10
MACQUARIE SHINHAN INFRASTRUCTURE MANAGEMENT KOREAN ROAD INFRASTRUCTURE FUND INTERIM REPORT FOR THE PERIOD ENDED JUNE 30, 2004 Disclaimer MSIM is the manager of KRIF. MSIM is owned by a Macquarie Bank Limited subsidiary, Macquarie Internationale Holdings Ltd, Shinhan Bank and Shinhan Capital Co., Ltd (“Shinhan”). Investments in KRIF are not deposits with or liabilities of Macquarie Bank Limited, or any member in the Macquarie Bank Group (“Macquarie”) and are subject to investment risk, including possible delays in repayment and loss of income and capital invested. Neither MSIM, nor Macquarie guarantees the performance of KRIF, the repayment of capital or the payment of a particular rate of return on KRIF securities. This interim report is only for information purposes and will not override the various reports produced as required under legislation which should be the prevailing documents for legal reporting purposes. Advice warning This interim report is not an offer or invitation for subscription or purchase of or a recommendation of securities. It does not take into account the investment objectives, financial situation and particular needs of the investor. Before making an investment in KRIF, the investor or prospective investor should consider whether such an investment is appropriate to their particular investment needs, objectives and financial circumstances and consult an investment adviser if necessary. Management fees MSIM is entitled to fees for acting as manager of KRIF. Financial statements The financial statements have been prepared by Abrain Fund Services, KRIF’s fund administrator, to enable KRIF to comply with its obligations under the Securities Investment Company Act and satisfy the requirements of Korean generally accepted accounting standards. This interim report includes the financial statements and audit report for KRIF for the period ended June 30, 2004. Directory Macquarie Shinhan Infrastructure Management Co., Ltd. 9th Floor, Hanwha Building 110 Sokong-Dong, Chung-Ku Seoul, 100-755, Korea Telephone (Korea) 02 3705 8500 Telephone (int’l) 822 3705 8500 Facsimile 02 3705 8596 Email: [email protected] Website: http://www.macquarie.com/kr/en/krif/index.html KRIF INTERIM REPORT 02 Representative Director’s Report 04 Half Year In Review 06 New Acquisitions Baekyang Tunnel 07 Machang Bridge 08 Portfolio Review Kwangju 2nd Beltway, Section 1 Daegu-Busan Expressway 09 Incheon International Airport Expressway Woomyunsan Tunnel 10 Asset Locations 11 Portfolio Summary Asset Weightings Asset Profiles 12 Net Asset Value Analysis Net Asset Value Growth Net Asset Value Summary 13 Statutory Auditor Report / Financial Statements

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Page 1: KOREAN ROAD INFRASTRUCTURE FUND - Macquarie … · KOREAN ROAD INFRASTRUCTURE FUND ... 30, 2004, KRIF’s strategy has remained the same: to acquire, operate and ... (“BTL”),

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DisclaimerMSIM is the manager of KRIF. MSIM is owned by a Macquarie Bank Limitedsubsidiary, Macquarie Internationale Holdings Ltd, Shinhan Bank and ShinhanCapital Co., Ltd (“Shinhan”).

Investments in KRIF are not deposits with or liabilities of Macquarie BankLimited, or any member in the Macquarie Bank Group (“Macquarie”) and aresubject to investment risk, including possible delays in repayment and loss ofincome and capital invested. Neither MSIM, nor Macquarie guarantees theperformance of KRIF, the repayment of capital or the payment of a particularrate of return on KRIF securities.

This interim report is only for information purposes and will not override thevarious reports produced as required under legislation which should be theprevailing documents for legal reporting purposes.

Advice warningThis interim report is not an offer or invitation for subscription or purchase of ora recommendation of securities. It does not take into account the investmentobjectives, financial situation and particular needs of the investor.

Before making an investment in KRIF, the investor or prospective investorshould consider whether such an investment is appropriate to their particularinvestment needs, objectives and financial circumstances and consult aninvestment adviser if necessary.

Management feesMSIM is entitled to fees for acting as manager of KRIF.

Financial statementsThe financial statements have been prepared by Abrain FundServices, KRIF’s fund administrator, to enable KRIF to complywith its obligations under the Securities Investment CompanyAct and satisfy the requirements of Korean generally acceptedaccounting standards.

This interim report includes the financial statements and auditreport for KRIF for the period ended June 30, 2004.

DirectoryMacquarie Shinhan Infrastructure Management Co., Ltd.9th Floor, Hanwha Building110 Sokong-Dong, Chung-KuSeoul, 100-755, KoreaTelephone (Korea) 02 3705 8500Telephone (int’l) 822 3705 8500Facsimile 02 3705 8596Email: [email protected]: http://www.macquarie.com/kr/en/krif/index.html

KRIFINTERIMREPORT

02 Representative Director’s Report04 Half Year In Review06 New Acquisitions

Baekyang Tunnel07 Machang Bridge08 Portfolio Review

Kwangju 2nd Beltway, Section 1Daegu-Busan Expressway

09 Incheon International Airport ExpresswayWoomyunsan Tunnel

10 Asset Locations11 Portfolio Summary

Asset WeightingsAsset Profiles

12 Net Asset Value AnalysisNet Asset Value GrowthNet Asset Value Summary

13 Statutory Auditor Report / Financial Statements

Page 2: KOREAN ROAD INFRASTRUCTURE FUND - Macquarie … · KOREAN ROAD INFRASTRUCTURE FUND ... 30, 2004, KRIF’s strategy has remained the same: to acquire, operate and ... (“BTL”),

payment schedule of current and future

revenue guarantee payments owed.

- Woomyunsan Tunnel’s initial traffic

levels were significantly below original

estimates due to the sharp increase in

the toll rate upon commencement

(from KRW 800 to KRW 2,000)

imposed by Seoul Metropolitan City

(“SMC”). Together with the project’s

sellers, KRIF continues to negotiate

new concession agreement terms with

SMC, with a favourable outcome

expected in the next financial year.

KRIF will not complete this transaction

until satisfactory terms have been

negotiated.

- As at June 30, 2004 the net interest

that has accrued on KRIF’s converting

bonds in Daegu-Busan Expressway

Co., Ltd. (“DBEC”) is KRW 2.14 billion.

