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. ^[1] ^[2]

In Australia, treasurer Joe Hockey announced the Asset Recycling Initiative policy in the 2014 / 2015 budget ^[3]. 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. ^[4] 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: ^[5]

State / Territory	Details of asset sold	Details on the proceeds of funds
NSW	100% of TransGrid 'sold' as 99 year lease to an international consortium for $10.258 billion ^[6]	Under agreement with the Commonwealth, the money will be mostly spent on: ^[7] (Note that the below figures are based on the assumption of further sale proceeds from Ausgrid, Endeavour Energy, and other government property holdings) Sydney Metro (City & South-West) - $11.3 billion (+ $1.7 billion from the Asset Recycling Initiative fund) Sydney's Rail Future - 2018 Timetable - $655 million (+ $98 million from the Asset Recycling Initiative fund) Parramatta light rail - $522 million (+ $78.3 million from the Asset Recycling Initiative fund) Regional freight corridors: Newell highway - $525 million (+ $78.8 million from the Asset Recycling Initiative fund) Mitchell Highway - $37.4 million (+ $5.6 million from the Asset Recycling Initiative fund) New England Highway - $202 million (+ $30.3 million from the Asset Recycling Initiative fund) Princes highway - $350 million (+ $52.5 million from the Asset Recycling Initiative fund) Pinch points and Clearways Program - $375 million (+ $52.2 million from the Asset Recycling Initiative fund) Smart Motorways Program - $400 million (+ $60 million from the Asset Recycling Initiative fund) Gateway to the South Project - $261 million (+ $39 million from the Asset Recycling Initiative fund) $115 million for preparatory activities for a Western Sydney airport
ACT	Various property assets to the value of $400 million ^[8]	The full $400 million used to support its Capital Metro light rail project, (+ $60 million from the Asset Recycling Initiative fund)^[8] ^[9]
Victoria	Port of Melbourne 'sold as 50 year lease to an international consortium for $9.7 billion ^[10]	The sale of the Port of Melbourne was executed after the deadline of securing funds through the federal government's Asset Recycling Initiative Fund. As such, funds were secured, however the amount was negotiated between the state and federal government, and was well below the 15% maximum rate. The allocation of the sale funds is not fully clear, however the funds provided by the federal government from the Asset Recycling initiative fund are as follows: ^[11] $857 million for Melbourne Metro $20.2 million for Murray Basin Rail $1.5 billion special payment was provided to the Victorian government for the East West Link, however these funds were re-allocated to other projects including the Monash Freeway, M80 Ring Road, Murray Basin freight, rail, rural and regional roads package as well as towards urban congestion.
Queensland	Queensland sold the majority share of its Brisbane Airport Link and leased few underground tunnels	Queensland ineffectively conducted asset recycling schemes to finance Brisbane's airport link and underground tunnels. The wrong forecasts of profitability for these infrastructure came at the cost of the private sector and government.^[12]
Western Australia	Western Australia did not sell or lease any assets under the scheme	*Western Australia was made a special payment of almost $500 million for its $2 billion Forrestfield Airport Link project as compensation for receiving lower GST funding.^[13]
South Australia	South Australia primarily asset recycled its energy sector rather than its transport	The gas fired power station will come at the expenditure of $550 million. Privatisation of the energy sector leads to the significantly higher energy cost in Australia, as compared with other developed countries.^[12]
Northern Territory	Territory Insurance Office (TIO) - $410.9 million ^[14] Port of Darwin - $506 million	Roads and flood mitigation projects - $138 million (+ $20.7 million from the Asset Recycling Initiative fund) Ship lift and Marine industries project & Territory Generation (T-Gen) project - $130 million (+ $19.5 million from the Asset Recycling Initiative fund)

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:

