.8% yield on share price as at 31 December 2015.

 

Share price at 31/12/15: 116.7p

 

Total dividend paid within the calendar year: 6.50pps

 

Status: 6.50% on the IPO issue price5, being 5.3% yield on share price as at 31 December 2014.

 

Share price at 31/12/14: 122.8p

Comments

While there was further progression of the total dividends paid within the financial year, the dividend yield

on the closing share price decreased (relative to 2015) as consequence of the increase in share price over

the period.

Fund IRR6

Objective: To target an IRR of 7-8% over the longer term.

 

Measurement: This is by reference to the IPO Issue Price of 100p, the year-end share price and dividends paid since launch

 

Fund IRR since launch:

9.8%

 

Fund IRR since launch:

8.6%

 

Fund IRR since launch:

10.4%

Comments

The IRR delivered by JLIF to its shareholders over the period from IPO to 31 December 2016 of 8.5% remains above the long term target of 7-

  8%.                                                                                                               

 

 

 

 

Policy based KPIs

 

KPI

2016

2015

2014

The value of any single investment shall not be greater than 25% of the Total Assets of the Group measured post acquisition

Maximum single asset

%:

13.25% of total asset value

Maximum single asset

%: 7.71% of total asset value

Maximum single asset %:

7.59% of total asset value

The borrowings of the

Maximum debt drawn

Maximum debt drawn

Maximum debt drawn

 

Group, including financial guarantees supporting subscription obligations, shall not exceed 35%7 of the Total Assets of the Group

during the year: 15.81% of total asset value.

during the year: 1.92% of total asset value.

during the year: 0% of total asset value

The value of

investments in the construction phase shall not exceed 30% of the total assets

of the Group

Value of investments

at the year-end: 3.91% of total asset value

Value of investments

at the year-end: 0% of total asset value

Value of investments

at the year-end: 0% of total asset value

The value of investments receiving demand-based payments shall not exceed 15% of the Total Assets of the Group

Value of investments at the year-end: 8.45%8 of total asset value

Value of investments at the year-end: 0% of total asset value

Value of investments at the year-end: 0% of total asset value

The value of investments in non- PPP infrastructure assets (but with substantially similar characteristics and risk profiles) shall not exceed 10% of the Total Assets of the Group9

Value of investments at the year-end: 0% of total asset value

Value of investments at the year-end: 0% of total asset value

Value of investments at the year-end: 0% of total asset value

 

5   £1 in November 2010.

6   Dividends not assumed to be re-invested.

 

Increase from 25% approved by shareholders at AGM in May 2016.

 

8 As noted above, approximately 37% (NPV basis) of the income received by the SPV over the concession for the Connecticut Service Stations P3 project is dependent upon consumer demand, relating to fuel and retail sales. Under JLIF's investment criteria, this project is therefore categorised as demand-based.

 

This was the subject of a resolution approved by shareholders in February 2014.

 

RISK COMMITTEE REPORT

 

Risk is uncertainty of outcome and represents either a threat to or an opportunity for a business's success - its business model, reputation or financial standing. Risk is therefore closely monitored by the Company, and risk management is embedded in its culture and that of its advisers. While is it is not possible to entirely eliminate all risk, it is possible to manage risk through a process of identification, review and mitigation, either to reduce the likelihood of a risk materialising, or in the event that a risk should materialise, to reduce any adverse impact it may have.

 

JLIF has a dedicated Risk Committee to leads its risk management activities. While the Investment Adviser manages the risks facing the Company on a day-to-day basis, the Board (managed via the Risk Committee) retains ultimate responsibility.

 

Risk identification, review and mitigation

Risk management is a continuous process as the risks facing the Company evolve. New risks can emerge and risks previously identified can change either in their probability of occurrence or potential impact. With this in mind, the Company maintains a risk register that is reviewed by the Risk Committee on a quarterly basis. This is designed to identify the principal risks facing the Company, and employs a red-amber-green system, which is based on assessment of the probability and impact of each risk identified. The assessment is made for each risk both pre- and post-mitigation.

 

Risks classified as Red are considered very likely to occur and to have the potential to significantly impact the Company's business prospects in the event of occurrence. Risks classified as Amber are considered to have a medium likelihood of occurrence, with a medium potential impact should they materialise. Risks classified as Green have a low likelihood of occurrence, and a low potential impact should they materialise.

 

The system described above is designed to help JLIF prioritise and focus its risk mitigation strategies and controls.

 

JLIF's risk register covers six main areas of risk:

 

1.  Economic;

2.  Political;

3.  Operational;

4.  Financial;

5.  Taxation; and

6.  Compliance and Legal.

 

 


Risk

Pre-

Mitigation Risk Rating

Post-

Mitigation Risk Rating10

Reputational

Risk Rating

Economic

Exchange rates

Red

Green

Green


Interest and deposit rates

Red

Green

Green


Equity market sentiment

Red

Green

Amber

Political

Pressures on contract terms and/or early termination

Red

Red

Red


Change in political environment affecting PPP projects

Red

Amber

Amber


UK European Union membership

Red

Red

Green

Operational

Competition for assets

Red

Amber

Amber


Counterparty and demand risk

Red

Green

Red


Supply chain

Red

Amber

Amber


Asset availability

Red

Red

Amber


Lifecycle risk

Amber

Green

Green


Performance of the Investment Adviser

Amber

Amber

Red



Cyber risk

Green

Green

Red

Financial

Portfolio valuation

Red

Green

Amber


Refinancing risk

Red

Amber

Green

Taxation

Changes to tax legislation and rates

Red

Amber

Amber

Compliance and Legal

Regulatory compliance and change

Green

Green

Red


Contractual Risk

Amber

Green

Green

 

10 Mitigating actions are described in further detail in the text that follows.

 

 

Risk

Description

Pre- Mitigation Rating

Mitigation

Post- Mitigation Rating

Reputational Risk

Economic

Exchange rates

As at 31

December 2016, JLIF held eight investments denominated in currencies other than Sterling. The currencies covered are Euro, Canadian Dollar and US Dollar.

Together these eight investments comprised 32.4% of the Portfolio Value. There is a risk that fluctuations in exchange rates may reduce the Sterling-value of the cash flows received from the investments, adversely affecting the valuation of such projects and JLIF's dividend cash cover.

Red

While JLIF's stated policy since launch in November 2010 has been not to hedge the balance sheet value of its non-Sterling assets, JLIF does make prudent use of foreign exchange hedging instruments to hedge non-Sterling cash flows, typically looking out up to 18 months.

 

JLIF's investment policy requires at least 50% of the Portfolio to be UK- based at any time.

 

JLIF can draw on its revolving credit facility in the local currency and repay borrowings in the same currency from its portfolio of assets denominated in the same currency, thereby creating a natural hedge.

Green

Green

Interest and deposit rates

JLIF has exposure to interest rate risk through its own cash deposits, the interest payments on debt at the

Red

JLIF's own long term cash deposits are generally minimal (given its approach to raising new capital).

Green

Green



underlying projects, borrowings on its revolving credit facility and on cash deposits at the project SPVs in which JLIF is a shareholder.


 

The senior debt at the underlying projects is typically hedged using interest rate swaps.

 

JLIF has no long term gearing and the periods in which the revolving credit facility is drawn are typically short.

 

Sensitivities to changes in deposit rates are included in the Investment Adviser Report.



Equity market sentiment

There is a risk that, due to disruption to equity markets, the Company is unable to raise new capital and therefore be able to repay any debt drawn on its revolving credit facility (used to finance new acquisitions).

Red

The Investment Adviser and JLIF's Corporate Broker monitor market sentiment and will not recommend drawing significantly on JLIF's revolving credit facility if it is considered likely that subsequent capital raising would be problematic.

Furthermore, if JLIF was unable to raise new capital, outstanding borrowings could ultimately be repaid using distributions from JLIF's Portfolio or by disposals of projects.

Green

Amber

Political

Pressures on contract terms and/or early termination

There is a risk that political and financial pressure could result in certain public- sector counterparties seeking to use contractual provisions to extract a financial benefit or

Red

JLIF and the Investment Adviser engage regularly with HM Treasury and other governmental PPP units in order to remain aware of policy developments and to represent the interests of the

Red

Red



voluntarily to terminate a project.


Company.

 

In the event of voluntary termination, equity investors benefit from compensation provisions that, in the majority of cases, ensures that market value is received.

 

The Company is a signatory of the Code of Conduct for Operational PFI/PPP contracts in the UK, which sets out the basis on which public and private sector partners agree to work together to make savings in operational PPP contracts.



Change in political environment affecting PPP projects

Concession based PPP projects form the core of JLIF's investment focus. A shift in political policy away from the PPP model could compromise JLIF's ability to access new projects and impact the way it engages with public-sectors clients.

Red

JLIF closely monitors the political environment in countries in which it invests (or is considering investing) to gauge political support for PPP.

Amber

Amber

UK

European Union membership

In June 2016, the UK voted in favour of leaving the EU. As a result of this outcome, there is likely to be a prolonged period of market uncertainty, which may see greater volatility in macroeconomic indicators.

Red

The mitigation measures for the risks associated with this event are those described above in respect of interest and deposit rates and with respect to inflation rate risk are as follows. Before making any investment, JLIF undertakes sensitivity analysis

Red

Green





to establish the correlation of such investment to inflation and takes this into consideration in its investment decision and valuation. JLIF discloses to shareholders bi- annually the sensitivity of the Portfolio to inflation, thereby affording the ability to anticipate the likely effect of changes in inflation. JLIF takes a long term view of inflation, both in valuing its current Portfolio and in valuing potential new investments.

Where possible, inflation assumptions are benchmarked to independent sources.



Competition for assets

There is an over- supply of capital seeking investment in PPP infrastructure projects and an under-supply of projects to which to deploy that capital, particularly in the UK. This has the effect of increasing asset pricing. There is a risk that JLIF over- pays for an asset or that JLIF's ability to continue to grow its Portfolio is restricted.

Red

JLIF benefits from an experienced Investment Adviser with significant knowledge of the infrastructure market and appoints a team of external advisers to undertake due diligence on assets prior to investment in order to establish a fair market valuation.

 

The Investment Adviser seeks to establish bi-lateral investment opportunities by developing long term relationships with potential vendors and co- shareholders in order to avoid

Red

Amber





competitive auction processes.

 

JLIF also benefits from two First Offer Agreements with John Laing Group plc giving it the right of first offer over a significant portfolio of infrastructure projects.

 

JLIF's investment policy provides it with scope to invest up to 50% of the Portfolio by value in projects located outside of the UK. This gives it the ability to operate in markets that are not characterised  by the same degree of competition as the UK, where better value is more readily achievable. The Investment Adviser maintains a global view with respect to originating new investment opportunities.



Operational

Counterparty and demand risk

There is a risk that one of JLIF's clients has financial difficulties and is unable to meet its payment obligations as they fall due under a PPP agreement, thereby adversely affecting the project cash flows.

 

In respect of JLIF's investment in the Connecticut Service Stations project, where some of the revenue is related

Red

With a Portfolio of 62 assets, JLIF's exposure to any single counterparty is considered low, with the impact

of any single counterparty failing being reduced.

 

JLIF's investment policy dictates that JLIF invests only in jurisdictions where public-sector or government-backed obligations carry a satisfactory credit rating and where contract structures

Green

Red



to the level of usage, there is risk that, for reasons outside of the control of the project company, this may be less than forecast/assumed at the time of investment.


and their enforceability are reliable.

 

Prior to making an investment in a project with demand risk, JLIF undertakes detailed review of the key factors that drive demand. JLIF procures the advice of third party experts and believes that its assumptions in respect of future demand are prudent.

 

JLIF's Investment Policy limits the percentage of Total Assets invested in projects with revenues exposed to demand risk to no more than 15%.



Supply chain

The project companies in which JLIF invests have agreements with sub- contractors to provide facilities management and SPV management services. There is a risk of poor performance by such sub- contractors that could adversely affect the project cash flows.

 

There is a risk in the event of having to replace a sub-contractor that a replacement sub-contractor may only be found at a higher cost, which may not be recoverable.

Red

JLIF's Portfolio provides good diversification, reducing the reliance on any single sub- contractor, and supply chain diversification is considered on a frequent basis by the Company and prior to any new investment.

 

In the event of poor performance by a sub-contractor, the agreements include provisions allowing the SPVs in which JLIF invests to pass-down performance penalties to sub- contractors and ultimately to terminate and

Amber

Amber





replace  with another provider. Thresholds are set such that this can be done prior to any performance penalties (i.e. deductions) are incurred by the SPV itself.



Asset availability

The majority of the revenues received by the SPVs in which JLIF invests are dependent on the relevant asset being available for use and meeting certain performance criteria. In the event an asset is deemed either wholly or partially unavailable, deductions can be enforced by the public-sector counterparty, adversely affecting revenues and project cash flows.

Red

Unavailability can be caused by a number of factors but is most likely to be caused by underperformance of a service delivery partner. Through its director representation on each of the SPV boards, JLIF is able to monitor operational performance and to identify and correct any trends early.

 

Contractual provisions allow performance deductions to be passed-down to the sub-contractor at fault, although such provisions may include caps relating

to sub-contractor liability. As discussed above, ultimately a sub- contractor may be terminated for continued poor performance and replaced.

Red

Amber

Lifecycle risk

During the life of a project, there are a number of items that may need replacing (e.g. elevators, air conditioning equipment, flooring etc.).

There is a risk that

Amber

While in some projects this risk is passed-down in full to sub-contractors, on other projects this risk is retained by equity shareholders. As part of JLIF's due diligence process, it

Green

Green



the actual cost of replacement is greater than the forecast cost or the actual timing of replacement is sooner than forecast.


appoints experienced technical advisers to opine on the adequacy of the lifecycle cost profile within the financial model (used to derive JLIF's valuation of the asset).