The project construction remains on

schedule and the road is due to open

in February 2006.

Financial HighlightsThe company produced a net profit of

KRW 13.75 billion for the fiscal period

ended June 30, 2004.

During the June fiscal period, KRIF

issued new shares to investors to raise

an additional KRW 143 billion in capital.

As at June 30, 2004, KRIF’s share

capital was KRW 333 billion with

65,290,905 shares issued.

KRIF will be paying shareholders a

dividend of KRW 13.89 billion for the

fiscal period ended June 30, 2004. At

the Ordinary General Shareholders’

Meeting (“GSM”) to be held on

September 10, 2004, shareholders will

vote on the issuance of the dividend.

The Korean Road Infrastructure Fund’s

(“KRIF”) portfolio of toll road

investments now includes interests in 6

toll roads, tunnels and bridges around

South Korea. In the six months to June

30, 2004, KRIF’s strategy has remained

the same: to acquire, operate and

develop toll road concessions.

Throughout this period, the staff of

Macquarie Shinhan Infrastructure

Management Co., Ltd (“MSIM”) have

continued to evaluate new toll road

opportunities and enhance the value of

KRIF’s portfolio of assets. This has

included optimisation of KRIF’s project

financing structures, the overseeing of

project development, construction

programs and tolling operations, and

the negotiation of agreements and

contracts with Government bodies and

other counterparties.

In April, MSIM held a seminar and

conference series for the shareholders

of KRIF. These sessions informed

KRIF shareholders about KRIF’s

acquisition program and asset

management initiatives. These sessions

also enabled KRIF shareholders to

share their views on KRIF’s current

activities and future direction.

Portfolio reviewKRIF experienced several key events

during the past half year period:

- As at June 30, 2004, KRIF’s total

investment commitments including

acquisition expenses stood at KRW 469

billion, representing 74 % of investors’

total capital commitments of KRW 630.2

billion. This was an increase from KRW

241 billion of investment commitments

(including acquisition expenses) as at

December 31, 2003.

- In March, 2004, KRIF completed the

project financing documents for

Machang Bridge project and became

the first financial investor to participate

in a greenfield toll road project in

Korea. KRIF’s total investment in this

project, through equity and

subordinated debt funding, is KRW

79.1 billion to be injected/drawn down

over the 50-month construction period.

Construction commenced in April 2004

and is currently on schedule. KRIF has

completed two equity and

subordinated debt injections as of

June 30, 2004.

- Also in March 2004, KRIF acquired

99.2% of one of the strongest private

toll road concessions in Korea, being

that of Baekyang Tunnel in Busan, for

KRW125.4 billion. The Tunnel has

been operating above the concession’s

revenue support level from the

government for a number of years.

Traffic and revenue figures during the

first half of 2004 continue to make the

Tunnel one of the best performing toll

road concessions in Korea. The

project was acquired without the use of

third party senior debt and produces

particularly strong cash yields for KRIF.

- The period also saw some strong

traffic increases at Incheon

International Airport Expressway

compared to the first half of 2003.

KRIF acquired 25% of the shares of

New Airport Hiway Co., Ltd. (“NAHC”),

the concession holder of Incheon

International Airport Expressway, in

December 2003 for KRW 114 billion,

with the transaction subject to final

government approval.

- Traffic at Kwangju 2nd Beltway,

Section 1 has been lower than

expected during the first half of 2004

with adjacent construction works and

macro-economic influences such as

rising oil prices thought to be having

particular effect. Revenue levels are

however guaranteed by Kwangju

Metropolitan City (“KMC”) and

shortfalls will be compensated in due

course. As at June 30, 2004, the

revenue guarantee payment for 2002

with respect to this project is still

outstanding from KMC. However

significant progress has been made in

the negotiations with KMC and

payment is expected in the next

financial year. The agreement with

KMC is expected to provide a tighter

2 KRIF INTERIM REPORT 2004 |MACQUARIE SHINHAN INFRASTRUCTURE MANAGEMENT MACQUARIE SHINHAN INFRASTRUCTURE MANAGEMENT | KRIF INTERIM REPORT 2004 3

Representative Director’s Report

The dividend will then be paid to

shareholders within a month of being

approved.

MSIM DevelopmentsMr Richard Timbs of Macquarie Bank in

Sydney has been supporting MSIM as

Head of Investments. Mr Timbs has

worked in Macquarie Bank’s

infrastructure team since 1997. He

brings a strong track record of having

completed deals in Korea and globally.

MSIM and KRIF are fortunate to have

him committed to securing and executing

more toll road investment transactions.

OutlookIn the period to December 31, 2004,

KRIF will be particularly focussed on:

�Completing the fourth fund raising

program scheduled to close in July.

�Completing new investments into

additional PPI concessions in Korea

to broaden and strengthen KRIF’s

existing portfolio.

�Ensuring the best possible

operational and financial

management of KRIF’s existing

interests.

�Enhancing revenue growth through

review of traffic and implementation

of technology upgrades; and

�Appointing a new Independent

Director to KRIF to further enhance

the culture of strong and independent

corporate governance.

The Boards of KRIF and MSIM are

confident of KRIF’s ability to maintain its

strategy of growth in the Korean market

and performance in relation to its

existing portfolio of infrastructure

assets.

On behalf of the Board of Directors of

KRIF, I would like to thank the

shareholders for their continuing

support.

Yours faithfully,

Nick van Gelder

Representative Director

Korean Road Infrastructure Fund

Page 3: KOREAN ROAD INFRASTRUCTURE FUND - Macquarie … · KOREAN ROAD INFRASTRUCTURE FUND ... 30, 2004, KRIF’s strategy has remained the same: to acquire, operate and ... (“BTL”),

Kwangju Beltway Investment Co., Ltd(“KBICL”) completed and funded theremaining ancillary works on the Kwangju 2ndBeltway, Section 1 that started in the secondhalf of 2003. Replacement of cables,improvements to CCTV camera coverage,slope stability works and improvements to

outdoor structures were all undertaken and successfullycompleted.

On March 10, KRIF completed the acquisition of 99.2% ofthe equity in and subordinated debt of Baekyang TunnelLtd, the concessionaire of the Baekyang Tunnel, in Busan.KRW 125.4 billion was invested by KRIF into this projectwith a mix of shareholder’s loans (predominant) andequity.

