There are renewed calls from sections of the the financial community and press for revival of the Commonwealth Government's Asset Recycling Initiative.
The $5 billion Asset Recycling Initiative was introduced in the 2014 Commonwealth Budget to incentivise states and territories to privatise public infrastructure assets by paying a state 15 per cent of the value of the sold asset which is allocated to fund new infrastructure, ostensibly as a means of raising additional funds for investment in new infrastructure assets.
The initiative was a key measure of the commonwealth's $11.6 billion Infrastructure Growth Package. The other key measure was $3.7 billion towards road projects, including $2.9 billion for Sydney's Westconnex, Melbourne's East-West Link and Perth Freight Link.
Only NSW, the ACT and the Northern Territory participated in the scheme. Under the scheme, NSW privatised $19.54 billion of assets including a 99-year lease for 50.4 per cent of electricity distributors Ausgrid and Endeavour Energy and 100 per cent of Transgrid. The ACT privatised $472 million of assets including the sale of public housing and betting agency ACTTAB. The Northern Territory privatised $916.9 million of assets including the controversial 99-year lease of 50.4 per cent of the Port of Darwin to Chinese company Landbridge which raised concerns from US President Obama.
Other jurisdictions declined to participate on policy grounds. In a comment echoing the findings of the Productivity Commission's review of the scheme, the Western Australian Government responded that "if they privatise assets they will do it for sound policy reasons and not just for additional budget" (Commonwealth Treasury 2019).
A turning point for the scheme came with the Productivity Commission's critical report which found that asset recycling posed significant economic risks by conflating two very distinct questions which, in the Commission's view, should not be connected at all. That is, that whether an asset should be privatised is unrelated to the question of whether a proposed new asset should be built. By encouraging the privatisation of brownfield assets to invest in new assets, the initiative intrinsically connected these discrete considerations:
Ultimately, poorly conceived decisions to link asset sales to new infrastructure investments could in fact have a negative future balance sheet impact and create long term additional liabilities for government...the Commission considers that decisions to privatise a state- owned asset and procure new infrastructure should be separated in time and space. The policy is risky, because it may bypass thorough and transparent analysis...Governments should avoid creating expectations in the community that privatisation is only good when the proceeds are used for procuring new infrastructure... (PC 2014)
The then Treasurer Scott Morrison announced the end of the scheme in the 2016 Commonwealth Budget. However, the newly appointed chair of the Productivity Commission has recently expressed support for asset recycling (AFR, 18 June 2019).
Setting aside the political controversy, the central question nevertheless remains: how to increase the quantum of public funds available for investment in new infrastructure?
An alternative approach to commonwealth financing of public infrastructure might be to sever the question of asset privatisation from new investment and, instead, relate payments directly to investment in new assets by the states. Say 15 per cent towards new assets only.
Some or all of the balance could be raised in the form of project-specific bonds made available to the general public. After all, if an asset offers sufficiently commercial returns to attract investment from institutional investors such as pension funds like the Queensland Investment Corporation (part owner of the Port of Melbourne), investment banks such as Macquarie Group (part owner of Endeavour Energy) and operators such as Transurban (majority owner of the Westconnex motorway), would it not attract investment from "mom and dad" investors", particularly as interest rates paid on deposits are at a record low?
An analogous instrument is the use of municipal bonds in the United States. Municipal bonds are issued by cities, counties and local governments to finance infrastructure investments. The most common form are general obligation bonds the borrowing authority repays from tax revenue. The remaining 40 per cent are revenue bonds which the authority repays with proceeds from a specific asset source, like a tollway. The major difference between them is that the latter render more transparent the risks and returns of specific opportunities – compared to a portfolio of assets – and thereby can offer increased clarity to potential investors. In 2018, the US municipal bond market was worth US$3.8 trillion.
However, a word of caution is warranted as in the US municipal bonds attract tax-free status on the interest they pay. Substantial research shows that preferential tax treatment of infrastructure creates a significant risk that an inefficient project may receive investment due the effect of its tax treatment helping it overcome hurdle rates, which it could not otherwise satisfy. Consequently, sub-optimal assets can receive investment.
A programme such as that suggested above might be called an Asset Creation Initiative rather than asset recycling, because infrastructure assets are not waste to be recycled but important enablers of economic growth.
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