Corporate Governance

BACKGROUND

Transfield Services Infrastructure Fund (TSI Fund) is a triple stapled entity where a unit in Transfield Services Infrastructure Trust (TSIT) is stapled to one share in Transfield Services Infrastructure Limited (TSIL) and one share in TSI International Limited (TSIIL), so that none of the securities (unit and shares, collectively stapled securities) can be dealt with separately. Infrastructure Fund Management Limited (IFML) is the Responsible Entity (RE) of TSIT.

The RE, TSIL and TSIIL are parties to a stapling deed that sets out the terms and conditions governing the relationship between them in respect of the stapled securities.

The boards of the RE, TSIL and TSIIL (collectively the Board) are composed of the same Directors, and hold board and committee meetings concurrently.

TSI Fund has a Management Services Agreement (MSA) with Transfield Services (Australia) Pty Limited (acting as the Manager), a wholly-owned major operating subsidiary of Transfield Services Limited (Transfield Services), and an Operations and Maintenance Alliance Agreement (OMAA) with Transfield Services (Australia) Pty Limited (TSAPL, acting as the operations and maintenance contractor).

Under the MSA, the Manager sources investment opportunities, provides management, corporate and administrative services to TSI Fund. Under the OMAA, TSAPL provides operations and maintenance services to TSI Fund’s wholly-owned assets.

The management of TSI Fund is, however, vested in the Directors of the Board and they are ultimately accountable to securityholders for the activities and performance of TSI Fund.

RELATIONSHIP BETWEEN TSI FUND AND TRANSFIELD SERVICES

Given the arrangements between TSI Fund and Transfield Services, a protocol has been developed to manage governance issues that may arise between TSI Fund and Transfield Services and its related bodies corporate. This protocol is contained in the Corporate Governance Framework and is supported by TSI Fund’s Conflicts of Interest Policy and Related Party Transactions Policy.

To illustrate, the Corporate Governance Framework addresses the management of conflict between TSI Fund and Transfield Services in the pursuit of new investment opportunities. The Manager acts in the best interests of TSI Fund securityholders at all times. Any pursuit of investment opportunities, which involves both TSI Fund and Transfield Services, is agreed on a case-by-case basis under the MSA and the Corporate Governance Framework.

Compliance Structure of the RE

The RE has a compliance program to ensure it complies with, and fulfils its obligations under the Compliance Plan for TSIT, and all other requirements set out in the Corporations Act 2001 (Cth) (Corporations Act), its Australian Financial Services Licence (AFSL) conditions and other relevant regulations.

These compliance procedures include arrangements for monitoring and supervision of outsourced providers of services and arrangements for dealing with conflicts of interest.

The Responsible Managers under the RE’s AFSL include a Compliance Officer who is primarily responsible for monitoring compliance issues for the RE and TSIT. The Compliance Officer reports regularly to the Board’s Risk, Audit and Compliance Committee.

ASX RECOMMENDATIONS

The TSI Fund Board believes that genuine and robust corporate governance is critical to business integrity and investor confidence. As an entity listed on the Australian Securities Exchange (ASX), TSI Fund is committed to a comprehensive level of disclosure of its governance framework and practices.

Last year, TSI Fund was an early adopter of ASX Corporate Governance Council’s revised Principles and Recommendations, reporting ahead of the effective compliance date of 1 January 2008.

TSI Fund continues to report on its compliance with the revised Principles and Recommendations in this Annual Report.

TSI Fund has complied with the Principles and Recommendations during this reporting period, other than Recommendation 2.4 in respect of a Nomination Committee for reasons set out on page 18 and Recommendation 8.1 in respect of a Remuneration Committee for reasons set out on page 20. TSI Fund believes that the departures from these recommendations are appropriate in the circumstances.

PRINCIPLE 1: LAY SOLID FOUNDATIONS FOR MANAGEMENT AND OVERSIGHT

The Board

The Board is responsible to securityholders for the overall direction and performance of TSI Fund. The Board’s functions, responsibilities and internal procedures are set out in the Charter of the Board of Directors (Board Charter). The Board’s responsibilities include:

  • monitoring and assessing the performance of the Manager in providing the services under the MSA and OMAA
  • considering and approving key management and Manager recommendations
  • reviewing financial information, liaising with the external auditors and constantly monitoring the financial position of TSI Fund
  • undertaking stewardship and protection of TSI Fund’s assets
  • monitoring compliance with law, major policies, the Code of Conduct and TSI Fund’s contractual obligations
  • identifying and managing key risks in liaison with TSI Fund’s management and the Manager
  • ensuring an informed market exists at all times in respect of TSI Fund, and
  • evaluating the performance of executives seconded to TSI Fund in consultation with the Manager.

