MACQUARIE KOREA INFRASTRUCTURE FUND 2008 ANNUAL REPORT

Transcription

1 MACQUARIE KOREA INFRASTRUCTURE FUND 2008 ANNUAL REPORT Gaehwa station of Seoul Subway Line 9, Section 1

2 CONTENTS 03 About MKIF 04 Letter to shareholders 06 Financial results key events 10 Portfolio snapshot 14 Asset under construction 20 Operating asset 29 Corporate governance statement 33 Environmental and social responsibilities 34 NonConsolidated Financial Statements

3 About MKIF SNAPSHOT Establishment Listing Exchange Market Capitalisation International Shareholding Assets in Portfolio Asset Manager 12 December March 2006 Korea Exchange (KS ) / London Stock Exchange (MKIF. LI) (Professional Securities Market) KRW1.6 trillion (US$1.2 billion) 31.3% 15 infrastructure assets (13 toll roads, one subway line and one port) Macquarie Shinhan Infrastructure Asset Management Co., Ltd.* * A joint venture between Macquarie Group and Shinhan Financial Group PROFILE Macquarie Korea Infrastructure Fund (MKIF) is one of the leading private sector infrastructure funds in Korea and has the largest portfolio of infrastructure assets in Korea that have been, or are being, constructed under the Private Participation in Infrastructure Act (PPI Act). Established in December 2002, MKIF s mandate is to invest in concession companies that construct or operate infrastructure assets in Korea. MKIF invests in these concession companies through equity and debt. MKIF is focused on generating profits from its investments and distributing these profits to its shareholders. MKIF is proud to be making a significant contribution to the development of Korea s infrastructure framework.

4 Letter to shareholders proceeds 1 and KRW79.4 billion of capital gains for MKIF. These transactions both helped to strengthen MKIF's capital position, and demonstrated the continued appetite for MKIF assets even during deteriorating financial market conditions. The deals also provided an important valuation benchmark for MKIF where the deals were priced at very favourable terms. Securitisation of the shareholder loan provided to Baekyang Tunnel (January 2008) MKIF securitised the shareholder loan provided for Baekyang Tunnel and received total net cash proceeds of KRW170.2 billion. Through this securitisation, MKIF recognised KRW24.5 billion of income, realising an internal rate of return of 18% per annum. This annual report provides an overview of MKIF's investment and operating activities for the 12 months to 31 December 2008 (the Period), as well as information on the performance of MKIF's assets. It also includes the audited nonconsolidated financial statements for the year. Dear shareholders, MKIF has delivered outstanding results for the Period. The operating performance of MKIF's underlying assets has remained relatively unscathed from the economic slowdown, with operating revenues recording another year of growth. MKIF also demonstrated strong capital management skills, with successful completion of a number of cashgenerative transactions. MKIF also managed to sustain conservative capital and debt positions. Construction continues to progress well at our greenfield assets, and is generally on time and on budget. Five of our six greenfield assets are expected to commence operation as planned during the second half of Finally, the stability of operating revenues supported by active capital management initiatives contributed to an increase in the distribution to shareholders for the Period. CAPITAL MANAGEMENT MKIF remains focused on creating value for shareholders through active capital management. In 2008, three transactions were successfully completed, resulting in KRW289.9 billion of cash Sale of the convertible bonds issued by New Daegu Busan (March 2008) MKIF divested its holding of convertible bonds (CB) issued by DaeguBusan Expressway for a total cash consideration of KRW108.3 billion. From this strategic divestment, MKIF recognised an accounting gain of KRW54.9 billion, realising an internal rate of return of 31% per annum. Refinancing of debt provided to Woomyunsan Tunnel (December 2008) MKIF successfully optimised the capital structure of Woomyunsan Tunnel through a KRW112.3 billion debt package. The transaction resulted in an immediate net cash inflow of KRW9.6 billion to MKIF. MKIF has been managing its capital and debt profile prudently and conservatively. Its liquidity position remains healthy with circa KRW350 billion of cash 2 at the end of the Period while having no external funding requirement in the next three years. All asset level external senior debt are fullyfunded and they amortise over the next nine years on average on the back of governmentsubsidised revenues. The proportionate gearing and interest coverage levels have also remained relatively low and MKIF will continue to manage these positions conservatively. FINANCIAL RESULTS Revenue and net profit surged by 56% and 124% respectively to KRW235.1 billion and KRW183.7 billion 04 MACQUARIE KOREA INFRASTRUCTURE FUND