Stakeholders	Considerations/Incentives
Federal government	The government overseas which projects will be recycled and critiques projects pursued by state governments. The federal government is concerned with risk management and ensuring the new infrastructure proposed can be adequately supported through asset recycling. Substantial risk arises from building infrastructure that do not compensate the period of loss or value of the asset recycled. Historically, the federal government has often critiqued the state government’s asset recycled expenditure as being unviable. A key example of this can be through the South Australian Labor State government proposed $550 million power plant.^[12]
State government(s)	Only state and local governments can introduce asset recycling schemes, however they may receive aid from federal subsidies ^[15]. State governments decide which assets they choose to recycle to facilitate future infrastructure. This raises the notion of ‘opportunity cost’, whereby the loss in leasing or selling an asset is compared with the proposed benefit of the future asset. With future assets, in particular transport infrastructure, the proposed future benefits are often aware or considering future associated costs. This has resulted in the failure of most state governments to successfully implement asset recycling as a viable method of financing new infrastructure.
Private companies	Private companies are the beneficiaries of asset recycling. Private investors prefer to invest in pre-existing infrastructure as this reduces the level of risk involved ^[16]. In Australia, the primary participant in asset recycling was Macquarie Bank. In the 1990s, recycling an income returning asset produced high early returns for private companies with relatively minor maintenance costs. It was during this time that Macquarie Bank was dubbed as the “millionaire’s factory”.^[12] However, more recent asset recycling ventures undertaken by private companies did not account for changing variables like traffic flows and toll road avoidance. As a result, private investors also incurred losses, primarily in the tunnel projects of Sydney and Brisbane.
Taxpayers / general public	As asset recycling is a partial financing model, it still requires the involvement of taxpayers to share the burden of the new infrastructure. If the government incurs a loss in asset recycling, in other words an income generating asset was recycled for unprofitable new infrastructure. This would have the opposite effect of the intended purpose of asset recycling and cause further deficit to the budget. This is because the income generated from recycled, income generating assets are forgone. To restore the budget, the government would therefore require greater taxation from the public. Although common sense negates the recycling of income generating assets for unprofitable ones, sometimes the government must introduce new infrastructure to meet the public’s demand. Therefore, the public are the key stakeholders behind the need for asset recycling and expedited delivery of new infrastructure. Although this new infrastructure is forecasted to be profitable, after completion this often is not the case. This can be exemplified through asset recycling to partially fund Sydney Light Rail.
Superannuation companies	As private investors have been the primary beneficiaries of asset recycling, the federal government proposes the usage of Australian superannuation funds for foreign asset recycling. Earlier this year Prime Minister Turnbull proposed investing $2.53 trillion for asset recycling in the US to renew its ailing national infrastructure. ^[15] However, as private companies have previously experienced, patterns do not always repeat themselves and variables are often not constant. Therefore, investing in the asset recycling scheme for a foreign country could is still a risky endeavour.

Timeline of events

Date	Event
May 2014	Federal government announces the Asset Recycling Initiative Policy and fund as part of the 2014-2015 budget. Agreement is made between all states and territories, and the federal government
February 2015	Australian Capital Territory is the first state / territory to develop an agreement with the federal government for recycled assets, to reinvest in new transport infrastructure
November 2015	New South Wales state government reached agreement on the sale of TransGrid, securing capital for various transport infrastructure projects
June 2016	Cut-off date for state governments and territories to reach agreements on asset sales and funding with the federal government under the Asset Recycling Initiative agreement
September 2016	Victorian state government sold Port of Melbourne. Due to the sale being past the deadline, only partial funding was provided from the federal government under the Asset Recycling Initiative policy.
March 2018	Outside of the Asset Recycling initiative, the government announced the sale of the Snowy Hydro from state to federal. The windfall of the sale, under the terms of agreement, will see additional funds towards new road and rail infrastructure projects ^[17]

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.^[12] 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.^[16] 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.^[12] 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. ^[13] In doing so, it was expected that this would stimulate close to $40 billion in new infrastructure investment. ^[18] 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. ^[19]

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^[20], 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. ^[21] ^[12]

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. ^[22] 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

References

[1] The Conversation - Explainer: What is Capital Recycling?

[2] The Australian - NSW gets $2 billion from Asset Recycling Fund

[3] Budget 2014-2015 Asset Recycling Initiative

[4] Council of Australian Governments - National partnership agreement on asset recycling

[5] Council on federal financial relations - National partnerships - infrastructure

[6] Frontier Economics Pty Ltd - Response to submissions on the relevance of the TransGrid sale - Report prepared for Jemena Electricity, Actewagl Distribution, and United Energy

[7] National partnership agreement on asset recycling - NSW - Schedule B

[reference7-8] Hockey signs first asset recycling deal – with a Labor government

[9] National partnership agreement on Asset Recycling - ACT - Schedule B

[10] Australia Financial Review - Port of Melbourne sale: How Lonsdale Consortium reeled in the $9.7b big fish

[11] The Age - Labor secures $9.7b Port of Melbourne windfall, but claims federal funds fall short

[ref15-12] ↑ ^a ^b ^c ^d ^e ^f ^g Lessons to be learned from the Australian “asset recycling” program

[reference12-13] Australian Financial Review - Government pockets leftover asset recycling funds in federal budget

[14] National partnership agreement on asset recycling - Northern Territory - Schedule C

[ref21-15] ttps://www.greenleft.org.au/content/will-our-super-fund-trumps-infrastructure-plan]

[ref20-16] How America can copy Australia's asset recycling scheme

[17] ttps://www.smh.com.au/politics/federal/malcolm-turnbull-buys-snowy-hydro-scheme-from-nsw-and-victoria-for-6-billion-20180301-p4z2e8.html Malcolm Turnbull buys Snowy Hydro scheme from NSW and Victoria for $6 billion]

[18] 2014-2015 Federal Budget Paper - Building Australia's Infrastructure

[19] SMH - NSW power sale a good deal for Baird

[20] NSW Government - Asset Recycling Insight Report - October 2016

[21] The Guardian - Asset recycling may look new and exciting. But it's the last gasp of a failed model

[22] National Infrastructure Construction Schedule - Asset sales

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