Transportation Planning Casebook/Asset Recycling

=Summary=

Asset Recycling provides part of the budget for case studies explored during this course. In terms of transport, asset recycling is responsible for partially funding multiple rail and roadwork developments throughout Sydney. Asset recycling refers to the process of governments either selling or leasing government-owned assets, and then using these proceeds as capital for new infrastructure projects. By recycling assets, governments mitigate the level of new capital required to fund future infrastructure.

In Australia, treasurer Joe Hockey announced the Asset Recycling Initiative policy in the 2014 / 2015 budget. The intent of the Asset Recycling Initiative policy was to provide a $5 billion fund, used to incentivise state governments and territories to sell or lease assets and use the proceeds of these sales to reinvest in new productive infrastructure, in particular transport infrastructure within various states, which would otherwise not be in a position to be funded with the required capital. The $5 billion fund was used for incentive payments to states or territories up to 15% of the sale price of the asset. This also provided opportunity for Superannuation companies to invest in good quality infrastructure assets.

The Asset Recycling Initiative policy was generally deemed successful. A number of states and territories took part in the initiative, which in turn provided the required capital to commence several transport projects which would have otherwise either not proceeded, or would have proceeded, however placing state governments and territories in significant debt.

=Annotated list of actors=

Deals made under the Asset Recycling Initiative
The following table notes sales and agreements made under the Asset Recycling Initiative:

Stakeholders
Asset recycling is introducing through acknowledging the considerations of all stakeholders involved. The examples mentioned in the table below will be discussed in detail in the policy section. The stakeholders for asset recycling are as follows:

=Timeline of events=

=Policy issues= Opportunity Cost

The crux of asset recycling risk lies in selling or leasing income-generating assets to produce new assets that do not generate income. Therefore, this is a double-down loss for the period which the income-generating asset was recycled and the loss in maintaining an unprofitable asset. State governments are often forced to procure new infrastructure at the expenditure of recycled profitable assets, to meet public demand. As asset recycling is a relatively new financing scheme, a handful of foreign examples exist off which the government can base its forecasting. Therefore, for transport infrastructure such as rail and airport infrastructure, the level of risk management conducted by the federal government is inexperienced and not reflective of future infrastructure performance.

Reliability

Asset recycling for the Airport Link tunnel in Brisbane displayed the lack of reliability in this financial scheme. The shares were offered on a part-paid basis to incentivise the private sector to invest. After project completion, investors realised the lack of profits yieldable from the airport link causing them to terminate their part-paid investment. This resulted in an unaccounted for long-term deficit in the project and shares of the project to plummet to a fraction of a cent. The federal government realised that privatisation of assets as an alternative to borrowing invoked a serious reliability issue to the levels of funds delivered.

Ethics

Ethics plays a significant role in asset recycling as the privatisation of public infrastructure is often solely based on profitability and disregards public interest. In terms of the proposed investment into USA’s asset recycling scheme, Chicago’s general public have already voiced their concern. Previously, Chicago leased its parking metres to not-for-profit retirement funds. This ultimately came at the cost of US$974 million loss in revenue for the state and higher fees for the general public. Asset recycling of public infrastructure is purely profit motivated and ultimately the general public and taxpayers would be coerced into maintaining this profit.

=Narrative of the case=

In the 2014-2015 budget, the Australian federal government announced their Asset Recycling Initiative policy. The policy was created as an incentive for state governments and territories to sell or lease assets under their control, and use this capital to reinvest in new infrastructure projects. The incentive worked in the form of a federal government grant to the state or territory selling or leasing the asset, at a value of 15% of the sale price, with a total initial budget of $5 billion available. In doing so, it was expected that this would stimulate close to $40 billion in new infrastructure investment. In November of 2015, as part of the Asset Recycling Initiative, the New South Wales Government sold 100% of TransGrid, in the form of a 99 year lease. The sale was worth $10.3 billion, unlocking significant cash for the New South Wales government to provide as capital for other infrastructure projects. This deal also provided a secure revenue stream for the consortium of investors, made up of 35% local, 25% from a Canadian investment firm, and 40% from investment firms in the Middle East.

The sale of TransGrid was the most significant Asset Recycling sale under the policy, and unlocked capital towards the Sydney Metro projects, which would have otherwise not been available. The financial windfall from Transgrid, and the additional incentive funding from the federal government, provided funding for almost every major transport infrastructure currently under construction in New South Wales.

Victoria also received significant windfalls from the 50 year lease of the Port of Melbourne($9.7 billion), however since conditions of the sale of the Port of Melbourne had not been finalised and agreed upon between the state and federal government prior to the two-year deadline in which the financing was available, and as such a smaller portion of incentive payments were provided to the Victorian government. Victoria received incentive payments of $877 million, or approximately 9% of the sale price.

The Asset Recycling Initiative has been received as positive by many, however the scheme has also been criticised by some. Skeptics of the scheme have argued that the core problem with asset recycling is that income-generating assets are sold off, and the proceeds used as capital for new investments which do not generate income.

Whilst the Asset Recycling Initiative set up by the federal government is no longer a current policy, the States and territories still seek to recycle assets where there is a business case to do so, and Federal governments may still provide cash incentives to states where there is benefit, particularly where the proceeds of the sales can be used to fund further transport projects which are of future benefit. There are currently state and territory assets for sale, where proceeds can be recycled into new transport infrastructure. As recently as March 2018, a deal has been made for the sale of the Snowy Hydro power scheme, whereby the Victorian and New South Wales state governments can sell their shares in the Snowy Hydro to the federal government, on the provision that the proceeds of the sale are recycled into transport infrastructure projects. whilst the deal is not fully finalised, it is worth approximately $6 billion, enabling capital for significant transport infrastructure projects.

=Discussion questions=

1)	Should asset recycling be done in Australia?

2)	What is the best method to estimate the opportunity cost associated with asset recycling?

3)	Is asset recycling better than borrowing and increasing Australia’s foreign debt?

4)	What mechanism(s) should be used to finance high demand public infrastructure?

5)	Should Australia pursue asset recycling of foreign public sectors?

=Additional Readings=


 * 1) TheConversation.com - How America can copy Australia's asset recycling scheme
 * 2) ABC.net.au - Snowy Hydro sale releases $4.1 billion cash windfall for regional NSW
 * 3) Australian Financial Review - Turnbull government urged to launch new asset recycling plan

=References=