Asset recycling: Greening the infrastructure portfolio

Governments are using asset recycling as an infrastructure funding mechanism to drive some of their ESG objectives. In this article, David Ng, Principal Advisor in the Infrastructure Advisory team at KPMG in Singapore, talks with Jeffrey Delmon, Senior PPP specialist at the World Bank about the trend towards creating programmatic asset recycling programs that help deliver on service, financial and ESG objectives.

• Governments are using asset recycling as a mechanism for funding infrastructure as well as driving ESG objectives
• You can get more value - financially and environmentally - by taking a strategic and programmatic approach
• The World Bank is working with governments to help them enhance their asset recycling programs.

Asset recycling allows governments to release the value of their existing assets by bringing forward future revenues. When the proceeds are invested back into new, more efficient and more sustainable infrastructure, a virtuous circle is created.

DN: What does a good asset recycling program look like?

JD: The key is to move towards a programmatic approach to asset recycling. So, instead of taking assets to market opportunistically, our experience shows that governments often get more value - financially and environmentally - when they take a strategic and programmatic approach to bringing assets to market.

In part, this is about making sure that the government is bringing forward assets that meet the capability and interest of investors without contributing to oversupply. It's also about creating capacity that can be used in later parts of the program.

Process and documentation, for instance, can be standardized across a number of different asset transactions which makes it easier for government to oversee and more transparent for potential investors.

For most governments, moving towards a programmatic approach to asset recycling can be tricky. You need to get different sectors working together (often under the responsibilities of different ministries or agencies) and agreeing on the terms. Some sectors may already have tried and tested approaches to private sector participation. In many markets, State Owned Enterprises (SOEs) are involved. Some decision-makers still need convincing on the merits of asset recycling.

It can be easy to be drawn into doing one-off deals as opportunities arise. And it may sometimes feel like creating a programmatic approach takes too much time or effort. But it's worth it; a programmatic approach can result in huge advantages.

DN: How does asset recycling help governments achieve their ESG goals?

JD: This is a super exciting space for ESG right now. We are seeing governments use asset recycling as a mechanism for driving ESG objectives. For example, we are seeing governments take Bus Rapid Transit systems out to market with a requirement that the investor replace the existing rolling stock with electric buses. That often allows the investor to access more, better, and cheaper capital from climate financing, and it potentially opens up new revenue streams from things like carbon credits. That's attracting a lot of private investors who are looking for greener assets and opportunities to contribute to ESG goals.

We're also seeing some very interesting activity using asset recycling approaches to support the transition away from coal. Essentially, those coal assets are ring-fenced into a package and then a mixture of grant concessions and commercial financing is used to buy-down the cost of that asset, thereby allowing it to be retired earlier than planned. That, again, could open up new climate financing options and revenue streams through carbon credits.

There are challenges, of course; few investors are terribly keen to add coal assets to their books these days. At the World Bank, we're still wrestling with how we can square that circle. But when we do, it could have a significant impact on the Net Zero agenda.

DN: What are some of the barriers government faces when considering an asset recycling program?

JD: The biggest is just the awareness and understanding of the benefits and mechanics of an asset recycling program. Sometimes you need to start with a series of ad-hoc deals in order to help people understand how the concept works and to gain comfort with it.

Many governments also struggle with carving out individual assets for asset recycling. In many departments and SOEs, losses from one asset can often be subsumed within the wider balance sheet. And governments don't tend to manage their asset data in the same way that private investors do. That leaves many government leaders struggling to work out what data they need to develop for a successful program.

Then you need to make sure you have the right rules in place to provide confidence to investors and transparency to the market. Investors want to see a program that is well-defined, where the process and terms of the transactions are equal and transparent, and where there is clarity into the long-term pipeline. And lastly, ensuring that the contractual obligations can be enforced.

DN: Do you believe asset recycling will play a role in driving the ESG agenda for governments going forward?

JD: I believe that asset recycling presents a huge opportunity for governments, particularly given the current confluence of economic, political, financial, governance, social and environmental challenges. I also believe tht infrastructure investors are looking for new investment opportunities that not only deliver financial value but also provide social and environmental upsides. So I am confident that asset recycling will play a key role. It's a very exciting space right now. And it's being made all the more relevant because of the ESG benefits it can also help deliver.