5 compared with the previous corresponding period (pcp). The increase was mainly due to the oneoff capital gains recognised from the transactions completed during the year in relation to Baekyang Tunnel and DaeguBusan Expressway. DISTRIBUTIONS MKIF declared a distribution of KRW582 per share for the Period, reflecting a special distribution component from the three profitable capital management transactions 3 completed during the Period. On a per share basis, the distribution consisted of KRW460 in cash and KRW122 in newly issued shares. On a cash only basis, the amount represented a year on year distribution growth of 4.5%. The cash component allowed MKIF to maintain cash distribution to shareholders consistent with the level paid in the previous year, while the stock component of the distribution enabled MKIF to conserve cash that can be used to fund existing and potentially future opportunities. In preparation for the completion of five greenfield assets in the second half of 2009, we have taken a number of steps to facilitate a smooth transition of the assets into the opening and rampup phases. These include establishing operation and management teams, building revenue and cost targets, and developing marketing and promotional plans. By the end of 2009, we will witness a major transformation of MKIF with close to 90% of the portfolio becoming fully operational, compared to the current level of 50%. MKIF will still remain a very young portfolio with a significant potential for future growth. We expect another active year of capital management. MKIF remains focussed on delivering capital management transactions that will help to bolster MKIF's capital position and create value for the shareholders. MKIF is confident that it will continue to provide shareholders with an attractive combination of strong, predictable income streams and growth potential. On behalf of the Manager and the MKIF Board, we thank you for your continued support of MKIF. BUSINESS OUTLOOK We currently operate in a challenging business environment and are carefully watching macroeconomic and capital markets developments. The global financial market disruptions have had a detrimental impact on the Korean economy and capital markets, and MKIF and its underlying assets are not completely isolated from these external factors. In 2009, we plan to be cautious and prudent in our approach to the business. Chul Hum Paik Representative Director Macquarie Shinhan Infrastructure Asset Management Co., Ltd. Corporate Director and Asset Manager of Macquarie Korea Infrastructure Fund We are fortunate to benefit from the inflationadjusted and governmentsubsidised revenue streams of MKIF's underlying assets that ensure stability of operating performance. However, we face an unprecedented business environment which demands a more vigilant approach to our activities. We continue to focus on optimising the operational efficiency of our assets to maximise value to shareholders. Active and rigorous operational management continues to be a major part of the MKIF's business strategy. 1 Including net cash proceeds of KRW9.6 billion in January 2009 from refinancing of debt in Woomyunsan Tunnel. 2 Proportionately consolidated cash balances of the assets and corporate cash balance of KRW182 billion. 3 Transactions include the securitisation of Baekyang Tunnel senior loan, the sale of convertible bonds in DaeguBusan Expressway and refinancing of debt provided to Woomyunsan Tunnel ANNUAL REPORT 05

6 Financial results* Solid growth reflecting the sound fundamentals of the businesses and profitable transactions INCOME STATEMENT (KRW billion) FY 2007 FY 2008 Net Profit Revenue Revenue Interest Income Arrangement fees Dividend Income Gain (loss) on valuation of debt securities Gain on sale of investment, net Other Income Expense Management fee Performance fee Interest expense Other expenses Net Profit FY , ,388 2, (2,922) 79, ,364 27,836 16,235 7, ,700 (KRW million) FY , , ,842 (3,786) 3, ,449 32,139 27, ,722 7,247 82,031 1 Includes gain on (i) securitisation of shareholders loan in Baekyang Tunnel of KRW24.5 billion and (ii) divestment of the convertible bond in New Daegu Busan Expressway of KRW54.9 billion. 2 Includes VAT amount of KRW2,665 million returned by the Manager. 3 Performance fee of KRW27.3 billion relating to outperformance for the second quarter. BALANCE SHEET 8% 9% 54% Equity securities Loans Cash and deposits Other assets 29% Total Assets I. Invested Assets Cash and cash equivalents Loans Equity Debt Securities II. Others (Receivables, prepayments, etc.) Total Liabilities Payables Longterm debts Misc. liabilities Total Shareholders Equity Total Liabilities and Shareholder Equity FY ,099,832 1,929, ,412 1,144, , , ,004 9, ,523 8,875 1,740,828 2,099,832 (KRW million) FY ,824,991 1,668,493 83,530 1,070, ,504 41, , , ,009 9,163 1,702,698 1,824,991 * Audited, nonconsolidated financial information 06 MACQUARIE KOREA INFRASTRUCTURE FUND

7 DISTRIBUTION (per share) Cash distribution Share distribution* *Number of new shares issued by stock divdend FY 2008 KRW 460 KRW 122 ( share) 7,969,137 shares FY 2007 KRW 440 (KRW) Cash distribution Stock distribution Cash distribution (prior to IPO) ANNUAL REPORT 07

8 2008 key events JANUARY MKIF reached financial close on its investment into the Seoul Metro Line 9 Co., Ltd., the concession company of Seoul Subway Line 9 Section 1. MARCH The ninth General Shareholders Meeting was held on March 21, where the reappointment of Supervisory Directors was approved. MKIF divested its Convertible Bond (CB) in New Daegu Busan Expressway Co., Ltd., the concession company of New DaeguBusan Expressway project for a total cash consideration of KRW108.3 billion. APRIL MKIF s credit rating of AA (Stable) was reaffirmed by the Korea Ratings Company. MKIF securitised its senior loan investment in Baekyang Tunnel Ltd., the concession company of Baekyang Tunnel. JULY Machang Bridge was opened to traffic after four year s of construction. On the Busan New Port Phase 23 Project, all conditions precedent to drawdown under the equity agreements were satisfied and MKIF injected KRW billion out of a total equity commitment of KRW billion to Busan New Container Terminal Co., Ltd., the concession company for this project. FEBRUARY A final distribution for 2007 of KRW220 per share was paid to shareholders. MKIF reached financial close on the purchase of the remaining 51% equity interest in MCB Co., Ltd., the concession company of Machang Bridge for KRW20.5 billion 08 MACQUARIE KOREA INFRASTRUCTURE FUND

9 AUGUST An interim distribution for 2008 of KRW230 per share was paid to shareholders. OCTOBER MKIF participated in the third KRX IR EXPO organised by the Korea Exchange. Creating value through active capital / portfolio management NOVEMBER MKIF convened an Extraordinary Shareholders Meeting on 7 November, where the reappointment of MSIAM as Corporate Director was approved. DECEMBER Woomyunsan Infraway Co., Ltd., the concession company of Woomyunsan Tunnel, completed the refinancing of the senior debt as well as capital redemption and financing of a subordinated debt. CAPITAL MANAGEMENT Asset Baekyang Tunnel Type Securitisation of the shareholder loan Net cash inflow 172 (KRW billion) Capital gain 24.5 DaeguBusan Expressway Sale of convertible bonds Woomyunsan Tunnel Capital restructuring 9.6 MKIF declared a distribution of KRW582 per share (KRW460 per share in cash and KRW122 per share in newly issued shares). KRW billion* NET CASH INFLOW KRW79.4 billion CAPITAL GAIN * Including net cash proceeds of KRW9.6 billion from refinancing the Woomyunsan Tunnel in January ANNUAL REPORT 09

