Babcock & Brown Public Partnerships Limited

Half yearly financial report for the six months ended 30 June 2008

Highlights

• Continued resilient performance during 2008 - outperforming the FTSE All-Share by 10.7%

• First-half distribution of 2.7 pence per share fully covered by operating cash flow. Target for distribution over the full-year of 5.4 pence

• Increase in value from derisking and management initiatives offset by strong increase in risk free rates

• 6 new investments made in first-half. Continued diversification by asset class and geography

• Average debt term of 25 years and average concession length 26 years ensuring strong protection from movements in interest rates and current credit conditions

Financial Highlights

Keith Dorrian, Chairman of the Board, said; 

"I am pleased to report that despite the significant recent turbulence in capital markets, the Company is performing well and in line with expectations. The first half has been an active period with six acquisitions and a C-share capital raising that has already been substantially invested and the investment pipeline remains strong. The Board is now looking forward to the remainder of 2008 with confidence that the Company's progress to date can be maintained despite the continuing uncertainty pervading investment markets at the current time. "

For further information, please contact:

Babcock & Brown Investment Management Limited - +44 (0) 20 7203 7300

Investors - Bianca Francis

Media - Anthony Kennaway

1    Uncommitted cash available for investment is the balance of cash that is unrestricted and is available to the Group for investment and excludes any undrawn amount available under the corporate debt facility.

2     The Net Asset Value ("NAV") referred to above and on pages 3 and 10 differs from the basis of recording net assets as set out in the balance sheet included in the condensed financial statements. Net Asset Value as shown above is a fair market valuation of the Group's economic interests (note 4), calculated utilising discounted cash flow methodology, adjusted for European Private Equity and Venture Capital Association (EVCA) guidelines, a methodology considered appropriate, given the special nature of infrastructure investments. Estimated future cash flows accruing to each economic interest have been discounted using discount rates that reflect the risks associated with that interest.

The only current exception to this methodology is with respect to the valuation of the following:

• Stapled units in RiverCity Motorway project,  valued using the closing share price at 30 June 2008 ('market value'),

• Royal Children's Hospital, Victoria, Australia, valued at acquisition price as purchased on 26 June 2008.

The Net Asset Value also includes cash, cash equivalents and assets and liabilities attributable to the Company and intermediate holding companies at 30 June 2008.

3     The Net Asset Value per Ordinary Share is for the period 31 December 2006 to 30 June 2007 as a full year comparison is not available as the company was incorporated on 2 August 2006.

        4    The Group's economic interests at 30 June 2008 are set out in the Portfolio Interests section of this half yearly financial report.

Chairman's Statement

The first half of 2008 was characterised by some of the most turbulent market conditions experienced for many years. Against this backdrop of general share price volatility it is especially pleasing to report that the Company continued to meet its projections, had a successful six month period of performance, successfully raised new capital and maintained a stable share price.

The Company outperformed the FTSE All Share index by 10.65 per cent in the period 1 January to 30 June 2008 and continues to pay dividends in line with expectations.

The Company enjoyed a very active period to 30 June 2008 investing in a series of new public infrastructure investments and raising approximately £84 million of additional capital through a C share issue. Again it is very pleasing to note that as a result of our policy of continuing to identify, research and review market opportunities to add to our pipeline of investments, the new capital was substantially invested ahead of schedule and the C shares converted into ordinary shares shortly before the end of the half year period.

It is now clear that investment in public infrastructure projects that are underpinned by long term contracted cashflows payable by public bodies are becoming a firmly established asset class combining significant growth prospects uncorrelated to, and with lower share price volatility, than other assets classes - a trend that has been amply demonstrated over this half year period.

Financial results for the period

On a consolidated basis the Group reported a profit before tax of £6.3 million for the period and basic earnings per share of 1.55 pence. The Net Asset Value (NAV) of the Group's investments is valued at £410.5 million, which on a per share basis, represents a slight decrease of 0.5% since 31 December 2007. It is worth noting that this result has been achieved notwithstanding an increase in the weighted average risk free rate (which is an important component of the NAV calculation) from 4.54% to 5.23% over the period.