Benchmarking is also undertaken against other similar projects within JLIF's Portfolio to verify further the adequacy of the lifecycle cost profile.



Performance of the investment adviser

The success of the Company depends to a large degree on the skill and ability of the Investment Adviser to identify, acquire and manage JLIF's investments.

Unlike some of the Company's peers, the Investment Adviser is owned by a corporate group, John Laing Group plc, and accordingly, John Laing (not the Investment Adviser team) have ultimate responsibility for setting the Investment Adviser's strategy and remuneration structures for the team as well as being the beneficiary of the profits of the Investment Adviser. A performance deterioration by

Amber

The Investment Adviser has a strong record of accomplishment of investing and managing infrastructure projects. JLCM, being a wholly- owned subsidiary of John Laing Group plc, has access to the depth of resource provided by its parent company, as well as robust policies, procedures, compliance systems and risk controls.  John Laing Group plc has significant personnel to draw from to provide the services under the Investment Advisory Agreement.

Ultimately, in the event of ongoing underperformance by the Investment Adviser, JLIF has the ability to serve notice and to

Amber

Red



the Investment Adviser, which may be as a result of lack of resource or loss of experienced personnel, would have a material impact on the Company's performance.


replace JLCM as Investment Adviser.



Cyber risk

There exists an increasing threat of

cyber-attack in which a hacker or computer virus may attempt to access the IT systems of the Group, the Investment Adviser or one of the SPVs, and attempt to destroy or use this data for malicious purposes. While JLIF considers it unlikely to be the deliberate target of a cyber-attack, there is a possibility that it could be targeted as part of a random or general act.

Green

JLIF, the Investment Adviser and the SPVs' IT providers have procedures in place to mitigate cyber- attacks and business continuity plans. Data is separately stored on multiple servers, which is backed-up regularly. IT controls are regularly reviewed, including by external specialist IT companies, to ensure they remain robust and provide a sufficient level of protection.

Green

Red

Financial

Portfolio valuation

The principal component of the investments of the Company is its Portfolio of PPP assets. JLCM is responsible for preparing a fair market value of the Portfolio, which is presented to and approved by the Board.

There is a risk that the valuation is not a fair reflection of the market valuation (i.e. the

Red

An independent verification exercise of the methodology and assumptions applied by JLCM is performed by a leading accountancy firm and an opinion provided to the Board. Additionally, the methodology and assumptions are subjected to significant external audit scrutiny and challenge.

Green

Amber



Portfolio is over- or under-valued).

This risk is a function of the financial models, both at the Group and underlying project level, on which the valuation is based, which may contain incorrect assumptions, and programming, logic or formulaic errors, thereby resulting

in inaccurate outputs.


The financial models are generally subject to audit by external accountancy firms, which is designed to identify and remove errors. As a control, JLCM also reviews the actual performance of investments against past projected performance, with significant deviations indicating a requirement to review a model for inaccuracies or errors.



Refinancing risk

The majority of projects in JLIF's Portfolio have in place long term debt broadly matching the duration of the concessions.

However, the Connecticut Service Stations project has senior debt maturing in 2023.

In addition, while the two Barcelona Metro Stations projects have long term debt in place, both include terms which require the use of equity distributions to pay down debt. There is a risk that refinancings cannot be achieved at forecast rates and costs, or at all, adversely affecting the distributions received by JLIF and hence the valuation of such projects.

Red

JLIF takes advice from the Investment Adviser (that has good knowledge of project finance and the debt markets) and from independent experts familiar with the relevant debt markets and is confident in the prudence of its forecast assumptions where this risk exists.

However, certain macroeconomic conditions are outside of the control of the Company. Projects with this risk are therefore valued at a higher discount rate to compensate for the additional degree of risk retained by equity.

Amber

Green


Taxation

Changes to tax legislation and rates

There is a risk that changes to the tax rules or rates (e.g. BEPS, cross- border tax treatment etc.) across the jurisdictions in which JLIF invests could result in JLIF, or the SPVs in which JLIF invests, having to pay more tax, adversely affecting either the distributions received from the Portfolio or distributions paid to shareholders in JLIF.

Red

JLIF works closely with expert tax advisers and adopts what it believes to be a conservative position with regard to tax planning.

That said, other than participating in industry consultation process, there is little within the power of the Company that it is able to do to mitigate changes in corporation tax rates and tax legislation. The diversification across jurisdiction offered by JLIF's Portfolio provides an inherent degree of mitigation against this risk.

 

With respect specifically to the OECD's Base Erosion Profit Shifting initiative, the Company continues to monitor and participate in consultation processes with HMRC, and seeks advice from independent tax experts as to the ramifications for JLIF. The final legislation is due to be enacted from April 2017.

Amber

Amber

Compliance and Legal

Regulatory compliance and change

JLIF is required to comply with certain UK Listing Rules applicable to 'Premium listings' as well as

Green

JLIF and the Investment Adviser monitor regulatory developments and seek independent professional advice

Green

Red



rules relating to the Guernsey Financial Services Commission.

There is a risk that failure to comply with any

of the relevant rules could result in a negative reputational or financial impact.


in order to manage compliance with changing regulatory requirements.

Where appropriate, JLCM participates in consultation processes to ensure that the views of the Company are heard by the legislature.



Contract risk

The projects in which JLIF invests rely on complex contractual arrangements in order to operate as intended. There is a risk that such contracts do not operate as intended, are incomplete, contain unanticipated liabilities, are subject to interpretation contrary to JLIF's expectations, or otherwise fail to provide the protection anticipated.

 

There is a risk that due diligence does not reveal all the facts and circumstances of a particular project, resulting in over- paying for an investment.

Amber

Such contracts have been entered into usually only after lengthy negotiations and with the benefit of external legal advice. JLIF engages legal advisers when undertaking due diligence on potential investments to understand the risks retained by the SPV.

 

JLIF seeks to mitigate the risk of over-paying by undertaking a structured due diligence process, with the support of independent expert advisers with strong market knowledge, and often with familiarity of the specific project itself.

Green

Green

 

 

 

Long Term Viability Statement

The Directors have assessed the viability of the Company over the three-year period to December 2019, taking account of the Company's current position and the potential impact of the principal risks documented in the Risk Committee report. Based on this robust assessment, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the period to December 2019.

 

In making this statement, the Directors have considered and challenged the reports of the Investment Adviser in relation to the resilience of


the Company, taking account of its current position, the principal risks facing it in severe but possible scenarios, the effectiveness of any mitigating actions and the Company's risk appetite. Where possible, sensitivity analysis has been undertaken to consider the potential impacts of such risks on the business model, future performance, solvency and liquidity over the period. The sensitivity analysis undertaken considered the impact of a significant proportion of the Portfolio not yielding, which is a plausible consequence of a number of the principal risks should they materialise, either in isolation or in parallel.

 

The sensitivity analysis was premised on a number of assumptions, including that the Company's revolving credit facility remains in place and is available to provide short term finance for future acquisitions undertaken in the period, that there will be sufficient liquidity within the market to raise new capital as and when required, that the Investment Adviser continues on the same terms as those existing and that there is no annual uplift in dividends paid to shareholders.

 

The Directors have determined that a three-year look forward to December 2019 is an appropriate period over which to provide its viability statement. This is consistent with the outlook period used in economic and other medium term forecasts regularly prepared for the Board by the Investment Adviser and is the outlook period generally used by the Board in its consideration of any new strategies. These reviews consider both the market opportunity and the associated risks, principally the ability to raise third party funds and invest capital.

 

The Directors' view on the going concern status of the Company can be found in the Report of the Directors.

 

BOARD OF DIRECTORS

 

All members of the JLIF Board have been in post since the Company was incorporated in August 2010, with the exception of Helen Green who was appointed in April 2014.

 

Paul Lester CBE, Chairman

Paul Lester, a resident of the United Kingdom, is currently non-executive Chairman of Greenergy International Ltd and Knight Square Holdings Ltd.

In April 2016 he was appointed non-executive Chairman of Essentra Plc and also Forterra Plc. Paul was chief executive of VT Group plc, the support services company, from July 2002 until its acquisition by Babcock International in July 2010.

 

Mr Lester was group managing director of Balfour Beatty plc, the international engineering, construction and services group, from 1997 to 2002, and chief executive of Graseby plc from 1990 to 1997. Mr Lester has also held senior management positions at Schlumberger and the Dowty Group plc.

 

Mr Lester is a former president of the Society of Maritime Industries, the BSA and the EEF.

 

David MacLellan, Deputy Chairman and Senior Independent Director

David MacLellan, a resident of the United Kingdom, is the founder and currently Chairman of RJD Partners, a midmarket private-equity business focussed on the services and leisure sectors.

Previously, Mr MacLellan was an executive director of Aberdeen Asset Managers plc following its acquisition in 2000 of Murray Johnstone where he was latterly Chief Executive having joined the company in 1984. Mr MacLellan has served on the boards of a number of companies and is currently a non-executive director of J&J Denholm Limited. He is a past council member of the British Venture Capital Association and is a member of the Institute of Chartered Accountants of Scotland.

 

Christopher Spencer

Christopher Spencer, a resident of Guernsey, qualified as a chartered accountant in London in 1975. Following two years in Bermuda, he moved to Guernsey. Mr Spencer, who specialised in audit and fiduciary work, was Managing Partner/Director of Pannell Kerr Forster (Guernsey) Limited from 1990 until his retirement in May 2000. Mr Spencer is a member of the AIC Offshore Committee, a past President of the Guernsey Society of Chartered and Certified Accountants and a past Chairman of the Guernsey Branch of the Institute of Directors. Mr Spencer also sits on the board of Directors of JPEL Private Equity Limited and SQN Asset Finance Income Fund Limited, each of which is listed on the London Stock Exchange, and Summit Germany Limited, which is listed on the London Stock Exchange's Alternative Investment Market.

 

Talmai Morgan

Talmai Morgan, a resident of Guernsey, qualified as a barrister in 1976. He holds a MA in Economics and Law from Cambridge University. He moved

to Guernsey in 1988 where he worked for Barings and then for the Bank of Bermuda. From 1999 to 2004, he was Director of Fiduciary Services and Enforcement at the Guernsey Financial Services Commission (Guernsey's financial regulatory agency) where he was responsible for the design and subsequent implementation of Guernsey's law relating to the regulation of fiduciaries, administration businesses and company directors. He was also particularly involved in the activities of the Financial Action Task Force and the Offshore Group of Banking Supervisors.

 

For the last ten years, Mr Morgan has been the non-executive chairman or a non-executive director of a number of publicly listed investment companies. He is presently Chairman of NB Private Equity Partners Limited, Sherborne Investors (Guernsey) B Limited and Global Fixed Income Realisation Limited. He also sits on the board of BH Global Limited.

 

 

Guido Van Berkel

Guido Van Berkel, a resident of Luxembourg, started his career in the financial industry more than 40 years ago and has held various senior positions with Bank Sarasin, Rabobank, Robeco Group and Citibank. Over the course of his career, he has worked in The Netherlands, Jersey, Switzerland, Luxembourg and Scandinavia.

 

From 2001 until 2007 Mr Van Berkel was active on the Executive Board of Bank Sarasin in Switzerland and as such he acted as chairman of various Sarasin entities across Europe and Asia. Currently Mr Van Berkel is an independent director in a number of Luxembourg, British, Channel Islands and Dutch investment fund ranges and from the beginning of 2012 until mid-2015 was chairman of BlackRock Luxembourg SA and BlackRock Fund Management S.à.r.l in Luxembourg as well as chairman of Blackrock Fund Netherlands BV.

 

Helen Green

Helen Green, a resident of Guernsey, has been employed by Saffery Champness, a top 15 firm of chartered accountants since 1984. She qualified

in 1987 and became a partner in the London office in 1997. Since 2000 she has been based in the Guernsey office where she is client liaison director responsible for trust and company administration. Mrs Green is a non-executive director of Acorn Income Fund Limited (of which she has been chairman since 2012), UK Mortgages Limited, Aberdeen Emerging Markets Investment Company Limited and City Natural Resources High Yield Trust Plc all of which are listed on the London Stock Exchange's Main Market and Landore Resources Limited which is listed on the London Stock Exchange's Alternative Investment Market.


GROUP INVESTMENT PORTFOLIO

 

As at 31 December 2016, JLIF's Portfolio comprised investments in 62 low-risk, infrastructure PPP projects, across seven primary sectors and six countries.