10 Portfolio snapshot * MKIF s young and diversified asset portfolio offers attractive investment opportunities, creating a longterm revenue stream and real capital growth for investors * As of 31 December 2008, on a commitment amuont basis INVESTMENT Strategy MKIF's mandate is to acquire a portfolio of infrastructure assets in Korea developed under the Private Participation in Infrastructure Act. MKIF seeks to provide investors with a combination of stable cash distributions and capital gains by investing in infrastructure assets, which are in the development stage as well as those that are near completion or operational with an established history. Key characteristics A balanced exposure to equity and debt investments Longterm concession agreements, which typically provide for annual inflationlinked toll increases A high level of government support in the form of inflationlinked government revenue support and termination payments in the event of default; and Stable and predictable operating costs CONSTRUCTION Progress Machang Bridge opened in July 2008, becoming the first of MKIF's greenfield assets to open. Construction of the remaining greenfield assets is largely progressing on schedule, with five assets anticipated to open in the second half of Contractors Since the contractors in the construction consortium of MKIF assets are generally jointly liable for any losses by delays, failure or cost overruns, the construction risks are largely transferred to the contractors. More importantly, the majority of the contractors are blue chip companies, maintaining local credit ratings above A, and currently expected to complete construction without delay or failure. 10 MACQUARIE KOREA INFRASTRUCTURE FUND

11 12% 10% 22% 4% 44% Infrastructure Investment 52% Stage of Sector Type Operation 13% 84% 34% 25% Port Subway Toll roads Equity Senior debt Sub debt Construction Mature Growth Rampup The portfolio is expected undergo a significant transformation in 2009 as five of six assets under construction will become operational by the year end OPERATING PERFORMANCE Traffic and revenue MKIF assets were resilient to the economic slowdown and continued to perform well. On a weighted average basis, traffic revenue across the portfolio increased by 1.5% over 2007 mainly due to the toll rate increases despite traffic volume decreasing by 1.6% over the same period. MANAGEMENT INITIATIVES Operational improvement MKIF has a dedicated asset management team working closely with governments and concession companies' management and boards to enhance the performance of MKIF's assets. The efforts include active involvement in the construction process to ensure that assets are being built to the highest standard and delivered on time and budget for operating assets. MKIF is focused on working with the concession companies of operating assets to implement traffic enhancement measures and cost reduction plans, and improve customer service, safety and travel reliability. Capital management An important part of MKIF's management initiatives is optimising capital structure of the underlying assets through the life cycle of the assets. As underlying assets mature, their risk profile and revenues generally improve, providing opportunities to refinance the debts at lower interest rates and improved debt covenants. MKIF has been active on the capital management transactions to bring additional value to its shareholders ANNUAL REPORT 11

12 Portfolio snapshot (continued) As at the end of 2008, MKIF has committed to invest in 15 infrastructure assets in Korea with commitments totalling KRW2.13 trillion, positioning it as the largest infrastructure fund in Korea INVESTMENT PORTFOLIO Operating assets 1_ Incheon International Airport Expressway 2_ Baekyang Tunnel 3_ Gwangju 2 nd Beltway, Section 31 4_ Gwangju 2 nd Beltway, Section 1 5_ Woomyunsan Tunnel 6_ CheonanNonsan Expressway 7_ Soojungsan Tunnel 8_ Daegu 4 th Beltway, East 9_ Machang Bridge Equity (KRW billion) MKIF Commitment Sub debt Senior Debt Total Ownership (%) Total , Includes KRW3.2 billion of working capital facility 12 MACQUARIE KOREA INFRASTRUCTURE FUND

13 12 11 GANGWONDO Incheon Metropolitan CIty Third largest city in Korea Population: Approx. 2.7million SEOUL INCHEON 10 Seoul Metropolitan CIty Largest city in Korea Population: Approx. 10.2million 14 6 CHUNGCHEONG BUKDO MKIF's portfolio of 15 investments in toll road concession companies, a subway line and a port represents a balanced mix of operating and construction assets, with a broad geographic spread throughout the Republic of Korea CHUNGCHEONG NAMDO Gwangju Metropolitan City Sixth Iargest city in Korea Population: Approx. 1.4million 3 GWANGJU 4 Daegu Metropolitan City Fourth Iargest city in Korea Population: Approx. 2.5million DAEGU Busan Metropolitan City Second Iargest city in Korea Population: Approx. 3.6million BUSAN JEJUDO Operating assets Assets under construction Source: Korea National Statistical Office (as at 31 December 2008) Assets under construction 10_ YonginSeoul Expressway 11_ Seoul Subway Line 9, Section 1 12_ SeoulChuncheon Expressway 13_ Incheon Grand Bridge 14_ SeosuwonOsanPyungtaek Expressway 15_ Busan New Port Phase 23 Equity (KRW billion) MKIF Commitment Sub debt Senior Debt Total Ownership (%) / Total , Includes MKIF s commitment to acquire an additional 32% equity interest agreed (increasing MKIF s equity stake to 67%) 2 As of 26 March 2009, MKIF divested its senior loan commitment provided to Incheon Bridge Co., Ltd., of KRW188 billion (invested amount of KRW133 billion) 2008 ANNUAL REPORT 13

14 ASSET UNDER CONSTRUCTION YonginSeoul Expressway Expected opening in July 2009 An alternative route, alleviating traffic congestion in Suwon to Seoul section of the SeoulBusan Highway ASSET DESCRIPTION YonginSeoul Expressway is a 22.9 km, dual two to threelane tolled expressway consisting of six bridges, 10 tunnels and six interchanges connecting Youngduckri, Yongin City to SegokDong in Seoul. Concession company: Gyungsu Highway Co., Ltd. Concession term: 30 years MRG 1 period: 10 years from commencement of operations Relevant authority: Ministry of Land, Transport and Maritime Affairs Total commitment: KRW206.6 billion 2 Proportion of MKIF portfolio 3 : 9.7% 1 Minimum Revenue Guarantee revenue support provided by the relevant authority under the concession agreement for all or a substantial proportion of the concession term 2 Includes MKIF s commitment to acquire an additional 32% equity interest at the maximum of variable price range agreed with project sponsors (increasing MKIF s equity stake to 67%) 3 Based on the total MKIF investment commitment to all investments in the portfolio 14 MACQUARIE KOREA INFRASTRUCTURE FUND