The Board meets as frequently as required, but not less than six times a year.

Key activities for the Board during the year included major business decisions in relation to capital projects and capital management strategies.

Examples of capital projects considered and approved by the Board included:

  • the turbine blade upgrade of Townsville Power Station which increased the station’s capacity by 12.7 megawatts to 234 megawatts, and
  • the decision not to invest in the 130 megawatt Barn Hill Wind Farm development project, the first of the wind farm sites to be developed by Transfield Services since its acquisition of a wind farm development portfolio in December 2007. TSI Fund has a right of first refusal to invest in the wind farm development opportunities in the Transfield Services portfolio. The uncertain state of the capital markets led to TSI Fund’s decision not to invest and to concentrate on positioning itself to participate in Transfield Services’ future wind farm developments.

Examples of capital management strategies considered and approved by the Board include:

  • the revised distribution level for the interim distribution paid on 31 March 2009 due to recent factors in TSI Fund’s portfolio at the time. These factors included operational issues at Loy Yang A, a decision to fund part of investment capital expenditure by using cash rather than debt and a conservative cash management approach to improve financial flexibility, and
  • the review of capital structure alternatives aimed at maximising value for securityholders.

The Board Charter is available at www.tsinfrastructurefund.com.

The Board has established the following committees to assist with the effective discharge of its duties:

  • Risk, Audit and Compliance Committee (RACC)
  • Investment Review Committee (IRC), and
  • Disclosure Committee (DC).

The committees regularly report to the Board and make recommendations to it, as necessary.

The number of Board and committee meetings held and Director’s attendance is set out in the Directors’ Report on page 25 of this Annual Report.

Directors’ Terms of Appointment

Upon appointment, new Directors are provided with a letter of appointment that sets out their term in office, duties, responsibilities and other matters such as remuneration and expected time commitment required.

The term of appointment is agreed as part of such appointment. TSI Fund’s constitutions require that at every Annual General Meeting a third of Directors must retire and, if applicable, offer themselves for re-election.

The powers and duties of Directors are set out in TSI Fund’s constitutions, the Board Charter and the Corporations Act.

Seconded Executives

The Board has arranged for a Chief Executive Officer (CEO), Chief Financial Officer (CFO) and General Manager Assets (collectively Seconded Executives) to be provided by the Manager to

TSI Fund on secondment under the MSA. The Board has assigned roles and responsibilities to the CEO subject to specified limits set out in a delegated authority statement.

The CEO is supported by the IRC – a Board committee formed to undertake assessment of investment opportunities for TSI Fund and provide recommendations to the Board on prospective investment opportunities being considered by management. The committee comprises all independent non-executive Directors of the Board, with the CEO and CFO being regular attendees.

A TSI Fund Operations and Management Committee, involving TSI Fund’s CEO, CFO and General Manager, Assets and Transfield Services’ representatives, oversees the management of MSA activities and addresses operational areas for modification and improvement. A Transfield Services’ appointed MSA Manager is responsible for overseeing MSA activities, and participates in this Committee.

Performance Evaluation

The performance of Seconded Executives is reviewed by the Manager with input from the Board. The Board may notify the Manager of its recommended revisions to key performance measures, remuneration and incentive programs, which the Manager must consider in consultation with the Board. This review has been completed in accordance with the process disclosed.

The performance of dedicated personnel, other than Seconded Executives, who provide support to TSI Fund, remains the responsibility of Transfield Services. Dedicated personnel participate in an annual Performance Development Review and, in some instances, a Short-Term Incentive Scheme, where performance is measured against set key performance indicators. Transfield Services is in the process of completing these evaluations in accordance with processes disclosed in its Annual Report.

PRINCIPLE 2: STRUCTURE THE BOARD TO ADD VALUE

The Directors are profiled on page 8 to 9 of this Annual Report. The Directors’ skills, knowledge and experience are appropriate to ensure the effective performance of TSI Fund and to address current and emerging industry and market issues.