On March 10, KRIF held a GSM to approve the financialstatements and the payment of dividends in relation to thefiscal period ended December 31, 2003.

On March 12, KRIF signed the financing documents toprovide 49% of the equity and all of the subordinated debtrequired to fund the development of the Machang Bridge project.

After receiving approval from shareholders at the GSM held in March, dividends amounting toKRW 3.2 billion in relation to the fiscal period ending December 31, 2003 were paid to KRIFshareholders on March 19, 2004.

46

KRIF held its 2004 seminar in Miyazaki, Japan during

the third and fourth weekends of April. Investors

participated in discussion sessions and presentations

along with MSIM staff. Investors provided important

comments during the various sessions that will be

applied in KRIF’s future business endeavours.

On April 15, MCB Co., Ltd. (“MCB”), the concessionaire

of Machang Bridge, officially commenced construction

of the project.

The first drawdown from Machang Bridge equity and

debt providers was successfully completed on June 1,

with MSIM working closely with MCB and the lenders

to ensure that the conditions precedent were

completed on time.

On June 23, NAHC, the concessionaire of the Incheon

International Airport Expressway, received a payment of

KRW 105 billion from the Ministry of Construction and

Transportation for the revenue shortfall experienced

during 2003.

12

3

Construction progress of the Daegu-Busan Expressway reached the milestone ofbeing 60% complete. The cost and construction programmes were both in linewith the project’s schedule. The Expressway is expected to be completed byFebruary 2006.

On February 28, KRIF signed an exclusive sale and purchase agreement for theacquisition of the Cheonan-Nonsan Expressway, an 81 km toll road that has beenoperating since 2002. There are several outstanding conditions precedent to thistransaction in KRIF’s favour and KRIF’s Investment Committee will be providedwith full details of this investment in due course.

JANUARY

FEBRUARY

JUNE

APRIL

MARCH

4 KRIF INTERIM REPORT 2004 |MACQUARIE SHINHAN INFRASTRUCTURE MANAGEMENT MACQUARIE SHINHAN INFRASTRUCTURE MANAGEMENT | KRIF INTERIM REPORT 2004 5

Half Year in Review

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6 KRIF INTERIM REPORT 2004 |MACQUARIE SHINHAN INFRASTRUCTURE MANAGEMENT MACQUARIE SHINHAN INFRASTRUCTURE MANAGEMENT | KRIF INTERIM REPORT 2004 7

Asset DataOn March 10, 2004 KRIF purchased a 99.2 % interest in the

equity and subordinated debt of Baekyang Tunnel Co., Ltd.

(“BTL”), the owner of the concession right to the Baekyang

Tunnel in Busan.

cash compensation on terms to be agreed.

BTL has also begun to review how it can make its tolling

operations more efficient and more advanced. Transtoll Co.,

Ltd of Australia, an expert company in tolling technology,

reviewed BTL’s operations in April and has made several

recommendations that are to be implemented. Electronic

tolling is also being evaluated in consideration of Korea

Highway Corporation’s national roll out of its own system.

DistributionsAs anticipated at the time of investment into BTL, distributions to

KRIF have begun with interest payments in relation to KRIF’s

loan to BTL. As of June 30, 2004 KRIF has received KRW 4.07

billion in interest payments from BTL.

ValuationThe valuation of KRIF’s investment in BTL on June 30, 2004 is

KRW 125.4 billion. The valuation is at cost, and does not reflect

any revaluation or capitalised investment costs.

OutlookTraffic is expected to continue to grow throughout 2004. The

Tunnel is heavily patronised by regular commuter traffic.

Given the relatively fixed nature of operating costs, traffic and

revenue increases have resulted in a strong operating margin

and based on future traffic growth, this should continue to

improve. Looking forward, the Tunnel is expected to benefit from

the opening of the Daegu-Busan Expressway in early 2006.

New Acquisitions

2004 PerformanceSince being acquired by KRIF in March 2004, Baekyang

Tunnel’s operations have continued smoothly. Monthly revenue

for 2004, up to June 30, has been steady and is slightly above

the cumulative revenue collected during the first half of 2003.

In accordance with the concession agreement, BTL is

performing above the revenue guarantee level and is not

expected to receive any government support. The Tunnel is

one of the strongest performing private toll road assets in Korea.

Operation and maintenance costs are fixed with a contract

between BTL and Daewoo Engineering and Construction,

which is back-to-back sub-contracted to Korea Road

Management, a Daewoo subsidiary.

Business InitiativesManagement’s focus since acquisition has been on developing

key relationships, particularly with Busan Metropolitan City

(“BMC”). Following joint discussions, BMC is expected to

approve BTL’s request to receive compensation payments for

the applicable toll rates that have not been increased for the

2004 period. This is expected to take the form of BTL receiving

2004 ProgressThe Machang Bridge project commenced construction on April15, 2004. As of June 30, 2004, two drawdowns have beencompleted with KRW 999 million in equity funding and KRW1.35 billion in subordinated loans being provided. Thisrepresents approximately 2.95% of KRIF’s equity andsubordinated debt commitments throughout the constructionperiod.

KRIF and the senior lenders to the Machang Bridge projecthave retained the services of an independent engineer to reviewthe progress, work schedules, bills of quantities and quality ofconstruction throughout the construction period of 50 months.

DistributionsDuring the construction period, MCB is scheduled to makepayment of 50% of the interest bearing on the subordinateddebt facility provided by KRIF. These interest payments are tobe made in quarterly instalments. As of June 30, 2004, KRIFhas not received any distributions from MCB. The firstpayment of subordinated debt interest is expected onSeptember 1, 2004.

On June 2, 2004 MCB made an underwriting fee payment toKRIF of KRW 3.5 billion in relation to the subordinated debtfacility provided by KRIF for this project.

ValuationThe total valuation of the equity held by KRIF and subordinateddebt extended to MCB on June 30, 2004 is KRW 2.353 billion.The valuation is at cost, and does not reflect any revaluation.

2004 OutlookStage 1 of construction of the project progresses in line withexpectations and project completion is expected by February2008. Stage 2 design has been approved by the designsupervisor and has been reviewed by the independentengineer. The design was submitted to the relevant authority,Gyungsangnam-do Provincial Government in July 2004.