 

 

 

Health

 

 

Education

Justice &

Emergency Services

 

 

Transport

Regeneration

& Social Housing

 

Government Buildings

 

Street Lighting

Kingston Hospital 60%

Glasgow Schools 20%

Greater Manchester Police Stations 27.08%

E18 Road, Finland 50%

Brockley Social Housing PPP 100%

MoD Main Building, London 26%

Manchester Street Lighting 50%

Forth Valley Royal Hospital, Scotland 100%

South Lanarkshire Schools 15%

Metropolitan Specialist Police Training Centre, Gravesend 27.08%

M40 Motorway (UK)

50%

Bentilee Hub Community Centre 100%

Kromhout Barracks PPP Project, The Netherlands 100%

Walsall Street Lighting 100%

Queen Elizabeth Hospital, Greenwich 27.5%

Edinburgh Schools 20%

North East Fire and Rescue 100%

Sirhowy Way 100%

Camden Social Housing 50%

Groningen Tax Office, The Netherlands 40%

Wakefield Street Lighting 50%

Abbotsford Regional Hospital and Cancer Centre, Canada 100%

North Swindon Schools

100%

Avon and Somerset Courts 40%

M6/M74

Motorway (Scotland) 11%

Islington Social Housing I 45%


Barnet Street Lighting 100%

Vancouver General Hospital, Canada 100%

Highland School, Enfield 100%

Cleveland Police Station and HQ 50%

LUL Connect (CityLink), London 33.5%

Islington Social Housing II 45%


Enfield Street Lighting 100%

Roseberry Park Hospital, Middlesbrough 100%

Newham Schools 100%

South East London

Police Stations 50%

Barcelona Metro Stations L9T2

53.5%

Miles Platting Social Housing, Manchester 50%


Lambeth Street Lighting 100%

Tunbridge Wells Hospital

37.5%

Enfield Schools 100%

British Transport Police, London 100%

Barcelona Metro Stations L9T4

13.5%

Canning Town Social Housing 100%


Redcar and Cleveland Street Lighting 100%

Newcastle Hospital 15%

Leeds Combined Secondary Schools 100%


Connecticut Service Stations 100%

Kirklees Social Housing

100%


Surrey Street Lighting

50%

Peterborough Hospital

30%

Bexley Schools 100%


A55 Llandegai to Holyhead DBFO

100%

Oldham Social Housing

95%



Realise Health LIFT (Colchester) 60%

Bristol BSF 37.5%


Intercity Express Programme Phase 1

6%




Northampton Mental Health 100%

Peterborough Schools 100%






North








Staffordshire Hospital 75%

Kelowna and Vernon Hospitals, Canada

50%

North Birmingham Mental Health 100%

 

 

 

 

INVESTMENT POLICY

 

The following describes JLIF's investment policy which, as noted below, was changed at the Company's AGM in May 2016 to increase the gearing limit from 25% to 35% of Total Assets. At the AGM in May 2017, JLIF intends to put to shareholders an amendment to the investment policy to expand the geographical limits but keeping with the requirement that over 50% of Total Assets (by value) are

UK-based.

 

General

JLIF's investment policy is to invest predominantly in the equity and subordinated debt issued with respect to infrastructure projects that are predominantly PPP projects. The Company predominantly invests in projects that have completed construction and that are in their operational phase. Investment capital in projects that are under construction is limited to 30% of the Total Assets of the Fund (calculated at the time of investment).

 

JLIF predominantly invests in projects whose revenue streams:

 

•  are public-sector or government-backed; and

 

•  are predominantly availability-based (where payments received by the Project Entities do not generally depend on the level of use of the asset), other projects being "demand-based" (where payments received by the Project Entities depend on the level of use of the project assets). A project is availability-based or demand-based for these purposes if the Investment Adviser deems that 75% or more of payments received by the relevant Project Entity does or does not, as appropriate, generally depend on the level of use of the project asset.

 

Whilst it is envisaged that further acquisitions will be of operational PPP projects with availability- based revenues, it may be possible that a limited number of projects in construction and/or with demand-based revenue mechanisms may be acquired.

 

Investment capital in projects whose revenue streams are predominantly demand-based is limited to 15% of the Total Assets of the Fund (calculated at the time of investment). For the purposes of this restriction, the shadow toll mechanisms for the investments in the M40 and M6/M74 motorway projects and the A55 road project are not regarded as carrying demand risk due to their relative insensitivity to traffic movement.

 

In addition, the Company may invest up to 10% of its Total Assets (calculated at the time of investment) in infrastructure assets that are not government-backed PPP assets but that have substantially the same risk profile and characteristics as PPP assets.

 

Geographic focus


We believe that attractive opportunities for JLIF to enhance returns for shareholders are likely to arise in areas of the world where PPP is a practiced route for delivering infrastructure investments. The Company may, therefore, make investments in the European Union, other European countries, Canada, the United States of America and the Asia Pacific region.

 

The Company will seek to mitigate country risk by concentrating on investment opportunities in jurisdictions where JLCM advises that contract structures and their enforceability are reliable, where (to the extent applicable) JLCM advises that public-sector or government-backed obligations carry a satisfactory credit rating and where financial markets are relatively mature. JLIF will ensure that over 50% of the Company's Total Assets, measured by value, will be in respect of projects based in the UK (although this will not require JLIF to dispose of Investment Capital in respect of non-UK projects if this limit is breached as a result of changes in value of the Investment Portfolio).

 

Single investment limit and diversity of clients and suppliers

When any new acquisition is made, JLIF will ensure that the investment (or, in the event of an acquisition of a portfolio of investments, each investment in the portfolio) acquired does not have an acquisition value (or, if it is an additional stake in an existing investment, the combined value of both the existing stake and the additional stake acquired is not) greater than 25% of JLIF's Total Assets at the time of investment. In selecting new investments to acquire, JLIF will seek to ensure that its Portfolio comprises a range of public-sector clients and supply chain contractors, in order to avoid over-reliance on any single client or contractor.

 

Gearing

JLIF intends to make prudent use of leverage held in JLIF Limited Partnership for financing acquisitions of investments and working capital purposes. Under the company articles, and in accordance with JLIF's Investment Policy, JLIF's outstanding borrowings, excluding intra-group borrowings and the debts of underlying Project Entities, but including any financial guarantees to support subscription obligations, will be limited to 35% of JLIF's Total Assets11. JLIF may borrow in currencies other than Sterling as part of its currency hedging strategy.

 

Origination of investments

All of the investments in the Portfolio have similar characteristics to those set out above and further investment opportunities will only be pursued if they also satisfy these criteria.

 

It is expected that further investments will include investments that have been originated and developed by members of John Laing Group and may be acquired from them. JLIF has established procedures to deal with any potential conflicts of interest that may arise in relation to any acquisition of assets from John Laing Group. These procedures include:

 

•  complete segregation of JLCM, acting on behalf of JLIF, and the John Laing "sell side" team;

 

•  a requirement to conduct asset due diligence through third party suppliers acting for JLIF, and for an opinion from an independent expert on the Fair Market Value of the Investment Capital to be obtained; and

 

•  a requirement for JLIF board approval prior to submitting an offer to John Laing and prior to execution of the Sale and Purchase Agreement.

 

JLIF will seek to acquire further investments going forward both from John Laing and from the wider market. In selecting the assets to acquire, JLCM will ensure that these projects have similar characteristics to the projects in the current Portfolio and meet JLIF's investment criteria.

 

Any proposed acquisition of assets by JLIF from the John Laing Group that fall within the overall investment parameters set by JLIF, including in relation to funding, will be subject to approval by the Directors, who are independent of John Laing.


The relationship between JLIF and John Laing is governed by the Rules, as defined in the Prospectus. These require that any arrangements between a Relevant Person (as defined in the Rules) and JLIF are at least as favourable to JLIF as would be any comparable arrangement effected on normal commercial terms negotiated at arms' length between the Relevant Person and an independent party.

 

JLIF has a contractual right of first offer (in accordance with the Amended Existing FOA and the New FOA) for relevant Investment Capital in UK, European and Canadian accommodation and roads and certain rail projects of which the John Laing Group wishes to dispose and that are consistent with our Investment Policy. It is envisaged that the John Laing Group will periodically make available for sale further portfolios of Investment Capital in infrastructure projects (although there is no guarantee that this will be the case). Subject to due diligence and agreement on price and transaction documentation, JLIF will seek to acquire those projects that fit its Investment Policy.

 

JLIF will also seek out and review acquisition opportunities from outside the John Laing Group that arise and will, where appropriate, carry out the necessary due diligence. If, in the opinion of JLCM, as Operator of JLIF Limited Partnership (the Partnership), the risk characteristics, valuation and price of the Investment Capital in the project or portfolio of projects for sale is acceptable and is consistent with our Investment Policy, then (subject to JLIF having funds) an offer will be made (without seeking the prior approval of the Board) and, if successful, the Investment Capital in the relevant project or portfolio of projects will be acquired by JLIF, following approval by the Board.

 

Potential disposals of investments

Whilst the Directors may elect to retain Investment Capital in the Portfolio and any other further investments made by JLIF over the long term, JLCM will regularly monitor the valuations of such projects and any secondary market opportunities to dispose of Investment Capital and report to the Directors accordingly. The Directors only intend to dispose of Investments where (upon the advice of JLCM) they consider that it would be in the best interest of shareholders. Proceeds from the disposal of investments may be reinvested or distributed at the discretion of the Directors.

 

Currency and hedging policy

A portion of JLIF's underlying investments may be denominated in currencies other than Sterling. For example, currently some of the Portfolio is denominated in Canadian Dollars, US Dollars and Euros. However, any dividends or distributions in respect of the Ordinary Shares will be made in Sterling and the market prices and Net Asset Value of the Ordinary Shares will be reported in Sterling. Currency hedging will only be carried out to seek to provide protection to the level of Sterling dividends and other distributions that JLIF aims to pay on the Ordinary Shares, and in order to reduce the risk of currency fluctuations and the volatility of returns that may result from such currency exposure. This may involve the use of foreign currency borrowings to finance foreign currency assets, or forward foreign exchange contracts for up to three years to hedge the income from assets that are exposed to exchange rate risk against Sterling.

 

Interest rate hedging may also be carried out to seek to provide protection against increasing costs of servicing any debt drawn down by the Company to finance investments. This may involve the use of interest rate derivatives and similar derivative instruments.

 

Currency and interest rate hedging transactions will only be undertaken for the purpose of efficient Portfolio management and these transactions will not be undertaken for speculative purposes.

 

Amendments to and compliance with the Investment Policy

Material changes to JLIF's Investment Policy may only be made in accordance with the approval of the shareholders by way of ordinary resolution and (for so long as the Ordinary Shares are listed on the official list) in accordance with the UKLA Listing Rules.

 

The investment restrictions detailed above apply at the time of the acquisition of Investment Capital. In the ordinary course of business, JLIF will not be required to dispose of Investment


Capital and to rebalance its investment Portfolio as a result of a change in the respective valuations of Investment Capital. Minor changes to the Investment Policy must be approved by the JLIF Board, taking into account advice from the Investment Adviser where appropriate.

 

11 Increased from 25% following shareholder approval at the Company's AGM in May 2016.

 

 

THE INVESTMENT ADVISER

 

JLIF is advised by John Laing Capital Management ("JLCM"), a specialist infrastructure manager, which is able to draw upon a wealth of experience in infrastructure investments, management and development.

 

Andrew Charlesworth

Andrew Charlesworth is a Director of JLCM and JLCM's Investment Adviser to JLIF, responsible for delivering the JLIF's performance targets. He has more than 21 years of experience in infrastructure development and finance. He has overseen the growth of JLIF's Portfolio from

£259.0 million at launch to £1,217.6 million. Andrew's broad experience of the PPP market, having acted as advisor to authorities in procuring PPP projects and to senior lenders in funding them, has ensured that the investments JLIF has made have been accretive to shareholder value, delivering above forecast returns.

 

Prior to his current role, Andrew led significant parts of the primary investment business within John Laing Group plc, initially as CEO of Regenter (a John Laing social housing PPP joint venture), then as Local Authority PPP Director and lastly as the Financial and Commercial Director for the global John Laing Investments business. Andrew holds the CFA UK's Investment Management Certificate (Part 1).

 

Gianluca Mazzoni

Gianluca Mazzoni is JLCM's Deputy Investment Adviser and Head of Business Development for JLIF, responsible for originating deals globally. He is a Director of JLCM and also sits on the board of the Connecticut Service Stations P3 project, and has more than 19 years' experience working in infrastructure investments.

 

Prior to joining JLCM, Gianluca worked for Société Générale (then Access Capital Partners) developing significant experience in the origination and execution of global investment opportunities in equity infrastructure. Prior to this Gianluca worked in corporate finance, private equity and M&A across a wide range of sectors including infrastructure as part of The Boston Consulting Group and Bain & Co. He holds an MBA from Bocconi University (Italy) and Columbia Business School (USA) and an M.Sc. in Economics and Finance from Universita Politecnica delle Marche (Italy).

 

Joanne Griffin

Joanne Griffin is JLCM's Director of Investments for JLIF, responsible for the sourcing, valuation and execution of acquisitions, development of JLIF's business into new PPP markets. Joanne has over 13 years' experience in infrastructure investments and serves as a director at both asset and corporate levels.

 

Prior to joining JLCM, Joanne led the finance and commercial elements of multiple PPP projects across most sectors of the infrastructure market, both in the UK and internationally. Previously, Joanne worked at Carillion, a construction-to-services company, and gained significant experience in financial modelling for bidding and advising consortia on their investments. Joanne is an Associate member of the Chartered Institute of Securities and Investment.

 

Jamie Pritchard

Jamie Pritchard is JLCM's Director of Asset Management for JLIF. His primary focus is valuation of the JLIF Portfolio, ensuring forecast returns from JLIF's investments are delivered and on identification and management of value enhancements. In his role, Jamie also serves as a director on the board of a number of the project companies in which JLIF is a shareholder. With over 16 years' experience in infrastructure investment gained across both the primary and secondary markets, Jamie's extensive portfolio management experience helps deliver value enhancements that underpin underlying growth. Jamie also provides support to JLIF's bidding activities with specific focus on valuation, identifying value enhancements and

portfolio structuring.

 

 

Prior to joining JLCM, Jamie worked at Serco plc leading the commercial and financial structuring of bids, prior to which he worked at Balfour Beatty Investments for 10 years. He is a member of the Institute of Chartered Accountants in England and Wales.

 

Matthew McLintock

Matthew is JLCM's Senior Analyst for JLIF, responsible for fund and portfolio analysis and reporting to shareholders and to the JLIF Board. Matthew also plays a key role in both reviewing and executing new investments, capital raising and portfolio valuations. Matthew serves as a director on the board of three of the project companies in which JLIF is a shareholder and acts as shadow director on the Intercity Express Programme Phase 1 project. Matthew has over eight years' experience in infrastructure, both in an advisory and investor capacity.

