Investments

US
The acquisition in the US of Balfour Beatty Communities (formerly GMH Military Housing) from GMH Communities for $350m in April 2008 was a major step in implementing our strategy of building a high-quality, domestic business in the US.

Balfour Beatty Communities is a market leader in the development, financing, operation and management of military accommodation PPP projects for the US Departments of the Army, Navy and Air Force.

Following the acquisition, Balfour Beatty Communities reached financial close on three concessions and acquired a further two concessions, and by the end of 2008 was responsible for 17 US military housing privatisation projects covering family housing at 44 military bases and one unaccompanied personnel project.

UK
Following the acquisition of 60% of Exeter International Airport in 2007, we acquired 95% of Blackpool International Airport in May 2008, as part of the strategy to extend our business into non-PPP investments.

UK
There remains a strong commitment to improve public services in the UK with PPP a key part of the procurement process and, despite financial issues in the market, we expect a steady flow of opportunities to continue, particularly in the education sector.

Inevitably, the market for the procurement of public services is changing and alternative PPP models and new public procurement models are emerging.

There will be opportunities to bid a number of schools projects in the UK in 2009 under the Building Schools for the Future (BSF) initiative. During 2008, Balfour Beatty achieved financial close on its first BSF project using a Local Educational Partnership (LEP) model, a new form of partnership with local education authorities, at Islington Schools.

In the UK healthcare market, there has been a reduction in the number of major hospital projects coming to market.

In the UK roads sector, Balfour Beatty has a strong record and the M25 widening scheme is expected to reach financial close in the first half of 2009.

Social housing, prisons, highways maintenance and fire and rescue are all potential new sectors for UK PPP.

US
The PPP (P3) market in the US is slowly evolving. Following the acquisition of Balfour Beatty Communities, the company is well-placed to win concessions for more of the remaining military family housing projects, along with the unaccompanied military personnel housing schemes currently being piloted.

Balfour Beatty is reviewing potential opportunities for new privatisation projects in the US for student accommodation and educational facilities, renewable energy, and social infrastructure projects such as hospitals and court houses.

Singapore
In Singapore, financial close was reached on the first accommodation-based PPP in the country, and we look forward to completing construction of the Institute of Technical Education in 2010.

Germany
We continue to evaluate opportunities in Germany and other parts of Europe.

In the UK, we have a leading position in the PPP market and will continue to pursue bidding opportunities which align with the Group’s competitive strengths. Balfour Beatty’s integrated capability in combining its engineering, construction and services skills, together with the strength of the balance sheet and track record of delivering successful PPP schemes, will continue to be a key differentiator.

In the US, Balfour Beatty Communities is the market leader in the most developed PPP market – military housing – and is well-positioned to leverage the Group’s expertise in winning further privatisation projects.

The skills acquired in PPP will continue to be applied to the wider infrastructure market, in particular where there are attractive opportunities to take management control and to improve the quality of assets in markets and sectors that are familiar to us.

Our PPP concession and non-PPP investment portfolio has grown both organically and through acquisition to become a very significant part of the Group’s business and a major driver of shareholder value.

Profit from continuing operations, before exceptional items and amortisation of intangible assets, increased by 94% to £31m (2007: £16m).

There was good underlying concession performance and a first contribution from Balfour Beatty Communities in the US. Acquired in April 2008, Balfour Beatty Communities is a major addition to our Investments business and performed well, in line with our expectations at the time of acquisition. The acquisition secured a reliable, long-term profit and cash flow from a high-quality portfolio of PPP military housing concessions, as well as an experienced and successful management team to develop our presence in the growing US PPP market.

We reached financial close on phase 1 of the £150m Islington Schools for the Future PPP concession. In Singapore, Gammon Capital, our PPP joint venture in South-East Asia, reached financial close for the new Institute of Technical Education (ITE) College West.

Preferred bidder status was achieved by Connect Plus, a consortium in which we have a 40% shareholding, for the PPP contract to provide additional capacity and maintain the M25. We were also appointed preferred bidder for the £200m Southwark Schools for the Future programme.

The strong performance of Barking Power continued, driven by the beneficial impact of electricity prices on its revenue and also boosted by insurance recoveries following a generator outage in 2007.

Our strategy to extend our infrastructure investment business beyond the UK PPP market, which began with the acquisition of Exeter International Airport in 2007, continued in May 2008 with the acquisition of Blackpool International Airport. As is the case with Exeter, Blackpool is a well-located regional airport with long-term growth potential.

In total, at 31 December 2008, we had committed equity and subordinated debt of £516m across 47 PPP concessions, four of which were at preferred bidder stage.

Using a single discount rate of 8.0% nominal post-shareholder tax, the 2008 directors’ valuation of the Group’s PPP portfolio stands at £556m (2007 restated: £306m). A full explanation of the PPP valuation is on pages 6 to 8 of the Directors’ report and accounts 2008 (PDF 1.8MB).

Financial close is anticipated on three preferred bidder PPP projects in the UK – the M25 widening and two other schemes – in the first half of 2009.

There is a healthy pipeline of UK projects and we expect increased bidding activity in 2009, especially for schools projects.

In the US military housing market, the long-term nature of our contracts provides strong visibility of earnings and there are further business development opportunities both within and outside the military accommodation PPP market.

While the current economic environment presents challenges for project financing, we remain confident about the future and anticipate further growth.