15 ASSET UNDER CONSTRUCTION Seoul Subway Line 9, Section 1 A direct railway connection between Kimpo Airport and the major business and residential districts of Seoul Expected opening in July 2009 ASSET DESCRIPTION Seoul Subway Line 9, Section 1 is a 25.5 km subway line with 25 stations (including six transfer stations) running between Kimpo Airport in western Seoul to Gangnam along the south bank of the Han River. Concession company: Seoul Metro Line 9 Co., Ltd. Concession term: 30 years MRGperiod: 15 years from commencement of operations Relevant authority: Seoul Metropolitan City Total commitment: KRW74.4 billion Proportion of MKIF portfolio: 3.5% 2008 ANNUAL REPORT 15

16 ASSET UNDER CONSTRUCTION SeoulChuncheon Expressway Expected opening in August 2009 An alternative link from Seoul to the East Coast area of Korea, relieving the heavy traffic congestion in east Seoul and providing a direct route to Chuncheon, the Gangwon Province area ASSET DESCRIPTION SeoulChuncheon Expressway is a 61.4 km, dualtwo to threelane tolled expressway providing a direct link between Seoul and Chuncheon, the largest city in Gangwon Province. It will provide an alternate link between east part of Seoul to Chuncheon via Kyunggido, where the regional expressways and highways experience heavy congestion, especially on weekends. Concession company: Seoul Chuncheon Highway Co., Ltd. Concession term: 30 years MRGperiod: 15 years from commencement of operations Relevant authority: Ministry of Land, Transport and Maritime Affairs Total commitment: KRW136.0 billion Proportion of MKIF portfolio: 6.4% 16 MACQUARIE KOREA INFRASTRUCTURE FUND

17 ASSET UNDER CONSTRUCTION Incheon Grand Bridge Another link to Incheon International Airport expected to reduce travel time between outer Seoul region, Incheon s new Songdo city and the airport Expected opening in October 2009 ASSET DESCRIPTION Incheon Grand Bridge is a 12.3 km, dual threelane tolled bridge which will be Korea s longest bridge and the fifth largest cable stayed bridge in the world upon completion. It will connect Incheon International Airport to the commercial area of New Songdo City in the Incheon Free Economic Zone. Concession company: Incheon Bridge Co., Ltd. Concession term: 30 years MRGperiod: 15 years from commencement of operations Relevant authority: Ministry of Land, Transport and Maritime Affairs Total commitment: KRW351.9 billion Proportion of MKIF portfolio: 16.5% 2008 ANNUAL REPORT 17

18 ASSET UNDER CONSTRUCTION SeosuwonOsanPyungtaek Expressway Expected opening in October 2009 A 'T' shaped expressway reducing traffic congestion and providing connectivity to the fast growing satellite cities of Seoul ASSET DESCRIPTION SeosuwonOsanPyungtaek Expressway is a 38.5 km, dual two to threelane tolled expressway connecting the southern part of Seoul to the satellite cities including Suwon, Hwasung, Osan and Pyungtaek. It is wellplaced to be the key infrastructure to support the continued population and economic growth in the region. Concession company: Gyunggi Highway Co., Ltd. Concession term: 30 years MRGperiod: 15 years Relevant authority: Ministry of Land, Transport and Maritime Affairs Total commitment: KRW80 billion Proportion of MKIF portfolio: 3.8% 18 MACQUARIE KOREA INFRASTRUCTURE FUND

19 ASSET UNDER CONSTRUCTION Busan New Port Phase 23 One of the national priority projects designed to meet future demand driven by Busan's position as a regional shipping and logistics hub Expected opening in December 2011 Photo does not depict Busan New Port Phase 23 ASSET DESCRIPTION Busan New Port Phase 23 is a container terminal and part of the continuing development of the New Port. It consists of four 50,000 ton berths handling maximum capacity of 2.7 million TEU (Twentyfoot Equivalent Units) per year. Concession company: Busan New Container Terminal Co., Ltd. Concession term: 29 years and 3 months from the start of the operation Relevant authority: Ministry of Land, Transport and Maritime Affairs Total commitment: KRW259.4 billion Proportion of MKIF portfolio: 12.2% 2008 ANNUAL REPORT 19

20 OPERATING ASSET Incheon International Airport Expressway ASSET DESCRIPTION Incheon International Expressway is a 40.2 km, dual three to fourlane expressway links between Yongjong Island, the site of the Incheon International Airport, and Korea's capial, Seoul. It includes two major bridges the 4.4 km Yongjong Bridge and the 2.6 km Banghwa Bridge, as well as the 630 m Gaehwa Tunnel. Concession company: New Airport Highway Co., Ltd. Opened: December 2000 Concession period: 30 years to 2030 (22 years remaining) MRG period: 20 years Relevant authority: Ministry of Land, Transport and Maritime Affairs Total commitment: KRW109.9 billion Proportion of MKIF portfolio: 5.1% TRAFFIC AND REVENUE Category Average daily traffic (vehicles / day) Average daily revenue (1,000 won) , ,291 64, , MACQUARIE KOREA INFRASTRUCTURE FUND