 

Prior to joining JLCM, Matthew worked for URS Corporation (now AECOM) as part of their Infrastructure Economics and Strategy team, advising lenders and sponsors in respect of commercial and technical risk. Matthew is a Chartered Member of the Institute for Securities and Investment.

 

1.       ABOUT THE INVESTMENT ADVISER

John Laing Capital Management Limited ("JLCM"), a wholly owned subsidiary of John Laing, acts as the Investment Adviser to the Company and as the Operator of JLIF Limited Partnership. JLCM was incorporated in England and Wales on 19 May 2004 under the Companies Act 1985 (registered number 5132286) and has been authorised and regulated in the UK by the Financial Services Authority (now the Financial Conduct Authority) since December 2004. JLCM has the ability to call on and utilise the substantial experience of the John Laing Group in the management of the Fund.

 

2.       INVESTMENT PERFORMANCE

2.1     Share Price Performance

During 2016 JLIF's share price climbed from 116.7p at the start of the year to 129.7p at its close. 6.82p per share of dividends were paid during the year and therefore JLIF delivered a share price total return to shareholders of 17.5% for the year (with dividends re-invested).. Whilst JLIF is not managed with regard to any benchmark, the share price of JLIF, with its government-backed

and partially inflation-linked revenues should, arguably, broadly track the capital performance of a basket of Gilts (the "Gilt Basket"). JLIF's share price over the year as a whole broadly tracked the Gilt Basket's capital performance. The share price went ex-dividend 3.41p on each of 3 March and 22 September.

 

Overall JLIF's share price remained relatively stable, trading throughout the period at a premium to NAV and growing its dividend versus 2015. JLIF, along with the Gilt Basket, experienced strong performance in the aftermath of the UK Referendum on EU membership, especially following the Bank of England's stimulus measures announced in early August 2016. This was reversed through the autumn with the decline in the capital values of the Gilt Basket partly linked to the election of Donald Trump as the next President of the US, promising tax cuts and a large programme of infrastructure spending. The premium to NAV at which the Company's shares traded over 2016 reflects both the historical performance of the Fund and general market appetite for income and infrastructure stocks such as JLIF. From launch in November 2010 to the end of December 2016, JLIF has delivered total shareholder returns of 76.5%, and an annualised return of 9.8% (simple basis, dividends re-invested).

 

2.2     Ongoing Charges

Ongoing charges is a measure of the efficiency of managing a fund and takes account of day-to-day management costs. It is expressed in terms of percentage impact on shareholder returns, assuming that markets remain static and that the Portfolio is not traded.

 

 

JLIF's ongoing charges ratio has been calculated in accordance with the Association of Investment Companies ("AIC") recommended methodology12. Calculated on a profit and loss basis, JLIF's ongoing charges ratio for 2016 was 1.25% while for 2015 it was 1.24%.

 

The AIC's recommended methodology does not include acquisition fees in the calculation of the ongoing charges ratio. JLCM earns acquisition fees on acquisitions not deriving from JLIF's First Offer Agreements with John Laing Group. In accordance with the AIC's recommended disclosure we have presented below the impact of these acquisition fees.

 

 

Ongoing Charges

2016

(£m)

2016

(£m)

Investment Adviser fee

10.9

9.6

Group audit fees

0.3

0.3

Directors' fees and expenses

0.3

0.3

Other ongoing expenses

0.9

0.8

Total expenses

12.5

11.0

Average NAV

1,002.0

884.8

Ongoing charges ratio (using AIC recommended

  methodology)                                                                                                                    

1.25%

1.24%

Acquisition fees

0.2

0.0

Ongoing charges including acquisitions fees

1.40%

1.24%

 

12For further details see http://www.theaic.co.uk/sites/default/files/hidden- files/AICOngoingChargesCalculationMay12.pdf

 

3.       VALUATION

3.1.    Valuation of the Company

The Company accounts for its interest in its wholly owned subsidiary JLIF Luxco 1 S.à.r.l. as an investment at fair value through profit or loss. The fair value of the Company's investment in JLIF Luxco 1 S.à.r.l. comprises the fair value of JLIF Luxco 1 S.à.r.l., all the intermediate holding companies and the Portfolio of PPP investments.

The fair value of JLIF Luxco 1 S.à.r.l. and all the intermediate holding companies is equivalent to their net book value. The investment at fair value through profit and loss of the Company as at 31 December 2016 was £1,078.2 million (31 December 2015:

£883.1 million).

 

The fair value of the intermediate holding companies is principally comprised of cash, debt drawn on the Company's revolving credit facility and working capital balances, while the principal component of the investments of the Company are its Portfolio of 62 PPP assets. Further details of the value of this Portfolio follow below.

 

3.2.    Portfolio Value

JLCM is responsible for undertaking a fair market valuation of the JLIF Portfolio (of 62 PPP assets as at 31 December 2016), which is presented to the Board. To provide additional assurance to both the Board and to JLIF's investors, the valuation is independently verified by a leading accountancy firm who provide a valuation opinion to the Directors. Subsequently, the Board approves the valuation of the Portfolio for the year ended 31 December 2016.

 

The valuation methodology is based on discounting forecast future cash flows from the underlying assets in the Portfolio. This is consistent with the methodology used to the value the Portfolio since launch in November 2010.


JLIF's Portfolio value increased over the 12 months to 31 December 2015 from £867.8 million to £1,217.6 million. A breakdown of the movements in Portfolio value is provided in the table below, as well as a comparative table for 2015.


£'000s

% growth

Opening value at 31 December 2015

867,830


Investments

306,042


Disposals

(43,380)


Cash received from investments

(93,208)


Discount rate movements

43,396


Exchange rate movements

44,919


Opening value rebased at 31 December 2015

1,125,599


Growth from discount rate unwind

79,209

7.04

Growth from value enhancements

12,839

1.14

Value at 31 December 2016

1,217,647


 


£'000s

% growth

Opening value at 31 December 2014

864,887


Investments

14,363


Disposals

-


Cash received from investments

(73,261)


Discount rate movements

7,462


Exchange rate movements

(12,435)


Opening value rebased at 31 December 2014

801,016


Growth from discount rate unwind

65,064

8.12

Growth from value enhancements

1,750

0.22

Value at 31 December 2015

867,830


 

After adjusting for investments of £306.0 million, disposals of £43.4 million, cash received from investments of £93.2 million, changes to discount rates of £43.4 million and positive unrealised exchange rate movements of £44.9 million, the rebased valuation as at 31 December 2015 was £1,125.6 million. Therefore, underlying growth in the Portfolio to 31 December 2016 was 8.18%.

 

The weighted average discount rate ("WADR") for the Portfolio was 7.87% as at 31 December 2016. If all 62 assets comprising the Portfolio as at 31 December 2016 had been held for the full year and all cash distributions from the investments had been received at the beginning of the year, the expected growth in the Portfolio due to the unwind of the discount rate would have been the WADR, i.e. 7.87%. In reality, acquisitions and disposals were made and distributions were received at various times throughout the year (see sections 4.1 for details). After adjusting for the actual timing of acquisitions, disposals and distributions, the expected growth (the "Adjusted DRU") was 7.04%. The underlying growth delivered of 8.18% therefore compares favourably, being 1.14% ahead of the Adjusted DRU. The drivers for this outperformance are discussed further in section 4.5.

 

3.3     Valuation Assumptions

3.3.1. Discount Rate

The methodology used by JLCM in determining the appropriate discount rate by which to value each asset in the Portfolio is based on historical five-year rolling average gilt rates (of equal duration to the relevant project concessions). These represent a proxy for the 'risk free rate'. Specific premiums are added to these to reflect the individual project risks and to ensure that the resultant rate is reflective of market conditions. This methodology has been consistently applied each year since JLIF launched in 2010.

Since the discount rates used are a key driver of the valuation, they are reviewed by an independent accountancy firm with a long track record in PPP valuation as part of their overall assessment of the Portfolio valuation. An opinion on the appropriateness of the


range of discount rates used is provided to the Directors to give them additional assurance.

 

The table below shows the range of discount rates used to value the Portfolio versus those used for the 2015 year-end valuation, together with the sensitivity of the Portfolio valuation to movements in discount rates.

 

Year

2016

2015

Weighted average gilt rate

2.73%

2.89%

Weighted average risk premium

5.14%

4.93%

WADR at 31 December

7.87%

7.82%

Range of asset discount rates

7.02% - 9.00%

7.19% - 8.46%

Number of assets

62

57

Sensitivity of the Portfolio Valuation to movements in the discount rate



+ 1% (8.87% for 2016)

Decreases by 7.9% (£96.7m)

Decreases by 7.5% (£65.1m)

- 1% (6.87% for 2016)

Increases by 9.2% (£111.7m)

Increases by 8.6% (£74.8m)

 

The increase in WADR from 7.82% (as at 31 December 2015) to 7.87% is a result of investments in certain projects during the year (Connecticut Service Stations, Intercity Express Programme Phase 1 and Barcelona Metro Stations L9T2 and L9T4) at higher discount rates, partially offset by a reduction in discount rates applied to the projects comprising the Portfolio as at the end of December 2015. The table below shows this in more detail. The reduction in the WADR of projects comprising the Portfolio as at 31 December 2015 was a consequence of a reduction in gilt rates over the period.

 


2016

2015

WADR of projects comprising Portfolio as at

  31/12/15                                                                                                                                

7.45%

7.82%

WADR of acquisitions during 2016

8.65%

-

WADR at 31 December

7.87%

7.82%

 

 

3.3.2. Interest rates

Each of the projects in the Portfolio are funded effectively with fixed-rate financing, either through the use of interest rate swaps or through fixed-rate or index-linked bond finance. Changes to interest rates therefore have little impact on the finance costs of the projects and therefore the returns received by JLIF are largely insulated from this risk.

 

Long term gilt yields in the UK, Continental Europe and North America continued to decrease over 2016 and remain at historically low levels. There is the potential that these could increase over time. Historically, there appears only limited correlation between movements in gilt rates and discount rates used to value PPP projects. The current Portfolio WADR of 7.87% is significantly higher than the Portfolio weighted average gilt rate, a differential that remains at an historic high since launch.

 

3.3.3 Cash deposit rates

Each asset in JLIF's Portfolio holds cash deposits (usually six-month terms) in reserve accounts, typically a requirement of the senior debt providers. As a result, investment income from the Portfolio can vary depending on the interest earned on these deposits. The table below shows the deposit rate assumptions used to establish the Portfolio


value as at 31 December 2016. The deposit rate assumptions have been updated based on rates being achieved and the latest market forecasts of future deposit rates.

 


2016

2015

UK

2017 - 1.0%

2016 - 1.0%


2018 - 1.5%

2017 - 2.0%


2019 - 2.0%

2018 - 3.0%


Thereafter 2.75%

Thereafter - 3.25%

Continental Europe

2017 - 1.0%

2016 - 1.0%

(incl. Finland, the Netherlands and Spain)

2018 - 1.0%

2017 - 1.5%


2019 - 1.5%

Thereafter 2.5%


2020 - 2.0%



Thereafter 2.5%


North America

2017 - 1.0%

2016 - 1.0%

(incl. Canada & USA)

2018 - 1.5%

2017 - 2.0%


2019 - 2.0%

Thereafter 3.0%


Thereafter 2.5%


 

 

The impact on the Portfolio valuation to changes in deposit rates is shown in the table below.

 


Portfolio Value Impact

2016

Portfolio Value Impact

2015

Increase by 1%

Increases by 1.79%

(£21.8m)

Increases by 2.12%

(£18.4m)

Decrease by 1%

Decreases by 1.77%

(£21.5m)

Decreases by 2.11%

(£18.3m)

 

If actual deposit rates were to vary from those assumed in the valuation of JLIF's Portfolio for only the next few years, as opposed to the entire remaining life of the projects (average life of the Portfolio was 19.8 years at 31 December 2016), the impact on Portfolio valuation would consequently be much reduced.

 

3.3.4.Foreign Exchange

As at the 31 December 2016 the Portfolio comprised nine assets that have exposure to foreign exchange cash flows, being the Euro, the Canadian Dollar and the US Dollar.

These projects with non-Sterling denominated cash flows comprised 32.4% of the Portfolio valuation (31 December 2015: 12.5%).

 

JLIF uses the spot rate as at the valuation date to value its Portfolio. The table below illustrates the impact on the Portfolio value (Sterling) resulting from a 10% change in the relevant exchange rates.

 

Non-Sterling denominated income from JLIF's assets is considered relative to the foreign exchange market to determine whether the potential volatility is material enough to enter into a forward contract to hedge against currency movements.

 

 

 

 

 

Scenario

 

 

EUR:GBP

at 31 December

2016

 

CAD:Sterling

at 31 December

2016

 

USD:GBP

at 31 December

2016

Portfolio

Valuation

at 31 December

2016

 

 

 

 

Impact

Portfolio value

1.1708

1.6565

1.2329

£1,217.6m

-

GBP

1.0537

1.4909

1.1096

£1,257.1m

+ £39.5m


depreciates by 10%





((+3.2%)

GBP

appreciates by 10%

1.2879

1.8222

1.3562

£1,181.8m

-£35.9m (-2.9%)

 

During 2016, JLIF Limited Partnership did not hedge, or hold any hedges, of any of its foreign currency income with forward foreign exchange contracts. As at 31 December 2016, JLIF did not hold any open foreign exchange contracts (31 December 2015: none held). However, as noted, in respect of the income received from JLIF's Euro- denominated projects, for the immediate future at least (while Sterling remains at historically low levels versus the Euro), JLIF has chosen to create a natural hedge by using this income to service and repay the Euro debt.