KRIF will look to increase its holding in MCB through furtheracquisitions of equity from current sponsors upon completion ofconstruction.

Asset DataOn March 12, 2004, KRIF signed the credit facilities agreement,which signalled the successful completion of financing for theMachang Bridge project. KRIF is both an equity investor and asubordinated lender to MCB (the concessionaire) for KRW 27.85billion and KRW 51.26 billion respectively. KRIF’s investmentinto the Machang Bridge project will be drawn down over the 50month construction period.Date Purchased by KRIF

Asset Class, Location

% equity owned by KRIF

Investment cost (including transaction costs)

Project Enterprise Value

KRIF Investment (Equity & Sub-debt)

Toll Revenue (from January 1 - June 30, 2004)

Relevant Authority

Toll tunnel, Busan

99.2 %

KRW 128.8 billion

KRW 126.4 billion

KRW 125.4 billion

KRW 8.28 billion

Busan Metropolitan City Government

March 10, 2004

Baekyang Tunnel Machang Bridge

Date of Investment Commitment by KRIF

Asset Class, Location

Nature of KRIF Investment

Investment cost (total commitment up to completion and including sponsor takeout and investment costs)

Project Enterprise Value (upon completion)

Senior Debt (including stand-by facility)

Subordinated Debt

Equity (Sponsors 51%, KRIF 49%)

Government subsidy

Total Contract cost (incl. Construction, Design)

2004 Revenue

Revelant Authority

March 12, 2004

Toll bridge, Masan Bay, Gyungsangnam-do

Equity and Subordinated Debt

KRW 58.2 billion

KRW 330.8 billion

KRW 222.0 billion

KRW 51.26 billion

KRW 56.83 billion

KRW 63.45 billion

KRW 230.4 billion

Expected completion and commencement of operation in 2008

Gyungsangnam-do Provincial Government

Page 5: KOREAN ROAD INFRASTRUCTURE FUND - Macquarie … · KOREAN ROAD INFRASTRUCTURE FUND ... 30, 2004, KRIF’s strategy has remained the same: to acquire, operate and ... (“BTL”),

The transaction is still under escrow as finalconcession agreement terms are yet to befinalised between SMC and the sellers. Prior toopening, SMC increased the toll rate to KRW2,000 for all vehicles which has caused traffic todrop considerably below original base caseexpectations.

KRIF continues to participate in and monitor theconcession agreement negotiations. KRIF’sacquisition of Woomyunsan DevelopmentCompany (the concessionaire) shares fromsellers will be completed upon KRIF beingsatisfied with the revised terms, which isanticipated to be reached early in the nextfinancial period.

8 KRIF INTERIM REPORT 2004 |MACQUARIE SHINHAN INFRASTRUCTURE MANAGEMENT MACQUARIE SHINHAN INFRASTRUCTURE MANAGEMENT | KRIF INTERIM REPORT 2004 9

Portfolio Review

2004 started well with January revenueup 11% from 2003, however periodicinclement weekend weather (weekendsare generally peak days) combined withongoing construction work at theHyoduk IC and macro-economicinfluences dampened toll revenueduring the first half of 2004. Tollrevenue collected at the end of June 30is at the same level as one year ago,with annual revenue guaranteed eachyear by the Kwangju City Governmentfor the duration of the concession.

The construction work at the Hyoduk IC,which is at the entrance to the feedingroad to Section 1, continues to hampertraffic throughput. The constructionrelates to Section 3 of the Kwangju 2ndBeltway, which will link to Section 1.The completion of this connectinginfrastructure is expected to increase

Daegu-Busan Expressway is still underconstruction. Progress continues in linewith work schedules and completion isstill expected by February 2006.Construction was 65.37% complete asof June 7, 2004.

The net interest accrued on KRIF’sconverting bonds as of June 30, 2004 isKRW 2.14 billion.

KRIF plans to schedule a site visit andreview by an independent engineer inthe next financial period. ParsonsBrinckerhoff conducted the originalphysical due diligence when KRIFacquired the converting bonds in DBEC

The Ministry of Construction and Transportation (“MOCT”)is still processing the approval of the share transfer forKRIF’s purchase of 25 % of the equity in NAHC, theconcessionaire to the Incheon International AirportExpressway.

On June 23, 2004, NAHC received a revenue guaranteepayment of KRW 105 billion from MOCT for the revenueshortfall of the 2003 financial year. This was significantlyhigher than the amount forecasted at acquisition, due toconservative assumptions, and has improved the project’sreturn profile for KRIF. For the period from January 1 toJune 30, 2004, NAHC collected approximately KRW50.02 billion in toll revenue.

At the end of April 2004, KRIF received KRW 1.8 billion forthe first quarter interest payment on the subordinated debtfacility extended to NAHC. Despite the MOCT having stillnot technically approved KRIF’s purchase of NAHCshares from Korea Teachers Credit Union (“KTCU”), KRIFcontinues to enjoy the benefits of its shareholding throughthe conditions and terms as set out in the sale andpurchase agreement with KTCU.

traffic on Section 1.

KRIF has been engaged in longnegotiations with KMC in regards to therevenue support that KBICL is entitledto for the revenue shortfall of the 2002fiscal year. Newly revised guidelines inregards to private participation ininfrastructure in Korea have placed new

discussion items in front of the parties,although substantial progress hasrecently been made. KRIF is veryconfident that negotiations will becompleted in the next financial periodand this will be accompanied with aclear structure and process for futurerevenue support payment mechanisms.

and they will re-visit the various worksites along the alignment to reviewconstruction completion and check workand cost schedules.

