Financing greenfield infrastructure through the sale of brownfield infrastructure

Context

• Australia’s federal government introduced policy to incentivise asset recycling by state governments, offering up to 15% of the sale or lease proceeds of asset privatisations for re-investment in infrastructure projects.
• Continual upgrade and revitalisation of urban assets and infrastructure is required to meet the needs of a rapidly growing and changing population in the state of New South Wales (NSW).
• Since 2014, asset recycling (the sale of underperforming or surplus assets to return the capital to invest in new assets or revitalise existing assets) has been one of the core principles of the NSW Government’s property policy. Asset recycling is also known as capital recycling.

Problem

• To fund an ambitious infrastructure investment program, the NSW Government explored PPP, public funding (including value capture), and debt financing – each of which has its own challenges. For example, PPPs require scale and must demonstrate value for money. Public funding through taxes or user-pays systems have limited maximum market capacity. Further debt financing risks the AAA credit rating of the NSW Government, making it harder to attract investment and impacting future opportunity costs.
• The NSW Government faced a politically complex challenge with asset privatisations, given public concern over job losses.

Stakeholders involved

• Australian Federal Government
• New South Wales Government

Innovation

• To alleviate some political pressures, certain asset recycling deals were not required to obtain the approval of the NSW parliament, although they were required to receive a green light from the Australian Competition and Consumer Commission.
• Asset recycling projects also required private sector investors to make capital improvements or expand the capacity of the leased facilities.
• The NSW government established a pipeline of identified infrastructure projects for the asset recycling proceeds to be invested in.

Timeline

Result and impact

• NSW has gained AUD6.7 billion (USD5.2 billion) from the leases of Port Kembla, Port Botany, and the Port of Newcastle. As of November 2020, the proceeds of asset recycling in NSW totaled AUD32.7 billion (USD25.2 billion).
• These funds are invested in NSW Government agency–led infrastructure projects, as well as local and community infrastructure projects being delivered by local government, non-government organisations, and other entities.

Key lessons learnt

• Planning: One success was identification of income-generating public assets that are underutilised and not of long-term strategic importance. Another positive lesson was the value of creating a clear link between the proceeds of the sale of existing assets and new infrastructure investment at the outset of the program.
• Governance: The NSW Government utilised 5-year guaranteed employment clauses for employees of privatized public assets to manage public concern about wide-scale privatisation initiatives.
• Activity: Transferring an asset from public to private ownership will generate significant risks for the new operator. The challenge for an investor is knowing when and how to undertake commercial risk transfer. This will apply both in terms of operating the asset and in terms of working within a potentially shifting regulatory environment.