 

In line with JLIF's policy since launch, the Balance Sheet value of its non-Sterling denominated assets is not hedged. While in 2016 JLIF's Portfolio benefitted from unrealised positive exchange rate movements of £44.9 million, there is an equal possibility that the value of JLIF's non-Sterling projects may decrease at future valuation dates, should exchange rates move in the opposite direction.

 

3.3.5 Inflation

Each asset in JLIF's Portfolio receives revenue from its public-sector client that is partially or, in some cases, wholly linked to inflation. The weighted average assumption used for inflation for the Portfolio valuation is 2.52% (31 December 2015: 2.67%).

 

After taking account of the cost indexation arrangements of the project agreements, cash flows from the Portfolio as a whole are positively correlated to inflation, meaning if inflation increases, then the value of the Portfolio increases and vice versa.

 

The approximate correlation between Portfolio valuation and inflation is approximately

0.5 (31 December 2015: 0.5); meaning for every one-percentage point increase in inflation above the level assumed in JLIF's Portfolio valuation, returns increase by approximately 0.5%. The correlation is broadly symmetrical and so a fall in inflation would produce a similar but opposite effect.

 

The most significant long term indexation assumptions used to value the Portfolio at 31 December 2016 are set out below. The assumptions are based on the latest long term market forecasts for each jurisdiction.

 

Country

Index

2016

2015

Portfolio

Weighted average

2.52%

2.67%

United Kingdom

RPI / RPIx

2.75%

2.75%

Canada

CPI

2.10%

2.10%

The Netherlands

CPI

2.00%

1.90%

Finland

MAKU /

Elpsot

3.0% / 2.5%

3.0% / 2.5%

Spain

CPI

2.00%

n/a

USA

CPI

2.00%

n/a

 

Sensitivity analysis has been performed to demonstrate the impact of movements in inflation on the Portfolio valuation. The results of this analysis is presented below.

 


Portfolio Value Impact 2016

Portfolio Value Impact 2015

Increase by 1% (i.e. 3.52%)

Increases by 4.31% (£52.5m)

Increases by 3.90%

(£33.8m)

Decrease by 1% (i.e.

Decreases by 3.88% (£47.3m)

Decreases by 3.55%


1.52%)

(£30.8m)

 

3.3.6  Corporation tax

The taxable profits of each of the project companies in the Portfolio are subject to corporation tax in their respective jurisdictions and, over their lifetimes, each project is likely to pay significant amounts of tax.

 

The amount of tax to be paid over the remaining life of each project has been estimated and included as a negative item in its valuation. JLIF has made certain assumptions regarding the availability of group relief to reduce the tax payable to HMRC and has included part

of the benefit attributable to this within its Portfolio valuation. This benefit arises from the availability of tax losses within the intermediate holding companies to surrender to profit-making project companies. JLIF believes that its assumptions with respect to group relief rules are prudent. The value of the benefit attributable to group relief is immaterial in the context of the valuation of the Portfolio.

 

Country

2016

2015

United Kingdom

20%, then 19% from 1 April

2017,

20%, then 19% from April

2017,


then 17% from 1 April 2020

onwards

then 18% from 1 April 2020

onwards

Canada

26%

26%

The Netherlands

20% - 25%

20% - 25%

Finland

20%

20%

Spain

25%

n/a

USA

35%/9%13

n/a

 

13    Federal tax rate / Connecticut State tax rate.

 

The long term rate applied across JLIF's UK portfolio has decreased since last year from 18% to 17% from April 2020 onwards reflecting the provisions of the Finance Bill enacted in September 2016. This resulted in an increase in the Portfolio valuation of approximately £4.4 million. The rates assumed in the valuation of the overseas assets reflect the enacted rates in those jurisdictions and are unchanged from those used to value the Portfolio as at 31 December 2015.

 

In December 2016, the UK Government published draft legislation in response to the OECD's Base Erosion Profit Sharing ("BEPS") initiative. Having sought advice from independent tax experts, the Company's assessment of the risk presented by the proposals contained within the draft legislation has resulted in no specific adjustment to be made in the valuation of the Portfolio as at 31 December 2016.

 

3.3.7  Lifecycle

One of the key areas of risk within some of JLIF's projects is major maintenance or lifecycle costs. This is the cost of maintaining or replacing structural installations, building fabric or high value items (e.g. air conditioning, heating units, flooring etc.) that is required to ensure a project continues to meet the contractual specifications. Each of the financial models used to establish the valuation of JLIF's Portfolio contain allowances for lifecycle costs. On some projects, the risk of actual costs varying from budgeted costs is retained by the project company, while on others this risk is passed down to the Hard Facilities Management ("Hard FM") provider.

 

As at 31 December 2016, of the 62 projects comprising the Portfolio, lifecycle risk is retained by the project company in 31 instances. For the remaining 31 projects lifecycle risk is passed down to the Hard FM provider, the cost allowances for which are included in the Hard FM service payments, which are fixed in real terms. The Hard FM


provider takes the full risk of these payments being adequate. In five of the 31 projects, JLIF has an upside only sharing mechanism with the Hard FM provider and in a further two cases the lifecycle risk (upside and downside) is shared between the project company and the Hard FM provider.

 


Impact on 24 assets

where lifecycle risk retained by SPV

 

Portfolio Value Impact 2015

Increase in forecast lifecycle expenditure by 10%

Decreases by 3.08%

(£17.0m)

Decreases by 1.40%

(£17.0m)

Decrease in forecast lifecycle expenditure by 10%

Increases by 2.88%

(£16.0m)

Increases by 1.31%

(£16.0m)

 

The sensitivity analysis was performed across a sample of the five largest assets by value in which lifecycle risk is retained by the project company. The analysis therefore covered approximately 60% of all assets by value in which lifecycle risk is held in full at the project company level. The results of the sensitivity were then extrapolated across each of the 24 assets in which lifecycle risk is retained in full by the project company.

 

 

4.       PORTFOLIO PERFORMANCE

 

 

4.1     Investments and Disposals

During the period, JLIF made investments totalling £306.0 million, including interests in seven new projects. Approximately £95.6 million was in UK projects and £210.4 million in overseas projects.

 

•  In January 2016, JLIF acquired a 40% indirect interest in Barcelona Metro Stations L9T2 from Iridium, a wholly-owned subsidiary of Grupo ACS;

 

•  In February 2016, JLIF acquired a 100% interest in the British Transport Police PPP project from a member of John Laing Group plc and The John Laing Pension Trust Limited;

 

•  In May 2016, JLIF acquired a 95% interest in the Oldham Social Housing project from a member of John Laing Group plc;

 

•  In June 2016, JLIF acquired a 100% interest in the Connecticut Service Stations project from The Carlyle Group;

 

•  In July 2016, JLIF acquired an incremental 13.5% interest in the Barcelona Metro Stations L9T2 project and a new 13.5% interest in the Barcelona Metro Stations L9T4 project, both from Acsa, Obras e Infraestructuras, a member of the Sorigué group;

 

•  In December 2016, JLIF acquired a 100% interest in the A55 Holyhead to Llandegai DBFO project from a member of John Laing Group plc; and

 

•  In December 2016, JLIF acquired a 6% indirect interest in the Intercity Express Programme Phase 1 project from a member of John Laing Group plc.

 

JLIF's investment in the Connecticut Service Stations project saw it acquire a 100% interest in the project company, Project Service LLC, which is the exclusive provider of 23 highway service areas in the State of Connecticut (USA). The project involves the renovation (completed in August 2015), operation and maintenance of 23 highway


service areas under a 35-year concession signed in 2009. Project Service LLC is the exclusive provider of on-highway fuel and food facilities along three distinct corridors between New York and Boston. Long term tenant agreements are in place (15-35 years) with major food and fuel providers, including four key anchor tenants - McDonald's, Dunkin' Donuts, Subway Restaurants and Alliance Energy (Mobil brand).

 

With respect to the investments made in the two Barcelona Metro Stations projects, it is JLIF's strategy to refinance the senior debt over the next few years. JLIF has included certain assumptions within its valuation of these projects with respect to refinancing. The risks associated with refinancing is discussed in more detail in the Risk Committee report on pages 10 to 15.

 

Also during the period, JLIF sold its entire interests in the Newham Hospital and Barnsley Building Schoolsfor the Future projects for a combined consideration of £43.4 million, an uplift on the carrying value of the investments as at 31 March 2016 of approximately 36%. These realisation values resulted in an aggregate realised IRR of approximately 16%. Given that the Board considered these offers to be significantly ahead of the value that could be achieved by retaining the interests, the decision was made to sell and to re-deploy the capital more effectively and at better value elsewhere.

 

4.2     Distributions from investments

During 2016, JLIF continued to receive cash income from its Portfolio, principally in the form of dividends and interest and repayment of principal on shareholder loans. During the 12-month period ended 31 December 2016, these totalled £93.2 million (31 December 2015:£73.3 million). Distributions from the underlying project companies naturally reduce the Portfolio Value since the cash flows have been realised and are no longer included within forecast future income.

 

4.3     Exchange rate impact

As noted in section 3.3.4, JLIF's policy remains not to hedge the balance sheet value of its non-Sterling denominated assets. As a result, the value of JLIF's overseas assets can vary depending on movements in the Canadian Dollar, Euro and US Dollar exchange rates relative to Sterling. Relative to the opening rates as at 1 January 2016, the Canadian Dollar appreciated by 19.6% from an exchange rate of 2.060 to 1.657 and the Euro appreciated by 13.8% from an exchange rate of 1.359 to 1.171. The investment in the Connecticut Service Stations project made in June 2016 benefitted from a subsequent 10.1% appreciation of the US Dollar against Sterling from a weighted average rate of 1.371 to 1.233. The net impact of these movements was an increase in the Portfolio Value of £44.9 million.

 

The Portfolio Value is the principal component of the Net Asset Value ("NAV"), NAV being Total Assets (including Portfolio Value) minus the liabilities of the Group. To aid clarity, the table below shows the NAV with and without the impact of exchange rate movements, recognised in 2016 and 2015 respectively.

 


As at

31 December

2016

As at

31 December

2015


Net Asset Value per

share

Net Asset Value per

share

Including exchange variations

120.2p

108.4p

Excluding exchange variations

115.3p

109.9p


4.4     Rebased valuation

After taking account of acquisitions and disposals in the period, distributions from investments and changes in both discount rates and exchange rates, the rebased valuation as at 31 December 2016 was £1,125.6 million.

 

4.5     Portfolio growth

The WADR of the Portfolio as at 31 December 2016 was 7.87% (31 December 2015: 7.82%). If all investments were held throughout the entire year, and all cash income from investments received at the beginning of the year this would be the percentage growth forecast due to the natural unwinding of the discount rate. However, certain acquisitions were made during the course of the year and cash income from investments was received at various times throughout the year. Adjusting for this timing, the expected growth (i.e. the "Adjusted DRU") for 2016 was 7.04% or £79.2 million.

 

JLIF delivered underlying Portfolio growth that was ahead of that expected from the unwind of the Adjusted DRU by £12.8 million or 1.14% in 2016. This was principally the result of the following:

 

•  The disposal of JLIF's interests in the Newham Hospital and Barnsley Building Schools for the Future projects at an uplift to carrying value of c.36%;

 

•  More efficient management of our projects including cost efficiencies identified and delivered both at a Portfolio and individual project level, such as insurance and SPV management costs;

 

•  Prudent management of lifecycle costs where this risk is retained by the SPV;

 

•  Better than forecast traffic performance on UK road projects;

 

•  Reduced margins from the refinancing of senior debt on our Kirklees Social Housing project; and

 

•  The net impact of changes to macroeconomic assumptions, principally being the downside impact of lower than forecast inflation during the year and a reduction in deposit rate assumptions, partially offset by the reduction in UK corporation tax rates to 17% as enacted in the Finance Bill 2016.

 

As a result of this continued asset focus and active management of the Portfolio, every year since it launched in November 2010, JLIF has delivered underlying Portfolio growth in excess of that expected from the unwind of the Adjusted DRU, as detailed below.

 


2011

2012

2013

2014

2015

2016

Underlying portfolio growth

9.22%

8.49%

7.24%

9.22%

8.34%

8.18%

Adjusted unwind of the discount rate

7.62%

7.20%

6.38%

7.81%

8.12%

7.04%

Excluding exchange variations

1.60%

1.29%

0.86%

1.41%

0.22%

1.14%

 

As at 31 December 2016, the Portfolio comprised investments in 62 projects. As described above, overall the underlying growth in Portfolio Value exceeded that forecast from the Adjusted DRU. However, as with any portfolio there is a degree of variability in the valuation growth exhibited by each individual project, some growing by more than forecast and others by less.


Those projects for which growth exceeded expectations included the M40 Motorway, Kirklees Social Housing and the Connecticut Service Station project. The increases in value largely resulted from value enhancement activities undertaken during the year including major maintenance cost reviews, refinancing of project finance debt and the reduction of operational maintenance costs.

 

Those projects for which growth was below expectations were mainly in the UK Health sector, where a number of legal disputes have been continuing during 2016, and the Edinburgh Schools project. Performance on the remaining assets in the Portfolio was generally in line with expectations. The paragraphs below describe the status of the projects where major disputes were conducted during 2016.

 

In 2013 a legal dispute arose between the Newcastle Hospital project company (in which JLIF holds a 15% shareholding) and the public-sector client regarding the completion of phase 8 (the clinical office block) of the project, and other operational aspects of the project. This resulted in court action between the construction contractor, the project company and the public-sector client. During 2016, negotiations took place amongst all parties, which resulted in a settlement agreement being reached in August 2016. The outcome of this agreement is broadly in line with our expectations. All legal agreements relating to the dispute have now been executed and the project is operating within the parameters of the settlement agreement.