Kwangju 2nd Beltway, Section 1 Incheon International Airport Expressway

Woomyunsan TunnelDaegu-Busan Expressway

Page 6: KOREAN ROAD INFRASTRUCTURE FUND - Macquarie … · KOREAN ROAD INFRASTRUCTURE FUND ... 30, 2004, KRIF’s strategy has remained the same: to acquire, operate and ... (“BTL”),

Incheon International Airport ExpresswayIncheon International Airport ExpresswayIncheon International Airport ExpresswayIncheon International Airport ExpresswayIncheon International Airport ExpresswayIncheon International Airport ExpresswayIncheon International Airport ExpresswayIncheon International Airport ExpresswayIncheon International Airport ExpresswayIncheon International Airport ExpresswayIncheon International Airport ExpresswayIncheon International Airport ExpresswayIncheon International Airport ExpresswayIncheon International Airport ExpresswayIncheon International Airport ExpresswayIncheon International Airport ExpresswayIncheon International Airport ExpresswayIncheon International Airport ExpresswayIncheon International Airport ExpresswayIncheon International Airport ExpresswayIncheon International Airport ExpresswayIncheon International Airport Expressway

Ulsan

Busan

Sunch'on

MasanMasanMasan

NaesoKaya ChaChang-Wng-WononChang-Won

Chinhae

Kimhae

Daegu

KwangnyosanMountain

Express Bus Terminal

Incheo

n Interna

tional A

irport Ex

pressway

Ulsan

Busan

Sunch'on

Masan

Chang-Won

Kimhae

Daegu

Express Bus Terminal

Incheo

n Interna

tional A

irport Ex

pressway

Ulsan

Busan

Sunch'on

Masan

Chang-Won

Kimhae

Daegu

Kwach'onAnyang

Express BusTerminal

ExprExpress Bus Tess Bus TerminalerminalExpress Bus Terminal

Seoul Nat'l Univ.�Education

Seoul National University

Kwanak Mountain

YangjaeIC

KyongbuExpressway

88 Olympic Expressw

ay

Kangbyon

Highwa

y

Incheo

n Interna

tional A

irport Ex

pressway

Ulsan

Busan

Chonju Namwon

Sunch'onSunch'onSunch'onMokpo

Masan

Chang-Won

Kwangju

Kimhae

Daegu

Honam ExpresswayKakwa Bridge IC

Kwangju World Cup StadiumKwangjuAirport

Section 1Se

ction 5

Section 3

Express Bus Terminal

Incheo

n Interna

tional A

irport Ex

pressway

Woomyunsan Tunnel

Daegu-Busan Expressway

Baekyang Tunnel

Kwangju 2nd Beltway, Section 1

Machang Bridge

Asset Locations

10 KRIF INTERIM REPORT 2004 |MACQUARIE SHINHAN INFRASTRUCTURE MANAGEMENT MACQUARIE SHINHAN INFRASTRUCTURE MANAGEMENT | KRIF INTERIM REPORT 2004 11

Portfolio Summary

Asset Profiles

Notes1. Enterprise value forecast following capital injection to finance payment of 2nd instalment (March 2005).2. Enterprise value forecast upon expected construction completion (February 2006).3. Enterprise value on date of prepayment. Acquisition subject to government approvals and satisfaction of purchase terms and conditions precedent.4. Enterprise value on date of prepayment. Acquisition subject to government approvals.5. Enterprise value forecast upon expected construction completion (June 2008).

*KRIF currently holds converting bonds which will, subject to the satisfaction of conditions precedent, convert into equity in 2008, representing a 6.5%stake in DBEC.**As at June 30, 2004. Equity stake to be increased throughout construction period to 49% upon completion.

Asset

Kwangju 2nd Beltway, Section 1

Daegu-Busan Expressway

Woomyunsan Tunnel

Incheon International AirportExpressway

Baekyang Tunnel

Machang Bridge

Location

Kwangju,Chollanam-do

Daegu-Busan,Gyeongsangnam- do

Seoul

Seoul-Incheon

Busan

Masan Bay,Gyungsangnam-do

Description

Operatingtoll road

Underconstruction

Operatingtoll tunnel

Operatingtoll road

Operatingtoll tunnel

Underconstruction

Enterprise value(KRW billion) Notes KRIF’s

stake

191

1,817

180

1,465

126.4

330.8

1

2

3

4

5

100%

6.5%*

36%

25%

99.2%

4%**

Asset Weightingsas at June 30, 2004

31%

6%9% 9%

10%

1%

34%Kwangju 2nd Beltway, Section 1

Daegu-Busan Expressway

Woomyunsan Tunnel

Incheon International Airport Expressway

Baekyang Tunnel

Machang Bridge

Cash and Other

Ulsan

Busan

Sunch'on

Masan

Chang-Won

Kimhae

Daegu

Kimpo

Buch'on

Incheon AnyangIncheon InternationalAirport

Express Bus Terminal

Incheo

n Interna

tional A

irport Ex

pressway

Incheo

n Interna

tional A

irport Ex

pressway

Kyongin Expressway

Seoul Beltway

2nd Kyongin Expressway

KangbyonHighway88

Olympic Expressway

Kimch'on

Pohang

UlsaUlsanUlsan

BusaBusanBusan

Sunch'on

Masan

Chang-Won

Masan

ChinjuKimhaeKimhaeKimhae

DaeguaeguDaegu

Milyang

Kum

aExpressway

Na

mhae

Expressway

KyongbuExpressway

Chung-angExp

ressway

Express Bus Terminal

Incheo

n Interna

tional A

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Page 7: KOREAN ROAD INFRASTRUCTURE FUND - Macquarie … · KOREAN ROAD INFRASTRUCTURE FUND ... 30, 2004, KRIF’s strategy has remained the same: to acquire, operate and ... (“BTL”),

Net Asset Value Analysis

Net Asset Value Summary

January 1, 2004 to June 30, 2004

Opening Net Asset Value

Acquisition and Related Costs

Increase in Cash Balance

Accrued Income

Increase in Borrowings & Other Liabilities

Distribution

Closing Net Asset Value

KRW

193,742,580,888

133,348,123,449

19,698,122,282

7,523,763,091

(3,819,359,237)

(3,221,838,762)

347,271,391,711

*Net asset value per share calculated as at the end date of each fiscal period

Net Asset Value Growth*

(Unit: KRW)

12 KRIF INTERIM REPORT 2004 |MACQUARIE SHINHAN INFRASTRUCTURE MANAGEMENT MACQUARIE SHINHAN INFRASTRUCTURE MANAGEMENT | KRIF INTERIM REPORT 2004 13