21 OPERATING ASSET Baekyang Tunnel ASSET DESCRIPTION Baekyang Tunnel is a 2.3 km, dual twolane tunnel that runs underneath Baekyang Mountain in Busan city, providing a link between the Busan central business district, Busan port and the northern and western residential areas as well as Kimhae International Airport. Beakyang Tunnel was set up to solve severe traffic congestion problems within the urban area, resulting from the increasing number of traffic volumes in and out of Busan Port and Kimhae Area. Concession company: Baekyang Tunnel Ltd. Opened: January 2000 Concession period: 25 years to 2025 (16 years remaining) MRG period: 25 years Relevant authority: Busan Metropolitan City Total commitment: KRW2.9 billion Proportion of MKIF portfolio: 0.1% TRAFFIC AND REVENUE Category Average daily traffic (vehicles / day) Average daily revenue (1,000 won) , ,291 64, , ANNUAL REPORT 21

22 OPERATING ASSET Gwangju 2 nd Beltway, Section 31 ASSET DESCRIPTION Gwangju 2 nd Beltway Section, 31 is a 3.5 km dual threelane expressway running east to west along the southern edge of Gwangju, Korea's fifth largest city. Major infrastructure includes two bridges, two tunnels and one interchange. It provides better access to surrounding cities and eases traffic congestion in and around Gwangju. Concession company: Kwangju Ring Road Co., Ltd. Opened: December 2004 Concession period: 30 years to 2034 (26 years remaining) MRG period: 30 years Relevant authority: Gwangju Metropolitan City Total commitment: KRW102.2 billion Proportion of MKIF portfolio: 4.8% TRAFFIC AND REVENUE Category Average daily traffic (vehicles / day) Average daily revenue (900 won) ,123 17,843 25,411 20, MACQUARIE KOREA INFRASTRUCTURE FUND

23 OPERATING ASSET Gwangju 2 nd Beltway, Section 1 ASSET DESCRIPTION Gwangju 2 nd Beltway Section 1 is a 5.6 km dual threelane expressway consisting of four tunnels and 10 bridges, running from Kwangju Dooam Interchange to Sotae Interchange. It was constructed in response to city expansion and the development of industrial areas and to ease traffic congestion on the 1 st Beltway by providing better links to surrounding cities. Concession company: Kwangju Beltway Investment Co., Ltd. Opened: January 2001 Concession period: 28 years to 2028 (20 years remaining) MRG period: 28 years Relevant authority: Gwangju Metropolitan City Total commitment: KRW190.3 billion 1 Proportion of MKIF portfolio: 8.9% TRAFFIC AND REVENUE Category Average daily traffic (vehicles / day) Average daily revenue (1,000 won) ,719 32,253 35,743 31, Includes KRW3.2 billion working capital facility ANNUAL REPORT 23

24 OPERATING ASSET Woomyunsan Tunnel ASSET DESCRIPTION Woomyunsan Tunnel is a 3 km dual lane tunnel running underneath Mount Woomyun, providing a direct route between the Seoul Suburbs, Kwachon and Anyang. The tunnel enables traffic to avoid the longer route of Sadang and Yangjae area, instead travelling directly through Woomyunsan Tunnel via Banpo Bridge and the Seoul Arts Centre. Concession company: Woomyunsan Infraway Co., Ltd. Opened: January 2004 Concession period: 30 years to 2034 (25 years remaining) MRG period: 30 years Relevant authority: Seoul Metropolitan City Total commitment: KRW20.3 billion Proportion of MKIF portfolio: 1.0% TRAFFIC AND REVENUE Category Average daily traffic (vehicles / day) Average daily revenue (1,000 won) ,458 33,956 21,137 36, MACQUARIE KOREA INFRASTRUCTURE FUND

25 OPERATING ASSET CheonanNonsan Expressway ASSET DESCRIPTION CheonanNonsan Expressway is an 81 km, dual twolane toll expressway between Cheonan and Nonsan, connecting the northwestern and southwestern provinces of Korea as part of the national highway system. It has two major tunnels, 44 bridges and seven interchanges. Concession company: Cheonan Nonsan Expressway Co., Ltd. Opened: December 2002 and toll service started on December 2002 Concession period: 30 years to 2032 (24 years remaining) MRG period: 20 years Relevant authority: Ministry of Land, Transport and Maritime Affairs Total commitment: KRW270 billion Proportion of MKIF portfolio: 12.7% TRAFFIC AND REVENUE Category Average daily traffic (vehicles / day) Average daily revenue (1,000 won) , ,706 32, , ANNUAL REPORT 25

26 OPERATING ASSET Soojungsan Tunnel ASSET DESCRIPTION Soojungsan Tunnel is a 2.3 km, dual twolane tunnel located in Busan, Korea's second largest city. The tunnel serves as an important connection between Busan central business district and Busan's port area which is the largest port in Korea. It also links the northern and western residential areas of Busan as well as Kimhae International Airport. Concession company: Soojungsan Investment Co., Ltd. Opened: December 2001 Concession period: 25 years to 2027 (18 years remaining) MRG period: 25 years Relevant authority: Busan Metropolitan City Total commitment: KRW136.6 billion Proportion of MKIF portfolio: 6.4% TRAFFIC AND REVENUE Category Average daily traffic (vehicles / day) Average daily revenue (1,000 won) ,238 28,388 39,343 29, MACQUARIE KOREA INFRASTRUCTURE FUND

27 OPERATING ASSET Daegu 4 th Beltway, East ASSET DESCRIPTION Daegu 4 th Beltway, East is a 7.25 km, dual threelane beltway running north to south along the eastern perimeter of Daegu City. It consists of three bridges, one underpass and one viaduct. It is the first operational section of Daegu City's proposed circulation road. Concession company: Daegu East Circulation Road Co., Ltd. Opened: August 2002 Concession period: 24 years to 2026 (18 years remaining) MRG period: 20 years Relevant authority: Daegu Metropolitan City Total commitment: KRW89.5 billion Proportion of MKIF portfolio: 4.2% TRAFFIC AND REVENUE Category Average daily traffic (vehicles / day) Average daily revenue (1,000 won) ,981 19,009 18,359 18, ANNUAL REPORT 27