 

In 2015, a legal dispute also arose between the Peterborough Hospital project company (in which JLIF holds a 30% shareholding) and the public-sector client regarding certain alleged construction defects relating to fire compartmentation within the building and other operational aspects of the project. This dispute is ongoing; however, the outcome is not anticipated to have a material impact on the valuation of the Portfolio or its expected investment income.

 

During 2016, a dispute arose between the Roseberry Park Hospital project company (100% owned by JLIF) and the public-sector client regarding the provision of certain Hard FM services, the operation of the Service Helpdesk at the project as well as certain alleged construction defects. Settlement negotiations between all parties are continuing, the outcome of which is not yet certain.

 

During 2016, a dispute arose in respect of the Edinburgh Schools project in which JLIF holds a 20% shareholding, following the identification of material construction defects at the Oxgangs Primary School. Consequently, all of the project's 17 schools were closed pending further surveys, in agreement with the City of Edinburgh Council. All the schools re-opened prior to the start of the academic year in August. Commercial discussions between the private sector parties involved in the project continue, and the exact magnitude of the financial impact will not be known until these are concluded.

 

A provision based on our current view of the most likely outcome of these disputes has been included in the Portfolio Valuation at 31 December 2016, none of which are considered material.

 

During 2016, John Laing Group plc completed the sale of its Project Management Services activities in the UK to HCP Management Services ("HCP"). As at 31 December 2016 HCP provided management services to 34 of JLIF's UK-based PPP projects.

 

 

5.       GEARING

JLIF benefits from a £180 million multi-currency revolving credit facility, provided by Royal Bank of Scotland ("RBS"), HSBC Bank plc ("HSBC"), ING Bank NV ("ING") and Commonwealth Bank of Australia ("CBA"). The term of the facility is five years and runs until


August 2020. Attached to the facility is a £150 million accordion facility, which was signed in June 2016. The margin on both facilities is 175bps over LIBOR (with commitment fees of 35bps of the margin).

 

As at 1 January 2016, JLIF's revolving credit facility was drawn by £17.0 million. This was repaid in early January 2016, using distributions received from the Portfolio at the end of December 2015. In late January 2016, JLIF drew on its revolving credit facility in Sterling to finance the acquisition of a 40% interest in the Barcelona Metro Stations L9T2 project. The facility was repaid in March 2016 using the proceeds of a JLIF shareholder tap issue.

 

In June 2016, the revolving credit facility was drawn (in Sterling) to part-finance the acquisition of a 100% interest in the Connecticut Service Stations P3 project. In July, the facility was further drawn to finance the acquisition of an incremental 13.5% interest in Barcelona Metro Stations L9T2 and a new 13.5% interest in Barcelona Metro Stations L9T4. On this occasion, the drawing was made in Euros to mitigate the exchange rate risk, providing a natural hedge.

 

In December 2016, the facility was drawn to part-finance the acquisition of a 100% interest in the A55 Holyhead to Llandegai DBFO road project and to finance the acquisition of a 6% indirect interest in the Intercity Express Programme Phase 1 project. As at 31 December 2016, the revolving credit facility was drawn by £171.4 million, while the accordion facility was undrawn.

 

 

6.       FINANCIAL RESULTS

The financial statements of JLIF (or "the Company") for the year ended 31 December 2016 are on pages 55 to 86.

 

The Company prepared the financial statements for the year ended 31 December 2016 in accordance with International Financial Reporting Standards ("IFRS") as published by the EU.

 

In order to continue providing useful and relevant information to its investors, the financial statements also refer to the "Group" (defined below) which comprises the Company and its intermediate holding companies.

 

Basis of accounting

The Company applies IFRS 10 and Investment Entities - Amendments to IFRS 10, IFRS 12 and IAS 27. The Company accounts for its interest in its 100% owned immediate subsidiary JLIF Luxco 1 S.à.r.l. as an investment at fair value through profit or loss.

 

The Company does not consolidate its subsidiaries that provide investment services or its project companies subsidiaries, instead reporting them as investments at fair value. All intermediate holding companies and all the investments in PPP assets are accounted for on the same consistent basis.

 

The Group comprises the Company, its two wholly owned Luxembourg subsidiaries (JLIF Luxco 1 S.à.r.l. and JLIF Luxco 2 S.à.r.l.), JLIF (GP) Limited (the General Partner), JLIF Limited Partnership (the English Limited Partnership) and 31 (2015: 27) wholly owned subsidiaries of the English Limited Partnership.

 

The Company's subsidiaries provide services that relate to the Company's investment activities on its behalf, which are incidental to the management of the investment portfolio. These companies are recognised in the financial statements at their fair value, which is equivalent to their Net Assets.


As at 31 December 2016, the Group held investments in 62 (2015: 57) PPP projects which make distributions comprising returns on investments (interest on subordinated loans and dividends on equity) together with repayments of investments (subordinated loan repayments and equity redemptions).

 

Results for the year ended 31 December 2016

 

All amounts presented in £000s (except as noted)

Year ended

31 December

2016

Year ended

31 December

2015

Net assets14

1,080,568

883,096

PPP Assets15, 16

1,217,647

867,830

Intermediate Holding companies assets15

(139,472)

15,302

Operating income (including unrealised foreign

  exchange gains)                                                                                                                               

175,242

58,359

Net assets per share (pence)

120.2

108.4

Distributions, repayments and fees from PPP

  investments                                                                                                                                      

93,208

73,261

Profit before tax

160,429

46,966

 

14 Also referred to as Net Asset Value or "NAV"

15 Classified as investments at fair value through profit or loss on the Balance Sheet

16 Also referred to as Portfolio Value

 

Key points to note:

 

• Interim dividend of 3.41 pence per share declared in September 2016 and paid in October 2016.

 

• 8.18% increase on a rebased Portfolio Value as at 31 December 2016 to £1,217.6 million (2015: 8.34% increase to £867.8 million).

 

Net assets

The Company's Net Assets increased by £197.5 million from £883.1 million to £1,080.6 million at 31 December 2016. During the year, the movement in Net Assets is driven by the equity raise in March 2016 (generating net proceeds of £91.7 million), the increase in Portfolio Value mainly driven by unrealised positive exchange rate movements (£44.9 million), lower discount rates (£43.4 million), net effect of macroeconomic factors and value enhancement (£12.8 million) and unwind of discount (£79.2 million), offset by operating and financing cost (£19.9 million) and dividend paid to shareholders (£54.6 million). The Net Assets include investments at fair value through profit and loss of £1,078.2 million (of which

£1,217.6 million relates to the PPP investments, offset by £139.4 million of negative fair value of intermediate holding companies), a cash balance of £5.5 million, offset by other net liabilities of £3.1 million.

 

The intermediate holding companies' negative fair value of £139.4 million comprises of cash balances of £27.2 million, other net assets of £4.7 million, offset by outstanding debt of

£171.4 million drawn on the revolving credit facility.

 

Analysis of the Group's net assets

£'000s (except as noted)

2016

2015

Portfolio value

1,217,647

867,830

Intermediate holding companies cash

27,228

31,255

Intermediate holding companies credit facility debt

(171,393)

(17,000)

Intermediate holding companies other net assets

4,693

1,047

Fair value of the Company's investment in JLIF

  Luxco 1 S.à.r.l.                                                                                                  

1,078,175

883,132


Company's cash

5,511

2,533

Company's other net liabilities

(3,118)

(2,569)

Net Asset Value

1,080,568

883,096

Number of shares

899,003,264

814,751,471

Net Asset Value per share (pence)

120.2

108.4

 

At 31 December 2016, the Group (Company plus intermediate holdings companies) had a total cash balance of £32.7 million comprising £5.5 million in the Company's balance sheet (31 December 2015: £2.5 million) and £27.2 million in the intermediate holding companies, which is included in the Company's balance sheet under Investment at fair value though profit or loss (31 December 2015: £31.3 million).

 

The intermediate holding companies other net liabilities include the outstanding debt of

£171.4 million (31 December 2015: £17.0 million) under the Group's revolving credit facility.

 

The Portfolio Value is the fair value of the investments in 62 (31 December 2015: 57) PPP projects calculated using the discounted cash flow method.

 

The movement in the valuation of the Portfolio of PPP assets is summarised as follows:

 

  £'000s                                                                                                                                             

Portfolio value at 31 December 2015

867,830

Acquisitions

306,042

Disposals

(43,380)

Growth from discount rate unwind Growth from value enhancements

79,209

12,839

Underlying growth of the PPP investments

92,048

Positive exchange rate movements

44,919

Discount rate movements

43,396

Subordinated debt and equity repayments

(7,577)

Increase in movement in accrued interest receivable on subordinated loans

2,000

Distributions received from the PPP investments

(87,631)

Portfolio value at 31 December 2016

1,217,647

 

Further details on the Portfolio Valuation and the movements over the period are provided in Section 3 of this Investment Adviser's Report.

 

Profit before tax

The Company's profit before tax ("PBT") for the year ended 31 December 2016 is £160.4 million (2015: £47.0 million), generating earnings per share of 18.1p (2015: 5.8p).

 

In 2016, the operating income was £175.2 million (2015: £58.4 million). This increase reflects the underlying growth of the Portfolio Value of £92.0 million (2015: £66.8 million),the impact of discount rate movements of £43.4 million (2015: £7.4 million) and an unrealised foreign exchange gain of £44.9 million (2015: loss of £12.4 million), offset by the intermediate holding companies' expenses and other net costs of

£5.1 million (2015: £3.4 million).

 

The operating costs included in the income statement were £14.8 million in the year (2015:

£11.4 million) reflecting higher administrative expenses principally arising from the higher investment advisory fee due to the increased value of the Portfolio and Asset Origination Fee paid on acquisitions not acquired from a member of John Laing Group plc.


Cash flow statement

The Company had a total cash balance at 31 December 2016 of £5.5 million (31 December 2015: £2.5 million). The breakdown of the movements in cash is shown below.

 

Cash flows of the Company for the year (£ million):


2016

2015

Cash balance as at 1 January

2.5

4.3

Capital raising

92.9

-

Listing/ share issue cost

(1.2)

(0.1)

Loan to JLIF Luxco 1 S.à.r.l.

(91.6)

-

Interest received from JLIF Luxco 1 S.à.r.l.

71.8

60.9

Directors fee and expenses

(0.4)

(0.3)

Investment Adviser and origination fee

(12.1)

(9.5)

Administrative and other expenses

(1.8)

(1.7)

Dividends paid in cash to shareholders

(54.6)

(51.1)

Cash balance at 31 December

5.5

2.5

 

The Group had a total cash balance at 31 December 2016 of £32.7 million (31 December 2015: £33.8 million), and borrowings of £171.4 million (31 December 2015: £17.0 million). The breakdown of the movements in cash is shown below.

 

Cash flows of the Group for the year (£ million):


2016

2015

Cash balance as at 1 January

33.8

26.5

Capital raising

92.9

-

Listing / share issue costs

(1.2)

(0.1)

Investments in projects

(306.0)

(14.4)

Disposal proceeds

43.4

-

Acquisition costs

(3.8)

(0.1)

Cash received from projects (net of withholding tax)

93.2

73.3

Administrative and other expenses

(15.0)

(13.8)

Proceeds from borrowings

153.3

17.0

Financing costs (net of interest income)

(3.3)

(3.5)

Dividends paid in cash to shareholders

(54.6)

(51.1)

Cash balance at 31 December

32.7

33.8

 

 

During the year, the Group received cash of £93.2 million (2015: £73.3 million) from its Portfolio. The cash received from investments in the year more than sufficiently covers the operating and administrative expenses, financing costs as well as the dividends paid to its shareholders. JLCM anticipates future revenues from the Portfolio will continue to be in line with expectations and therefore will continue to fully cover future costs as well as planned dividends payable to shareholders.

 

The Company has declared a dividend of £31.3 million (3.48 pence per share) for the second half of 2016, which is an increase of 2.0% (against the most recent dividend paid by the Company in October 2016) and is payable on 16 May 2017. JLIF continues to offers a scrip dividend alternative that is the subject of a separate shareholder communication.

 

 

7.       OUTLOOK

In the UK, while there is increasing optimism that a pipeline of projects may be announced in 2017 (across education, health, justice & emergency, government buildings and transport) under the UK Government's "PF2" programme, it remains to be seen as to whether there is sufficient political support for the delivery of a significant pipeline using private finance.


Overall, the UK market remains competitive with a large proportion of operational assets already in the ownership of long term secondary market investors, and a lack of primary projects over the past few years to replenish the portfolios of primary investors and developers. In 2016, JLIF was invited to bid for a portfolio of six street lighting PPP projects, and made four investments in UK projects (all under the First Offer Agreements with John Laing Group plc), but otherwise, its participation in UK market activity was down compared to previous years. JLIF continues to benefit from the First Offer Agreements, giving it the right of first offer over a pipeline of infrastructure projects valued by John Laing at over £400 million over the next three years.

 

With many forecasts of a weakening of the Euro against the pound in 2017, the Eurozone may become relatively more attractive for non-Euro investors. The Netherlands has been one of the most active greenfield markets in recent times with four significant projects currently in procurement, including three roads and a lock project. Further new projects are expected to be launched in 2017, also in the transportation sector. While the Iberian markets have seen little in the way of major greenfield PPP developments in recent years, the two markets have been active for secondary market acquisitions and sales of assets. This is expected to continue in 2017. The Italian market has also been relatively active, and has a reasonable pipeline of greenfield projects at various stages of development (from planning to preferred bidder to financing). The pipeline in Italy primarily covers the road and rail sectors. In Norway, the Ministry of Transport has recently tabled a bill for the first project in the country's upcoming availability-based road PPP pipeline, with parliamentary approval expected shortly. However, there remains political disagreement that must be resolved first around the level of public-sector capital contribution before progress can be made.