KOREAN ROAD INFRASTRUCTURE FUND

Korean Road Infrastructure Fund

Statutory Auditor Report and Financial Statements

4th fiscal period: From January 1, 2004 to June 30, 2004

3rd fiscal period: From July 1, 2003 to December 31, 2003

Macquarie Shinhan Infrastructure Management Co., Ltd. is the manager of Korean Road Infrastructure Fund (the “Fund”). No member of the Macquarie Bank Groupguarantees the performance of the Fund, the repayment of capital or the payment of a particular rate of return on the shares of the Fund. This report is not an offer orinvitation for subscription or purchase, or a recommendation of securities. It does not take into account the investment objectives, financial situation and particular needs ofthe investor. Before making an investment in the Fund, the investor or prospective investor should consider whether such an investment is appropriate to their particularinvestment needs, objectives and financial circumstances and consult an investment adviser if necessary. Macquarie Shinhan Infrastructure Management Co., Ltd., asmanager of the Fund, is entitled to fees for so acting. Macquarie Bank Limited and its related corporations, together with their officers and directors, may hold shares in theFund from time to time.

This report is an English translated version of the original audited financial statements prepared in Korean by Abrain Fund Services, KRIF’s fund administrator, to assist thereader in their review and is prepared in accordance with auditing standards generally accepted in the Republic of Korea. Accordingly, the following audit report and theaccompanying financial statements are for use by readers who are knowledgeable of Korean accounting principles or auditing standards and their application in practice.

CONTENTS PAGE

Statutory Auditor Report 14

Financial Statements

Balance Sheet 15

Profit and Loss Statement 16

Distribution Statement 16

Supplementary Schedules 17

Notes to the Financial Statements 18

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14 KRIF INTERIM REPORT 2004 |MACQUARIE SHINHAN INFRASTRUCTURE MANAGEMENT MACQUARIE SHINHAN INFRASTRUCTURE MANAGEMENT | KRIF INTERIM REPORT 2004 15

KOREAN ROAD INFRASTRUCTURE FUND KOREAN ROAD INFRASTRUCTURE FUND

Statutory Auditor Report Balance Sheet4th Fiscal Period: as at June 30, 20043rd Fiscal Period: as at December 31, 2003

KRIF (Unit: KRW)

To the shareholders and Directors of the Korean Road Infrastructure Fund (“KRIF”).

As the statutory auditor of KRIF, I have audited the financial statements for the 4th fiscal year from January 1, 2004 to June 30,2004 in compliance with the Securities Investment Company Act, Article 52 and applicable Presidential Decree Article 28.

1. Summary of Audit ProceduresThe audit procedures included examination of accounting records and related documents, financial statements andsupplementary schedules to the financial statements. Generally accepted auditing procedures were adopted, includingcomparison, investigation and enquiry as was deemed necessary.

To audit the management of the business, appropriate procedures were performed by reviewing and conducting a detailedexamination of the Board of Directors’ Meeting Minutes and documents in relation to significant business issues.

Note that in the course of conducting this audit no limitations or impediments were encountered whilst performing the necessaryaudit procedures of comparison, investigation and enquiry to the accounting records.

2. Accounting RecordsThe entries in the accounting records are presented fairly and in conformity with applicable regulations and the Articles ofIncorporation. Furthermore, the balance sheet and profit and loss are in agreement with the accounting book entries.

3. Financial Statements There were no changes to accounting policies adopted in preparing the current fiscal period financial statements. The financialstatements correctly represent KRIF’s asset position and profit and loss position in accordance with applicable regulations andthe Articles of Incorporation.

4. Directors’ Duties No irregular practices were identified in relation to the Board of Directors performing their duties, during the audit of themanagement of the business.

August 20, 2004 Korean Road Infrastructure Fund

Byung Ik Kim, Statutory Auditor

Accounts4th Fiscal Period

Amount3rd Fiscal Period

Amount

Assets

Ⅰ. Invested assets

1. Cash & cash equivalents

2. Loan

3. Stocks

4. Bonds

Ⅱ. Others

1. Interest receivable

2. Receivables

3. Prepayments

4. Prepaid expenses

Total Assets

Liabilities

1. Borrowings

2. Payables

3. Deposits

4. Custodian fee payable (Note 3)

5. Sales agent fee payable (Note 3)

6. Manager fee payable (Note 3)

7. Administrator fee payable (Note 3)

8. Other expenses payable

9. Interest payable

Total Liabilities

Shareholders’Equity

1. Issued capital (Note 1)

(No. of shares as at the end of the 4th fiscal period:

65,290,905 )

2. Accumulated profit before disposal

Net profit for 4th Fiscal Period: KRW 13,754,746,935

Net profit for 3rd Fiscal Period: KRW 3,528,366,068

Total Shareholders’’Equity

Total Liabilities & Shareholders’’Equity

263,552,251,079 65,544,334,517

16,706,877,037 230,593,517

212,625,742,000 33,263,741,000

2,219,632,042 50,000,000

32,000,000,000 32,000,000,000

105,763,773,361 146,423,519,863

5,243,259,103 1,004,003,215

8,658,554,418 5,374,047,215

84,909,870,644 137,780,478,058

6,952,089,196 2,264,991,375

369,316,024,440 211,967,854,380

13,241,632,395 12,671,521,095

6,680,342,931 5,189,793,425

696,804,535 3,118

38,354,388 9,050,109

7,982,064 1,736,390

1,213,092,397 313,669,578

39,702,378 10,055,677

121,373,746 15,389,560

5,347,895 14,054,540

22,044,632,729 18,225,273,492

333,383,837,504 190,520,742,126

13,887,554,207 3,221,838,762

347,271,391,711 193,742,580,888

369,316,024,440 211,967,854,380

The accompanying notes form part of these financial statements.