Board Composition

The Board comprises five Directors, of whom three are independent non-executive Directors, including the Chairman. They are:

  • Peter Young AM, Independent non-executive Chairman
  • Kate Spargo, Independent non-executive Director
  • David Mathlin, Independent non-executive Director
  • Anthony Shepherd, Non-executive Director – Transfield Services’ nominee
  • Peter Goode, Non-executive Director – Transfield Services’ nominee

Transfield Services’ Managing Director and Chief Executive Officer, Peter Watson, resigned as non-executive Director of TSI Fund effective

1 April 2009. Transfield Services’ current Managing Director and Chief Executive Officer, Peter Goode, was appointed as a non-executive Director of TSI Fund on 1 April 2009.

The roles of Chairman and CEO are separate. The Chairman is responsible for the leadership of the Board. The CEO is responsible for day-to-day management of TSI Fund and is not a member of TSI Fund’s Board.

Independence of Directors

TSI Fund reviews Directors’ independence on an ongoing basis, having regard to the guidelines set out in the ASX Corporate Governance Principles and Recommendations, which seek to determine whether a Director is generally free of any interest or other relationship that could, or could reasonably be perceived to, materially interfere with the Director’s ability to act in the best interests of TSI Fund.

TSI Fund has determined that Peter Young AM, David Mathlin and Kate Spargo are independent.

Peter Young holds an advisory role with Royal Bank of Scotland (RBS), formerly ABN AMRO Group. RBS may potentially earn fees for transactions entered into by TSI Fund. David Mathlin holds an executive role with Sinclair Knight Merz Group, which may potentially earn fees for transactions on which it advises TSI Fund.

The interests held by Peter Young AM and David Mathlin either do not provide a personal benefit to them or are not material given the Directors’ circumstances, and the Board considers them to be independent, notwithstanding the relationships described.

Kate Spargo is a director of Australian Energy Market Operator, the national energy market regulator, which may scrutinise the operations of TSI Fund as part of its function.

The Directors have provided standing notices to these interests and other directorships, and the Board considers that they are able to exercise objective, independent and unfettered judgment in discharging their duties to TSI Fund.

Where a potential conflict of interest arises, the Director concerned will not receive copies of the relevant Board or committee papers and will withdraw from the Board or committee meeting while the matters are discussed. Accordingly, the Director will not be able to exercise influence over other members of the Board.

The other two Directors, Anthony Shepherd and Peter Goode, are non-executive, but are not considered to be independent as they are the nominee Directors of Transfield Services, a substantial security holder of TSI Fund. In accordance with TSI Fund’s constitutions, while Transfield Services holds at least 15 per cent of the stapled securities, it may appoint two Directors to the Board.

The Board considers this arrangement to be in the best interests of TSI Fund as the nominee Directors provide access to Transfield Services’ significant expertise in the operation and management of infrastructure assets, as well as its expertise in sourcing acquisitions, and improving and developing infrastructure assets.

All Directors are required to exercise independent and informed judgment in their role on the Board. The Board Charter facilitates Directors having access, where necessary, to independent, external and professional advice at TSI Fund’s expense. Directors also have access to the Company Secretary for governance support and to Transfield Services’ executives for information to assist in making informed decisions.

Nomination Committee

The Board has not established a Nomination Committee due to the current size of the Board (with the majority being independent Directors) and the arrangements between TSI Fund and Transfield Services. While this is inconsistent with Recommendation 2.4, the Board considers this appropriate.

Board Performance Review

Board, committee and Director performance is reviewed internally on an annual basis. The internal review process seeks responses from Directors, Seconded Executives and a number of other dedicated personnel, in relation to key elements of Board effectiveness, including:

  • Board composition and responsibilities
  • Board meetings and decision-making
  • Board committees
  • Chairman’s role
  • strategic planning and budgeting
  • evaluation and remuneration of Directors, and
  • evaluation of Seconded Executives.

The results of the review are analysed and recommendations formed and adopted to enhance performance.

A Board performance review for 2008 was carried out in February 2009. A number of suggestions raised in the review have been implemented, including:

  • deeper interaction between TSI Fund and Transfield Services’ Health, Safety and Sustainability Committee, and
  • familiarity with and utilisation of the Manager’s business resilience services.

PRINCIPLE 3: PROMOTE ETHICAL AND RESPONSIBLE DECISION-MAKING

TSI Fund maintains a Code of Conduct and a comprehensive policy framework to promote ethical and responsible practices and decision-making.