 

Relative to the UK market, the Canadian greenfield market continues to remain active with a sectoral focus on health and transportation, including an extensive pipeline of light rail PPP projects. In the US, with a new Administration in place, it is expected that spending on infrastructure will increase significantly, and that private finance will be used to play an important role in this. This could see significant, and long-awaited, opportunities for investors in Public-Private Partnerships. To incentivise private sector investment in infrastructure, the new President's plan will offer tax credits to attract greater investment and reduce project finance costs. The plan will also seek to lower project costs by reducing regulatory 'red tape' and the burdens of federal project delivery requirements. JLIF expects the US to present a significant source of investment opportunities over the coming years.

 

Both the Australian primary and secondary markets remain active with a number of transactions closing in both in 2016. Similar to other markets, much of the focus here is also on the transport sector, and particularly light rail and metro projects. However, other activity has included prison, student accommodation and road projects. In November 2016, the Australian and New Zealand Governments together launched a combined pipeline of approximately 50 projects, including 32 possible or confirmed PPP projects. In Latin America, Chile, a country with a long track record of using the PPP model, saw the financial close of several PPP transactions in the airports and health sectors and has a number of road PPPs currently in procurement.


ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) POLICY

 

The JLIF Board and its Investment Adviser, John Laing Capital Management Limited ("JLCM"), are committed to environmentally and socially responsible investing and understand the need to carry out our activities in a sustainable manner.

 

JLIF recognises the environmental, social and economic needs of the communities in which it works and looks for suitable opportunities to engage and support communities, by using the skills, time and financial support of its staff and those of the Investment Adviser. The commitment to corporate social responsibility ("CSR") is delivered through programmes directly supported by JLIF and through the activities of JLCM and JLIF's other partners who manage the projects and provide facilities management services to the Portfolio assets. JLIF actively encourages its partners to engage with the local communities in which our projects are located. It is the engagement of these teams that operate our assets on a daily basis and support the communities in which they operate that makes the greatest difference. A number of the CSR activities that have been undertaken during 2015 are detailed in the following section.

 

Community Engagement

At our North Swindon Schools project, the project company continued its sponsorship of the Isambard Community School and the Nova Hreod Academy to the Princes Teaching Institute. The Institute helps teachers rediscover their love of their subject, inspiring them to bring the latest thinking into their classrooms and supporting them to make lasting improvements in how they teach. It re-engages teachers with their specialist subjects, inspiring them to bring renewed enthusiasm into their classrooms and raise the aspirations of their pupils.

 

At our Peterborough Hospital project, the project company liaised with the specialist dementia nurse to identify ways by which the hospital environment could be improved to benefit patients suffering from dementia. A number of changes were identified and funded by the project company, including the introduction of blue crockery, new dementia friendly signs on five inpatient wards and Trust-wide plain curtains in calming colours. Research has shown that patients living with dementia find hospital environments less confusing when there are clear directions on signs that support way finding and navigation. Plain coloured curtains and environments, as opposed to patterned ones, help generate a greater feeling of safety.

 

At our Leeds Schools project, the project company sponsored, organised, compered and funded in full a Leed's Got Talent event in which each school (Ralph Thoresby School, John Smeaton Academy, Cooperative Academy, Carr Manor High School, South Leeds Academy and Shakespeare Primary) put forward two acts to perform on the evening, with each act including up to 20 pupils. The venue, the New Dock Hall at the Royal Armouries Museum in Leeds, opened at 2pm to allow the acts to familiarise themselves with the space and their surroundings, and all the children were provided with a healthy option meal before they performed. The event was linked to Leeds City Council's Children and Young People's Plan, and was open to all pupils (including those with special educational needs) and provided the opportunity to participate in an event in front of their peers. The event also helped to instil positive behaviour, promote working as a team, physical activity (a number of the acts included dance routines) and foster relationships between pupils from different schools. Participation in previous events like this have also been shown to help improve the social and emotional well-being of the pupils who take part, helping them to feel that they have a voice and influence. The event received critical acclaim by both those who took part and those forming part of the audience:

 

"I just wanted to say thank you for organising the event on Wednesday. It was an amazing opportunity for my students, one that is rare and unforgettable for them. They are still so excited if not exhausted from the day and have thoroughly enjoyed the experience. We are looking forward to next year already!"

John Smeaton Academy Teacher


"You gave these children an experience that no one can ever take away from them and they will carry it with them for the rest of their lives, that is a great achievement and one you should be very proud of, well done"

Leeds City Councillor

 

We would like to congratulate every one of the pupils that took part, and particularly 'Dance Legacy' from Carr Manor High School that was awarded first place. 'Lectryx' from the Cooperative Academy came a close second, with 'JSA Choir' from John Smeaton Academy claiming third place.

 

At our Miles Platting Social Housing, the project company part-funded and helped prepare a successful bid for National Lottery funding for a new community garden designed to help promote informed food choices and healthy eating through a weekly after-school club with pupils from one of the local schools. Surplus produce from the garden is donated to a local church to help provide meals at their homeless shelter.

 

Greenhouse Gas Emissions Statement

JLIF is an investment company and as such holds equity and sub-ordinated debt interests in its underlying investments. The approach that it has used to consolidate its greenhouse gas ("GHG") emissions reflects this structure and aggregates JLIF's equity share of emissions from each asset. In collating its data, JLIF has considered the GHG emissions from the facilities that it manages for the public-sector. However, JLIF does not have direct control over the energy usage of the facilities it manages as these are controlled by their public-sector end-users. As such, JLIF has limited ability to directly influence or reduce the energy consumption of the facilities.

 

Carbon Trust Certification Limited has verified that John Laing Infrastructure Fund Ltd has reported a carbon footprint of 127,925 tCO2e in accordance with the measurement requirements of the Carbon Trust Standard and in accordance with the principles of the WRI/WBCSD GHG Protocol.

 

Our footprint has been verified for the period of 1 July 2015 to 30 June 2016 and certification corresponds to the following boundary:

 

Organisational Boundary

All global investments less social housing.

 

Operational Boundary

Equity approach over Scope 1 and Scope 2 GHG emissions (Electricity, Gas and Fuel Oil).

 

Materiality

Carbon Trust Certification Limited has verified that all material non-conformities identified during the sampling performed on the footprint submitted have been closed and that no material errors, omissions or misrepresentations remain.

 

Scope 1 GHG emissions represent JLIF's share of direct emissions from the project facilities, typically through the consumption of gas. Scope 2 emissions are JLIF's share of indirect emissions from the project resulting from the generation of purchased energy.

 

 

Greenhouse Gas Emissions Source17

2016 (tC02e)

2016

(tC02e/£m)18

Scope 1

29,745

0.03

Scope 2

98,180

0.09

Total

127,925

0.12

Greenhouse Gas Emissions Source19

2015 (tC02e)

2015

(tC02e/£m)18

Scope 1

27,239

0.03


Scope 2

99,346

0.11

Total

126,585

0.14

 

In demonstrating our environmental stewardship, JLIF also participates in the public reporting of its GHG emissions through CDP (formerly the Carbon Disclosure Project). Our responses from 2013 onwards can be reviewed on the CPD website, www.cdp.net.

 

 

APPROVAL OF THE STRATEGIC REPORT

 

Paul Lester CBE

Chairman

20 March 2017

 

 

17 In order to ensure the accurate collation and verification of data the GHG emissions above represent JLIF's equity share of annual emissions from the underlying asset portfolio for the period 1 July 2015 to 30 June 2016. As such, these are not consistent with the time period of the rest of the financial statements being 1 January 2016 to 31 December 2016. Assets acquired during the financial statements period are excluded from the GHG emissions data reported.


18 CO


tonnes per £m of Net Asset Value.


19 In order to ensure the accurate collation and verification of data the GHG emissions above represent JLIF's equity share of annual emissions from the underlying asset portfolio for the period 1 July 2014 to 30 June 2015. As such, these are not consistent with the time period of the rest of the financial

statements being 1 January 2015 to 31 December 2015. Assets acquired during the financial statements period are excluded from the GHG emissions data reported.

 

 


CORPORATE GOVERNANCE

 

The Board of JLIF has considered the principles and recommendations of the AIC Code of Corporate Governance ("AIC Code") by reference to the AIC Corporate Governance Guide for Investment Companies ("AIC Guide"). The AIC Code, as explained by the AIC Guide, addresses all the principles set out in Section 1 of the Combined Code, as well as setting out additional principles and recommendations on issues that are of specific relevance to JLIF.

 

Procedures have been put in place to ensure compliance with the UK Corporate Governance code which was published in September 2014 and which applies to reporting periods beginning on or after 1 October 2014.

 

The Board considers that reporting against the principles and recommendations of the AIC Code, and by reference to the AIC Guide (which incorporates the Combined Code), will provide better information to shareholders.

 

The Company has complied with the recommendations of the AIC Code and the relevant provisions of Section 1 of the Combined Code, except as set out below.

 

The Combined Code includes provisions relating to:

 

•  the role of the chief executive (not applicable to JLIF);

 

•  executive Directors' remuneration (not applicable to JLIF); and

 

•  the need for an internal audit function.

 

For the reasons set out in the AIC Guide, and in the preamble to the Combined Code, the Board considers these provisions are not relevant to the position of JLIF, being an externally managed investment company. The company has therefore not reported further in respect of these provisions.

 

THE BOARD

The Board consists of six Non-Executive Directors, all of whom are independent of the Company's Investment Adviser. As the Company has no Executive Directors, the provision of the UK Corporate Governance Code relating to the combining of the roles of Chairman and Chief Executive Officer does not apply to the Company. Directors' details are contained in pages 16 and 17, which set out the range of investment, financial, and business skills and experience represented. The Chairman is an independent non-executive Director and the Deputy Chairman acts as Senior Independent Director.

 

The Board meets at least four times a year and, should the nature of the activity of the Company require it, additional meetings may be scheduled, sometimes at short notice. Between meetings there is regular contact with the Investment Adviser and the Administrator and the Board requires to be supplied in a timely manner with information by the Investment Adviser, the Company Secretary and other Advisers in a form and of a quality appropriate to enable it to discharge its duties.

 

The Company intends for all Directors to be subject to annual re-election at the Annual General Meeting of the Company. The Board intends to consider the tenure of each Director after six years. The tenure of Directors is expected to be between six and nine years to allow for phased board appointments and retirements. This process will take account of any changes to the Board's composition arising from the need to fill a casual vacancy.

The terms and conditions of appointment of non-executive Directors are available for inspection from the Company's registered office.


During the period the Board was pleased to support the work undertaken by the not-for-profit organisation "Board Apprentice" by welcoming Ms Theresa Grant, Chief Executive of Trafford Council, as an apprentice to JLIF's Board, on an unpaid basis. The initiative is designed to support increasing diversity on company boards by widening the pool of board-ready candidates. Ms Grant's role is to observe and learn from the Board and the work it does. The purpose of the role is educational only (to gain experience of the workings of a company at board level) and does not involve participation in the Board's work. Ms Grant's apprentice placement lasts for one year and is due to finish in April 2017.

 

Performance and Evaluation

The Board has adopted a process to review its performance on a regular basis and such reviews are expected to be carried out internally on an annual basis and through external facilitation every three years. This annual evaluation of the Board, the Audit Committee and individual Directors has taken the form of questionnaires and discussion to determine effectiveness and performance in various areas.

 

In November 2015, the Board engaged Optimus Group Limited ("Optimus"), a Guernsey based independent consultancy, to carry out an external evaluation. This involved meeting with the Board of Directors and the completion of a questionnaire by each Director as well as meetings with representatives from JLCM and Heritage International Fund Managers (the Administrator), reviewing key Board documentation, and evaluating Board and committee structures. Optimus reported its findings at the first scheduled Board meeting in 2016, concluding that the JLIF Board has a high standard of Corporate Governance and is compliant with the Codes (being the FRC UK Corporate Governance Code and the Association of Investment Companies Code). The next external evaluation will take place in 2018.

 

Any new Directors will receive an induction from the Investment Adviser. All Directors will receive relevant training as necessary.

 

Duties and Responsibilities

The Board is responsible to shareholders for the overall management of the Company. The Board has adopted a set of reserved powers that set out the particular duties of the Board. Such reserved powers include decisions relating to the determination of the Investment Policy and approval of investments, strategy, capital raising, statutory obligations and public disclosure, financial reporting and entering into any material contracts by the Company.

 

The Directors have access to the advice and services of the Company Secretary and Administrator, who is responsible to the Board for ensuring that board procedures are followed and that the Board complies with Guernsey Law and applicable rules and regulations of the Guernsey Financial Services Commission and the London Stock Exchange. Where necessary, in carrying out their duties, the Directors may seek independent professional advice at the expense of the Company. The Company maintains appropriate Directors' and Officers' liability insurance in respect of legal action against its Directors on an ongoing basis.

 

The Board has responsibility for ensuring that the Company keeps proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and which enable it to ensure that the financial statements comply with The Companies (Guernsey) Law, 2008 as amended. It is the Board's responsibility to present a fair, balanced and understandable assessment, which extends to interim and other price-sensitive public reports.

 

Committees of the Board

The Board has not deemed it necessary to appoint a remuneration committee as, being comprised of six Non-Executive Directors, it considers that such matters may be considered by the whole Board.

 

The Company has established an Audit Committee, chaired by Mr C Spencer, which operates within clearly-defined terms of reference and comprises five Non-Executive Directors: Mr Spencer,


Mr MacLellan, Mr Morgan, Mr Van Berkel and Ms Green, whose qualifications and experience are noted on pages 16 and 17. The Audit Committee meets at least three times a year at times appropriate to the financial reporting calendar.