28 OPERATING ASSET Machang Bridge ASSET DESCRIPTION Machang Bridge is a 1.7km, dual twolane, cablestayed bridge, providing a bypass to Masan for vehicles travelling between the cities of Masan and Changwon. The bridge shortens the costal route between Busan and Southwestern areas in Gyungsangnamdo Province. Machang Bridge also provides better access to the new Masan port facilities and relieves congestion on existing national highways and regional roads. Concession company: Machang Bridge Co., Ltd. Opened: July 2008 Concession period: 30 years to 2038 (30 years remaining) MRG period: 30 years Relevant authority: Gyungsangnam Provincial Government Total commitment: KRW99.5 billion Proportion of MKIF portfolio: 4.7% TRAFFIC AND REVENUE Category Average daily traffic (vehicles / day) Average daily revenue (1,000 won) 2007* ,170 21,736 * Machang Bridge opened to traffic in July MACQUARIE KOREA INFRASTRUCTURE FUND

29 Corporate governance statement MKIF S STRUCTURE Administrator Custodian Sales Agents SHAREHOLDERS INVESTMENTS MKIF DISTRIBUTIONS/ DIVIDENDS REGULATORY FRAMEWORK Private Participation in Infrastructure Act (PPI Act) Financial Investment Service and Capital Market Act (FISCMA) MSIAM (Asset Manager) LEGAL FRAMEWORK MKIF operates under the legal and regulatory framework established by the Financial Investment Service and Capital Market Act (FISCMA), and the Private Participation in Infrastructure Act (PPI Act). MKIF is required under FISCMA to appoint an asset manager, custodian, administrator and sales agent (collectively the Service Providers). MKIF BOARD OF DIRECTORS The MKIF Board of Directors, comprising a majority of independent supervisory directors, is responsible for overseeing MKIF operations, monitoring MKIF business affairs (including overseeing the performance of the asset manager and other service providers), capital management (including share issues) and approving and monitoring financial and other reporting. The Board is required to act in the best interests of MKIF and its shareholders. The Board is currently comprised of four directors: one corporate director and three supervisory directors. Under FISCMA and MKIF's Articles of Incorporation (AOI), MKIF is required to have at least one corporate director at all times. In accordance with FISCMA, MKIF's manager, MSIAM, is the corporate director and will appoint one of its officers or employees as its representative on the MKIF Board. MSIAM represents, manages and conducts the business of MKIF and must report to the MKIF Board the status of business conduct and asset management at least once every quarter. The directors are appointed by the shareholders at a general meeting held in accordance with MKIF's AOI. Pursuant to the MKIF's AOI, the maximum length of a supervisory director's term of office is three years, after which the director can stand for reappointment. However, the term of a corporate director has been changed to the dissolution of MKIF from 3 years in reflection with the FISCMA promulgated in August ANNUAL REPORT 29

30 Board meetings are held at least once every quarter. Directors are provided with board papers in advance of each meeting to enable informed discussion of agenda items. The supervisory directors may request the corporate director or any of MKIF's service providers to report to the Board the status of MKIF business or assets whenever the supervisory directors deem necessary. The Board has the right to decide the following matters: Execution and/or termination of the Management Agreement, Custodian Agreement, Sales Agency Agreements an Administration Agreement; Convening general meetings of shareholders; Issuance of new shares; Payment of expenses or fees (or commissions) payable to service providers in connection with the management, custody or distribution of MKIF assets, the administration of MKIF or other services; Matters relating to the allocation of distributions either in the form of cash or shares; and Any matters which require the resolution of the MKIF Board under the MKIF AOI, FISCMA, or other relevant legislation and regulations. MSIAM, as Manager, is a corporate director. The current supervisory directors of MKIF are as follows: Dae Yun Cho Reappointed as MKIF Supervisory Director in March 2008 (Initially appointed in December 2002) Practicing law at Kim&Chang Law Offices in Seoul since 1979 and he is currently a Senior Partner Consultant to various Korean Ministries, including the Ministry of Strategy and Finance and Ministry of Knowledge Economy Former senior adviser to the Korea International Trade Law Association, an arbitrator of the Korean Commercial Arbitration Board Panel member of the WTO s Subsidies and Countervailing Duties Committee President of the International Association Korean Lawyer Kyung Soon Song Reappointed as MKIF Supervisory Director in March 2008 (Initially appointed in March 2005) Founding Representative Director of Korea Expert Consulting Group (KECG) Visiting Professor at the Graduate School of International Studies of Seoul National University since 2003 Former senior staff member of World Bank Former chief operating officer of Nomura Project Finance International Limited Steering committee member of Korea Investment Corporation Tae Hee Yoon Reappointed as MKIF Supervisory Director in March 2008 (Initially appointed in September 2004) Chairman, Lutronic Corporation Inc, Korea Former ViceChairman, Financial Advisory Services, Pricewaterhouse Coopers Former Chairman of Arirang International TV Founding chairman of Korea Economic Intelligence, New York Wall Street Former senior staff member of World Bank MKIF S APPROACH TO CORPORATE GOVERNANCE The MKIF Board is committed to achieving sustainable financial performance for the benefit of MKIF security holders, while meeting the expectations of all stakeholders for responsible corporate governance. Accordingly, the Board has established clear corporate governance arrangements for MKIF, including delegation of responsibilities to MSIAM and other service providers. The Board monitors these delegations, and periodically reviews the effectiveness of arrangements to ensure they are in the best interest of MKIF and its security holders. MKIF relies extensively on its corporate director and asset manager, MSIAM, for effective daytoday control of MKIF s operations. This reliance is established by the Management Agreement, MKIF s AOI, and applicable 30 MACQUARIE KOREA INFRASTRUCTURE FUND