Distributions

The Directors are targeting a distribution payment of 5.4 pence per share for the period 1 January 2008 to 31 December 2008. Accordingly the Directors have approved an interim distribution of 2.7 pence per share which will be paid on 3 October 2008 to shareholders on the register as at 5 September 2008. Going forward, it remains the Company's desire to maintain the prospective dividend in real terms.

Gearing

As at 30 June 2008 the Company had negotiated a committed £100 million loan facility from the Royal Bank of Scotland plc and NAB Capital Limited. The Company had utilised £25 million of this facility as at that date. The current intention of the Board is not to maintain long term corporate debt within the Company but to use debt at the corporate level to finance the acquisition of attractive investment opportunities for the Company at times when insufficient equity capital is available. All other borrowings of the Group relate to the underlying project vehicles and are non-recourse to Group entities except the project vehicle to which the borrowing applies.

Related party transactions  

Related party transactions are disclosed in note 19 to the condensed set of Financial Statements. The Company has continued to benefit from investment opportunities sourced and developed by Babcock & Brown the parent group of the Company's investment adviser, Babcock & Brown Investment Management Limited.

Outlook

The Board believes that the Company's outlook is very positive. The Company's existing portfolio is performing well and additional benefits from activities such as variations to contracts are adding value to the portfolio. The higher inflationary environment that now seems likely to be a feature of many economies in the medium term is also likely to benefit projected future investment returns. As mentioned previously the Board and its Advisors continue to review a significant pipeline of new acquisition opportunities on an ongoing basis, thus ensuring the Company maintains the ability to expand. Initiatives such as public private partnerships are becoming increasingly attractive financing vehicles in the more mature economies throughout the developed world including substantially increased activity in North America. As a Board, we believe that the Company continues to have the opportunity to grow through the acquisition of well priced investments which will be accretive to projected returns. Growth of the Company will in the Board's view be beneficial in providing opportunities for further economies of scale with respect to operating costs and should increase liquidity in the Company's shares.

We look forward to the remaining half of 2008 with confidence that the Company's progress to date can be maintained despite the continuing uncertainty pervading investment markets at the current time.

Keith Dorrian

Chairman

28 August 2008

Portfolio Interests 

The Company held economic interests1 in the following projects at 30 June 2008 as set out below.

The Company also owns subordinated debt provided to finance certain projects developed under the NHS LIFT initiative as set out below. The Company's interests in NHS LIFT subordinated debt are estimated to comprise approximately 5% by value of the portfolio. 

A graphic portfolio breakdown section exists in this position in the main press release available on the website but not publishable on the RNS system.

Investment Advisor's Report

Introduction

About the Investment Advisor 

Babcock & Brown Investment Management Ltd (BBIML) is a wholly owned subsidiary of Babcock & Brown Limited, a global investment and advisory firm with longstanding capabilities in structured finance and the creation, syndication and management of asset and cash flow based investments. Babcock & Brown was founded in 1977 and is listed on the Australian Stock Exchange. BBIML acts as Investment Advisor to the Company and as Operator of Babcock & Brown Public Partnerships LP (BBPP LP). BBIML was incorporated in England and Wales on 14 August 2000 and is authorised and regulated by the Financial Services Authority. 

Portfolio Investment Performance

The assets within the Portfolio again performed ahead of the Company's projections during the period. The Portfolio continues to be actively managed. Highlights over the six month period include:

• Northampton Schools Variation - The Company reached agreement with Northamptonshire City Council for the inclusion of a new special education needs school into the existing 41 school PFI scheme. The variation comprises the demolition of an existing site and the construction of a new community special school for 85 students.

• Insurance Cost Savings - Negotiation of further insurance cost savings resulting in approximately a 20% reduction in like for like insurance per annum.

• Construction Completions - Completion of the final sites at Northampton Schools (excluding the variation mentioned above) is on track for delivery in September 2008. This will mark the completion of construction of the 41 school project, which has been delivered on time and on budget. The construction of a new secondary school in Maesteg in South Wales was also completed in July 2008.