Code of Conduct

The Code of Conduct outlines TSI Fund’s commitment to a high standard of behaviour, including:

  • conducting operations with fairness, integrity and good faith
  • striving towards best practice in internal business controls, financial administration and accounting policies
  • committing to protecting assets and ensuring sufficient use of those assets for legitimate business purposes
  • recognising obligations to individuals’ rights to privacy in respect of confidential
  • information, and
  • maintaining practices and policies that are in accordance with best practice including those in respect of occupational health and safety, anti-discrimination and conflicts of interest.

In June 2009, Transfield Services introduced a comprehensive Code of Business Conduct that applies to TSI Fund’s Seconded Executives and other dedicated personnel. This Code is a reference guide to minimum appropriate levels of conduct and is aimed at promoting compliance with legal and ethical standards.

The Code of Conduct is available at www.tsinfrastructurefund.com.

Core policies

Ethical and responsible decision-making is further promoted through the following policies:

  • Securities Trading Policy
  • Conflicts of Interest Policy
  • Related Party Transactions Policy, and
  • Non-Audit Services Policy.

The Securities Trading Policy restricts Directors and designated persons from buying or selling TSI Fund Stapled Securities only in the one-month period immediately following the announcement of half-yearly and annual results, and the Annual General Meeting. The Chairman or the Company Secretary may waive the restriction in limited circumstances.

Directors and designated persons are prohibited from buying or selling securities in TSI Fund at any time they are in possession of market-sensitive information.

The policy also places restrictions on the TSI Fund Directors, CEO, CFO, General Manager Assets and the Company Secretary trading in Transfield Services’ shares.

In recognition of market developments, the Securities Trading Policy was revised in 2008 to prohibit Directors and selected employees from using TSI Fund securities as collateral in any financial transaction, including margin loan arrangements.

The Conflicts of Interest Policy is aimed at protecting the integrity of TSI Fund’s decision-making processes by avoiding ethical, legal, financial or other conflicts of interest.

The Related Party Transactions Policy provides guidance on recognising and reporting related party transactions, and where necessary, submitting these for securityholder approval.

The Non-Audit Services Policy manages the engagement of TSI Fund’s external auditor to supply non-audit services, to ensure that such services do not impair the objectivity and independence of the auditor’s opinion on TSI Fund.

These policies are available at www.tsinfrastructurefund.com.

PRINCIPLE 4: SAFEGUARD INTEGRITY IN FINANCIAL REPORTING

The Board has established the Risk, Audit and Compliance Committee (RACC) to oversee the financial and business risk management of TSI Fund and report significant matters to the Board.

The RACC comprises three non-executive Directors (two of whom are independent). It is chaired by an independent non-executive Director, who is not the Chair of the Board.

The RACC operates in accordance with its Charter, which sets out its responsibilities, composition and internal procedures. The purpose of RACC is to assist the Board in discharging its statutory and oversight responsibilities relating to:

  • financial and risk management of TSI Fund
  • ensuring the highest appropriate practice is achieved as far as possible in the implementation and practice of compliance responsibilities and corporate governance of TSI Fund, and
  • overseeing the Board’s responsibilities in respect of its AFSL.

TSI Fund’s procedure for the selection, appointment, removal and rotation of external auditors follows the relevant statutory requirements.

TSI Fund also operates the Non-Audit Services Policy which sets strict rules for the engagement of the external auditor for non-audit services and is aimed at safeguarding the external auditor’s objectivity and independence.

The RACC receives written representation letters from the CEO and CFO regarding the accuracy and completeness of financial information, prior to the Board’s approval of their respective financial reports.

The RACC Charter is available at www.tsinfrastructurefund.com.

PRINCIPLE 5: MAKE TIMELY AND BALANCED DISCLOSURE

To ensure integrity and transparency in the market, TSI Fund keeps securityholders fully and promptly informed about significant developments in the business.

TSI Fund’s Continuous Disclosure Policy sets out obligations and guidelines for disclosure of material information pursuant to the ASX Listing Rules. The policy outlines the role of the Disclosure Committee, which is responsible for determining what information must be disclosed and ensuring TSI Fund complies with its disclosure obligations. The committee comprises an independent Director, CEO, CFO, Company Secretary and Transfield Services’ Group General Manager, Corporate Affairs.