 

The duties of the Audit Committee in discharging its responsibilities include reviewing the Annual Report and Financial Statements; the Interim Report and Financial Statements; the system of internal controls; and the terms of appointment of the Auditor, together with the Auditor's remuneration. It is also the forum through which the Auditor reports to the Board. The Audit Committee also reviews the objectivity of the Auditor along with the terms under which it is engaged to perform non-audit services. The provisions in place to maintain the independence and objectivity of the Auditor include the requirement to replace the lead audit partner every five years, and restrictions on the delivery of non-audit services to the Company with such services and the terms under which these are to be provided, considered by the Audit Committee on a case-by- case basis. Notwithstanding such services, the Audit Committee considers Deloitte LLP independent of the Company and that the provision of such non-audit services is not a threat to the objectivity and independence of the conduct of the audit.

 

The Audit Committee, having reviewed the performance of the Auditor, has recommended to the Board that the Auditor be offered for re-appointment at the Annual General Meeting of the Company in May 2017.

 

The Company has also established a Nomination Committee appointed in 2013. This is chaired by Mr D MacLellan and comprises three Non-Executive Directors: Mr MacLellan, Mr Spencer and Mr Morgan.

 

The duties of the Nomination Committee include regularly reviewing the structure, size and composition of the Board, keeping under review the leadership needs of the Company, leading the process for Board appointments and identifying suitable candidates.

 

The Board believes that diversity of experience and approach, including gender diversity, amongst Board members is of great importance and it is the Company's policy to consider carefully issues of Board balance and diversity when making new appointments.

 

The Company has also a Risk Committee, chaired by Ms H Green and comprising Mr Spencer, Mr Morgan and Mr Van Berkel. The Risk Committee, which reports to the Board, is mandated to review the effectiveness of the Company's (and that of the Investment Adviser, Administrator and other third party service providers as it deems fit) internal control policies and procedures for the identification, assessment and reporting of risks. The Risk Committee liaises with the Audit Committee (and vice versa) as appropriate.

 

Meeting attendance


 

Board Meeting max 4

Audit

Committee Meeting max 3

Nomination

Committee Meeting max 1

Risk

Committee Meeting max 3

Paul Lester, CBE

4

n/a

n/a

n/a

David MacLellan

4

3

1

n/a

Guido Van Berkel

4

3

n/a

4

Talmai Morgan

4

3

1

4

Christopher Spencer

4

3

-

4

Helen Green

4

3

n/a

4

 

A total of eleven other unscheduled Board meetings, ten other unscheduled Committee meetings and three unscheduled Board discussions were held during the year for specific purposes which were attended by some but not all of the Directors.


INTERNAL CONTROL AND FINANCIAL REPORTING

The Board is responsible for the Company's systems of internal control and for reviewing its effectiveness, and has established a set of ongoing processes designed to meet the particular needs of the Company in managing the risks to which it is exposed. These processes have been in place throughout the year ended 31 December 2016 and up until the date of this Report.

 

The process is based on a risk-based approach to internal control. It considers the key functions carried out by the Investment Adviser and other key service providers, the various activities undertaken within those functions, the risks associated with each activity and the controls employed to minimise those risks. A residual risk rating is then applied. A regular report is provided to the Board highlighting material changes to risk ratings and then a formal review of these procedures is carried out by the Audit Committee on an annual basis. By their nature, these procedures will provide a reasonable, but not absolute, assurance against material misstatement or loss.

 

At each Board meeting, the Board also monitors the Group's investment performance and activities since the last Board meeting to ensure that the Investment Adviser and Operator adhere to the agreed Investment Policy and approved investment guidelines. Furthermore, at each Board meeting, the Board receives reports from the Company Secretary and Administrator in respect of compliance matters and duties performed by them on behalf of the Company.

 

The Board considers that an internal audit function specific to the Company is unnecessary and that the systems and procedures employed by the Investment Adviser and Operator, including their own internal audit functions, provide sufficient assurance that a sound system of internal control, which safeguards the Company's assets, is maintained.

 

Investment Advisory services are provided to the Company by John Laing Capital Management Limited ("JLCM"). The Board is responsible for setting the overall Investment Policy and monitors the action of the Investment Adviser and Operator at regular Board meetings. The Board has also delegated administration and company secretarial services to Heritage International Fund Managers Limited but retains accountability for all functions it delegates.

 

RELATIONS WITH SHAREHOLDERS

The Company welcomes the views of shareholders and places great importance on communication with its shareholders. Senior members of the Investment Adviser make themselves available at all reasonable times to meet with principal shareholders and key sector analysts. The Chairman and other Directors are also available to meet with shareholders if required.

 

Reports on the views of shareholders are provided to the Board on a regular basis. The Board is also kept fully informed of all relevant market commentary on the Company by the Investment Adviser.

 

All shareholders can address their individual concerns to the Company in writing at its registered address, while the Annual General Meeting of the Company provides a forum for shareholders to meet and discuss issues with the Directors and the Investment Adviser.

 

SUMMARY OF THE ROLE OF THE AUDIT COMMITTEE

The Audit Committee is appointed by the Board from the non-executive Directors of the Company. The Audit Committee's terms of reference include all matters indicated by Disclosure and Transparency Rule 7.1 and the UK Corporate Governance Code. The terms of reference are considered annually by the Audit Committee and are then referred to the Board for approval. A copy of the terms of references is available upon request from the Company Secretary.

 

The main role and responsibilities of the Audit Committee are:


•  monitoring the integrity of the financial statements of the Group and any formal announcements relating to the Group's financial performance and reviewing significant financial reporting judgements contained therein;

 

•  reviewing the Group's internal financial controls (including liaising with the Investment Adviser who reviews the systems and internal controls of service providers) and, unless expressly addressed by the Board itself, the Group's internal control and risk management systems;

 

•  making recommendations to the Board, for a resolution to be put to the shareholders for their approval in general meeting, on the appointment of the external auditor and the approval of the remuneration and terms of engagement of the external auditor;

 

•  reviewing and monitoring the external auditor's independence and objectivity and the effectiveness of the audit process, taking into consideration relevant UK professional and regulatory requirements;

 

•  reviewing the Group's accounts;

 

•  developing and implementing a policy on the engagement of the external auditor to supply non- audit services, taking into account relevant guidance regarding the provision of non-audit services by the external audit firm; and

 

•  reporting to the Board on how it has discharged its responsibilities.

 

The Audit Committee is required to report its findings to the Board, identifying any matters on which it considers that action or improvement is needed, and make recommendations on the steps to be taken.

 

COMPOSITION OF THE AUDIT COMMITTEE

The members of the Audit Committee are:

 

Christopher Spencer (Chairman) David MacLellan

Talmai Morgan Guido Van Berkel Helen Green

 

See pages 16 to 17 for biographical details of the current Audit Committee members.

 

MEETINGS

The Audit Committee shall meet not less than three times a year and at such other times as the Audit Committee Chairman shall require.

 

Any member of the Audit Committee may request that a meeting be convened by the Secretary of the Audit Committee. The external auditor may request that a meeting be convened if it is deemed necessary.

 

Other Directors and third parties may be invited by the Audit Committee to attend meetings as and when appropriate.

 

ANNUAL GENERAL MEETING

The Audit Committee Chairman shall attend each Annual General Meeting of the Company and shall be prepared to respond to any shareholder questions on the Audit Committee's activities.

 

SIGNIFICANT ACCOUNTING RISKS

The Audit Committee considers the following significant risk in relation to the financial statements:


Fair value of investments

JLIF is required to determine the fair value of the investments. Whilst there is an active market for investments of this nature there is not a suitable listed, or other public market in these investments against which their value can benchmarked. As a result, a valuation is performed based on a discounted cash flow methodology in line with IAS 39 Financial Instruments: Recognition and Measurement and IFRS 13 Fair Value Measurement.

 

The calculation of the fair value of the investments carries elements of risk, mainly in relation to the assumptions and judgements made with respect to:

 

•  the determination of appropriate macroeconomic assumptions underlying the forecast investment cash flows;

 

•  the impact of project specific matters to the forecast cash flows for each investment;

 

•  the determination of appropriate discount rates for each investment that is reflective of the current market conditions;

 

•  the determination of appropriate sensitivities to apply to meet the required disclosures;

 

•  the underlying project financial models may not reflect the underlying performance of the investment;

 

•  the cash flows from the underlying financial models may not take into account current known issues;

 

•  the updates performed on the underlying financial models may result in errors in forecasting;

 

•  major maintenance/lifecycle is a significant cost in some investments with judgement around timing and quantum. This can have a significant impact on distributions; and

 

•  terms and costs of the future refinancing of senior debt on certain projects.

 

The Audit Committee is satisfied that the Investment Adviser's assumptions have been reviewed and challenged for:

 

•  the macroeconomic assumptions, including comparison of these assumptions to observable market data, actual results and prior year comparatives; and

 

•  the build-up of the discount rates for consistency and reasonableness, benchmarking against market data and peers and project-specific items.

The Audit Committee is also satisfied that the Portfolio valuation and associated disclosures have been appropriately calculated, ensuring that the investments are brought on balance sheet at fair value and that the independent valuation carried out by an independent firm has been reviewed and challenged by the Audit Committee and that the fair value of the investments is challenged by the Auditor.

 

INTERNAL AUDIT

The Audit Committee shall consider at least once a year whether or not there is a need for an internal audit function. Currently, the Audit Committee does not consider there to be a need for an internal audit function at the Group level. However, internal audits of the underlying PPP projects are performed periodically by the Investment Adviser who will report findings to the Audit Committee.

 

EXTERNAL AUDIT


Deloitte LLP has been the Company's external auditor since launch in 2010, and this is its seventh consecutive annual audit. As a result of its work during the year, the Audit Committee has concluded that it has acted in accordance with its terms of reference.

 

The Audit Committee has assessed the quality and the effectiveness of the audit process. To draw its conclusions, the Audit Committee reviewed:

 

•  the scope of the audit, the audit fee and the external auditor's fulfilment of the agreed audit plan;

 

•  the degree of diligence demonstrated by them in the course of their interaction with the Board, the Audit Committee and the Investment Adviser;

 

•  the external auditor's assessment of the Group's financial statement risks; and

 

•  the report highlighting the matters that arose during the course of the audit and the recommendations made by the external auditor.

 

The Audit Committee has noted the revisions to the UK Corporate Governance Code introduced by the Financial Reporting Council in September 2012 and the AIC Code of Corporate Governance issued in February 2013 and in particular the recommendation, in each, to put the external audit out to tender every five to ten years. The Audit Committee has also noted the requirements of The Competition and Markets Authority (formerly the UK Competition Commission) with respect to external auditor services and retendering.

 

The Audit Committee is satisfied with the effectiveness and independence of the audit process and as such recommended to the Board that Deloitte LLP be re-appointed as external auditor for the year ending 31 December 2017. The Audit Committee also recommended the Audit appointment is retendered every nine years, with the Audit partner changing every five years.

 

NON-AUDIT SERVICES

The Audit Committee considered the extent of non-audit services provided by the external auditor. The external auditor's objectivity and independence is safeguarded through limiting non-audit services such as work pertaining to their role as reporting accountants for capital raising services.

 

ACTIVITIES OF THE AUDIT COMMITTEE

The Audit Committee met on three occasions during the period 1 January 2016 to 31 December 2016. Matters considered at these meetings included but were not limited to:

 

•  review of the appointment of the external auditor;

 

•  review of the effectiveness of the external auditor;

 

•  approval of the external audit fees;

 

•  consideration and agreement of the terms of reference of the Audit Committee for approval by the Board;

 

•  review of the proposed accounting policies and format of the Financial Statements;

 

•  review of the audit plan and timetable for the preparation of the Report and Financial Statements; and

 

•  review of the 2015 Annual Accounts Report and Financial Statements and the 2016 Interim report.

 

APPROVAL

On behalf of the Audit Committee


Christopher Spencer

Chairman of the Audit Committee 20 March 2017

 

 

STATEMENT OF DIRECTORS' RESPONSIBILITIES

 

The Directors are responsible for preparing the Annual Report and Financial Statements in accordance with applicable laws and regulations. The Companies (Guernsey) Law 2008 requires the Directors to prepare financial statements for each financial year. Under that law, the Directors are required to prepare the Group financial statements in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union and the Directors must not approve the accounts unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.

 

In preparing these financial statements, International Accounting Standard 1 requires that Directors:

 

•  properly select and apply accounting policies;

 

•  present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

 

•  provide additional disclosures when compliance with the specific requirements in IFRS are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance; and

 

•  make an assessment of the Company's ability to continue as a going concern.

 

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and which 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 Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

 

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in Guernsey and the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

 

Responsibility Statement

We confirm that to the best of our knowledge:

 

•  The financial statements, prepared in accordance with IFRS, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole;

 

•  The strategic report includes a fair review of the development and performance of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that the Company faces; and

 

•  The Annual Report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's performance, business model and strategy.

 

 

By order of the Board

 

Paul Lester CBE

Chairman

20 March 2017

 

 

REPORT OF THE DIRECTORS

 

The Directors have pleasure in submitting their report and the Audited Financial Statements of the Company and its investments for the year ended 31 December 2016.

 

PRINCIPAL ACTIVITIES

John Laing Infrastructure Fund Limited ("JLIF") is a company incorporated and registered in Guernsey under the Companies (Guernsey) Law, 2008. JLIF was incorporated on 6 August 2010 with the company register number 52256.

 

As at 31 December 2015, the total number of Ordinary Shares of JLIF in issue was 814.8 million. This was increased by 81.2 million shares in March 2016 as a consequence of a shareholder tap issue, by a further 2.3 million shares in May 2016 as a result of certain shareholders electing to take up the Scrip Dividend