• Additional asset management staff - With the acquisition of six further assets this period (outlined below), BBIML has expanded its BBPP dedicated asset management team which now includes 16 full time staff responsible for looking after the assets within the Company's 48-strong portfolio. The asset management team continues to work on a number of operational initiatives designed to enhance the long-term performance of the portfolio.

Acquisitions

The Company acquired a number of economic interests over the period 1 January to 30 June 2008. These acquisitions consisted of:

• Orange Hospital - The Group acquired 100% of the economic interest in the equity of this significant hospital re-development located in rural New South Wales, Australia. The project is in construction.

• Royal Children's Hospital - The Group also acquired 100% of the economic interest in the equity of this major development project in Melbourne, Victoria, Australia. This project is also in construction.

• UK Regional LIFT - The Group acquired a portfolio of eight subordinated debt investments relating to health facilities developed under the NHS LIFT initiative in various regions within the UK. The portfolio includes two construction and six operational projects.

• East London LIFT - The Group also acquired a further portfolio of seven subordinated debt investments (and equity) in LIFT projects located in the London Boroughs of Tower Hamlets, Newham and Hackney.

• Brescia Hospital - The Group acquired 24% of the economic interest in the equity of Brescia Hospital in Italy which represents the Company's first investment in the Italian market. The project is operational.

• Diabolo. The Group acquired a further 27.5% of the economic interest in the equity of the Diabolo project which is a public infrastructure project to provide new rail access to Brussels airport. The Company now has a majority position in this project which is in construction. 

Also within the half year period the Company announced that it had entered into a conditional contract to acquire an interest in the UK business of Angel Trains, a major provider of rolling stock to the UK's railways. Completion of this noteworthy transaction occurred on 5 August 2008 and is therefore not included in the NAV calculation as at 30 June 2008.

Valuation and Net Asset Valuation Calculation

The Administrator (Heritage International Fund Managers Limited) calculates the Net Asset Value (NAV) of an Ordinary Share with the assistance of BBIML, who produce fair market valuations of the Group's investments on a six-monthly basis as at 30 June and 31 December. 

While the Company's Net Asset Value was broadly flat through the period the satisfactory performance of the underlying portfolio was offset by the worldwide increase in government bond rates impacting negatively on the NAV.

The Company's NAV is calculated by valuing the projected cashflows from the Company's underlying assets utilising the discounted cashflow methodology as detailed on page 2. The discount rate utilised for each asset for this purpose is the aggregate of the risk free rate in the relevant country plus an appropriate additional risk premium applicable to that asset. The risk premium applied by the Directors of the Company in valuing the Company's economic interest is based on the advice of the Investment Advisor, market knowledge and information in the public domain from comparable transactions.

Over the period the average weighted risk free rate applicable across the portfolio increased by 0.7% while the average weighted additional risk premium of the portfolio reduced by 0.1% reflecting the accretive nature of acquisitions, the increasing maturity of the portfolio and several significant projects nearing construction completion.

The discount rates used for valuing each of the Group's economic interests in the Portfolio as at 30 June 2008 range from 6.96 to 10.0% and the weighted average discount rate is 8.06%. This compares to the position as at 31 December 2007 when the weighted average discount rate utilised for valuation purposes was 7.5%.

The Company's portfolio was valued at £410.5 million at 30 June 2008, up from £330.4 million at 31 December 2007. This increase takes into account the additional capital raising and the subsequent deployment of that capital that occurred within the period.

Capital Initiatives

The Company completed a capital raising through a C share issue in April 2008. The proceeds of this issue were £84 million and provided the Company with additional capital to invest in further investments in public infrastructure assets. On 24 June 2008 the Company announced that the proceeds of this raising had been substantially invested and that the conditions for conversion of the C shares into ordinary shares in the Company had been met. The conversion took place on 30 June 2008. The Company now has 374,714,645 Ordinary shares in issue.

Borrowing

As at 30 June 2008 the Company had in place a £100 million debt facility with Royal Bank of Scotland plc and NAB Capital. An amount of £25 million has been used to partly fund one of the acquisitions that occurred in the period. The stated intention of the Company is not to maintain long term corporate debt within the Company but to use debt at the corporate level to finance the acquisition of attractive investment opportunities for the Company at times when equity capital is less freely available. The Company has no further gearing.