31 Korean laws and regulations, which together give MSIAM full authority with respect to the management of MKIF assets. Consequently, MSIAM is an important component of MKIF s corporate governance framework. As an affiliate of the Macquarie Group Ltd.(Macquarie), MSIAM has, to the extent possible and relevant, adopted the corporate governance framework that Macquarie applies to its funds management activities. The requirements of the framework and its related policies are broadly consistent with the Australian Stock Exchange s Corporate Governance Principles and Best Practice Recommendations (the Standards). The Standards are designed to maximise corporate performance and accountability in the interests of shareholders and the broader economy, and address matters such as board structure, promotion of ethical and responsible decisionmaking, timely and balanced disclosure, recognition and management of risk, and recognition of the interests of stakeholders. The MKIF and MSIAM Boards have adopted fund management policies that are consistent with the principles contained in the Macquarie funds management framework, although they have been amended to take account of Korean legal and regulatory requirements. The policies address the following key areas: Risk management External communications Staff trading Conflict of interest management Auditor independence Employee conduct Employee health and safety Environmental and social responsibility management Related party transactions MSIAM BOARD OF DIRECTORS The MSIAM Board of Directors (MSIAM Board) is responsible for establishing an effective corporate governance framework and MSIAM management oversight, with a view to ensuring that MSIAM performs its duties with due care and diligence in accordance with the management agreement. In particular, the Board is responsible for: Considering and approving the submission of investment or divestment recommendations to MKIF; Setting objectives, goals and strategic direction for management, with a view to maximizing shareholder wealth; The oversight of control and accountability systems; Ensuring MSIAM is performing its functions and providing services to MKIF as provided for under the Management Agreement; Review and ratification of systems for risk management framework and internal compliance standards; Approving and monitoring financial and other reporting; and Setting the highest business standards and codes for ethical behaviour. Board meetings are held at least quarterly or more frequently as required. Directors are provided with board papers in advance of each meeting to enable informed consideration of agenda items. MSIAM s current board of directors comprises three representatives nominated by the Macquarie Group and two nominated by the Shinhan Financial Group. Chul Hum Paik Appointed as MSIAM Representative Director in December 2006 Representative Director of MSIAM Former Head of the Financial Products division of Shinhan Macquarie Financial Advisory from 2001 to 2006 Joined Shinhan Bank in 1993, with responsibilities for international banking and investment banking division Nick van Gelder Reappointed as MSIAM Director in December 2008 (Initially appointed in December 2002) Head of Macquarie Capital Funds in Asia Representative Director of MSIAM from 2002 to ANNUAL REPORT 31

32 Joined Macquarie Group in 1997 in the infrastructure and real estate investment division Worked over 10 years in financial advisory and investment management prior to joining Macquarie Group Jason Pak Reappointed as MSIAM Director in November 2008 (Initially appointed in June 2008) Chief Operating Officer of Macquarie Shinhan Infrastructure Asset Management Co., Ltd. Joined Macquarie Group in 2002 and spent 4 years in the equity capital market and M&A advisory side with Macquarie Securities Worked over 5 years in the Corporate Finance division of KPMG, in Seoul and London on the M&A advisory side Young Sup Hwang Appointed to MSIAM Director in March 2009 Vice President at Shinhan Capital Joined Shinhan Capital in 1991 and worked in the investment management division Became the Head of Investment Banking Division at Shinhan Capital in 2006 Chang Soo Oh Reappointed as MSIAM Director in November 2008 (Initially appointed in November 2007) Head of Project Financing Team in Investment Banking Group of Shinhan Bank Joined Shinhan Bank in 1981 with responsibilities in various transactions and investment banking business SHAREHOLDER INFORMATION AND DISCLOSURE It is MKIF's policy to provide timely, open and accurate information to shareholders. Shareholders will be informed to the release of MKIF's annual report, audit report and financial statements and other regular reports through disclosure process. These reports will keep shareholders informed of MKIF's performance. FISCMA requires MSIAM to upload a quarterly asset management report on the MKIF website, and previe an annual and quarterly business report to the Financial Supervisory Committee (FSC) and the Korea Financial Investment Association (KOFIA). The FSC and KOFIA are responsible for disclosure of the reports to investors under the KOFIA. MKIF is required to disclose information to investment markets in accordance with the regulations of the Korea Exchange and the London Stock Exchange. COMPLIANCE Under the FISCMA, MSIAM, as MKIF s asset manager, is required to establish MSIAM Boardapproved internal control standards. Internal control standards are basic procedures and standards to be followed by MSIAM s officers and employees when they perform their duties in order to observe relevant laws and regulations, manage the company s assets effectively, and protect its investors. MSIAM appointed a compliance officer who is responsible for reviewing and monitoring the efficiency of compliance systems on an ongoing basis so that appropriate compliance procedures, staff education and board reporting arrangements are in place to enable observance of the internal control standards. 32 MACQUARIE KOREA INFRASTRUCTURE FUND