Page 9: KOREAN ROAD INFRASTRUCTURE FUND - Macquarie … · KOREAN ROAD INFRASTRUCTURE FUND ... 30, 2004, KRIF’s strategy has remained the same: to acquire, operate and ... (“BTL”),

16 KRIF INTERIM REPORT 2004 |MACQUARIE SHINHAN INFRASTRUCTURE MANAGEMENT MACQUARIE SHINHAN INFRASTRUCTURE MANAGEMENT | KRIF INTERIM REPORT 2004 17

KOREAN ROAD INFRASTRUCTURE FUND KOREAN ROAD INFRASTRUCTURE FUND

Supplementary Schedules4th Fiscal Period: as at June 30, 2004

1. Asset Holdings

Profit and Loss Statement4th Fiscal Period: January 1, 2004 to June 30, 2004

3rd Fiscal Period: July 1, 2003 to December 31, 2003

KRIF (Unit: KRW)

Accounts4th Fiscal Period

Amount3rd Fiscal Period

Amount

ⅠⅠ. Revenue

1. Interest income

2. Other income

ⅡⅡ. Expenses

1. Manager fee (Note 3)

2. Custodian fee (Note 3)

3. Sales agent fee (Note 3)

4. Administrator fee (Note 3)

5. Other expenses (Note 4)

6. Interest on borrowings

ⅥⅥ. Net Profit/(Loss)

(Profit per share: KRW243.86) (Note 6)

17,163,941,183 4,372,446,387

13,663,941,181 4,371,852,387

3,500,000,002 594,000

3,409,194,248 844,080,319

2,003,546,652 451,687,944

65,549,250 14,799,351

13,579,568 2,759,394

68,767,103 16,443,723

846,347,020 171,923,861

411,404,655 186,466,046

13,754,746,935 3,528,366,068

The accompanying notes form part of these financial statements.

Distribution Statement4th Fiscal Period: January 1, 2004 to June 30, 2004Resolution date (GSM): September 10, 2004

3rd Fiscal Period: July 1, 2003 to December 31, 2003Resolution date (GSM): March 10, 2004

KRIF (Unit: KRW)

Accounts4th Fiscal Period

Amount

3rd Fiscal Period

Amount

ⅠⅠ. Accumulated Profit before disposal

1. Profit/(Loss) carried forward from previous periods

2. ‘Discount on new shares issued’ carried forward

from previous period (Note 1)

3. Net Profit

ⅡⅡ. Disposition

1. Distribution

ⅢⅢ. Profit/(Loss) carried forward

13,887,554,207 3,221,838,762

- (306,527,306)

132,807,272 -

13,754,746,935 3,528,366,068

13,887,554,207 3,221,838,762

13,887,554,207 3,221,838,762

- -

The accompanying notes form part of these financial statements.

KRIF (Unit: KRW)

Accounts Holdings Amount Remarks

Cash & cash

equivalents

Loans

Stocks

Bonds

Interest receivable

Prepayments

Prepaid expenses

Receivables

Total Assets

MMDA (Shinhan Bank )

Sub-total

KBICL Subordinated Loan

KBICL Working Capital Facility

Incheon Expressway Subordinated Loan

Baekyang Tunnel Subordinated Loan

Machang Bridge Subordinated Loan

Sub-total

KBICL

Baekyang Tunnel

Machang Bridge

Sub-total

Daegu-Busan Convertible Bond

Sub-total

MMDA

Loans

Loans

Loans

Loans

Convertible Bond

Interest deferred

Sub-total

Woomyunsan share purchase

Incheon share purchase

Cheonan-Nonsan Expressway

Sub-total

Shinhan Bank arrangement fee

Scott Wilson Nairn traffic forecasting fee

Parsons Brinckerhoff engineering consulting fee

PwC tax advisory service fee

PwC financial model review fee

SMFA advisory service fee

Shin & Kim legal advisory fee

Transfield Services asset management consulting fee

Machang Bridge acquisition related costs

Baekyang Tunnel acquisition related costs

Sub-total

Interest on loan

Guarantee fee

Sub-total

16,706,877,037

16,706,877,037

31,950,000,000

1,313,741,000

53,600,001,000

124,408,000,000

1,354,000,000

212,625,742,000

50,000,000

1,018,539,175

1,151,092,867

2,219,632,042

32,000,000,000

32,000,000,000

16,675,676

18,046,742

1,265,547,420

930,503,671

22,257,534

2,140,586,759

849,641,301

5,243,259,103

21,788,943,974

62,957,194,030

163,732,640

84,909,870,644

329,214,997

43,135,128

83,685,238

11,085,840

9,749,882

1,543,012,409

361,949,004

8,671,024

1,283,699,406

3,277,886,268

6,952,089,196

8,258,554,418

400,000,000

8,658,554,418

369,316,024,440

KBICL

KBICL

Incheon

Baekyang

Machang

Shinhan Bank

KBICL

Incheon

Baekyang

Machang

Daegu-Busan

KBICL

Daegu-Busan

Daegu-Busan

Daegu-Busan

Daegu-Busan

Daegu-Busan

Daegu-Busan

Daegu-Busan

Daegu-Busan

Machang

Baekyang

KBICL

KBICL

Page 10: KOREAN ROAD INFRASTRUCTURE FUND - Macquarie … · KOREAN ROAD INFRASTRUCTURE FUND ... 30, 2004, KRIF’s strategy has remained the same: to acquire, operate and ... (“BTL”),

KOREAN ROAD INFRASTRUCTURE FUND KOREAN ROAD INFRASTRUCTURE FUND

2. Liability Holdings 3. FeesPursuant to relevant service provider agreements, KRIF pays custodian fees, management fees, fund administrator fees and sales agent fees.The details are as follows.(1) Management Fee: Manager receives 1.30% per annum (net of VAT) of invested capital (comprising funds invested in company assets or firmly committed

to be invested in company assets in relation to infrastructure business) less service provider fees, inflation adjusted from the date of acquisition orcommitment of each company asset and paid quarterly in arrears. Current fiscal period movements in invested capital are shown below.

(2) Custodian: 0.045% per annum of the average balance of the Net Asset Value is paid in arrears on a quarterly basis.(3) Fund administrator: 0.03% ~ 0.05% p.a. of the average balance of the Net Asset Value. Paid quarterly in arrears.(4) Sales agent fee: 0.01% p.a. of the average balance of the Net Asset Value attributable to its sales ratio. Paid quarterly in arrears.