Borrowings of the Group referred to in the Consolidated Financial Statements also include the underlying project level debt which is non-recourse to Group entities except the project vehicle to which the borrowing applies.

Risks and uncertainties 

There are a number of potential risks and uncertainties which could have a material impact on the Group's performance over the remaining six months of the financial year and could cause actual results to differ materially from expected and historical results. Further information on the principal long-term risks and uncertainties of the Group, which remain unchanged from the previous year end, are included in our latest annual report on pages 50 to 52.

The Company and its assets are managed in ways that are designed to mitigate risks and to provide high levels of confidence to investors as to the availability of project cashflows to enable payment of anticipated dividends. The Company's business model does not depend on growth or borrowing in order for anticipated dividends to be paid.

Indeed the Company currently enjoys projected excess cashflow from underlying investments over that anticipated to be required to pay targeted levels of dividends. Such excess is available for re-investment.

As indicated above the Company's NAV is calculated half yearly and its calculation is dependent in part on movement in risk free rates (ie government bond yields) from time to time in the territories where the Company has investments. The Company is unable to influence changes in such rates.

Inflation also may affect the Company's projected returns either in a positive or negative manner: generally higher inflation should have a net positive effect on cashflows arising from a number of the Company's investments.

Finally while the operational performance of the Company's portfolio is currently good, the possibility of an unanticipated deterioration in performance in one or more projects can never be excluded with the possible consequence that cashflow from investments to the Company is adversely affected.

Outlook

The Investment Adviser believes that the outlook for investors is positive. This is for the following reasons:

• Firstly, investment performance from the existing asset portfolio is good and the Company continues to project returns at levels consistent with projections and hopefully at levels ahead of these.

• Secondly, the Company has made a number of well priced acquisitions over the half year period and is again substantially fully invested. It is anticipated that these acquisitions will bring accretive benefits to the Company and its investment performance.

• Thirdly, the Company continues to be aware of and receive high quality opportunities to invest in attractive public infrastructure investments in developed countries around the world. These are arising both as a result of the continued access provided to the Company to opportunities created through the development activities of Babcock & Brown and through transactions sourced independently by the BBIML management team.

• Fourthly, the worldwide market for public infrastructure assets is growing as initiatives such as public private partnerships and private finance initiative type procurements are adopted by more and more public authorities in developed countries around the world. This growth, which is particularly marked in North America, seems likely to offer good opportunities to continue to acquire well priced investments and thus offer continued growth and geographic diversification for investors. 

• Finally, as the outlook for the investment performance of many other asset classes remains gloomy it is likely that the attractions of investment into assets that benefit predominantly from long term public sector backed cashflows and whose performance can be shown to be largely un-correlated with other asset classes will grow.

As a result, we continue to believe that the Company's pipeline of investment opportunities, together with the ongoing focus on driving performance of the existing assets, will provide good performance for the Company's investors.

Babcock & Brown Investment Management Limited

28 August 2008

Independent Review Report to the Members of Babcock & Brown Public Partnerships Limited

Introduction

We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2008 which comprise the condensed consolidated income statement, the condensed consolidated statement of changes in equity, the condensed consolidated balance sheet, the condensed consolidated cash flow statement and related notes 1 to 19. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the financial information.

This report is made solely to the company in accordance with International Standard on Review Engagements 2410 issued by the Auditing Practices Board. Our work has been undertaken so that we might state to the company those matters we are required to state to them in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our review work, for this report, or for the conclusions we have formed.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.

As disclosed in note 2, the annual financial statements of the group are prepared in accordance with IFRS.  The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34 'Interim Financial Reporting'. 

Our responsibility

Our responsibility is to express to the company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review. 

Scope of Review 

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2008 is not prepared, in all material respects, in accordance with International Accounting Standard 34 and the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority. 

Deloitte & Touche LLP

Chartered Accountants

Guernsey, Channel Islands

28 August 2008

Condensed Consolidated Income Statement (unaudited) 

Six months ended 30 June 2008