33 Environmental and social responsibilities MKIF s environmental and social responsibilities are managed throughout the investment process through our asset selection, ongoing asset management and shareholder reporting MKIF recognises that its infrastructure investments involve both environmental and social responsibilities as a result of the essential services provided by such assets. MKIF s environmental and social responsibility arises from the impact (both positive and negative) on natural resources, the community, customers, employees and investors by the operations of the fund and its investments. MKIF s environmental and social responsibilities are managed throughout the investment process as follows: Asset selection environmental and social responsibilities are reviewed as part of the acquisition due diligence process. Where they exist, regulatory obligations are viewed as minimum standards for environmental and social responsibility management postacquisition. Ongoing asset management MKIF s ability to control or influence the ongoing environmental and social responsibility management at each asset differs based on its level of investment and the regulatory framework that governs those issues. Importantly, the regulatory framework is not controlled by MKIF or its assets. In general, it is MKIF s policy to ensure compliance by its assets within the regulatory framework and the minimum standards under which an asset operates. Through participation on the Boards of concession companies, MKIF representatives actively participate in the consideration of environmental issues. Each concession company provides regular reports to its Board on environmental matters, and this enables compliance with environmental requirements to be monitored and environmental and social responsibility issues to be identified and resolved on a timely basis. KEY ENVIRONMENTAL AND SOCIAL RESPONSIBILITY FACTORS Following a review of the specific regulatory requirements and concession agreements related to each asset, MKIF has identified its key environmental and social responsibility factors as: Air quality Noise and other pollution Waste management Landscaping Flora and fauna management Occupational health and safety Recruitment and business contracting compliance Community relations ENVIRONMENTAL AND SOCIAL RESPONSIBILITYRELATED REGULATORY REQUIREMENTS MKIF is not aware of any significant breaches of relevant environmental and social responsibilityrelated regulatory standards by its assets during the year ended 31 December ANNUAL REPORT 33

34 MACQUARIE KOREA INFRASTRUCTURE FUND NonConsolidated Financial Statements December 31, 2007 and 2008 Index Report of Independent Auditors Nonconsolidated Balance Sheets Nonconsolidated Statements of Income Nonconsolidated Statements of Changes in Shareholders Equity Nonconsolidated Statements of Cash Flows Notes to Nonconsolidated Financial Statements

35 Report of Independent Auditors Samil PricewaterhouseCoopers To the Shareholders and Board of Directors of MACQUARIE KOREA INFRASTRUCTURE FUND LS Yong San Tower 191 Hangangno 2go, Yongsangu Seoul , KOREA (Yongsan P.O. Box 266, ) We have audited the accompanying balance sheets of MACQUARIE KOREA INFRASTRUCTURE FUND (the Company) as of December 31, 2007 and 2008, and the related statements of income, changes in shareholders equity and cash flows for the years then ended, expressed in Korean won. These financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the Republic of Korea. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements, referred to above, present fairly, in all material respects, the financial position of MACQUARIE KOREA INFRASTRUCTURE FUND as of December 31, 2007 and 2008, and the results of its operations, the changes in its shareholders equity and its cash flows for the years then ended in conformity with accounting principles generally accepted in the Republic of Korea. The amounts expressed in U.S. dollar, which are provided solely for the convenience of the readers as described in Note 2(b) to the accompanying financial statements, do not form part of the nonconsolidated financial statements and are unaudited. Accounting principles and auditing standards and their application in practice vary among countries. The accompanying financial statements are not intended to present the financial position, results of operations, changes in shareholders equity and cash flows in conformity with accounting principles and practices generally accepted in countries and jurisdictions other than the Republic of Korea. In addition, the procedures and practices used in the Republic of Korea to audit such financial statements may differ from those generally accepted and applied in other countries. Accordingly, this report and the accompanying financial statements are for use by those who are informed about Korean accounting principles or auditing standards and their application in practice. Seoul, Korea February 4, 2009 This report is effective as of February 4, 2009, the audit report date. Certain subsequent events or circumstances, which may occur between the audit report date and the time of reading this report, could have a material impact on the accompanying financial statements and notes thereto. Accordingly, the readers of the audit report should understand that there is a possibility that the above audit report may have to be revised to reflect the impact of such subsequent events or circumstances, if any. Samil PricewaterhouseCoopers is the Korean member firm of the PricewaterhouseCoopers. PricewaterhouseCoopers refers to the network of member firms of PricewaterhouseCoopers international Limited, each of which is a separate and independent legal entity.

36 Nonconsolidated Balance Sheets MACQUARIE KOREA INFRASTRUCTURE FUND December 31, 2007 and 2008 (In thousands of Korean Won and U.S. dollars, except per share data) Assets Invested assets: Cash and deposits (notes 3 and 8) Loans receivable (notes 4 and 7) Equity securities (notes 6 and 9) Debt securities (note 6) \ 83,529,392 1,070,291, ,504,141 41,167,966 Won (thousands) \ 182,411,903 1,144,655, ,553,300 U.S. dollars (note 2(b)) $ 145,059, ,262, ,167,634 Total invested assets 1,668,492,814 1,929,620,891 1,534,489,774 Other assets: Interest receivable (notes 4 and 7) Other receivables Deferred costs, net (note 5) 148,289,652 54,808 8,153, ,031,079 2,427,455 7,752, ,261,295 1,930,382 6,164,792 Total other assets 156,497, ,210, ,356,469 Total assets \ 1,824,990,618 \ 2,099,831,651 $ 1,669,846,243 Liabilities and Shareholders Equity Liabilities: Accounts payable (note 6 and 20) Management fee payable (note 8) Other liabilities (notes 8 and 10) Longterm debts (notes 8 and 11) \ 121,258 8,138,823 1,023, ,008,618 \ 9,605,635 5,974,591 2,900, ,523,026 $ 7,638,675 4,751,166 2,306, ,793,660 Total liabilities 122,292, ,003, ,490,178 Commitments (note 20) Shareholders equity: Share capital no par value Authorized 4,000,000,000 shares; Issued and outstanding: 323,490,204 shares in 2007 and 2008 (note 8) Retained earnings Net asset value per share in Korean Won and U.S. dollars: \5,264 in 2007 and \5,381 ($4.28) in 2008 (note 17) 1,652,985,097 49,713,305 1,631,530, ,297,195 1,297,439,807 86,916,258 Total shareholders equity 1,702,698,402 1,740,827,752 1,384,356,065 Total liabilities and shareholders equity \ 1,824,990,618 \ 2,099,831,651 $ 1,669,846,243 See accompanying notes to the nonconsolidated financial statements. 36 MACQUARIE KOREA INFRASTRUCTURE FUND