The policy is available at

www.tsinfrastructurefund.com.

PRINCIPLE 6: RESPECT THE RIGHTS OF SECURITYHOLDERS

TSI Fund aims to provide securityholders and the market with timely, clear and concise communication in relation to TSI Fund’s operations and performance.

TSI Fund follows communication plans to ensure its message is effectively delivered through various communication channels. ASX announcements are a primary source of material information regarding TSI Fund. Both ASX and media announcements are immediately uploaded to TSI Fund’s website. The website contains information about TSI Fund’s operations and achievements and features publications and investor presentations.

On the TSI Fund’s website, securityholders can also subscribe to RSS feeds, which communicate the latest ASX Announcements via an RSS reader on their computer.

Annual General Meetings are a valuable opportunity for the Board to outline TSI Fund’s recent developments and strategy, and for securityholders to comment on TSI Fund’s management and performance. Securityholders also have the opportunity to ask TSI Fund’s external auditor questions relevant to its audit function.

PRINCIPLE 7: RECOGNISE AND MANAGE RISK

The Board is responsible for determining the overall risk management strategy for TSI Fund and communicating it to Seconded Executives and dedicated personnel involved in TSI Fund’s operations. The Board is also responsible for reviewing major risk exposures and monitoring the overall effectiveness of the risk management program.

To assist the Board in discharging its risk management duties, the Board has delegated the following activities to the RACC:

  • overseeing strategies and procedures used to identify and evaluate principal risks and their potential impact
  • reviewing management plans for mitigation of material risks
  • evaluating the ongoing effectiveness and independence of risk management
  • functions, and
  • reporting to the Board on risk management.

Although ultimate responsibility for risk management lies with the Board and the RACC, the day-to-day responsibility for risk management rests with the Manager. As part of the services provided under the MSA, the Manager is required to maintain, identify and implement appropriate risk management policies and procedures in respect of TSI Fund and report on the adequacy and effectiveness of those policies and procedures on a regular basis to the Board.

In November 2008, RACC approved the Enterprise Risk Management Plan (ERMP). This plan reflects an update to TSI Fund’s risk management approach, which has identified six risk categories, each of which include a number of risk sub-categories.

Risk management effort is focused upon those risks that pose the greatest risk to TSI Fund and for which work is required to fully develop and implement mitigating measures.

The ERMP is addressed at each of the quarterly RACC meetings.

TSI Fund also utilises the expertise of Transfield Services’ Health, Safety and Sustainability Committee which provides risk management support in the areas of health, safety, sustainability and environmental performance. TSI Fund uses the Manager’s internal audit services to assist in the improvement of internal controls and to support the risk management framework.

Pertinent findings and recommendations are communicated to the RACC, which then ensures that management effectively responds to the recommendations. The RACC Chairman raises significant risk issues with the Board.

As part of the annual financial reporting processes, the CEO and CFO have certified to the RACC and the Board that TSI Fund’s financial results are founded on a sound system of risk management, internal compliance and controls adopted by the Board, and that the system is operating effectively in all material respects.

PRINCIPLE 8: REMUNERATE FAIRLY AND RESPONSIBLY

TSI Fund’s policy on Director’s remuneration is set out in the Remuneration Report on pages 27 to 34 of this Annual Report.

All personnel involved in TSI Fund’s operations are employed by the Manager and provided to TSI Fund as part of the MSA. This includes TSI Fund’s CEO, CFO and General Manager, Assets.

The performance review process of Seconded Executives and dedicated personnel involved in TSI Fund operations is outlined under Principle 1.

TSI Fund can make recommendations to the Manager on revisions to remuneration, incentive payments and programs linking remuneration to key performance measures of the Seconded Executives. In light of this, the Board does not consider it appropriate or necessary to establish a separate remuneration committee, as recommended by Recommendation 8.1.

TSI Fund is responsible for the remuneration of independent Directors. Transfield Services’ nominee Directors do not receive fees from TSI Fund. The review of TSI Fund’s Director’s performance is outlined under Principle 2.

Fees for independent Directors are calculated on the extent of their involvement at Board and committee level. In order to maintain their independence and impartiality, these fees are not based on TSI Fund’s performance. Independent Directors are not entitled to options, bonuses or retirement benefits other than statutory entitlements as part of their remuneration package.