4. Other expenses (1) Details of other expenses of KRW 846,347,020 accrued for the 4th fiscal period are as follows. (Unit: KRW ’000s)

5. Related Party Transactions Current period related party transaction details and relevant closing liabilities are shown below. (Unit: KRW ’000s)

6. Earnings per Share(1) Number of ordinary shares issued

Calculation Methodology:Weighted average number of shares = Total accumulated shares/number of days

= 10,256,511,204 shares/182 days= 56,403,907.71 shares

(2) Net Profit: KRW 13,754,746,935 (3) Earnings Per Share: KRW 13,754,746,935/56,403,907.71 shares = KRW 243.86

Notes to the Financial Statements4th Fiscal Period: January 1, 2004 to June 30, 2004

1. General(1) KRIF was incorporated on December 12, 2002 under the Securities Investment Company Act (“SICA”). As at June 30, 2004 the share capital is

KRW 333,384 million and the total number of shares issued is 65,290,905

18 KRIF INTERIM REPORT 2004 |MACQUARIE SHINHAN INFRASTRUCTURE MANAGEMENT MACQUARIE SHINHAN INFRASTRUCTURE MANAGEMENT | KRIF INTERIM REPORT 2004 19

KRIF (Unit: KRW)

Accounts Holdings Amount Remarks

Borrowings

Payables

Deposits

Fees payable

Other expenses payable

Interest payable

Total Liabilities

Shinhan Bank Loan

Sub-totalBaekyang Tunnel acquisition costs

Woomyunsan share purchase costs

Incheon Expressway share purchase costs

Fund closing costs

Other

Sub-totalSubscription refund

Arrangement fee

Sub-totalCustodian

Sales Agent

Manager

Fund Administrator

Sub-totalSalary

VAT on manager fees

Sub-totalInterest payable (Shinhan Bank)

Sub-total

13,241,632,395

13,241,632,3953,334,767,436

951,962,176

2,388,754,500

2,890,000

1,968,819

6,680,342,9314,522

696,800,013

696,804,53538,354,388

7,982,064

1,213,092,397

39,702,378

1,299,131,22764,516

121,309,230

121,373,7465,347,895

5,347,89522,044,632,729

Macquarie InternationaleHoldings Ltd.

Incheon Expressway

Classification Dates No. of newshares issued

Issue priceper share

Increase/(Decrease)

Share Capitalafter change

3rd Fiscal Period Closing

Discount on new shares issued from 2nd Fiscal Period (Note)

Share issuance

Share issuance

Share issuance

2004.01.19

2004.02.26

2004.03.08

37,696,321

3,010,990

3,186,216

21,397,378

5,147.46

5,177.61

5,187.55

(132,807,272)

15,498,950,584

16,496,983,823

110,999,968,243

190,520,742,126

190,387,934,854

205,886,885,438

222,383,869,261

333,383,837,504

(2) Changes to Share Capital during the current period

(Note): Share capital in the 2nd fiscal period was reported at the original issue price rather than the net asset value(“NAV”). As a result, this overstatement in share capitalcaused a decrease in retained earnings by the amount of discount on new shares. This period an adjustment is made to share capital so that it is reported at the NAV andretained earnings reflects the actual accumulated retained earnings for the period.

2. Significant Accounting Policies KRIF’s financial statements are prepared in accordance with SICA and Korean Generally Accepted Accounting Principles. The following significantaccounting policies have been adopted in the preparation of the financial statements: (1) Securities: As at the end of this fiscal period, all shares held are unlisted shares and are valued at acquisition price plus any related transaction costs. (2) Bond: As at the end of this fiscal period, bonds held are convertible bonds in Daegu-Busan Expressway Co., Ltd and are valued at acquisition price.(3) Prepaid Expenses: Transaction costs related to asset acquisitions are classified as prepaid expenses and are amortised proportionally over the

expected life of the asset. (4) Interest Income: KRIF’s interest income is recognised on an accrual basis.(5) Dividend: Dividend amount is paid upon shareholders’ approving the issuance of the dividend at the General Shareholders’ Meeting. Before the

approval of the dividend payment, the amount is reflected in retained earnings.

VAT on Management Fee

Amortized prepaid expenses

-Daegu-Busan Expressway

-Baekyang Tunnel

-Machang Bridge

Legal advisory fee

Tax advisory fee

Entertainment

Salary

Advertisement

Other administration expenses

Total

Macquarie Shinhan Infrastructure Management

Acquisition related costs

Acquisition related costs

Acquisition related costs

Shin & Kim, Kim & Chang

PwC

KRIF seminar

Includes investment Committee transportation fee

Publication of fiscal year end report, public notice of financial statement in newspaper, etc

Miscellaneous expenses

270,587

54,964

5,527

200,355

331,078

244,295

13,640

31,362

11,916

8,135

5,566

846,347

Items Sub Total Amount Remarks

SMFA

SMFA

SMFA

MSIM

Goodmorning Shinhan Securities

Shinhan Bank

Shinhan Bank

Advisory fee (Woomyunsan Tunnel)

Advisory fee (Incheon Expressway)

Advisory fee (Baekyang Tunnel)

Management fee (VAT included)

Sales agent fee

Custodian fee

Interest on borrowings

3,032,722

2,203,901

13,580

65,549

411,405

951,962

2,388,754

3,032,722

-

-

-

5,348

-

-

-

1,334,402

7,982

38,354

-

Counterparties TransactionClosing Liabilities

Expenses payable Fees payable

Amount incurred thisperiod

(Unit: KRW ’000s)

ItemsStart date of fee

calculation

Amount applicable to current period management fee calculation

Assets purchased Commitments Sum

KBICL Shares

Loan to KBICL (1st)

Commitment to KBICL

Daegu-Busan Convertible Bonds

Loan to KBICL (2nd)

Woomyunsan Tunnel

Incheon International Airport Expressway

Baekyang Tunnel

Baekyang Tunnel

Machang Bridge

Total

50,000

31,950,000

-

32,000,000

1,313,741

20,301,120

113,977,500

125,390,000

10,000

2,353,000

327,345,361

50,000

31,950,000

13,000,000

49,235,967

1,313,741

20,301,120

113,977,500

125,390,000

10,000

100,835,880

456,064,208

2003/01/15

2003/03/21

2003/03/27

2003/09/30

2003/12/19

2003/12/24

2003/12/29

2004/03/10

2004/03/31

2004/05/28

-

-

13,000,000

17,235,967

-

-

-

-

-

98,482,880

128,718,847

No. of shares

Opening

37,696,321

Increase

27,594,584

Decrease

-

Closing

65,290,905